<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-33547
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
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
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
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. [_]
----------------
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>
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 NOVEMBER 7, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
12,380,000 Shares
LOGO
LOGO
Common Shares of Beneficial Interest
- --------------------------------------------------------------------------------
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 succeed to and expand the office and
industrial real estate business
(continued on carryover page)
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 Common Shares have been approved for
listing on the New York Stock Exchange (the "NYSE") under the symbol "PGE,"
subject to official notice of issuance.
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.
November , 1997
<PAGE>
(continued from cover page)
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 private placement 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 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, $0.01 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, $0.01 par value per share
(the "Convertible Preferred Shares"), in a private placement 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
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<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
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<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
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<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
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<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. Prime has contributed separate operating divisions in
connection with the formation of the above-described companies and is
contributing its office and industrial division to the Company in order to
capitalize on the recovery in the markets in which the Properties are located.
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
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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 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 the New Mortgage Notes or other 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.
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 Properties in exchange for an aggregate
of 919,450 Common Units 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, among other things, Prime (as opposed to
the Company) will provide such IBD Contributors with a guaranteed annual pre-
tax return of 16.8% for up to three years following the Offering. See "Certain
Relationships and Related Transactions--IBD Contribution Agreement."
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 the NAC 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 the NAC General Partner of sales or
refinancings of certain of the Properties, which, together with certain
provision 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 the NAC 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.
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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;
. 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 subsequently has been 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."
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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 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."
18
<PAGE>
[INTENTIONALLY LEFT BLANK]
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 expects to execute a definitive
loan agreement with PSCC, an affiliate of Prudential Securities
Incorporated, to provide the New Mortgage Notes financing for a 90-day
term, convertible at the option of the Company into a seven-year term,
subject to certain conditions. 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."
VOTING RIGHTS OF THE CONVERTIBLE PREFERRED SHARES
Generally, the affirmative vote of at least 66 2/3% of the votes of the
holders of the outstanding Convertible Preferred Shares shall be necessary for
effecting: (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; 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. In addition,
if and whenever (i) two consecutive quarterly dividends payable on the
Convertible Preferred Shares shall be in arrears, 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 a specified amount per share,
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 case the Board of Trustees shall be increased by two)
and the holders of Convertible Preferred Shares 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 thereto. 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 $ . See "Description of Shares of Beneficial
Interest--Convertible Preferred Shares--Voting 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..........
Common Shares to be Outstanding after 22,371,443 shares(1)
the Offering.........................
Proposed NYSE Symbol.................. PGE
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."
- --------
(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)......... 3.46 0.58 0.52 3.23 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) before minority interest, plus combined fixed
charges and Convertible Preferred Share dividend. 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 Common 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. PSCC, an affiliate of Prudential Securities Incorporated, is expected
to be the mortgagee on the New Mortgage Notes, which are expected to be
secured by all of the Contribution Properties and certain of the Acquisition
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 expects that the New Mortgage Notes will have a 90-day term and that
such mortgage indebtedness will be refinanced with a seven-year term loan.
There can be no assurance that the New Mortgage Notes or any subsequent long-
term refinancing of the New Mortgage Notes will be obtained on terms favorable
to the Company, if at all. In addition, 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 the initial term of the
New Mortgage Notes expires or 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 $0.01 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 Partnership Agreement Could Inhibit Acquisitions
and Changes in Control. 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, 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 Partnership Agreement, the Company will not consummate a
Business Combination with respect to 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,
33
<PAGE>
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.
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."
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."
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 $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 in exchange 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 (the $83.5 million of New Mortgage Notes will be
used to repay certain mortgages);
. $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 (in-
cluding prepayment fee)............. 10.0% 3/98 $230.6
77 West Wacker Drive Building........ 11.0% 3/98 6.7
Various industrial properties........ Libor + 3.25% 7/00 14.7
Citibank Office Plaza................ Libor + 3.5% 7/99 8.8
201 4th Avenue N..................... 7.4% 10/98 5.3
Parking facility..................... 7.6% 10/98 1.2
------
$267.3
======
</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 pro
forma interest expense used in computing pro forma net income before minority
interests and pro forma Funds from Operations assumed that the interest
expense on the New Mortgage Notes and any subsequent long-term refinancing of
such New Mortgage Notes was payable at an interest rate of 7.36% per annum.
See "--Risk Factors--Real Estate Financing Risks--Company's Ability to Obtain
Permanent Financing Cannot Be Assured" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Pro Forma Liquidity
and Capital Resources." 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
54
<PAGE>
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
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 Transactions 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)......... 3.46 0.58 0.52 3.23 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) before minority interest, plus combined fixed
charges and Convertible Preferred Share dividend. 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 the New 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 for the initial 90-day term of the
New Mortgage Notes 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 was 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 Company expects to execute
a definitive loan agreement with PSCC, an affiliate of Prudential Securities
Incorporated, to provide the New Mortgage Notes financing for a 90-day term,
convertible at the option of the Company into a seven-year term, subject to
certain conditions. The New Mortgage Notes are expected to consist of two
separate notes secured, respectively, by first mortgages on all of the IBD
Properties and all of the NAC Properties, together in each case, with certain
of the Acquisition Properties. Interest on the New Mortgage Notes 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 was estimated, for
purposes of pro forma calculations, to be 7.36%, and if based on more recent
rates would be lower. Prior to the expiration of the New Mortgage Notes, the
Company expects to refinance the New Mortgage Notes with a seven-year term
loan that would provide for interest-only payments during years one through
three and principal and interest payments beginning in year four based on a
22-year amortization schedule. If the Company exercises its option to convert
the New Mortgage Notes into a seven-year term loan, the interest rate would be
equal to a spread over seven-year U.S. Treasury Notes offered to the Company
by PSCC on the 60th day following closing. If the Company chooses not to
exercise its option, the interest rate and other terms of such seven-year loan
will be negotiated with another lender selected by the Company. There can be
no assurance that any subsequent long-term refinancing of the New Mortgage
Notes 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 ($)(3)........... 8.47 3.90 6.16 1.31
Leasing Commissions ($)(4)........... 2.77 2.19 1.92 1.40
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 (26.1%)
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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<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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<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.
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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.
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,
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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
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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<PAGE>
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. However,
in early November 1997, one large apparel manufacturer announced plans to shut
down two of its factories in the Knoxville area. 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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<PAGE>
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>
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 E. 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. Based
on such estimates, the Company has recorded a provision for environmental
remediation costs of $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........ 46 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......... 49 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 Controller
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
Controller 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 elected 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 elected 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 elected 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 elected 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 elected 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. Since joining Blackstone Real Estate Advisors 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 Blackstone Real Estate Advisors, 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 trustees 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 all of the Contribution Properties
and certain of the Acquisition Properties. The Company expects to execute
a definitive loan agreement with PSCC, an affiliate of Prudential
Securities Incorporated, to provide a New Mortgage Note financing for a
90-day term, convertible at the option of the Company into a seven-year
term, subject to certain conditions. 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 ($69.3 million) and Mr.
Patterson ($2.2 million) 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
certain principals of the IBD Contributors pursuant to which the Operating
Partnership is required to indemnify such principals of the IBD
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Contributors for, among other things, 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 such principals of the IBD Contributors for certain tax
liabilities based on income or gain which such a principal 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. See "Business and Properties--Government Regulations--
Environmental Matters."
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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, the NAC General
Partner, their respective directors, 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," Notwithstanding the foregoing, the
Limited Partners 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 the applicable
Holding Periods without the consent of Prudential Securities Incorporated, as
representative of the Underwriters.
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 beginning twelve months following 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, 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(3)(4)........ 110,000 0.88 0.51
Kevork M. Derderian(4).. -- -- --
Edward S.
Hadesman(3)(4)(6)...... 859,161 6.49 4.01
Stephen J. Nardi(3)(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 options pursuant to the Share
Incentive Plan which 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 $0.01 per share, 65.0 million shares of
Excess Shares, par value $0.01 per share ("Excess Shares"), and 30.0 million
Preferred Shares, par value $0.01 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 case the Board of Trustees 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 Common Shares have been approved for listing on the NYSE under the
trading symbol "PGE," subject to official notice of issuance.
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, amendments to the Declaration of Trust and removal of trustees and,
if the applicable provision in the Bylaws is rescinded, the control share
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. The Common Shares have been 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 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 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 Convertible Preferred Shares for tax
purposes. Generally, such gain or loss will be capital gain or loss if the
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 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 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 are 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 shares only applies if
the subject preferred shares are (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 shares 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 shares. 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 Convertible Preferred Shares so converted, and,
provided that the 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 Convertible Preferred Shares converted. A holder,
however, will generally recognize gain or loss on the receipt of cash in lieu
of fractional 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 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 under ERISA," to a
prospective purchaser that is not an employee benefit plan, another tax-
qualified retirement plan or an 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.
The Common Shares have been approved for listing on the NYSE, subject to
official notice of issuance. 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 be
the mortgagee under the New Mortgage Notes and will make a $40.0 million loan
to the Primestone Joint Venture. The New Mortgage Notes are expected to be
secured by all of the Contribution Properties and certain of the Acquisition
Properties. The loan to the Primestone Joint Venture 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, the New Mortgage
Notes 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. Governor James R. Thompson, Chairman of
Winston & Strawn, is a trustee designee of the Company.
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 Shuman
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 Common 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 Shuman Boulevard, 475 Superior Avenue and 2205-
2255 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 E. 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.
"Blackstone" means Blackstone Real Estate Advisors, L.P. and certain of its
affiliates.
"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.
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"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.
"Bylaws" means the Amended and Restated Bylaws of the Company, as the same
may be further amended and/or restated.
"CBOE" means the Chicago Board Options Exchange.
"CBOT" means the Chicago Board of Trade.
"CEC" means the Chicago Enterprise Center.
"Central Loop" means the center of Chicago's downtown financial district and
the largest submarket of the Chicago CBD.
"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 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.
"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.
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"Class C" means, with regard to buildings, buildings that are generally
older buildings with progressing functional and/or economic obsolescence.
"CME" means the Chicago Mercantile Exchange.
"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 Company's offering hereby of the Common
Shares.
"Common Shares" means common shares of beneficial interest, par value $0.01
per share, of the Company.
"Common Units" means partnership interests in the common equity in the
Operating Partnership, represented by LP Common Units and GP Common Units,
collectively.
"Company" means Prime Group Realty Trust, a Maryland real estate investment
trust, and its subsidiaries.
"Compensation Committee" means the compensation committee of the Company's
Board of Trustees.
"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).
"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.
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"Contributed Common Units" means those Common Units contributed by Prime to
the Primestone Joint Venture.
"Contribution Properties" means, collectively, the IBD Properties and the
NAC Properties.
"Contributors" means, collectively, the IBD Contributors and the NAC
Contributors.
"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.
"Conversion Date" means 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 other date as determined by the
Company, upon which a holder of Convertible Preferred Shares shall have the
right, at its option, 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.
"Conversion Transaction" means 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), 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).
"Convertible Preferred Shares" means the cumulative convertible preferred
shares of beneficial interest, par value $0.01 per share, of the Company.
"Convertible Preferred Offering" means the Company's concurrent offering of
2,000,000 Convertible Preferred Shares in a private placement to Security
Capital Preferred Growth.
"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.
"Credit Facility" means the credit facility of up to a maximum of $225.0
million for which the Company has obtained a commitment from BankBoston, N.A.
and PSCC.
"Declaration of Trust" means the Company's Declaration of Trust, as amended
by Articles of Amendment and Restatement.
"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
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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).
"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 excess shares of beneficial
interest, $0.01 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.
"Expiration Time" means the last time at which tenders or exchanges may be
made pursuant to a tender or exchange offer (which terms 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.
"Fair Market Value" means the Weighted Average Trading Price for the Common
Shares for the 20 trading days preceding the Special Redemption Call Date.
"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
G-5
<PAGE>
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."
"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.
"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
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.
"Holding Periods" means, collectively, the periods of time following the
completion of the Offering during which 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. Such periods are:
(i) two years in the case of Prime, (ii) two years in the case of the
Contributed Common Units of the Primestone Joint Venture (except in the event
of a Dividend Reduction, the period shall be one year), (iii) one year in the
case of Purchased Common Units of the Primestone Joint Venture and (iv) one
year in the case of each of the IBD Contributors and Jeffrey A. Patterson.
"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 Corporation, 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.
"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.
G-6
<PAGE>
"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.
"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.
"Initial Grants" means the initial grant of options upon completion of the
Offering to certain key officers and employees of the Company, as described in
"Management--Share Incentive Plan."
"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.
"Issue Date" means, with respect to Convertible Preferred Shares, the date on
which such Convertible Preferred Shares are issued.
"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.
"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.
"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.
"LC" means leasing commissions.
"Libertyville Business Park" means that certain office and industrial park
located in the Village of Libertyville, Illinois.
"Limited Partners" initially means, any of Prime and the Contributors, each
of which are limited partners of the Operating Partnership.
"Liquidation Preference" means dollars and cents ($ ) which the
holders of Convertible Preferred Shares shall be entitled to receive 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,
and 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.
"Liquidation Preference Amount" means an amount equal to all dividends
(whether or not earned or declared) accrued and unpaid on the Convertible
Preferred Shares to the date of final distribution to the holders of such
Convertible Preferred Shares.
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<PAGE>
"LP Common Units" means common units representing limited partnership
interests in the common equity 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 E. Tower Road and 4343 Commerce Court, the
14 Industrial Properties and related assets that comprise 1401 S. Jefferson
Street, 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, and 550 Kehoe Boulevard and one retail center that
comprises 371-385 N. Gary Avenue.
"NACORE" means the International Association of Corporate Real Estate
Executives.
"NAIOP" means the National Association of Industrial and Office Parks.
"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.
"New Mortgage Notes" means the two separate mortgage loans secured by all of
the Contribution Properties and certain of the Acquisition Properties, under
which the Operating Partnership expects to borrow $83.5 million, as described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Pro Forma Liquidity and Capital Resources--New Mortgage Notes."
"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.
"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.
G-8
<PAGE>
"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).
"Parity Shares" means those classes or series of shares of beneficial
interest which rank 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 classes
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.
"Participants" means those eligible employees, and not nonemployee trustees,
who have been selected to participate in the Share Incentive Plan in accordance
with the provisions of the Plan.
"Partnership" means each of the Property Partnerships. "Partnerships" means
the Property Partnerships collectively.
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
"PGE" is the proposed trading symbol of the Company on the NYSE.
"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 Shares" means the 30.0 million authorized preferred shares, $0.01
par value per share, of the Company.
"Preferred Stock" means the non-voting participating preferred stock of the
Services Company.
"Preferred Trustee" means a trustee designated, appointed or elected by the
holders of the Convertible Preferred Shares.
"Preferred Units" means partnership interests representing the preferred
equity in the Operating Partnership.
G-9
<PAGE>
"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 E. 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 E. Algonquin
Road, the Chicago Enterprise Center, the East Chicago Enterprise Center, the
Hammond Enterprise Center and a parking facility.
"Primestone Joint Venture" means that certain joint venture between Prime and
certain affiliates of Blackstone, BRE/Primestone Investment L.L.C., a Delaware
limited liability company, and BRE/Primestone Management Investment L.L.C., a
Delaware limited liability company.
"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.
"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, one
industrial property under construction, one parking facility and one retail
center, 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, limited liablity companies,
general and limited partnerships and trusts that own the Properties.
"Prospectus" means the prospectus used in connection with the Offering.
"PSCC" means Prudential Securities Credit Corporation.
"Purchased Common Units" means those Common Units which are purchased by the
Primestone Joint Venture.
"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.
G-10
<PAGE>
"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 real estate investment trust as defined by the Code and the
applicable Treasury Regulations.
"REIT Requirements" means the requirements for qualifying as a REIT.
"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.
"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.
"Repurchase Date" means the date of repurchase or the date the Repurchase
Payment is made available, as described in "Description of Shares of Beneficial
Interest--Convertible Preferred Shares--Limitation on Issuance of Additional
Preferred Shares and Indebtedness."
"Repurchase Offer" means the method by which the Company shall offer to
repurchase Convertible Preferred Shares from holders of such shares in
accordance with certain conditions, as described in "Description of Shares of
Beneficial Interest--Convertible Preferred Shares--Limitation on Issuance of
Additional Preferred Shares and Indebtedness."
"Repurchase Payment" means the amount at which the holders of Convertible
Preferred Shares shall have the right to require that the Company repurchase
any or all of each holder's Convertible Preferred Shares, upon such conditions
as described in "Description of Shares of Beneficial Interest--Convertible
Preferred Shares--Limitation on Issuance of Additional Preferred Shares and
Indebtedness."
"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.
"Security Capital Preferred Growth" means Security Capital Preferred Growth
Incorporated.
G-11
<PAGE>
"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.
"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 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" means the Common Shares and the Convertible Preferred Shares,
collectively.
"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.
"Special Redemption Call Date" means date of the special redemption.
"Special Redemption Price" means the price at which the Company may, at its
option, redeem all, but not less than all, of the Convertible Preferred Shares,
beginning on , 1998 and ending on , 1998. Such Special
Redemption Price will be calculated to result in a total internal rate of
return to the holder of such Convertible Preferred Shares of 20.0% (including
the receipt of dividends and calculated on an annual compounded basis as if the
holder had owned the Convertible Preferred Shares since the Issue Date).
"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.
"TI" means tenant improvements.
"Total Base Rent" means, with respect to a lease, the contractual base net
rent pursuant to the lease agreement.
"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 GAAP, and also includes, to the extent not otherwise included, the
guarantee of items which would be included within this definition.
G-12
<PAGE>
"Total Market Capitalization" means the sum of the aggregate market value of
the outstanding Common Shares and Convertible Preferred Shares and the
liquidation preference of any other then outstanding 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.
"Underwriters" shall mean Prudential Securities Incorporated, Friedman,
Billings, Ramsey & Co., Inc., Smith Barney Inc. and Morgan Keegan & Company,
Inc., who are acting as underwriters for 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.
"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.
"USRPI" means any United States real property interests.
"Voting Preferred Shares" means the series of Parity Shares which are
entitled to elect one or more additional trustees to the Company's Board of
Trustees under certain conditions as described in "Description of Shares of
Beneficial Interest--Convertible Preferred Shares--Voting Rights."
"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.
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PRIME GROUP REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
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<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>
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<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 offering
(the Offering) of 12.38 million common shares of beneficial interest and the
private placement of 2.0 million cumulative convertible preferred 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................................... $5,080 $ 9,506
Tenant reimbursements.................... 1,152 2,171
------ -------
Total revenue............................ 6,232 11,677
Expenses
Property operating....................... 840 1,687
Real estate taxes........................ 757 1,427
------ -------
Total expenses........................... 1,597 3,114
------ -------
Revenue in excess of certain expenses.... $4,635 $ 8,563
====== =======
</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>
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.................................................... 110,430
Blue Sky fees and expenses.......................................... 5,000
Printing and engraving expenses..................................... 400,000
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 4,494,450 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. In addition, the Company will cause the
Operating Partnership to issue and sell 4,569,893 Common Units to the
Primestone Joint Venture for $85,000,000. 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 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. 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 other firm at the request 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
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 Indemnification Agreement
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 by and between Prime Group Realty, L.P. and
300 North LaSalle L.L.C.
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 Environmental Indemnification Agreement by and between
Prime Group Realty, L.P. and The Prime Group, Inc.
10.17 Form of Formation Agreement
10.18+ 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
12.1+ Statements re computation of ratios
21.1 Subsidiaries of Registrant
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 to be named Trustee of James R. Thompson
23.5.2+ Consent to be named Trustee of Christopher J. Nassetta
23.5.3+ Consent to be named Trustee of Jacque M. Ducharme
23.5.4+ Consent to be named Trustee of Stephen J. Nardi
23.5.5+ Consent to be named Trustee 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. 4 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on November 7, 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. 4 to registration statement has been signed below on November 7,
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 1.1
PRIME GROUP REALTY TRUST
12,380,000 COMMON SHARES(1)
OF BENEFICIAL INTEREST
FORM OF
UNDERWRITING AGREEMENT
PRUDENTIAL SECURITIES INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SMITH BARNEY INC.
MORGAN KEEGAN & COMPANY, INC.
November __, 1997
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Prime Group Realty Trust, a Maryland real estate
investment trust (the "Company"), and Prime Group Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"), each
hereby confirms its agreement with the several underwriters named
in Schedule 1 hereto (the "Underwriters"), for whom you have been
duly authorized to act as representatives (in such capacities,
the "Representatives"), as set forth below. If you are the only
Underwriters, all references herein to the Representatives shall
be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions
herein contained, the Company proposes to issue and sell to the
several Underwriters an aggregate of 12,380,000 Common Shares of
Beneficial Interest (the "Firm Securities"), par value $.01 per
share, of the Company (the "Common Shares"). The Company also
proposes to issue and sell to the several Underwriters not more
than 1,857,000 additional Common Shares if requested by the
Representatives as provided in Section 3 of this Agreement. Any
and all Common Shares to be purchased by the Underwriters
pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities
are collectively referred to herein as the "Securities."
2. Representations and Warranties of the Company and
the Operating Partnership. The Company and the Operating
Partnership, jointly and severally, represent and warrant to, and
agree with, each of the several Underwriters that:
(a) A registration statement on Form S-11 (File
No. 333-33547) with respect to the Securities, including a
prospectus subject to completion, has been filed by the Company
with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one
_______________________
1 Plus an option to purchase from Prime Group Realty Trust up
to 1,857,000 additional shares to cover over-allotments.
<PAGE>
or more amendments to such registration statement may have been
so filed. After the execution of this Agreement, the Company
will file with the Commission either (i) if such registration
statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Securities, that shall
identify the Preliminary Prospectus (as hereinafter defined) that
it supplements containing such information as is required or
permitted by Rules 434, 430A and 424(b) under the Act or (B) if
the Company does not rely on Rule 434 under the Act, a prospectus
in the form most recently included in an amendment to such
registration statement (or, if no such amendment shall have been
filed, in such registration statement), with such changes or
insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act, and in the case of either
clause (i)(A) or (i)(B) of this sentence as have been provided to
and approved by the Representatives prior to the execution of
this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for the purpose
of registering certain additional Securities, which registration
shall be effective upon filing with the Commission. As used in
this Agreement, the term "Original Registration Statement" means
the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto
and including any information omitted therefrom pursuant to Rule
430A under the Act and included in the Prospectus (as hereinafter
defined); the term "Rule 462(b) Registration Statement" means any
registration statement filed with the Commission pursuant to Rule
462(b) under the Act (including the Registration Statement (as
hereinafter defined) and any Preliminary Prospectus or Prospectus
incorporated therein at the time such Registration Statement
becomes effective); the term "Registration Statement" includes
both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means
each prospectus subject to completion filed with such
Registration Statement and any amendment or supplement thereto
(including the prospectus subject to completion, if any, included
in the Registration Statement or any amendment thereto at the
time it was or is declared effective); the term "Prospectus"
means:
(A) if the Company relies on Rule 434 under the Act, the
Term Sheet relating to the Securities that is first filed
pursuant to Rule 424(b)(7) under the Act, together with the
Preliminary Prospectus identified therein that such Term
Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act,
the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act
<PAGE>
and if no prospectus is required to be filed pursuant to
Rule 424(b) under the Act, the prospectus included in the
Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference herein to
the "date" of a Prospectus that includes a Term Sheet shall mean
the date of such Term Sheet.
(b) The Commission has not issued any order
preventing or suspending use of any Preliminary Prospectus. When
any Preliminary Prospectus was filed with the Commission it (i)
contained all statements required to be stated therein in
accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was or
is declared effective, it (i) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any
untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein not misleading.
When the Prospectus or any Term Sheet that is a part thereof or
any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or part
thereof or such amendment or supplement is not required to be so
filed, when the Registration Statement or the amendment thereto
containing such amendment or supplement to the Prospectus was or
is declared effective) and on the Firm Closing Date and any
Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules
and regulations of the Commission thereunder and (ii) did not or
will not include any untrue statement of a material fact or omit
to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which
they were made, not misleading. The foregoing provisions of this
paragraph (b) do not apply to statements or omissions made in any
Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or
supplement thereto in reliance upon and in conformity with
written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule
462(b) and the Rule 462(b) Registration Statement has not been
declared effective (i) the Company has filed a Rule 462(b)
Registration Statement in compliance with, and that is effective
upon filing with the Commission pursuant to, Rule 462(b) and has
received confirmation of the Commission's receipt and (ii) the
Company has given irrevocable instructions for transmission of
the applicable filing fee in connection with the filing of the
<PAGE>
Rule 462(b) Registration Statement, in compliance with Rule 111
promulgated under the Act or the Commission has received payment
of such filing fee.
(d) The Company has been duly organized and is
validly existing as a trust in good standing under the laws of
Maryland and is duly qualified to transact business as a foreign
trust and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification, except
where the failure to be so qualified does not amount to a
material liability or disability to the Company and its
subsidiaries, taken as a whole. Each of the Company's
subsidiaries (which are corporations) have been duly organized
and are validly existing as corporations in good standing under
the laws of their respective jurisdictions of incorporation and
are duly qualified to transact business as foreign corporations
and are in good standing under the laws of all other
jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the
Company and its subsidiaries, taken as a whole. Each of the
Company's subsidiaries (which are partnerships), including the
Property Partnerships that are partnerships (as defined in the
Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) have been duly organized and are
validly existing as partnerships in good standing under the laws
of their respective jurisdictions of organization and are duly
qualified to transact business as foreign partnerships and are in
good standing under the laws of all other jurisdictions where the
ownership or leasing of their respective properties or the
conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company
and its subsidiaries, taken as a whole. Each of the Company's
subsidiaries (which are limited liability companies), including
the Property Partnerships that are limited liability companies
have been duly organized and are validly existing as limited
liability companies in good standing under the laws of their
respective jurisdictions of organization and are duly qualified
to transact business as foreign limited liability companies and
are in good standing under the laws of all other jurisdictions
where the ownership or leasing of their respective properties or
the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company
and its subsidiaries, taken as a whole.
(e) The Company and each of its subsidiaries have
full power (corporate or other) to own or lease their respective
properties and conduct their respective businesses as described
in the Registration Statement and the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus; and each of the Company and the Operating Partnership
has full power (corporate or other) to enter into this Agreement
and to carry out all the terms and provisions hereof to be
carried out by it.
(f) The issued shares of capital stock of each of
<PAGE>
the Company's subsidiaries (which are corporations) have been
duly authorized and validly issued, are fully paid and
nonassessable and, except as otherwise set forth in the
Prospectus or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus, are owned beneficially by the
Company free and clear of any security interests, liens,
encumbrances, equities or claims. The partnership agreements of
the Company's subsidiaries (which are partnerships) have been
duly authorized, executed and delivered by the general partners
thereof and constitute the valid and binding obligation of the
general partners thereof. Such partnership agreements, other
than the partnership agreement for the Operating Partnership and
the Property Partnership that holds [insert name of Tennessee
Property], reflect the Company and/or one or more of the
Company's subsidiaries as the sole beneficial owners of the
partnership interests in such partnerships.
(g) The Operating Partnership has been duly
organized and is validly existing as a limited partnership in
good standing under the laws of its jurisdiction of organization
and is duly qualified to transact business as a foreign limited
partnership and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or
the conduct of its business requires such qualification, except
where the failure to be so qualified does not amount to a
material liability or disability to the Company and its
subsidiaries, taken as a whole. As of the Firm Closing Date, the
Company, the NAC General Partner (as defined in the Prospectus
or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and the limited partners of the Operating
Partnership will enter into an Agreement of Limited Partnership
of the Operating Partnership, substantially in the form of
Exhibit 10.1 to the Registration Statement, with such other
nonmaterial changes and revisions as are acceptable to the
Representatives (the "Operating Partnership Agreement"), which
agreement will be in full force and effect as of the Firm Closing
Date. All of the partnership interests in the Operating
Partnership (the "Common Units") and the Preferred Units (as
defined in the Prospectus, or if the Prospectus is not in
existence, the most recent Preliminary Prospectus) to be issued
in connection with the Formation Transactions (as defined in the
Prospectus, or if the Prospectus is not in existence, the most
recent Preliminary Prospectus) have been duly authorized for
issuance by the Operating Partnership to the holders or
prospective holders thereof, and, at the Firm Closing Date,
against the payment of consideration therefor in accordance with
the Operating Partnership Agreement, will be validly issued,
fully paid and owned in the amounts set forth on Schedule 2
hereto, and, in the case of the Common Units and the Preferred
Units to be issued to the Company, free and clear of any security
interests, liens, encumbrances, equities or claims. Immediately
after the Firm Closing Date, 9,064,343 Common Units of limited
partner interest, 13,307,100 Common Units of general partner
interest and 2,000,000 Preferred Units of the Operating
Partnership will be issued and outstanding. The Common Units and
Preferred Units conform in all material respects to the
description thereof contained in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus. The Company is, and immediately after the Firm
Closing Date will be, the managing general partner of the
<PAGE>
Operating Partnership.
(h) The Company has an authorized, issued and
outstanding capitalization as set forth in the Prospectus or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus. All of the issued shares of beneficial interest of
the Company have been duly authorized and validly issued and are
fully paid and nonassessable. The Firm Securities and the Option
Securities have been duly authorized and at the Firm Closing Date
or the related Option Closing Date (as the case may be), after
payment therefor in accordance herewith, will be validly issued,
fully paid and nonassessable. No holders of outstanding shares
of beneficial interest of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the
Securities, and no holder of securities of the Company has any
right which has not been fully exercised or waived to require the
Company to register the offer or sale of any securities owned by
such holder under the Act in the public offering contemplated by
this Agreement.
(i) The capitalization of the Company conforms to
the description thereof contained in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus.
(j) All of the issued and outstanding Common
Shares of the Company have been offered and sold in compliance
with all applicable laws (including, without limitation, federal
and state securities laws). Except as described in the
Prospectus (or, if the Prospectus does not exist, the most recent
Preliminary Prospectus), the Company has not issued or sold any
Common Shares during the six-month period preceding the initial
filing date of the Registration Statement including any sales
pursuant to Rule 144A under, or Regulation D or S of, the Act.
(k) Except as disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding (A) securities, equity
interests or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any beneficial
interests, capital stock or other equity interests (as the case
may be) of the Company or any such subsidiary, (B) warrants,
rights or options to subscribe for or purchase from the Company
or any such subsidiary any such beneficial interests, capital
stock or other equity interests or any such convertible or
exchangeable securities, equity interests or obligations, or (C)
obligations of the Company or any such subsidiary to issue any
shares of beneficial interests, capital stock, other equity
interests, any such convertible or exchangeable securities,
equity interests or obligations, or any such warrants, rights or
options.
(l) The offer, issuance and exchange of the
Common Units in connection with the Formation Transactions were
or will be exempt from the registration requirements of the Act
and applicable state securities and blue sky laws. The Company
and the Operating Partnership reasonably believe that all persons
and entities to whom such Common Units have been issued or will
be issued on the Firm Closing Date were or will be at the time of
issuance "accredited investors" as that term is defined in Rule
<PAGE>
501(a) under the Act.
(m) The pro forma condensed consolidated balance
sheet and the pro forma condensed consolidated statements of
operations of the Company (in each case, including the notes
thereto) included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) fairly present the financial
position of the Company at the dates therein specified. The
combined financial statements (including the notes thereto) of
the Prime Properties (as defined in the notes thereto) included
in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present the financial position, the results of
operations and cash flows and changes in financial condition of
the Prime Properties, at the date and for the periods therein
specified. The combined statement of revenues and certain
expenses (including the notes thereto) of the Prime Industrial
Contribution Properties (as defined in the notes thereto)
included in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present the combined revenues and certain
expenses of the Prime Industrial Contribution Properties for the
periods therein specified. The combined statement of revenues
and certain expenses (including the notes thereto) of the IBD
Contribution Properties (as defined in the notes thereto)
included in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present the combined revenues and certain
expenses of the IBD Contribution Properties for the periods
therein specified. The combined statement of revenues and certain
expenses (including the notes thereto) of the NAC Contribution
Properties (as defined in the notes thereto) included in the
Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus)
fairly present the combined revenues and certain expenses of the
NAC Contribution Properties for the periods therein specified.
The statement of revenues and certain expenses of Citibank Office
Plaza included in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present revenues and certain
expenses of Citibank Office Plaza for the periods therein
specified. The statement of revenues and certain expenses of
Salt Creek Office Center included in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present revenues
and certain expenses of Salt Creek Office Center for the periods
therein specified. The statement of revenues and certain expenses
of 280 Schuman Boulevard included in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) fairly present revenues
and certain expenses of 280 Schuman Boulevard for the periods
therein specified. The statement of revenues and certain
expenses of 475 Superior Avenue included in the Registration
Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present
revenues and certain expenses of 475 Superior Avenue for the
periods therein specified. All of the foregoing financial
statements (including the notes thereto) and schedules have been
prepared in accordance with generally accepted accounting
<PAGE>
principles consistently applied for each of the periods
presented. The selected financial data set forth under the
caption "Selected Financial Data" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus
(or such Preliminary Prospectus), the information included
therein.
(n) The pro forma condensed consolidated balance
sheet and the pro forma condensed consolidated statements of
operations of the Company included in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) comply in all material
respects with the applicable requirements of Rule 11-02 of
Regulation S-X of the Commission and the pro forma adjustments
have been properly applied to the historical amounts in the
compilation of such information and the assumptions used in the
preparation thereof are, in the opinion of the Company,
reasonable. Other than the historical and pro forma financial
statements (and schedules) included therein, no other historical
or pro forma financial statements (or schedules) are required to
be included in the Registration Statement or Prospectus.
(o) Ernst & Young LLP, who have certified certain
financial statements and schedules, and delivered their reports
with respect to the audited financial statements and schedules,
included in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), are independent public accountants as required by
the Act and the applicable rules and regulations thereunder.
(p) The assumptions made by the Company disclosed
in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), under the caption
"Distribution Policy" are reasonable in light of the expected and
intended method of operation of the Company and the Operating
Partnership.
(q) The execution and delivery of this Agreement
have been duly authorized by the Company and the Operating
Partnership and this Agreement has been duly executed and
delivered by the Company and the Operating Partnership, and is
the valid and binding agreement of each of the Company and the
Operating Partnership, enforceable against the Company and the
Operating Partnership in accordance with its terms, subject to
the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance, reorganization and similar laws relating to
creditors' rights generally and to the application of equitable
principles in any proceeding, whether at law or in equity.
(r) No legal or governmental proceedings are
pending to which the Company or any of its subsidiaries is a
party or to which the property of the Company or any of its
subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) and
are not described therein, and no such proceedings have been
threatened against the Company or any of its subsidiaries or with
respect to any of their respective properties; and no contract or
other document is required to be described in the Registration
<PAGE>
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) or filed as required.
(s) The issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to this
Agreement, the compliance by the Company and the Operating
Partnership with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not
(i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such
as have been obtained, such as may be required under state
securities or blue sky laws and, if the registration statement
filed with respect to the Securities (as amended) is not
effective under the Act as of the time of execution hereof, such
as may be required (and shall be obtained as provided in this
Agreement) under the Act, or (ii) conflict with or result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, material lease or other material agreement or material
instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any
of their respective properties are bound, or the charter
documents or by-laws or certificate of limited partnership or
partnership agreement (as the case may be) of the Company or any
of its subsidiaries, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of
its subsidiaries.
(t) Each of the Company and its subsidiaries has
full power (corporate or other) to enter into and deliver (as
applicable) the agreements set forth on Schedule 3 hereto and all
other agreements and other documents related to the Formation
Transactions (collectively, the "Transaction Documents") to which
each is party and to carry out all the terms and provisions
thereof to be carried out by each, respectively. The execution
and delivery of each of the Transaction Documents have been duly
authorized by the Company and its subsidiaries (as applicable)
and the Transaction Documents have been or will be on the Firm
Closing Date duly executed and delivered by the Company and its
subsidiaries (as applicable), and each is the valid and binding
agreement of the Company and its subsidiaries (as applicable),
enforceable against the Company and its subsidiaries (as
applicable) in accordance with its terms, subject to the effect
of bankruptcy, insolvency, moratorium, fraudulent conveyance,
reorganization and similar laws relating to creditors' rights
generally and to the application of equitable principles in any
proceeding, whether at law or in equity.
(u) The execution and delivery of the Transaction
Documents, the compliance by the Company and its subsidiaries (as
applicable) with their respective obligations under the
Transaction Documents and the consummation of the Formation
Transactions do not (i) require the consent, approval,
authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such
as may be required under state securities or blue sky laws and,
if the Registration Statement filed with respect to the
<PAGE>
Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be
obtained as provided in this Agreement) under the Act, or (ii)
conflict with or result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any
indenture, mortgage (except that (i) in connection with certain
mortgages to be assumed concurrently with the Closing as
described in the Prospectus, consents from the mortgage holders
will be required as a condition of Closing, and (ii) in
connection with mortgages to be repaid concurrently with the
Closing as described in the Prospectus, an agreement to
contribute may be a violation of such mortgages, but such
mortgages will be repaid concurrently with the Closing), deed of
trust, material lease or other material agreement or material
instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any
of their respective properties are bound, or the charter
documents or by-laws or certificate of limited partnership or
partnership agreement (as the case may be) of the Company or any
of its subsidiaries, or any statute or any judgment, decree,
order, rule or regulation of any court or other governmental
authority or any arbitrator applicable to the Company or any of
its subsidiaries.
(v) Subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), neither the Company nor any of
its subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding and there has not been any material adverse change, or
any development involving a prospective material adverse change,
in the condition (financial or otherwise), management, business
prospects, net worth, or results of operations of the Company and
its subsidiaries, taken as a whole, except in each case as
described in or contemplated by the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(w) The Company has not, directly or indirectly,
(i) taken any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or (ii) since the filing of the Registration Statement
(A) sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities or (B) paid or agreed to
pay to any person any compensation for soliciting another to
purchase any other securities of the Company.
(x) The Company has not distributed and, prior to
the later of (i) the Closing Date and (ii) the completion of the
distribution of the Securities, will not distribute any offering
material in connection with the offering and sale of the
Securities other than the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or other materials, if any,
permitted by the Act.
<PAGE>
(y) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), (1) the Company
and its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any shares of its
outstanding beneficial interests, nor declared, paid or otherwise made any
dividend or distribution of any kind on its shares of beneficial interests,
other than as described in Item 32 of Part II of the Registration Statement; and
(3) there has not been any material change in the beneficial interests, capital
stock or partnership interests (as the case may be), short-term debt or long-
term debt of the Company and its consolidated subsidiaries, except in each case
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(z) Upon consummation of the Formation Transactions (including,
for purposes of this Agreement, the consummation of the issuance and sale of the
Firm Securities pursuant to Section 3 hereof), or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and the application of the
proceeds from such issuance and sale and such borrowings (which application
shall occur concurrently with such issuance and sale) as set forth under the
caption "Use of Proceeds" in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus),
the Company or its subsidiaries will have good and marketable title in fee
simple to all items of real property comprising part of the Properties,
including the Acquisition Properties and the Contribution Properties (as such
terms are defined in the Registration Statement and the Prospectus, or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
marketable title to all personal property comprising part of the Properties, in
each case free and clear of any security interests, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not interfere with the use
made or proposed to be made of such property by the Company or such subsidiary,
and any real property and buildings comprising part of the Properties held under
lease by the Company or any such subsidiary are held under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary, in each case except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(aa) No labor dispute with the employees of the Company or any
of its subsidiaries exists or is threatened or, to the best of the Company's
knowledge, imminent that could result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary
<PAGE>
Prospectus).
(ab) Upon consummation of the Formation
Transactions, the Company and its subsidiaries will own or
possess, or will be able to acquire on reasonable terms, all
material patents, patent applications, trademarks, service marks,
trade names, licenses, copyrights and proprietary or other
confidential information currently employed or proposed to be
employed by them in connection with the business now operated or
proposed to be operated by them as described in the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and neither the Company nor any such
subsidiary has received any notice of infringement of or conflict
with asserted rights of any third parry with respect to any of
the foregoing which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ac) Upon consummation of the Formation
Transactions, the Company and each of its subsidiaries will own
or possess all contract rights that are material to the
businesses now operated or proposed to be operated by them taken
as a whole as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus),
including all such contract rights referred to in the Prospectus.
The Company has not received any written notices that any of such
contracts are not in full force and effect, and neither the
Company nor any such subsidiary has received written notice of
any material breach by any party under any of such contracts.
(ad) As of the Firm Closing Date, the Company and
each of its subsidiaries will be insured by insurers of
recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the
businesses in which they are or will be engaged as described in
the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus); and neither the Company nor
any such subsidiary has any reason to believe that it will not be
able to renew such insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as
may be necessary to continue its business at a cost that would
not materially and adversely affect the condition (financial or
otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(ae) No subsidiary of the Company is currently
prohibited, directly or indirectly, from paying any dividends to
the Company, from making any other distribution on such
subsidiary's capital stock or partnership interests, from
repaying to the Company any loans or advances to such subsidiary
from the Company or from transferring any of such subsidiary's
property or assets to the Company or any other subsidiary of the
<PAGE>
Company, except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(af) The Company and its subsidiaries will
possess as of the Firm Closing Date all certificates,
authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct
their respective businesses, and neither the Company nor any such
subsidiary has received any written notice of proceedings
relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the
aggregate, if the subject of any unfavorable decision, ruling or
finding, would result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries,
taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(ag) The Company will conduct its operations in a
manner that will not subject it to registration as an investment
company under the Investment Company Act of 1940, as amended, and
the Formation Transactions and other transactions contemplated by
this Agreement will not cause the Company to become an investment
company subject to registration under such act.
(ah) Each of the Company and its subsidiaries has
filed all foreign, federal, state and local tax returns that are
required to be filed or has requested extensions thereof (except
in any case in which the failure so to file would not have a
material adverse effect on the Company and its subsidiaries,
taken as a whole) and has paid all taxes required to be paid by
it and any other assessment, fine or penalty levied against it,
to the extent that any of the foregoing is due and payable,
except for any such assessment, fine or penalty that is currently
being contested in good faith or as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(ai) Neither the Company nor any of its
subsidiaries is in violation of any applicable federal or state
law or regulation relating to occupational safety and health or
to the storage, handling or transportation of hazardous or toxic
materials and the Company and its subsidiaries have received all
permits, licenses or other approvals required of them under
applicable federal and state occupational safety and health and
environmental laws and regulations to conduct their respective
businesses or the businesses proposed to be conducted by them as
described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), and the
Company and each such subsidiary is in compliance with all terms
and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive
required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, result in
a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole,
<PAGE>
except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(aj) Each certificate signed by any officer of
the Company and delivered to the Representatives or counsel for
the Underwriters on the Firm Closing Date or on the Option
Closing Date shall be deemed to be a representation and warranty
by the Company to each Underwriter as to the matters covered
thereby.
(ak) Except for the shares of capital stock of,
or partnership interests in (as applicable), each of the
subsidiaries owned by the Company and such subsidiaries, neither
the Company nor any such subsidiary owns any shares of stock or
any other equity securities of any corporation or has any equity
interest in any firm, partnership, association or other entity,
except as described in or contemplated by the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(al) The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (1) transactions are executed
in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset
accountability; (3) access to assets is permitted only in
accordance with management's general or specific authorization;
and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(am) No default exists, and no event has occurred
which, with notice or lapse of time or both, would constitute a
default in the due performance and observance of any term,
covenant or condition of any indenture, mortgage, deed of trust,
lease, partnership agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their
respective properties is bound or may be affected in any material
adverse respect with regard to property, business or operations
of the Company and its subsidiaries.
(an) The Securities have been approved for
listing on the New York Stock Exchange, subject to official
notice of issuance.
(ao) Except as otherwise disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), since January 1, 1990 no
foreclosures have been instituted and none are currently
threatened with respect to any property or assets directly or
indirectly owned (whether now or in the past) by The Prime Group,
Inc. or the Company or any of its subsidiaries. Except for the
assets of The Prime Group, Inc. that will not be transferred to
the Company in the Formation Transactions that are described
under the heading "Business and Properties Prime Assets Not
Acquired by the Company" in the Prospectus, or, if the Prospectus
<PAGE>
is not in existence, the most recent Preliminary Prospectus (the
"Excluded Properties"), no director, executive officer or 5% or
more stockholder (each, a "Member") of The Prime Group, Inc.
owns or operates any real property other than the real properties
comprising part of the Properties.
(ap) Except as otherwise described in the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), (i) no proceeding or filing of a
petition seeking relief under Title 11 of the United States Code
or any other federal, state or foreign bankruptcy, insolvency,
liquidation or similar law has been commenced or instituted
(whether voluntary or involuntary) by or with respect to any
Member of The Prime Group, Inc., (ii) no Member of The Prime
Group, Inc. has applied for or consented to the appointment of a
receiver, trustee, custodian, sequestrator or similar official
for any such persons or for a substantial part of any such
persons' property or assets and (iii) no Member of The Prime
Group, Inc. has made a general assignment for the benefit of its
creditors.
(aq) No relationship, direct or indirect, exists
between or among the Company or the Operating Partnership on the
one hand, and the directors, officers, shareholders (in the case
of the Company), partners (in the case of the Operating
Partnership), tenants, customers or suppliers of the Company or
the Operating Partnership on the other hand, which is required to
be described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) which is not
so described.
(ar) The transfer of interests or other assets
pursuant to the agreements and instruments set forth on Schedule
4 hereto (the "Transfer Documents") does not violate the articles
or certificate of incorporation, by-laws, limited liability
company operating agreement, declaration of trust, certificate of
limited partnership, partnership agreement or other
organizational documents, as the case may be, of any Member of
The Prime Group, Inc. The Transfer Documents are sufficient to
effect the transfer to the Company or its subsidiaries of all
direct or indirect interests in the Properties and other assets
specified therein upon payment of the specified consideration
therefor. Pursuant to the Transfer Documents, the Properties and
other assets specified therein will be transferred to the Company
or its subsidiaries directly and not by way of a transfer of
interests in partnerships or other types of entities which,
immediately prior to the transfer, own the Properties and such
other assets, except in the case of the Prime Properties and
certain other Properties encumbered by tax-exempt bonds, in which
case the Transfer Documents provide that the interests in the
Property Partnerships subject to such encumbrances will be
transferred to the Company or its subsidiaries.
(as) Commencing with the Firm Closing Date, after
giving effect to the Formation Transactions, the Company will be
organized in conformity with the requirements for qualification
as a real estate investment trust (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), and will have no
earnings and profits accumulated in a non-REIT year within the
meaning of Section 857(a)(3)(B) of the Code, and the proposed
<PAGE>
method of operation of the Company and its subsidiaries will
enable the Company to meet the requirements for taxation as a
REIT under the Code beginning with its taxable year ending
December 31, 1997 and for its subsequent taxable years. All
statements in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) regarding the
Company's qualification as a REIT are true, complete and correct
in all material respects.
(at) Except as disclosed in physical inspection
reports, leases, environmental reports and other written
materials previously provided by the Company to the
Representatives and their counsel, (i) the Company has not
received any written notice that any of the Properties is not in
compliance with all applicable codes, laws, ordinances and
regulations (including, without limitation, building and zoning
codes and laws and regulations relating to access to the
Properties) and deed restrictions or other covenants, except for
such failures to comply that would not materially impair the
value of any of the Properties or would not result in a
forfeiture or reversion of title; (ii) neither the Company nor
any of its subsidiaries has knowledge of any pending or
threatened litigation, moratorium, condemnation proceedings,
zoning change, or other similar proceeding or action that could
in any manner affect the size of, use of, improvements on,
construction on, access to or availability of utilities or other
necessary services to, the Properties, except such proceedings or
actions which are not reasonably expected to, singly or in the
aggregate, result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, taken
as a whole; (iii) all liens, charges, encumbrances, claims, or
restrictions on or affecting the properties and assets (including
the Properties) of the Company or any of its subsidiaries that
are required to be disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus) are disclosed therein; (iv) to the best of the
Company's knowledge, neither the Company, any of its
subsidiaries nor any tenant of any portion of any of the
Properties is in default under any of the ground leases (as
lessor), space leases (as lessor or lessee, as the case may be)
or other occupancy or license agreement relating to, or under any
of the mortgages which will remain in effect after the Closing or
other security documents or other agreements encumbering or
otherwise recorded against, the Properties and there is no event
which, but for the passage of time or the giving of notice or
both, would constitute a default under any of such documents or
agreements, except such defaults that would not, singly or in the
aggregate, result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries; and
(v) except as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) and
except as otherwise provided by law, upon consummation of the
Formation Transactions, no tenant under any lease pursuant to
which the Company or any of its subsidiaries will lease the
Properties will have an option or right of first refusal to
purchase the premises leased thereunder or the building of which
such premises are a part.
<PAGE>
(au) Except as otherwise disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), the mortgages and deeds of trust
encumbering the properties and assets described in the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) which will remain in effect after the
Closing are not convertible and neither the Company, any of its
subsidiaries nor any person affiliated therewith holds a
participating interest therein, and such mortgages and deeds of
trust are not cross-defaulted or cross-collateralized to any
property not owned directly or indirectly by the Company or any
of its subsidiaries.
(av) Each of the Properties is in substantial
compliance with all presently applicable provisions of the
Americans with Disabilities Act and no failure of the Company or
any of its subsidiaries to comply with all presently applicable
provisions of the Americans with Disabilities Act would result in
a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, taken as a whole.
(aw) Except as otherwise disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), (i) neither the Company, any
of its subsidiaries nor, to the best knowledge of the Company, any
other owners of the Properties at any time or any other party has
at any time, handled, stored, treated, transported, manufactured,
spilled, leaked, or discharged, dumped, transferred or otherwise
disposed of or dealt with, Hazardous Materials (as hereinafter
defined) on, to or from the Properties, other than by any such
action taken in compliance with all applicable Environmental
Statutes; (ii) neither the Company nor any of its subsidiaries
intends to use the Properties or any subsequently acquired
properties for the purpose of handling, storing, treating,
transporting, manufacturing, spilling, leaking, discharging,
dumping, transferring or otherwise disposing of or dealing with
Hazardous Materials; (iii) neither the Company nor any of its
subsidiaries knows of any seepage, leak, discharge, release,
emission, spill, or dumping of Hazardous Materials into waters on
or adjacent to the Properties or any other real property owned or
occupied by any such party, or onto lands from which Hazardous
Materials might seep, flow or drain into such waters; (iv) except
as described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), neither the
Company nor any of its subsidiaries has received any notice of,
or has any knowledge of any occurrence or circumstance which,
with notice or passage of time or both, would give rise to a
claim under or pursuant to any federal, state or local
environmental statute or regulation or under common law,
pertaining to Hazardous Materials on or originating from any of
the Properties or any assets described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus) or any other real property owned or occupied by any
such party or arising out of the conduct of any such party,
including without limitation a claim under or pursuant to any
Environmental Statute (as hereinafter defined); (v) none of the
Properties is included or, to the best of the Company's
knowledge, proposed for inclusion on the National Priorities List
issued pursuant to CERCLA (as hereinafter defined) by the United
<PAGE>
States Environmental Protection Agency (the "EPA") or, to the
best of the Company's knowledge, proposed for inclusion on any
similar list or inventory issued pursuant to any other
Environmental Statute or issued by any other Governmental
Authority (as hereinafter defined).
As used herein, "Hazardous Material" shall
include, without limitation, any flammable explosives,
radioactive materials, hazardous materials, hazardous wastes,
toxic substances, or related materials, asbestos or any hazardous
materials as defined by any federal, state or local environmental
law, ordinance, rule or regulation including, without limitation,
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. SECTIONS 9601-9675
("CERCLA"), the Hazardous Materials Transportation Act, as
amended, 49 U.S.C. SECTIONS 1801-1819, the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. SECTIONS 6901-6992K, the Emergency
Planning and Community Right-to-Know Act of 1986, 42 U.S.C.
SECTIONS 11001-11050, the Toxic Substances Control Act, 15 U.S.C.
SECTIONS 2601-2671, the Federal Insecticide, Fungicide and Rodenticide
Act, 7 U.S.C. SECTIONS 136-136y, the Clean Air Act, 42 U.S.C.
SECTIONS 7401-7642, the Clean Water Act (Federal Water Pollution
Control Act), 33 U.S.C. SECTIONS 1251-1387, the Safe Drinking Water
Act, 42 U.S.C. SECTIONS 300f-300j-26, and the Occupational Safety and
Health Act, 29 U.S.C. SECTIONS 651-678, as any of the above statutes
may be amended from time to time, and in the regulations
promulgated pursuant to each of the foregoing (individually, an
"Environmental Statute") or by any federal, state or local
governmental authority having or claiming jurisdiction over the
properties and assets described in the Prospectus (a
"Governmental Authority").
(ax) None of the environmental consultants which
prepared environmental and asbestos inspection reports with
respect to any of the Properties (including, for purposes of this
paragraph, the Excluded Properties), the engineering consultants
which prepared engineering inspection reports with respect to any
of the Properties or Rosen Consulting Group, real estate
advisors, which prepared regional economic overviews and market
analysis for The Prime Group, Inc., dated October , 1997, were
employed for such purpose on a contingent basis or has any
substantial interest in the Company or any of its subsidiaries
and none of them or any of their directors, officers or employees
is connected with the Company or any of its subsidiaries as a
promoter, selling agent, voting trustee, director, officer or
employee.
(ay) Except as set forth in the environmental and
engineering inspection reports prepared with respect to the
Properties (including, for purposes of this paragraph, the
Excluded Properties), neither the Company nor the Operating
Partnership is aware of any environmental or engineering
condition at any of the Properties that would result in a
material adverse change in the condition (financial or otherwise)
or business prospects, net worth or results of operations of the
Company and its subsidiaries, taken as a whole.
(az) No real estate transfer or similar taxes are
or will become due and payable by the Company or any of its
subsidiaries as a result of the acquisition by the Company or any
<PAGE>
of its subsidiaries of any direct or indirect interest in any
Property in connection with the Formation Transactions, other
than customary documentary transfer taxes which will be paid in
full on or prior to the Firm Closing Date or as otherwise
disclosed in the Prospectus.
(ba) At the firm Closing Date, the Company or its
subsidiaries will have obtained title insurance on each of the
Properties which constitute real property (including ground
leasehold estates) in an amount (the "Insured Title Amount") at
least equal to the sum of (i) the purchase price, in the case of
the Acquisition Properties, (ii) $ [insert the amount
of borrowings permitted under the Primestone Loan and the Credit
Facility] and (iii) the costs of the other Properties, in the
amount reasonably determined by the Company.
(bb) At or prior to the Firm Closing Date, each
of the transactions constituting the Formation Transactions will
have occurred in the manner described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), including, without limitation, the acquisition of
all of the Acquisition Properties and the Contribution Properties
and the execution and delivery of the Credit Facility.
(bc) All of the representations and warranties of
the Company, the Operating Partnership, The Prime Group, Inc. and
the other limited partners of the Operating Partnership contained
in the Transaction Documents are true and correct in all material
respects.
Each reference in this Section 2 to "the condition
(financial or otherwise), management, business prospects, net
worth, or results of operations of the Company and its
subsidiaries" means the condition (financial or otherwise),
management, business prospects, net worth, or results of
operations of the Company and its subsidiaries, upon consummation
of the Formation Transactions.
3. Purchase, Sale and Delivery of the Securities. (a)
On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company,
at a purchase price of $___ per Common Share, the number of Firm
Securities set forth opposite the name of such Underwriter in
Schedule 1 hereto. One or more certificates in definitive form
for the Firm Securities that the several Underwriters have agreed
to purchase hereunder, and in such denomination or denominations
and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the
Firm Closing Date, shall be delivered by or on behalf of the
Company to the Representatives for the respective accounts of the
Underwriters, against payment by or on behalf of the Underwriters
of the purchase price therefor by wire transfer in same-day funds
(the "Wired Funds") to the account of the Company. Such delivery
of and payment for the Firm Securities shall be made at the
offices of Winston & Strawn, 35 West Wacker Drive, Chicago,
Illinois, at 8:30 A.M., Chicago time, on November ___, 1997, or
at such other place, time or date as the Representatives and the
<PAGE>
Company may agree upon or as the Representatives may determine
pursuant to Section 9 hereof, such time and date of delivery
against payment being herein referred to as the "Firm Closing
Date". The Company will make such certificate or certificates
for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the
Company's transfer agent or registrar or of Prudential Securities
Incorporated at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any
over-allotments in connection with the distribution and sale of
the Firm Securities as contemplated by the Prospectus, the
Company hereby grants to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the
same price per share as the price per share for the Firm
Securities set forth above in paragraph (a) of this Section 3,
plus, if the purchase and sale of any Option Securities takes
place after the Firm Closing Date and after the Firm Securities
are trading "ex-dividend", an amount equal to the dividends
payable on such Option Securities. The option granted hereby may
be exercised as to all or any part of the Option Securities from
time to time within thirty days after the date of the Prospectus
(or, if such 30th day shall be a Saturday or Sunday or a holiday,
on the next business day thereafter when the New York Stock
Exchange is open for trading). The Underwriters shall not be
under any obligation to purchase any of the Option Securities
prior to the exercise of such option. The Representatives may
from time to time exercise the option granted hereby by giving
notice in writing or by telephone (confirmed in writing) to the
Company setting forth the aggregate number of Option Securities
as to which the several Underwriters are then exercising the
option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be determined
by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the
option and, in any event, shall not be earlier than the Firm
Closing Date. The time and date set forth in such notice, or
such other time on such other date as the Representatives and
Company may agree upon or as the Representatives may determine
pursuant to Section 9 hereof, is herein called the "Option
Closing Date" with respect to such Option Securities. Upon
exercise of the option as provided herein, the Company shall
become obligated to sell to each of the several Underwriters,
and, subject to the terms and conditions herein set forth, each
of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Company, the same percentage of
the total number of the Option Securities as to which the several
Underwriters are then exercising the option as such Underwriter
is obligated to purchase of the aggregate number of Firm
Securities, as adjusted by the Representatives in such manner as
they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one
or more certificates in definitive form for such Option
Securities, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and
conditions, set forth in paragraph (a) of this Section 3, except
that reference therein to the Firm Securities and the Firm
Closing Date shall be deemed, for purposes of this paragraph (b),
to refer to such Option Securities and Option Closing Date,
<PAGE>
respectively.
(c) The Company hereby acknowledges that the wire
transfer by or on behalf of the Underwriters of the purchase
price for any Securities does not constitute closing of a
purchase and sale of the Securities. Only execution and delivery
of a receipt for Securities by the Underwriters indicates
completion of the closing of a purchase of the Securities from
the Company. Furthermore, in the event that the Underwriters
wire the Wired Funds to the Company prior to the completion of
the closing of a purchase of Securities, the Company hereby
acknowledges that until the Underwriters execute and deliver a
receipt for the Securities, by facsimile or otherwise, the
Company will not be entitled to the Wired Funds and shall return
the Wired Funds to the Underwriters as soon as practicable (by
wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of Securities is not completed and the
Wired Funds are not returned by the Company to the Underwriters
on the same day the Wired Funds were received by the Company, the
Company agrees to pay to the Underwriters in respect of each day
the Wired Funds are not returned by it, in same-day funds,
interest on the amount of such Wired Funds in an amount
representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated.
(d) It is understood that any of you,
individually and not as one of the Representatives, may (but
shall not be obligated to) make payment on behalf of any
Underwriter or Underwriters for any of the Securities to be
purchased by such Underwriter or Underwriters. No such payment
shall relieve such Underwriter or Underwriters from any of its or
their obligations hereunder.
4. Offering by the Underwriters. Upon your
authorization of the release of the Firm Securities, the several
Underwriters propose to offer the Firm Securities for sale to the
public upon the terms set forth in the Prospectus.
5. Covenants of the Company. Each of the Company and
the Operating Partnership covenants and agrees with each of the
Underwriters that:
(a) The Company will use its best efforts to
cause the Registration Statement, if not effective at the time of
execution of this Agreement, and any amendments thereto to become
effective as promptly as possible. If required, the Company will
file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the
Commission in the manner and within the time period required by
Rules 434 and 424(b) under the Act. During any time when a
prospectus relating to the Securities is required to be delivered
under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the
Commission thereunder to the extent necessary to permit the
continuance of sales of or dealings in the Securities in
accordance with the provisions hereof and of the Prospectus, as
then amended or supplemented, and (ii) will not file with the
Commission the Prospectus, Term Sheet or the amendment referred
to in the second sentence of Section 2(a) hereof, any amendment
or supplement to such Prospectus, Term Sheet or any amendment to
<PAGE>
the Registration Statement or any Rule 462(b) Registration
Statement of which the Representatives previously have been
advised and furnished with a copy for a reasonable period of time
prior to the proposed filing and as to which filing the
Representatives shall not have given their consent. The Company
will prepare and file with the Commission, in accordance with the
rules and regulations of the Commission, promptly upon request by
the Representatives or counsel for the Underwriters, any
amendments to the Registration Statement or amendments or
supplements to the Prospectus that may be necessary or advisable
in connection with the distribution of the Securities by the
several Underwriters, and will use its best efforts to cause any
such amendment to the Registration Statement to be declared
effective by the Commission as promptly as possible. The Company
will advise the Representatives, promptly after receiving notice
thereof, of the time when the Registration Statement or any
amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed
and will provide evidence satisfactory to the Representatives of
each such filing or effectiveness.
(b) The Company will advise the Representatives,
promptly after receiving notice or obtaining knowledge thereof,
of (i) the issuance by the Commission of any stop order
suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use
of any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, (ii) the suspension of the qualification
of the Securities for offering or sale in any jurisdiction, (iii)
the institution, threatening or contemplation of any proceeding
for any such purpose or (iv) any request made by the Commission
for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the
Prospectus or for additional information. The Company will use
its best efforts to prevent the issuance of any such stop order
and, if any such stop order is issued, to obtain the withdrawal
thereof as promptly as possible.
(c) The Company will promptly from time to time
take such action as the Representatives may reasonably request to
qualify the Securities for offering and sale under the securities
or blue sky laws of such jurisdictions as the Representatives may
reasonably request and will continue to comply with such laws for
as long as may be necessary to complete the distribution of the
Securities, provided, however, that in connection therewith the
Company shall not be required to take any action that would
subject it to income taxation in such jurisdictions, to qualify
as a foreign corporation or to execute a general consent to
service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the
final date when a prospectus relating to the Securities is
required to be delivered under the Act or (ii) the Option Closing
Date, any event occurs as a result of which the Prospectus, as
then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if
for any other reason it is necessary at any time to amend or
<PAGE>
supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to
Section 5(a) hereof, will prepare and file with the Commission,
at the Company's expense, an amendment to the Registration
Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i)
to the Representatives and to counsel for the Underwriters a
signed copy of the registration statement originally filed with
respect to the Securities and each amendment thereto (in each
case including exhibits thereto) or any Rule 462(b) Registration
Statement, certified by the Secretary or an Assistant Secretary
of the Company to be true and complete copies thereof as filed
with the Commission by electronic transmission, (ii) to each
other Underwriter, a conformed copy of such registration
statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and
(iii) so long as a prospectus relating to the Securities is
required to be delivered under the Act, as many copies of each
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto as the Representatives may reasonably request;
without limiting the application of clause (iii) of this
sentence, the Company, not later than (A) 6:00 P.M., New York
City time, on the date of determination of the public offering
price, if such determination occurred at or prior to 10:00 A.M.,
New York City time, on such date or (B) 2:00 P.M., New York City
time, on the business day following the date of determination of
the public offering price, if such determination occurred after
10:00 A.M., New York City time, on such date, will deliver to the
Underwriters, without charge, as many copies of the Prospectus
and any amendment or supplement thereto as the Representatives
may reasonably request for purposes of confirming orders that are
expected to settle on the Firm Closing Date.
(f) The Company, as soon as practicable, will
make generally available to its securityholders and to the
Representatives a consolidated earnings statement of the Company
and its subsidiaries that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(g) The Company will apply the net proceeds from
the sale of the Securities as set forth under "Use of Proceeds"
in the Prospectus.
(h) The Company will not, directly or indirectly,
without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, 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 Common
Units or other partnership interests of the Operating
Partnership, or any securities convertible into, or exchangeable
or exercisable for, Common Shares or other shares of beneficial
interest of the Company or Common Units or other partnership
interests of the Operating Partnership, for a period of 180 days
after the date hereof, except (i) pursuant to this Agreement,
<PAGE>
(ii) pursuant to a dividend reinvestment plan of the Company,
(iii) pursuant to the Company's Share Incentive Plan, and (iv) in
connection with the acquisition by the Company or the Operating
Partnership of real property or interests in entities holding
real property, provided that the recipient or transferee of such
securities or interests agrees in writing to be subject to the
lock-up contained in this Section 5(h) (without giving effect to
clauses (i), (ii), (iii) and (iv)) for a period ending on the
date that is 180 days after the date hereof.
(i) The Company will not, directly or indirectly,
(i) take any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any
compensation for soliciting purchases of, the Securities or (B)
pay or agree to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.
(j) The Company will obtain the lock-up
agreements described in Section 7(f) hereof prior to the Firm
Closing Date.
(k) If at any time during the 25-day period after
the Registration Statement becomes effective or the period prior
to the Option Closing Date, any rumor, publication or event
relating to or affecting the Company shall occur as a result of
which in your opinion the market price of the Common Stock has
been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will,
after notice from you advising the Company to the effect set
forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or
commenting on such rumor, publication or event.
(l) If the Company elects to rely on Rule 462(b),
the Company shall both file a Rule 462(b) Registration Statement
with the Commission in compliance with Rule 462(b) and pay the
applicable fees in accordance with Rule 111 promulgated under the
Act by the earlier of (i) 10:00 P.M. Eastern time on the date of
this Agreement and (ii) the time confirmations are sent or given,
as specified by Rule 462(b)(2).
(m) The Company will cause the Securities to be
duly authorized for listing by the New York Stock Exchange prior
to the Firm Closing Date, subject to official notice of issuance.
(n) The Company will use its best efforts to meet
the requirements to qualify, commencing with the taxable year
ending December 31, 1997, as a REIT under the Code.
(o) The Company will cause the Operating
Partnership to operate as a limited partnership in accordance
with the requirements of Delaware law.
6. Expenses. The Company will pay all costs and
expenses incident to the performance of its and the Operating
<PAGE>
Partnership's obligations under this Agreement, whether or not
the transactions contemplated herein are consummated or this
Agreement is terminated pursuant to Section 11 hereof, including
all costs and expenses incident to (i) the printing or other
production of documents with respect to the transactions,
including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any Preliminary
Prospectus and the Prospectus and any amendment or supplement
thereto, this Agreement and any blue sky memoranda, (ii) all
arrangements relating to the delivery to the Underwriters of
copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other
experts or advisors retained by the Company, (iv) preparation,
issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and
registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating
thereto, (vi) the filing fees of the Commission and the National
Association of Securities Dealers, Inc. relating to the
Securities, (vii) any listing of the Securities on the New York
Stock Exchange, (viii) any meetings with prospective investors in
the Securities (other than as shall have been specifically
approved by the Representatives to be paid for by the
Underwriters) and (ix) advertising relating to the offering of
the Securities (other than as shall have been specifically
approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein
is not consummated because any condition to the obligations of
the Underwriters set forth in Section 7 hereof is not satisfied,
because this Agreement is terminated pursuant to Section 11
hereof or because of any failure, refusal or inability on the
part of the Company or the Operating Partnership to perform all
obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse
the Underwriters severally upon demand for all reasonable out-of
pocket expenses (including reasonable counsel fees and
disbursements) that shall have been incurred by them in
connection with the proposed purchase and sale of the Securities.
The Company shall in no event be liable to any of the
Underwriters for the loss of anticipated profits from the
transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for
the Firm Securities shall be subject, in the Representatives'
sole discretion, to the accuracy of the representations and
warranties of the Company and the Operating Partnership contained
herein as of the date hereof and as of the Firm Closing Date, as
if made on and as of the Firm Closing Date, to the accuracy of
the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company and the
Operating Partnership of their respective covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any
amendment thereto filed prior to the Firm Closing Date has not
been declared effective as of the time of execution hereof, the
<PAGE>
Original Registration Statement or such amendment and, if the
Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have been declared effective not
later than the earlier of (i) 11:00 A.M., New York time, on the
date on which the amendment to the registration statement
originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing
information regarding the initial public offering price of the
Securities has been filed with the Commission and (ii) the time
confirmations are sent or given as specified by Rule 462(b)(2),
or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the
Representatives; if required, the Prospectus or any Term Sheet
that constitutes a part thereof and any amendment or supplement
thereto shall have been filed with the Commission in the manner
and within the time period required by Rules 434 and 424(b) under
the Act; no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto shall have been
issued, and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and
the Company shall have complied with any request of the
Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an
opinion, dated the Firm Closing Date, of Winston & Strawn,
counsel for the Company and its subsidiaries, to the effect that:
(i) the Company has been duly organized and is
validly existing as a trust in good standing under the laws
of the state of Maryland and is duly qualified to transact
business as a foreign trust and is in good standing under
the laws of all other jurisdictions where the ownership or
leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be
so qualified does not amount to a material liability or
disability to the Company and the Subsidiaries, taken as a
whole. The Operating Partnership has been duly organized
and is validly existing as a limited partnership in good
standing under the laws of the State of Delaware and is duly
qualified to transact business as a foreign limited
partnership and is in good standing under the laws of all
other jurisdictions where the ownership or leasing of its
properties or the conduct of its business requires such
qualification, except where the failure to be so qualified
does not amount to a material liability or disability to the
Company and the Subsidiaries, taken as a whole. Each of the
subsidiaries of the Company listed in Exhibit 22.1 to the
Registration Statement (the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good
standing under the laws of its respective jurisdiction of
incorporation and is duly qualified to transact business as
a foreign corporation and is in good standing under the laws
of all other jurisdictions where the ownership or leasing of
their respective properties or the conduct of their
respective businesses requires such qualification, except
where the failure to be so qualified does not amount to a
material liability or disability to the Company and the
Subsidiaries, taken as a whole.
<PAGE>
(ii) the Company and each of the Subsidiaries
have trust, corporate or partnership power (as the case may
be) to own or lease their respective properties and conduct
their respective businesses as described in the Registration
Statement and the Prospectus, and each of the Company and
the Operating Partnership has trust or partnership power (as
the case may be) to enter into this Agreement and to carry
out all the terms and provisions hereof to be carried out by
it;
(iii) the issued shares of capital stock of the
Services Company have been duly authorized and validly
issued, are fully paid and nonassessable and, except as
otherwise set forth in the Prospectus, are owned
beneficially by the Company free and clear of any perfected
security interests or any other security interests, liens,
encumbrances, equities or claims; the issued shares of
capital stock of the Finance Company have been duly
authorized and validly issued, are fully paid and
nonassessable and are owned of record and, to the knowledge
of such counsel, beneficially by the Company free and clear
of any perfected security interests or any other security
interests, liens, encumbrances, equities or claims; the
partnership agreement of the Finance Partnership has been
duly authorized, executed and delivered by the Finance
Company, as its general partner, and constitutes the valid
and binding obligation of the Finance Company, as its
general partner; such partnership agreement reflects the
Finance Company as the sole general partner of the Finance
Partnership and the Operating Partnership as the sole
limited partner of the Finance Partnership;
(iv) the authorized, issued and outstanding
capital stock of the Company is as set forth under the
caption "Capitalization" in the Prospectus; all necessary
and proper corporate proceedings have been taken in order to
authorize validly the Common Shares referred to therein; all
outstanding Common Shares (including the Firm Securities,
when issued and paid for by the Underwriters in accordance
with the terms of this Agreement) have been (or, in the case
of the Firm Securities, will be) duly and validly issued,
are fully paid and nonassessable, have been issued in
compliance with the registration requirements of federal
securities laws (or pursuant to an exemption therefrom),
were not issued in violation of or subject to, under the
Company's charter or Maryland law or any agreement to which
the Company is a party and which is known to such counsel,
any preemptive rights or other rights to subscribe for or
purchase any securities, and conform to the description
thereof contained in the Prospectus; no holders of
outstanding shares of capital stock of the Company are
entitled under the Company's charter or Maryland law or any
agreement to which the Company is a party and which is known
to such counsel, as such, to any preemptive or other rights
to subscribe for any of the Firm Securities; and no holders
of securities of the Company are entitled to have such
securities registered under the Registration Statement;
(v) the Common Units issued in connection with
<PAGE>
the Formation Transactions, including, without limitation,
the Common Units issued to the Company, were duly authorized
for issuance by the Operating Partnership to the holders
thereof; the Common Units issued to the Company, upon
contribution of cash in the amount specified in the
Operating Partnership Agreement, will be validly issued; the
Common Units issued to the Limited Partners in connection
with the Formation Transactions, upon delivery of the
consideration specified in the [ ] Agreement
(identified on Schedule 3 hereto), will be validly issued.
The issuance of the Common Units to the Limited Partners at
or prior to the Firm Closing Date as contemplated in the
[ ] Agreement is or was (as the case may be) exempt
from registration under the Act. The terms of the Common
Units conform in all material respects to the description
thereof and all statements related thereto contained in the
Prospectus. The issuances of securities described in Items
31 and 32 of the Registration Statement were not at the time
of issue, and are not as of the Firm Closing Date, required
to be registered under the Act;
(vi) the Formation Transactions constitute a
transaction in which the securities issued or exchanged are
not required to be and are not registered under the Act, and
therefore, pursuant to the exception provided by Item 901
(c)(2)(ii) of Regulation S-K under the Act ("Regulation
S-K"), do not constitute a "roll-up transaction" within the
meaning of Item 901 (c)(1) of Regulation S-K. For purposes
of this paragraph, "Formation Transactions" shall be limited
to (i) the formation of the Company, (ii) the formation of
the Operating Partnership, (iii) the formation,
capitalization and issuance of capital stock of the Services
Company and (iv) the contribution of the Properties to the
Operating Partnership in exchange for the Common Units
representing limited partnership interests therein pursuant
to the terms and conditions as set forth in the [ ]
Agreement.
(vii) except as disclosed in the Registration
Statement and the Prospectus, to the knowledge of such
counsel there are no outstanding (A) securities, equity
interests or obligations of the Company or any of the
Subsidiaries convertible into or exchangeable for any
capital stock or equity interests (as the case may be) of
the Company or any such Subsidiary, (B) warrants, rights or
options to subscribe for or purchase from the Company to any
such Subsidiary any such capital stock or equity interests
or any such convertible or exchangeable securities, equity
interests or obligations, or (C) obligations of the Company
or any such Subsidiary to issue an shares of capital stock,
equity interests, any such convertible or exchangeable
securities, equity interests or obligations, or any such
warrants, rights or options;
(viii) the statements set forth under the
headings "Business and Properties-Legal Proceedings",
"Description of Shares of Beneficial Interest", "Structure
and Formation of the Company", "Certain Relationships and
Transactions", "Partnership Agreement", "Certain Provisions
of Maryland Law and of the Company's Declaration of Trust
<PAGE>
and Bylaws", "Partnership Agreement", "Shares Available for
Future Sale", "Certain Federal Income Tax Consequences" and
"ERISA Considerations" in the Prospectus, insofar as such
statements describe statutes, rules or regulations, legal
conclusions with respect to their application or provisions
of the organizational documents of the Company, the
Operating Partnership or the Services Company, have been
reviewed by such counsel, are correct in all material
respects and present fairly the information required to be
disclosed therein;
(ix) the execution and delivery of this Agreement
have been duly authorized by all necessary trust, corporate
or partnership (as the case may be) action of the Company
and the Operating Partnership, and this Agreement has been
duly executed and delivered by the Company and the Operating
Partnership;
(x) (A) no legal or governmental proceedings are
pending to which the Company or any of the Subsidiaries is a
party or to which the property of the Company or any of the
Subsidiaries is subject that are required to be described in
the Registration Statement or the Prospectus and are not
described therein, and no such proceedings have been
threatened against the Company or any of the Subsidiaries or
with respect to any of their respective properties and (B)
no contract or other document is required to be disclosed in
the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement that is not
disclosed therein or filed as required;
(xi) the issuance, offering and sale of the
Securities to the Underwriters by the Company pursuant to
this Agreement, the compliance by the Company and the
Operating Partnership with the other provisions of this
Agreement and the consummation of the other transactions
herein contemplated do not (A) require the consent,
approval, authorization, registration or qualification of or
with any governmental authority, except such as have been
obtained and such as may be required under state securities
or blue sky laws, or (B) conflict with or result in a breach
or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument known to such
counsel to which the Company or any of the Subsidiaries is a
party or by which the Company or any of the Subsidiaries or
any of their respective properties are bound (the "Material
Agreements"), or the charter documents or by-laws or
certificate of limited partnership or partnership agreement
(as the case may be) of the Company or any of the
Subsidiaries, or any provision of any statute, rule or
regulation or any judgment, decree or order of any court or
other governmental authority or any arbitrator known to such
counsel and applicable to the Company or the Subsidiaries;
(xii) each of the Company and the Subsidiaries
has the trust, corporate or partnership power (as the case
may be) to enter into and deliver (as applicable) the
agreements and instruments set forth on Schedule 5 hereto
(the "Operative Documents") to which it is party and to
<PAGE>
carry out all the terms and provisions thereof to be carried
out by it. The execution and delivery of the Operative
Documents have been duly authorized by the Company and the
Subsidiaries (as applicable) and the Operative Documents
have been or will be on the Firm Closing Date duly executed
and delivered by the Company and the Subsidiaries (as
applicable), and each is the valid and binding agreement of
the Company and the Subsidiaries (as applicable),
enforceable against the Company and the Subsidiaries (as
applicable) in accordance with its terms, subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance, reorganization and similar laws relating to
creditors' rights generally and to the application of
equitable principles in any proceeding, whether at law or in
equity;
(xiii) the execution and delivery of the
Operative Documents, the compliance by the Company and the
Subsidiaries (as applicable) with their respective
obligations under the Operative Documents and the
consummation of the Formation Transactions do not (A)
require the consent, approval, authorization, registration
or qualification of or with any governmental authority,
except such as have been obtained under the Act, such as may
be required under state securities or blue sky laws and, if
the registration statement filed with respect to the
Securities (as amended) is not effective under the Act as of
the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the
Act, or (B) conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a
default under, any Material Agreement, or the charter
documents or by-laws or certificate of limited partnership
or partnership agreement (as the case may be) of the Company
or any of the Subsidiaries, or any provision of any statute,
rule or regulation, or any judgment, decree or order or any
court or governmental authority;
(xiv) none of the Company's subsidiaries is
currently contractually prohibited, directly or indirectly,
from paying any dividends to the Company, from making any
other distribution on such subsidiary's capital stock or
other equity interest, from repaying to the Company any
loans or advances to such subsidiary from the Company or
firm transferring any of such subsidiary's property or
assets to the Company or any of the other subsidiaries,
except as described in or contemplated by the Prospectus;
(xv) the Company and its subsidiaries possess all
certificates, authorizations, licenses and permits issued by
the appropriate federal, state, municipal or foreign
regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating
to the revocation or modification of any such certificate,
authorization, license or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling
or finding, would, upon consummation of the Formation
Transactions, result in a material adverse change in the
condition (financial or otherwise), business prospects, net
<PAGE>
worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the
Prospectus;
(xvi) the Company is not, and after giving effect
to the Formation Transactions and the other transactions
contemplated by this Agreement will not be, an investment
company subject to registration under the Investment Company
Act of 1940, as amended;
(xvii) the transfer of interests or other assets
pursuant to the Transfer Documents does not violate the
articles or certificate of incorporation, by-laws, limited
liability company agreement, declaration of trust,
certificate of limited partnership, partnership agreement or
other organizational documents, as the case may be, of any
member of The Prime Group, Inc.; each of the Transfer
Documents has been duly authorized, executed and delivered
by The Prime Group, Inc. and the Contributors (as
applicable) and is a valid and binding agreement of The
Prime Group, Inc. and the Contributors (as applicable),
enforceable in accordance with its terms, subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance, reorganization and similar laws relating to
creditors rights generally and to the application of
equitable principles in any proceeding, whether at law or in
equity;
(xviii) the Registration Statement is effective
under the Act; any required filing of the Prospectus, or any
Term Sheet that constitutes a part thereof, pursuant to
Rules 424(b) and 434 has been made in the manner and within
the time period required thereby; and no stop order
suspending the effectiveness of the Registration Statement
or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or threatened or, to
the best knowledge of such counsel, are contemplated by the
Commission;
(xix) the Registration Statement originally filed
with respect to the Securities and each amendment thereto,
any Rule 462(b) Registration Statement and the Prospectus
(in each case, other than the financial statements and other
financial information contained therein, as to which such
counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the
Act and the rules and regulations of the Commission
thereunder,
(xx) if the Company elects to rely on Rule 434,
the Prospectus is not "materially different", as such term
is used in Rule 434, from the prospectus included in the
Registration Statement at the time of its effectiveness or
an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to
Rule 430A); and
(xxi) upon completion of the Formation
Transactions, the Company will be organized in conformity
with the requirements for qualification as a real estate
<PAGE>
investment trust under the Code, and the proposed method of
operation of the Company and the Operating Partnership as
described in the Registration Statement and the Prospectus
and a certificate of a responsible officer of the Company
will enable the Company to meet the requirements for
taxation as a real estate investment trust under the Code
beginning with the year ended December 31, 1997.
In addition to rendering the legal opinions set forth
above, such counsel to the Company and its subsidiaries shall
also state that they have participated in conferences with
officers and other representatives of the Company,
representatives of the independent public accountants for the
Company, and representatives of the Underwriters, at which the
contents of the Registration Statement and the Prospectus and
related matters were discussed and, although such counsel is not
passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements contained in
the Registration Statement and the Prospectus and has not made
any independent check or verification thereof, during the course
of such participation (relying as to materiality to a large
extent upon the statements of officers and other representatives
of the Company) no facts came to the attention of such counsel
that caused such counsel to believe that the Registration
Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or that the Prospectus, as of its date or
as of the Firm Closing Date, contained an untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under
which they were made, not misleading; it being understood that
such counsel need express no belief with respect to the financial
statements schedules and other financial information included in
the Registration Statement or the Prospectus.
In rendering its legal opinion, such counsel may rely,
as to matters of fact, to the extent such counsel deems proper,
on certificates of responsible officers of the Company, the
Operating Partnership and public officials and, as to matters
involving the application of laws of any jurisdiction other than
the State of Illinois, the State of New York, the Delaware
General Corporation Law and the Delaware Revised Limited
Partnership Act or the United States, to the extent satisfactory
in form, and scope to counsel for the Underwriters, upon the
opinion of Miles and Stockbridge, a Professional Corporation, as
to Maryland law. Copies of such opinions shall be delivered to
the Representatives and counsel for the Underwriters.
References to the Registration Statement and the
Prospectus in this paragraph (b) shall include any amendment or
supplement thereto at the date of such opinion.
(c) The Representatives shall have received an
opinion, dated the Firm Closing Date, of Skadden, Arps, Slate,
Meagher & Flom LLP, counsel for the Underwriters, with respect to
the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as
the Representatives may reasonably require, and the Company shall
have furnished to such counsel such documents as they may
<PAGE>
reasonably request for the purpose of enabling them to pass upon
such matters.
(d) The Representatives shall have received from
Ernst & Young LLP, a letter or letters dated, respectively, the
date hereof and the Firm Closing Date, in form and substance
satisfactory to the Representatives, to the effect that:
(i) they are independent accountants with respect
to the Company and its consolidated subsidiaries and the
Prime Properties, the Contribution Properties and the
Acquisition Properties within the meaning of the Act and the
applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated
financial statements and schedules and pro forma financial
statements examined by them and included in the Registration
Statement and the Prospectus comply in form in all material
respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of a reading of the latest
available interim unaudited consolidated condensed financial
statements of the Company, the Prime Properties, the
Contribution Properties and the Acquisition Properties,
carrying out certain specified procedures (which do not
constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily
reveal matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the minute
books of the shareholders, the board of trustees and any
committees thereof of the Company and inquiries of certain
officials of the Company who have responsibility for
financial and accounting matters, nothing came to their
attention that caused them to believe that:
(A) at a specific date (not more than five business
days prior to the date of such letter), there were any
increases in debt or accumulated deficit of the Prime
Properties or any decreases in total assets of the
Prime Properties, in each case as compared with amounts
shown in the [June 30, 1997] combined balance sheet
included in the Registration Statement and the
Prospectus, or for the period from [_________], 1997 to
[________], 1997, there were any decreases, as compared
with the corresponding period of the previous year, in
rental income, total revenues or net income (as
applicable) of the Prime Properties, the Acquisition
Properties and the Contribution Properties, except in
all instances for changes, increases or decreases which
the Registration Statement and the Prospectus disclose
have occurred or may occur; and
(B) at a specific date (not more than five business
days prior to the date of such letter), with respect to
the Prime Properties, there were any increases in
borrowings as compared with amounts shown in the [June
30, 1997] balance sheet included in the Registration
Statement and the Prospectus, except in all instances
for changes or increases which the Registration
<PAGE>
Statement and the Prospectus disclose have occurred or
may occur.
(iv) they have carried out certain specified
procedures, not constituting an audit, with respect to
certain amounts, percentages and financial information
identified by the Representatives that are derived from the
general accounting records of the Company and its
consolidated subsidiaries and are included in the
Registration Statement and the Prospectus and have compared
such amounts, percentages and financial information with
such records of the Company and its consolidated
subsidiaries and with information derived from such records
and have found them to be in agreement, excluding any
questions of legal interpretation; and
(v) on the basis of a reading of the unaudited
pro forma condensed consolidated financial statements
included in the Registration Statement and the Prospectus,
carrying out certain specified procedures that would not
necessarily reveal matters of significance with respect to
the comments set forth in this paragraph (v), inquiries of
certain officials of the Company and its consolidated
subsidiaries who have responsibility for financial and
accounting matters and proving the arithmetic accuracy of
the application of the pro forma adjustments to the
historical amounts in the unaudited pro forma condensed
consolidated financial statements, nothing came to their
attention that caused them to believe that the unaudited pro
forma condensed consolidated financial statements do not
comply in form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or
that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such
statements.
In the event that the letters referred to above set
forth any such changes, decreases or increases, it shall be a
further condition to the obligations of the Underwriters under
this Agreement that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance
thereof, unless the Representatives deem such explanation
unnecessary, and (B) such changes, decreases or increases do not,
in the sole judgment of the Representatives, make it impractical
or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as
amended as of the date hereof.
References to the Registration Statement and the
Prospectus in this paragraph (d) with respect to either letter
referred to above shall include any amendment or supplement
thereto at the date of such letter.
(e) The Representatives shall have received a
certificate, dated the Firm Closing Date, of the chief executive
officer and the principal financial or accounting officer of the
Company to the effect that:
(i) the representations and warranties of the
Company and the Operating Partnership in this Agreement are
<PAGE>
true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm
Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary
to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm
Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
and each of the Company and the Operating Partnership has
performed all covenants and agreements and satisfied all
conditions on its part to be performed or satisfied at or
prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness
of the Registration Statement or any amendment thereto has
been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best of the Company's or
the Operating Partnership's knowledge, are contemplated by
the Commission; and
(iii) subsequent to the respective dates as of
which information is given in the Registration Statement and
the Prospectus, neither the Company nor any of its
subsidiaries has sustained any material loss or interference
with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not
covered by insurance, or from any labor dispute or any legal
or governmental proceeding, and there has not been any
material adverse change, or any development involving a
prospective material adverse change, in the condition
(financial or otherwise), management, business prospects,
net worth or results of operations of the Company and its
subsidiaries, taken as a whole, except in each case as
described in or contemplated by the Registration Statement
and the Prospectus (exclusive of any amendment or supplement
thereto).
(f) The Representatives shall have received from
each Limited Partner an agreement to the effect that such person
will not, directly or indirectly, without the prior written
consent of Prudential Securities Incorporated, on behalf of the
Underwriters, 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 an option to purchase or other sale or
disposition) of any Common Shares or other shares of beneficial
interest of the Company or Common Units or other partnership
interests of the Operating Partnership, or any securities
convertible into, or exchangeable or exercisable for, Common
Shares or other shares of beneficial interest of the Company or
Common Units or other partnership interests of the Operating
Partnership, for a period of (x) two years after the date of this
Agreement in the case of The Prime Group, Inc. and (y) one year
after the date of this Agreement in the case of the other Limited
Partners.
(g) On or before the Firm Closing Date, the
Representatives and counsel for the Underwriters shall have
<PAGE>
received such further certificates, documents or other
information as they may have reasonably requested from the
Company.
(h) Prior to the commencement of the offering of
the Securities, the Securities shall have been approved for
listing on the New York Stock Exchange, subject to official
notice of issuance.
(i) The Formation Transactions shall have been
consummated or shall occur simultaneously with the closing of the
purchase and sale of the Firm Securities hereunder.
(j) On or before the Firm Closing Date, all
necessary consents to the Formation Transactions shall have been
obtained.
(k) On or before the Firm Closing Date, the
Company and the Operating Partnership shall have delivered to you
with respect to each of the Properties copies of:
(i) an owner policy or polices of title insurance
insuring that each of the Property Partnerships owns fee
simple title to the real property (other than the land in
which the applicable Property Partnership is acquiring a
ground leasehold estate) comprising part of the related
Property and owns and holds a valid ground leasehold estate
in the land comprising part of the related Property in which
such Property Partnership is acquiring a ground leasehold
estate, in an amount at least equal to the Insured Title
Amount, which policies shall be issued by a title insurance
company or companies as previously disclosed to you and your
counsel (any such person or persons, the "Title Company"),
and contain as exceptions to title only those exceptions
acceptable to the Representatives;
(ii) an as-built survey of each of the Properties
in form satisfactory to you;
(iii) all assignments of tenant leases, service
contracts and similar rights owned, immediately prior to the
Closing, (i) by Prime, in the case of the Prime Properties
and the Prime Contribution Properties, (ii) by the NAC
Contributors, in the case of the NAC Contribution
Properties, (iii) by the IBD Contributors, in the case of
the IBD Contribution Properties, and (iv) the respective
sellers of the Acquisition Properties, in the case of the
Acquisition Properties;
(iv) all tenant estoppels, third party consents,
waivers, licenses, permits, authorizations, agreements,
certificates and the like required to be delivered to the
Company pursuant to the applicable acquisition, contribution
or formation agreements;
(v) all certificates of occupancy, zoning
compliance letters and evidence of utility availability for
each of the Properties, to the extent not included in the
title insurance policies and surveys delivered pursuant to
clauses (i) and (ii);
<PAGE>
(vi) policies or certificates of insurance
(including earthquake insurance) relating to each of the
Properties evidencing coverages and in amounts as are
prudent and customary in the businesses in which they are or
will be engaged;
(vii) UCC, judgment and tax lien searches
confirming that the personal property comprising part of the
Properties is subject to no liens, charges, encumbrances,
claims or restrictions;
(viii) checks payable to the appropriate public
officials in payment of all recording costs and transfer
taxes (or checks or wire transfers to the Title Company in
respect of such amounts) due in respect of the recording of
any instruments to be recorded in connection with the
Formation Transactions, together with a check or wire
transfer for the Title Company in payment of the Title
Company's premium, search and examination charges, survey
costs and any other amounts due in connection with the
issuance of its policy (or commitment); and
(ix) if any of the Properties is subject to an
existing mortgage which is contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) to be paid and satisfied in full
concurrently with the Closing , a current payoff letter from
the holder of such existing mortgage indicating the
principal amount required to satisfy all amounts then
secured by such existing mortgage and the additional amount
required for each day after the date of such letter
necessary to satisfy all obligations secured thereby.
All opinions, certificates, letters and documents
delivered pursuant to this Agreement will comply with the
provisions hereof only if they are reasonably satisfactory in all
material respects to the Representatives and counsel for the
Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and
documents in such quantities as the Representatives and counsel
for the Underwriters shall reasonably request.
The respective obligations of the several Underwriters
to purchase and pay for any Option Securities shall be subject,
in their discretion, to each of the foregoing conditions to
purchase the Firm Securities, except that all references to the
Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing
Date, respectively.
8. Indemnification and Contribution. (a) Each of the
Company and the Operating Partnership, jointly and severally,
agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Securities Exchange
Act of 1934 (the "Exchange Act"), against any losses, claims,
damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or
<PAGE>
liabilities (or actions in respect thereof) arise out of or are
based upon:
(i) any untrue statement or alleged untrue
statement made by the Company or the Operating Partnership
in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue
statement of any material fact contained in (A) the
Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or (B) any application or other document,
or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the securities or blue sky laws
thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state
in the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application a material fact
required to be stated therein or necessary to make the
statements therein not misleading or
(iv) any untrue statement or alleged untrue
statement of any material fact contained in any audio or
visual materials used in connection with the marketing of
the Securities, including, without limitation, slides,
videos, films and tape recordings,
and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in
connection with investigating, defending against or appearing as
a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that neither the
Company nor the Operating Partnership will be liable in any such
case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged
untrue statement or omission or alleged omission made in such
registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto
or any Application in reliance upon and in conformity with
written information furnished to the Company by such Underwriter
through the Representatives specifically for use therein; and
provided, further, that neither the Company nor the Operating
Partnership will be liable to any Underwriter or any person
controlling such Underwriter with respect to any such untrue
statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not
sent or given a copy of the Prospectus (as amended or
supplemented) at or prior to the written confirmation of the sale
of such Securities to such person in any case where such delivery
of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or
supplemented) was a result of noncompliance by the Company or the
<PAGE>
Operating Partnership with Section 5(d) and (e) of this
Agreement. This indemnity agreement will be in addition to any
liability which the Company or the Operating Partnership may
otherwise have. Neither the Company nor the Operating
Partnership will, without the prior written consent of the
Underwriter or Underwriters purchasing, in the aggregate, more
than fifty percent (50%) of the Securities, settle or compromise
or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent
includes an unconditional release of all of the Underwriters and
such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly,
will indemnify and hold harmless the Company, each of its
trustees (including any person who, with his or her consent, is
named in the Registration Statement as about to become a trustee
of the Company), each of its officers who signed the Registration
Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities
to which the Company or any such trustee, officer or controlling
person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact
contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or
the alleged omission to state therein a material fact required to
be stated in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application or necessary to make the
statements therein not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the
Representatives specifically for use therein; and, subject to the
limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably
incurred by the Company or any such trustee, officer or
controlling person in connection with investigating or defending
any such loss, claim, damage, liability or any action in respect
thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have. No
Underwriter will, without the prior written consent of the
Company, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought
hereunder (whether or not the Company, any of its trustees or
officers who signed the Registration Statement or any person who
controls the Company within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding), unless such settlement, compromise
<PAGE>
or consent includes an unconditional release of the Company, its
trustees and officers who signed the Registration Statement and
such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(c) Promptly after receipt by an indemnified
party under this Section 8 of notice of the commencement of any
action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party
will not relieve it from (i) any liability which it may have to
any indemnified party under this Section 8 except to the extent
that the indemnifying party has been materially prejudiced as a
result thereof or (ii) any liability which it may have to any
indemnified party otherwise than under this Section 8. In case
any such action is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and,
to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and
the indemnified party shall have reasonably concluded that there
may be one or more legal defenses available to it and/or other
indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party
shall not have the right to direct the defense of such action on
behalf of such indemnified party or parties and such indemnified
party or parties shall have the right to select separate counsel
to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense
thereof and approval by such indemnified party of counsel
appointed to defend such action, the indemnifying party will not
be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified
party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood,
however, that in connection with such action the indemnifying
party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action
or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations or
circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action
or actions) or (ii) the indemnifying party does not promptly
retain counsel satisfactory to the indemnified party or (iii) the
indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified
party, the indemnifying party will not be liable for the costs
and expenses of any settlement of such action effected by such
indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity
<PAGE>
agreement provided for in the preceding paragraphs of this
Section 8 is unavailable or insufficient, for any reason, to hold
harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits
received by the indemnifying party or parties on the one hand and
the indemnified party on the other from the offering of the
Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying
party or parties on the one hand and the indemnified party on the
other in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims,
damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative
benefits received by the Company and the Operating Partnership on
the one hand and the Underwriters on the other shall be deemed to
be in the same proportion as the total proceeds from the offering
of the Securities (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the
parties' relative intents, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and
any other equitable considerations appropriate in the
circumstances. The Company and the Operating Partnership and the
Underwriters agree that it would not be equitable if the amount
of such contribution were determined by pro rata or per capita
allocation (even if the Underwriters were treated as one entity
for such purpose) or by any other method of allocation that does
not take into account the equitable considerations referred to
above in this paragraph (d). Notwithstanding any other provision
of this paragraph (d), no Underwriter shall be obligated to make
contributions hereunder that in the aggregate exceed the total
public offering price of the Securities purchased by such
Underwriter under this Agreement, less the aggregate amount of
any damages that such Underwriter has otherwise been required to
pay in respect of the same or any substantially similar claim,
and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their
respective underwriting obligations and not joint, and
contributions among Underwriters shall be governed by the
provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph
(d), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange
Act shall have the same rights to contribution as such
Underwriter, and the Company and the Operating Partnership shall
be deemed one party and jointly and severally liable for any
obligations to contribute hereunder and each director of the
<PAGE>
Company, each officer of the Company who signed the Registration
Statement and each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, shall have the same rights to contribution as the
Company and the Operating Partnership.
9. Default of Underwriters. If one or more
Underwriters default in their obligations to purchase Firm
Securities or Option Securities hereunder and the aggregate
number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less
of the aggregate number of Firm Securities or Option Securities
to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements
satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the
non-defaulting Underwriters, including the Representatives), but
if no such arrangements are made by the Firm Closing Date or the
related Option Closing Date, as the case may be, the other
Underwriters shall be obligated severally in proportion to their
respective commitments hereunder to purchase the Firm Securities
or Option Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of
Securities that is more than ten percent of the aggregate number
of Firm Securities or Option Securities, as the case may be, to
be purchased by all of the Underwriters at such time hereunder,
and if arrangements satisfactory to the Representatives are not
made within 36 hours after such default for the purchase by other
persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities
with respect to which such default occurs, this Agreement will
terminate without liability on the part of any non-defaulting
Underwriter or the Company or the Operating Partnership other
than as provided in Section 10 hereof. In the event of any
default by one or more Underwriters as described in this Section
9, the Representatives shall have the right to postpone the Firm
Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than
seven business days in order that any necessary changes may be
made in the arrangements or documents for the purchase and
delivery of the Firm Securities or Option Securities, as the case
may be. As used in this Agreement, the term "Underwriter"
includes any person substituted for an Underwriter under this
Section 9. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
10. Survival. The respective representations,
warranties, agreements, covenants, indemnities and other
statements of the Company, its officers, the Operating
Partnership and the several Underwriters set forth in this
Agreement or made by or on behalf of them, respectively, pursuant
to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the
Company, any of its officers or directors, the Operating
Partnership, any Underwriter or any controlling person referred
to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall
remain in full force and effect, regardless of any termination or
<PAGE>
cancellation of this Agreement.
11. Termination. (a) This Agreement may be
terminated with respect to the Firm Securities or any Option
Securities in the sole discretion of the Representatives by
notice to the Company given prior to the Firm Closing Date or the
related Option Closing Date, respectively, in the event that the
Company or the Operating Partnership shall have failed, refused
or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at
or prior thereto or, if at or prior to the Firm Closing Date or
such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall
have, in the sole judgment of the Representatives, sustained
any material loss or interference with their respective
businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or
governmental proceeding or there shall have been any
material adverse change, or any development involving a
prospective material adverse change (including without
limitation a change in management or control of the
Company), in the condition (financial or otherwise),
business prospects, net worth or results of operations of
the Company and its subsidiaries, taken as whole, except in
each case as described in or contemplated by the
Registration Statement and the Prospectus (exclusive of any
amendment or supplement thereto);
(ii) trading in the Common Stock shall have been
suspended by the Commission or the New York Stock Exchange
or trading in securities generally on the New York Stock
Exchange shall have been suspended or minimum or maximum
prices shall have been established on such exchange;
(iii) a banking moratorium shall have been
declared by New York, Illinois or United States authorities;
or
(iv) there shall have been (A) an outbreak or
escalation of hostilities between the United States and any
foreign power, (B) an outbreak or escalation of any other
insurrection or armed conflict involving the United States
or (C) any other calamity or crisis or material adverse
change in general economic, political or financial
conditions having an effect on the U.S. financial markets
that, in the sole judgment of the Representatives, makes it
impractical or inadvisable to proceed with the public
offering or the delivery of the Securities as contemplated
by the Registration Statement, as amended as of the date
hereof.
(b) Termination of this Agreement pursuant to
this Section 11 shall be without liability of any party to any
other party except as provided in Sections 6 and 10 hereof.
12. Information Supplied by Underwriters. The
statements set forth in the last paragraph on the front cover
page and under the heading "Underwriting" in any Preliminary
<PAGE>
Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information
furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(b) and 8 hereof. The
Underwriters confirm that such statements (to such extent) are
correct.
13. Notices. All communications hereunder shall be in
writing and, if sent to any of the Underwriters, shall be
delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to Prudential Securities Incorporated, One
New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be
delivered or sent by mail, telex or facsimile transmission and
confirmed in writing to the Company at 77 W. Wacker Drive, Suite
3900, Chicago, Illinois 60601, Attention: Chief Executive
Officer, with a copy to the Company at 77 W. Wacker Drive, Suite
3900, Chicago, Illinois 60601, Attention: General Counsel.
14. Successors. This Agreement shall inure to the
benefit of and shall be binding upon the several Underwriters,
the Company, the Operating Partnership and their respective
successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions
herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other
person except that (i) the indemnities of the Company and the
Operating Partnership contained in Section 8 of this Agreement
shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act and (ii) the indemnities of
the Underwriters contained in Section 8 of this Agreement shall
also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration
Statement and any person or persons who control the Company
within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act. No purchaser of Securities from any Underwriter
shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation
of this Agreement, and the terms and conditions set forth herein,
shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to any provisions
relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process.
All judicial proceedings arising out of or relating to this
Agreement may be brought in any state or federal court of
competent jurisdiction in the State of New York, and by execution
and delivery of this Agreement, each of the Company and the
Operating Partnership accepts for itself and in connection with
its properties, generally and unconditionally, the nonexclusive
jurisdiction of the aforesaid courts and waives any defense of
forum non conveniens and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement. The
Company designates and appoints The Corporation Trust Inc. and
the Operating Partnership designates and appoints The Corporation
<PAGE>
Trust Company, and such other persons as may hereafter be
selected by each of the Company and the Operating Partnership
irrevocably agreeing in writing to so serve, as its agent to
receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby
acknowledged by each of the Company and the Operating Partnership
to be effective and binding service in every respect. A copy of
any such process so served shall be mailed by registered mail to
each of the Company and the Operating Partnership at its address
provided in Section 13 hereof; provided, however, that, unless
otherwise provided by applicable law, any failure to mail such
copy shall not affect the validity of service of such process.
If any agent appointed by the Company or the Operating
Partnership refuses to accept service, each of the Company and
the Operating Partnership hereby agrees that service of process
sufficient for personal jurisdiction in any action against the
Company or the Operating Partnership in the State of New York may
be made by registered or certified mail, return receipt
requested, to the Company or the Operating Partnership at its
address provided in Section 13 hereof, and each of the Company
and the Operating Partnership hereby acknowledges that such
service shall be effective and binding in every respect. Nothing
herein shall affect the right to serve process in any other
manner permitted by law or shall limit the right of any
Underwriter to bring proceedings against each of the Company and
the Operating Partnership in the courts of any other
jurisdiction.
17. Counterparts. 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.
If the foregoing correctly sets forth our
understanding, please indicate your acceptance thereof in the
space provided below for that purpose, whereupon this letter
shall constitute an agreement binding the Company, the Operating
Partnership and each of the several Underwriters.
Very truly yours,
PRIME GROUP REALTY TRUST
By:_______________________
Name:
Title:
PRIME GROUP REALTY, L.P.
By: Prime Group Realty Trust,
its managing general partner
By: __________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
<PAGE>
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SMITH BARNEY INC.
MORGAN KEEGAN & COMPANY, INC.
By: PRUDENTIAL SECURITIES INCORPORATED
By:_____________________________________
Name: Jean-Claude Canfin
Title: Managing Director
For itself and on behalf of the Representatives as
Representatives of the other several Underwriters
named in Schedule I hereto
SCHEDULE 1
UNDERWRITERS
Number of
Firm Securities
Underwriter to be Purchased
Prudential Securities Incorporated..............
Friedman, Billlings, Ramsey & Co., Inc..........
Smith Barney Inc................................
Morgan Keegan & Company, Inc....................
Total...........................................
SCHEDULE 2
PARTNERS OF OPERATING PARTNERSHIP
Number of Percentage of
General Partner Common Units All Units
Prime Group Realty Trust
Limited Partners
___________ _______
Total 100%
=========== =======
SCHEDULE 3
<PAGE>
TRANSACTION DOCUMENTS
SCHEDULE 4
TRANSFER DOCUMENTS
SCHEDULE 5
OPERATIVE DOCUMENTS
<PAGE>
EXHIBIT 3.2
FORM OF AMENDED AND RESTATED BYLAWS
OF
PRIME GROUP REALTY TRUST
a Maryland real estate investment trust
ARTICLE I
Offices and Fiscal Year
-----------------------
Section 1.1. Registered Office. Prime Group Realty Trust (the "Trust")
shall maintain a registered office in the State of Maryland as required by law.
Section 1.2. Principal Office. The Trust also has a principal office
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 principal office at such other places both within and without the State of
Maryland as the Board of Trustees may from time to time determine or as the
business of the Trust may require.
Section 1.4. Fiscal and Taxable Years. The fiscal and taxable years of
the Trust shall begin on January 1 and end on December 31.
ARTICLE II
Meetings of Shareholders
Section 2.1. Place. All meetings of shareholders shall be held at the
principal office of the Trust or at such other place within the United States as
shall be stated in the notice of the meeting.
Section 2.2. Annual Meetings. An annual meeting of the shareholders for
the election of Trustees and the transaction of any business within the powers
of the Trust shall be held each year beginning with the year 1999, after the
delivery of the annual report referred to in Section 2.14 of this Article II, at
a convenient location and on proper notice, on a date and at the time set by the
Trustees. Failure to hold an annual meeting does not invalidate the Trust's
existence or affect any otherwise valid acts of the Trust.
<PAGE>
Section 2.3. Special Meetings. The chairman of the Board of Trustees, the
president or the Board of Trustees may call special meetings of the
shareholders. Special meetings of shareholders shall also be called by the
secretary upon the written request of the holders of shares entitled to cast not
less than a majority of all the votes entitled to be cast at such meeting. Such
request shall state the purpose of such meeting and the matters proposed to be
acted on at such meeting. The secretary shall inform such shareholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment by such shareholders to the Trust of such costs, the secretary
shall give notice to each shareholder entitled to notice of the meeting. Each
special meeting shall be held upon such date and at such time and place either
within or without the State of Maryland as shall be designated by the person or
persons calling such special meeting at least ten (10) days prior to the special
meeting.
Section 2.4. Notice of Meeting. Not less than ten (10) nor more than ninety
(90) days before such meeting of shareholders, the secretary shall give to each
shareholder entitled to vote at such meeting and to each shareholder not
entitled to vote who is entitled to notice of the meeting, written or printed
notice stating the time and place of the meeting and, in the case of a special
meeting or as otherwise may be required by any statute, the purpose for which
the meeting is called, either by mail or by presenting it to such shareholder
personally or by leaving it at its residence or usual place of business. If
mailed, such notice shall be deemed to be given when deposited in the United
States mail addressed to the shareholder at its post office address which
appears in the records of the Trust, with postage thereon prepaid.
Section 2.5. Scope of Notice. Any business of the Trust may be transacted
at an annual meeting of shareholders without being specifically designated in
such notice, except such business as is required by any statute to be stated in
such notice. No business shall be transacted at a special meeting of
shareholders except as specifically designated in the notice.
Section 2.6. Organization. Meetings of shareholders shall be presided over
by the chairman of the Board of Trustees, if any, or in his or her absence one
of the following officers present shall conduct the meeting in the order stated:
the president; the vice presidents in their order of rank and seniority; or a
chairman chosen by the shareholders entitled to cast a majority of the votes
which all shareholders present in person or by proxy are entitled to cast. The
secretary, or, in his or her absence, an assistant secretary, or in the absence
of both the secretary and assistant secretaries, a person appointed by the
chairman, shall act as secretary.
Section 2.7. Quorum. Unless otherwise provided by law or the Articles of
Amendment and Restatement of Declaration of Trust of
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<PAGE>
the Trust (the "Declaration of Trust"), at each meeting of shareholders, the
presence in person or representation by proxy of the holders entitled to cast a
majority of all the votes entitled to be cast at such meeting shall constitute a
quorum for the transaction of business. In the absence of a quorum, the
shareholders so present and represented may, by vote of the holders of a
majority of the shares of the Trust so present and represented, adjourn the
meeting from time to time until a quorum shall attend, and Section 2.8 of these
Bylaws shall apply to each such adjournment.
Section 2.8. Adjournments. Any meeting of shareholders, 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
(30) 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
shareholder of record entitled to vote at the meeting.
Section 2.9. Voting. Subject to the provisions of the Declaration of
Trust, a plurality of all the votes cast at a meeting of shareholders duly
called and at which a quorum is present shall be sufficient to elect a Trustee.
A majority of the votes cast at a meeting of shareholders duly called and at
which a quorum is present shall be sufficient to approve any other matter which
may properly come before the meeting, unless more than a majority of the votes
cast is required herein or by statute or by the Declaration of Trust. Unless
otherwise provided in the Declaration of Trust, each share shall be entitled to
one vote on each matter submitted to a vote at a meeting of shareholders.
Shareholders will have no right to cumulative voting for the election of
Trustees.
Section 2.10. Proxies. A shareholder may cast the votes entitled to be cast
due to the shares owned of record by him or her either in person or by a proxy,
executed in writing by the shareholder or by his or her duly authorized
attorney-in-fact. Such proxy shall be filed with the secretary of the Trust
before or at the time of the meeting. No proxy shall be valid after eleven (11)
months from the date of its execution, unless otherwise provided in the proxy.
Section 2.11. Fixing Date for Determination of Shareholders of Record. In
order that the Trust may determine the shareholders entitled to notice of or to
vote at any meeting of shareholders or any adjournment thereof 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,
-3-
<PAGE>
conversion or exchange of Common Shares or for the purpose of any other lawful
action, the Board of Trustees may fix, in advance, a record date, which shall
not be (i) more than ninety (90) nor less than ten (10) days before the date of
such meeting nor (ii) more than ninety (90) days prior to any other action. If
no record date is fixed: (a) the record date for determining shareholders
entitled to notice of or to vote at a meeting of shareholders 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; and (b) the record date for determining
shareholders 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 shareholders of record entitled to notice of or to vote at a
meeting of shareholders 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 2.12. Voting of Shares by Certain Holders. Any shares registered
in the name of a corporation, partnership, trust or other entity, if entitled to
be voted, may be voted by the president, a vice president, a general partner or
trustee thereof, as the case may be, or a proxy appointed by any of the
foregoing individuals, unless some other person who has been appointed to vote
such shares pursuant to a bylaw or a resolution of the governing board of such
corporation or other entity or agreement of the partners of the partnership
presents a certified copy of such bylaw, resolution or agreement, in which case
such person may vote such shares. Any trustee or other fiduciary may vote shares
registered in his name as such fiduciary, either in person or by proxy.
Shares of the Trust directly or indirectly owned by it shall not be voted
at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Trustees may adopt by resolution a procedure by which a shareholder may
certify in writing to the Trust that any shares registered in the name of the
shareholder are held for the account of a specified person other than the
shareholder. The resolution shall set forth the class of shareholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share transfer
books, the time after the record date or closing of the share transfer books
within which the certification must be received by the Trust; and any other
provisions with respect to the procedure which the Trustees consider necessary
or desirable. On receipt of such certification,
-4-
<PAGE>
the person specified in the certification shall be regarded as, for the purposes
set forth in the certification, the shareholder of record of the specified
shares in place of the shareholder who makes the certification.
Notwithstanding any other provision contained in the Declaration of Trust
or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any acquisition by any person of shares of beneficial interest of the
Trust. This Section 2.12 may be repealed, in whole or in part, at any time.
Section 2.13. Inspectors. At any meeting of shareholders, the chairman of
the meeting may, or upon the request of any shareholder shall, appoint one or
more persons as inspectors for such meetings. Such inspectors shall ascertain
and report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the shareholders.
Each report of an inspector shall be in writing and signed by him or her,
or by a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall be
the report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
Section 2.14. Reports to Shareholders.
(a) The Trustees shall submit to the shareholders at or before the
annual meeting of shareholders a report of the business and operations of the
Trust during such fiscal year, containing a balance sheet and a statement of
income and surplus of the Trust, accompanied by the certification of an
independent certified public accountant, and such further information as the
Trustees may determine is required pursuant to any law or regulation to which
the Trust is subject. Within the earlier of twenty (20) days after the annual
meeting of shareholders or one hundred and twenty (120) days after the end of
the fiscal year of the Trust, the Trustees shall place the annual report on file
at the principal office of the Trust and with any governmental agencies as may
be required by law and as the Trustees may deem appropriate.
(b) Not later than forty-five (45) days after the end of each of the
first three (3) quarterly periods of each fiscal year, the Trustees shall
deliver or cause to be delivered an interim report to the shareholders
containing unaudited financial statements for such quarter and for the period
from the beginning
-5-
<PAGE>
of the fiscal year to the end of such quarter, and such further information as
the Trustees may determine is required pursuant to any law or regulation to
which the Trust is subject.
Section 2.15. List of Shareholders Entitled to Vote. The Secretary shall
make, at least ten (10) days before every meeting of shareholders, a complete
list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of Common Shares registered in the name of each shareholder. Such list shall be
open to the examination of any Shareholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10) 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 shareholder who is present.
Section 2.16. Nominations and Shareholder Business.
(a) Annual Meetings of Shareholders.
(1) Nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by the shareholders may be made at an
annual meeting of shareholders (i) pursuant to the Trust's notice of meeting,
(ii) by or at the direction of the Trustees or (iii) by any shareholder of the
Trust who was a shareholder of record both at the time of giving of notice
provided for in this Section 2.16 and at the time of the annual meeting, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Section 2.16.
(2) For nominations or other business to be properly brought before
an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a)(1)
of this Section 2.16, the shareholder must have given timely notice thereof in
writing to the Secretary of the Trust and such other business must otherwise be
a proper matter for action by shareholders. To be timely, a shareholder's notice
shall be delivered to the Secretary at the principal executive offices of the
Trust not later than the close of business on the 60th day nor earlier than the
close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting; provided, however, that in the event that the
date of the annual meeting is advanced by more than thirty (30) days or delayed
by more than sixty (60) days from such anniversary date or if the Trust has not
previously held an annual meeting, notice by the shareholder to be timely must
be so delivered not earlier than the close of business on the 90th day prior to
such annual meeting and not later than the close of business on the later of the
60th day prior to such annual meeting or the tenth day
-6-
<PAGE>
following the day on which public announcement of the date of such meeting is
first made by the Trust. In no event shall the public announcement of a
postponement or adjournment of an annual meeting to a later date or time
commence a new time period for the giving of a shareholder's notice as described
above. Such shareholder's notice shall set forth (i) as to each person whom the
shareholder proposes to nominate for election or reelection as a Trustee all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Trustees, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serving as a Trustee if
elected); (ii) as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (iii) as to the
shareholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made: (x) the name and address of such shareholder
as they appear on the Trust's books; (y) the name and address of such beneficial
owner; and (z) the number of each class of Common Shares of the Trust which are
owned beneficially and of record by such shareholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 2.16 to the contrary, in the event that the number of
Trustees to be elected to the Board of Trustees is increased and there is no
public announcement by the Trust naming all of the nominees for Trustee or
specifying the size of the increased Board of Trustees at least seventy (70)
days prior to the first anniversary of the preceding year's annual meeting, a
shareholder's notice required by this Section 2.16 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it is delivered to the Secretary at the principal executive offices
of the Trust not later than the close of business on the tenth day following the
day on which such public announcement is first made by the Trust.
(b) Special Meeting of Shareholders. Only such business shall be
conducted at a special meeting of shareholders as shall have been brought before
the meeting pursuant to the Trust's notice of meeting. Nominations of persons
for election to the Board of Trustees may be made at a special meeting of
shareholders at which Trustees are to be elected (i) pursuant to the Trust's
notice of the meeting, (ii) by or at the direction of the Board of Trustees or
(iii) provided that the Board of Trustees has determined that Trustees shall be
elected at such special meeting, by any shareholder of the Trust who was a
shareholder of record both at the time of giving of notice provided for in this
Section 2.16 and
-7-
<PAGE>
at the time of the special meeting, who is entitled to vote at the meeting and
who complied with the notice procedures set forth in this Section 2.16. In the
event the Trust calls a special meeting of shareholders for the purpose of
electing one or more Trustees to the Board of Trustees, any such shareholder may
nominate a person or persons (as the case may be) for election to such position
as specified in the Trust's notice of meeting, if the shareholder's notice
containing the information required by paragraph (a)(2) of this Section 2.16
shall be delivered to the Secretary at the principal office of the Trust not
earlier than the close of business on the 90th day prior to such special meeting
and not later than the close of business on the later of the 60th day prior to
such special meeting or the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Trustees to be elected at such meeting. In no event
shall the public announcement of a postponement or adjournment of a special
meeting to a later date or time commence a new time period for the giving of a
shareholder's notice as described above.
(c) General.
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 2.16 shall be eligible to serve as Trustees
and only such business shall be conducted at a meeting of shareholders as shall
have been brought before the meeting in accordance with procedures set forth in
this Section 2.16. The chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 2.16 and, if any proposed nomination or
business is not in compliance with this Section 2.16, to declare that such
nomination or proposal shall be disregarded.
(2) For purposes of this Section 2.16, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Trust with the Securities and Exchange Commission pursuant to Section 13,
14, or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section
2.16, a shareholder shall also comply with all applicable requirements of state
law and of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 2.16. Nothing in this Section
2.16 shall be deemed to affect any rights of shareholder to request inclusion of
proposals in, nor any of the rights of the Trust to omit a proposal from, the
Trust's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
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Section 2.17. Informal Action By Shareholders. Any action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if a consent in writing, setting forth such action, is signed by each
shareholder entitled to vote on the matter and any other shareholder entitled to
notice of a meeting of shareholders (but not to vote thereat) has waived in
writing any right to dissent from such action, and such consent and waiver are
filed with the minutes of proceedings of the shareholders.
Section 2.18. Voting By Ballot. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any shareholder
shall demand that voting be by ballot.
ARTICLE III
Board of Trustees
-----------------
Section 3.1. Powers; 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, Trustees need not be shareholders. A Trustee shall be
an individual at least 21 years of age who is not under legal disability.
Section 3.2. Annual and Regular Meetings. An annual meeting of the
Trustees shall be held immediately after and at the same place as the annual
meeting of shareholders, no notice other than this Bylaw being necessary. The
Trustees may provide, by resolution, the time and place, either within or
without the State of Maryland, for the holding of regular meetings of the
Trustees without other notice than such resolution.
Section 3.3. Special Meetings. Special meetings of the Trustees may be
called by or at the request of the chairman or chief executive officer or by
one-half or more of the Trustees then in office. The person or persons
authorized to call special meetings of the Trustees may fix any place, either
within or without the State of Maryland, as the place for holding any special
meeting of the Trustees called by them.
Section 3.4. Notice. Notice of any special meeting shall be given by
written notice delivered personally, transmitted by facsimile, telegraphed or
mailed to each Trustee at his or her business or residence address or by
telephone or facsimile transmission. Personally delivered, facsimile transmitted
or telegraphed notices shall be given at least two (2) days prior to the
meeting. Telephone notice shall be given at least twenty-four (24) hours prior
to the meeting. Notice by mail shall be given at least five (5) days prior to
the meeting. If mailed, such notice shall be deemed to be given when deposited
in the United States
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mail properly addressed, with postage thereon prepaid. If given by telegram,
such notice shall be deemed to be given when the telegram is delivered to the
telegraph company. Telephone notice shall be deemed given when the Trustee is
personally given notice in a telephone call to which such Trustee personally is
a party. Facsimile transmission shall be deemed given upon receipt by the sender
of confirmation indicating receipt of the transaction. Neither the business to
be transacted at, nor the purpose of, any annual, regular or special meeting of
the Trustees need be stated in the notice, unless specifically required by
statute or these Bylaws.
Section 3.5. Quorum; Vote Required for Action. A majority of the entire
Board of Trustees shall constitute a quorum for transaction of business at any
meeting of the Trustees; provided, that if less than a majority of such Trustees
are present at said meeting, a majority of the Trustees present may adjourn the
meeting from time to time without further notice; and provided further, that if
pursuant to the Declaration of Trust or these Bylaws the vote of a majority of a
particular group of Trustees is required for action, a quorum must also include
a majority of such group.
The Trustees present at a meeting which has been duly called and convened
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Trustees to leave less than a quorum.
Section 3.6. Voting.
(a) The action of the majority of the Trustees present at a meeting
at which a quorum is present shall be the action of the Trustees, unless the
concurrence of a greater proportion is required for such action by applicable
statute.
Section 3.7. Telephonic Meetings Permitted. The Board of Trustees may
participate in a meeting of the Board of Trustees through use of conference
telephone or similar communication equipment by means of which all persons
participating in the meeting can hear each other. Participation in the meeting
pursuant to this Bylaw shall constitute presence in person at such meeting.
Section 3.8. Informal Action by Trustees. Unless otherwise provided by
the Declaration of Trust, any action required or permitted to be taken at any
meeting of the Board of Trustees may be taken without a meeting if all members
of the Board of Trustees consent thereto in writing, and the writing or writings
are filed with the minutes of proceedings of the Board of Trustees.
Section 3.9. Vacancies. If for any reason any or all of the Trustees
cease to be Trustees, such event shall not terminate the Trust or affect these
Bylaws or the powers of the remaining Trustees hereunder (even if fewer than two
Trustees remain). Any
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vacancy (including a vacancy created by an increase in the number of Trustees)
shall be filled, at any regular meeting or at any special meeting called for
that purpose, by a majority of the remaining Trustees. Any individual so elected
as Trustee shall hold office for the unexpired term of the Trustee he or she is
replacing.
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. Such compensation may, by resolution of the Trustees,
include a fixed sum of cash and/or shares of beneficial interest of the Trust
(or options to acquire shares) per year and/or per visit to real property owned
or to be acquired by the Trust and for any service or activity they performed or
engaged in as Trustees. Trustees may be reimbursed for expenses of attendance,
if any, at each annual, regular or special meeting of the Trustees or of any
committee thereof; and for their expenses, if any, in connection with each
property visit and any other service or activity performed or engaged in as
Trustees; but nothing herein contained shall be construed to preclude any
Trustees form serving the Trust in any other capacity and receiving compensation
therefor.
Section 3.11. Removal of Trustees. The shareholders may, at any time,
remove any Trustee in the manner provided in the Declaration of Trust.
Section 3.12. Loss of Deposits. No Trustee shall be liable for any loss
which may occur by reason of the failure of a bank, trust company, savings and
loan association, or other institution with whom moneys or shares have been
deposited.
Section 3.13. Surety Bond. Unless required by law, no Trustee shall be
obligated to give any bond or surety or other security for the performance of
any of his or her duties.
Section 3.14. Reliance. Each Trustee, officer, employee and agent of the
Trust shall, in the performance of his or her duties with respect to the Trust,
be fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the Trust,
upon an opinion of counsel or upon reports made to the Trust by any of its
officers or employees or by the adviser, accountants, appraisers or other
experts or consultants selected by the Trustees or officers of the Trust,
regardless of whether such counsel or expert may also be a Trustee.
Section 3.15. Number and Classification. The number of Trustees of the
Trust shall initially be seven (7). The Trustees shall be classified, with
respect to the terms for which they severally hold office, into separate classes
in the manner prescribed in the Declaration of Trust. At any regular meeting or
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at any special meeting called for that purpose, by the affirmative vote of at
least two-thirds of the members, the Board of Trustees may increase or decrease
the number of Trustees; provided, that the number thereof shall not be fewer
than three (3) nor more than thirteen (13); and provided further, that the
tenure of office of a Trustee shall not be affected by any decrease in the
number of Trustees.
ARTICLE IV
Committees
----------
Section 4.1. Number, Tenure and Vacancies. The Board of Trustees may, by
resolution passed by a majority of the Trustees in office, appoint from among
its members committees comprised of two (2) or more Trustees. Notice of
committee meetings shall be given in the same manner as notice for special
meetings of the Board of Trustees. Subject to the provisions hereof, the Board
of Trustees shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternative members to replace
any absent or disqualified member or to dissolve any such committee.
Section 4.2. Power of Committees. Except as prohibited by law, the Board
of Trustees may delegate to any committee designated under Section 4.1 hereof
any of the powers and authority of the Board of Trustees in the management of
the business and affairs of the Trust.
Section 4.3. Meetings. In the absence of any member of any such
committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another Trustee to act in the place of such
absent member.
One-third, but not less than two (2), of the members of any committee shall
be present in person at any meeting of such committee in order to constitute a
quorum for the transaction of business at such meeting, and the act of the
majority present shall be the act of such committee. The Board of Trustees may
designate a chairman of any committee, and such chairman or any two members of
any committee may fix the time and place of its meetings unless the Board shall
otherwise provide. In the absence or disqualification of any member of any
committee, the members thereof present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
Trustee to act at the meeting in the place of such absent or disqualified
members; provided, however, that in the event of the absence or disqualification
of an Independent Trustee, such appointee shall be an Independent Trustee.
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Each committee shall keep minutes of its proceedings and shall report the
same to the Board of Trustees at the meeting next succeeding, and any action by
the committees shall be subject to revision and alteration by the Board of
Trustees; provided that no rights of third persons shall be affected by any such
revision or alteration.
Section 4.4. Telephone Meetings. Members of a committee of the Trustees
may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting can hear
each other at the same time. Participation in a meeting by these means shall
constitute presence in person at the meeting.
Section 4.5. Informal Action by Committees. Any action required or
permitted to be taken at any meeting of a committee of the Trustees may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
ARTICLE V
Officers
--------
Section 5.1 General Provisions. The officers of the Trust may consist of
a chairman of the board, one or more chief operating officers, one or more chief
executive officers, a president, one or more vice presidents, a chief financial
officer, a treasurer, one or more assistant treasurers, a secretary, and one or
more assistant secretaries. In addition, the Trustees may from time to time
appoint such other officers with such powers and duties as they shall deem
necessary or desirable. The officers of the Trust shall be elected annually by
the Trustees at the first meeting of the Trustees held after each annual meeting
of shareholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his or her successor is elected and qualifies or
until his or her death, resignation or removal in the manner hereinafter
provided. Any two or more offices may be held by the same person. In their
discretion, the Trustees may leave unfilled any office except that of president
and secretary. Election of an officer or agent shall not of itself create
contract rights between the Trust and such officer or agent.
Section 5.2. Removal and Resignation. Any officer or agent of the Trust
may be removed by a majority of the members of the Board of Trustees if in their
judgment the best interests of the Trust would be served thereby, but any such
removal shall be without prejudice to the contractual rights, if any, of the
person so removed. Any officer of the Trust may resign at any time by
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giving written notice of his or her resignation to the Trustees, the chairman of
the board, the president or the secretary. Any resignation shall take effect at
any time subsequent to the time specified therein or, if the time when it shall
become effective is not specified therein, immediately upon its receipt. The
acceptance of a resignation shall not be necessary to make such resignation
effective unless otherwise stated in the resignation.
Section 5.3. Vacancies. A vacancy in any office may be filled by the
Trustees for the balance of the term.
Section 5.4. Chairman of the Board. The chairman of the board shall
preside over the meetings of the Trustees and of the shareholders at which he or
she shall be present and shall in general oversee all of the business and
affairs of the Trust. The chairman shall perform such other duties as may be
assigned to him or her by the Trustees. The chairman of the board may execute
any deed, mortgage, bond, contract or other instrument, except in cases where
the execution thereof shall be expressly delegated by the Trustees or by these
Bylaws to some other officer or agent of the Trust or shall be required by law
to be otherwise executed.
Section 5.5. Chief Executive Officer. The Trustees may designate a chief
executive officer from among the elected officers. The chief executive officer
shall have general responsibility for implementation of the policies of the
Trust, as determined by the Trustees, and for the management of the business
affairs of the Trust. In the absence of the chairman of the board, the chief
executive officer shall preside over the meetings of the Trustees and of the
shareholders at which he or she shall be present.
Section 5.6. Chief Operating Officer. The Trustees may designate one or
more chief operating officers from among the elected officers. Said officer will
have the responsibilities and duties as set forth by the Trustees.
Section 5.7. Chief Financial Officer. The Trustees may designate a chief
financial officer from among the elected officers. Said officer will have such
responsibilities and duties as set forth by the Trustees or the chief executive
officer.
Section 5.8. President. In the absence of the chairman of the board and
the chief executive officer, the president shall preside over the meetings of
the Trustees and of the shareholders at which he or she shall be present. In the
absence of a designation of a chief executive officer by the Trustees, the
president shall be the chief executive officer and shall be ex officio a member
of all committees that may, from time to time, be constituted by the Trustees.
The president may execute any deed, mortgage, bond, contract or other
instrument, except in cases where the execution thereof shall be expressly
delegated by the Trustees
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or by these Bylaws to some other officer or agent of the Trust or shall be
required by law to be otherwise executed; and in general shall perform all
duties incident to the office of president and such other duties as may be
prescribed by the Trustees from time to time.
Section 5.9. Vice Presidents. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there by
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president. Such vice president also shall perform such other duties as from time
to time may be assigned to him or her by the president or by the Trustees. The
Trustees may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 5.10. Controller. The controller shall have the custody of the
funds and securities of the Trust and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit all
moneys and other valuable effects in the name and to the credit of the Trust in
such depositories as may be designated by the Trustees. The controller shall
disburse the funds of the Trust as may be ordered by the Trustees, taking proper
vouchers for such disbursements, and shall render to the chief executive officer
and Trustees, at the regular meetings of the Trustees or whenever they may
require it, an account of all his or her transactions as controller and of the
financial condition of the Trust. If required by the Trustees, he or she shall
give the Trust a bond in such sum and with such surety or sureties as shall be
satisfactory to the Trustees for the faithful performance of the duties of his
or her office and for the restoration of the Trust, in case of his or her death,
resignation, retirement or removal from office, all books, papers, vouchers,
moneys and other property of whatever kind in his or her possession or under his
or her control belonging to the Trust. Such controller also shall perform such
other duties as from time to time may be assigned to him or her by the
president, the chief financial officer or the Trustees.
Section 5.11. Secretary. The secretary shall (a) keep the minutes of the
proceedings of the shareholders, the Trustees and committees of the Trustees in
one or more books provided for that purpose; (b) see that all notices are duly
given in accordance with the provisions of these Bylaws or as required by law;
(c) be custodian of the trust records and of the seal of the Trust; (d) keep a
register of the post office address of each shareholder which shall be furnished
to the Secretary by such shareholder; (e) have general charge of the share
transfer books of the Trust; and
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(f) in general perform such other duties as from time to time may be assigned to
him or her by the chief executive officer, the president or by the Trustees.
Section 5.12. Assistant Secretaries and Assistant Controllers. The
assistant secretaries, in general, shall perform such duties as shall be
assigned to them by the secretary or by the controller, respectively, or by the
president and assistant controllers or the Trustees. The assistant controllers
shall, if required by the Trustees, give bonds for the faithful performance of
their duties in such sums and with such surety or sureties as shall be
satisfactory to the Trustees.
Section 5.13. Compensation. The salaries of the officers shall be fixed
from time to time by the Trustees and no officer shall be prevented from
receiving such salary by reason of the fact that he or she is also a Trustee.
ARTICLE VI
Contracts, Loans, Checks and Deposits
-------------------------------------
Section 6.1. Contracts. The Trustees may authorize any officer or agent
to enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the Trust and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Trustees or by an authorized person shall be
deemed valid and binding upon the Trustees and upon the Trust when so authorized
or ratified by action of the Trustees.
Section 6.2. Checks and Drafts. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Trust shall be signed by such officer or officers, agent or agents
of the Trust and in such manner as shall from time to time be determined by the
Trustees.
Section 6.3. Deposits. All funds of the Trust not otherwise employed
shall be deposited from time to time to the credit of the Trust in such banks,
trust companies or other depositories as the Trustees may designate.
ARTICLE VII
Shares of Beneficial Interest
-----------------------------
Section 7.1. Certificates. Every shareholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of beneficial interest held by such shareholder in the
Trust. Each certificate shall be
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signed by or in the name of the Trust by the chairman, if any, or the president
or a vice president and countersigned by the secretary or an assistant secretary
or the treasurer or an assistant treasurer and may be sealed with the seal, if
any, of the Trust. The signatures may be either manual or facsimile.
Certificates shall be consecutively numbered; and if the Trust shall, from time
to time, issue several classes of shares, each class may have its own number
series. A certificate is valid and may be issued whether or not an officer who
signed it is still an officer when it is issued. Each certificate representing
shares which are restricted as to their transferability or voting powers, which
are preferred or limited as to their dividends or as to their allocable portion
of the assets upon liquidation or which are redeemable at the option of the
Trust, shall have a statement of such restriction, limitation, preference or
redemption provision, or a summary thereof, plainly stated on the certificate.
In lieu of such statement or summary, the Trust may set forth upon the face or
back of the certificate a statement that the Trust will furnish to any
shareholder, upon request and without charge, a full statement of such
information.
Section 7.2. Transfers. Certificates shall be treated as negotiable, and
title thereto and to the shares they represent shall be transferred by delivery
thereof to the same extent as those of a Maryland stock corporation. No
transfers of shares of the Trust shall be made if (i) void ab initio pursuant to
any provision of the Declaration of Trust or (ii) the Board of Trustees,
pursuant to any provision of the Declaration of Trust, shall have refused to
permit the transfer of such shares. Permitted transfers of shares of the Trust
shall be made on the share records of the Trust only upon the instruction of the
registered holder thereof, or by its attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary or with a transfer agent or
transfer clerk, and upon surrender of the certificate or certificates, if
issued, for such shares properly endorsed or accompanied by a duly executed
share transfer power and the payment of all taxes thereon. Upon surrender to the
Trust or the transfer agent of the Trust of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, as to any transfers not prohibited by any provision of
the Declaration of Trust or by action of the Board of Trustees thereunder, it
shall be the duty of the Trust to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Section 7.3. Replacement Certificate. Any officer designated by the
Trustees may direct a new certificate to be issued in place of any certificate
previously issued by the Trust alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate to be lost, stolen or destroyed. When authorizing the issuance of a
new certificate,
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the officer designated by the Trustees may, in his or her own discretion and as
a condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or the owner's legal representative to advertise
the same in such manner as he or she shall require and/or to give bond, with
sufficient surety, to the Trust to indemnify it against any loss or claim which
may arise as a result of the issuance of a new certificate.
Section 7.4. Closing of Transfer Books or Fixing of Record Date. The
Trustees may set, in advance, a record date for the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders or
determining shareholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to made a determination of
shareholders for any other purpose. Such date, in any case, shall not be prior
to the close of business on the day the record date is fixed and shall be not
more than ninety (90) days and, in the case of a meeting of shareholders not
less than ten (10) days, before the date on which the meeting or particular
action requiring such determination of shareholders of record is to be held or
taken.
In lieu of fixing a record date, the Trustees may provide that the share
transfer books shall be closed for a stated period but not longer than twenty
(20) days. If the share transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten (10) days before the date of such
meeting.
If no record date is fixed and the share transfer books are not closed for
the determination of shareholders, (a) the record date for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be at the close of business on the day on which the notice of meeting is mailed
or the 30th day before the meeting, whichever is the closer date to the meeting;
and (b) the record date for the determination of shareholders entitled to
receive payment of a dividend or an allotment of any other rights shall be the
close of business on the day on which the resolution of the Trustees, declaring
the dividend or allotment of rights is adopted.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section 7.4, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than one
hundred and twenty (120) days after the record date fixed for the original
meeting, in either of which case a new record shall be determined as set forth
herein.
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Section 7.5. Share Ledger. The Trust shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
shareholder and the number of shareholders of each class held by such
shareholder.
Section 7.6. Fractional Shares; Issuance of Units. Trustees may issue
fractional shares or provide for the issuance of scrip, all on such terms and
under such conditions as they may determine. Notwithstanding any other provision
of the Declaration of Trust or these Bylaws, the Trustees may issue units
consisting of different securities of the Trust. Any security issued in a unit
shall have the same characteristics as any identical securities issued by the
Trust, except that the Trustees may provide that for a specified period
securities of the Trust issued in such unit may be transferred on the books of
the Trust only in such unit.
ARTICLE VIII
Dividends
---------
Section 8.1. Authorization and Declaration. Dividends upon the shares of
the Trust may be declared by the Trustees, subject to the provisions of law and
the Declaration of Trust. Dividends may be paid in cash, property or shares of
the Trust, subject to the provisions of law and the Declaration of Trust.
Section 8.2. Contingencies. Before payment of any dividends, there may be
set aside out of any funds of the Trust available for dividends such sum or sums
as the Trustees may from time to time, in their absolute discretion, think
proper as the reserve fund for contingencies, for equalizing dividends, for
repairing or maintaining any property of the Trust or for such other purpose as
the Trustees shall determine to be in the best interest of the Trust, and the
Trustees may modify or abolish any such reserve in the manner in which it was
created.
ARTICLE IX
Miscellaneous
-------------
Section 9.1. Right to Indemnification. The Trust shall indemnify, to the
fullest extent permitted by Maryland law, as applicable from time to time, all
persons who at any time were or are trustees or officers of the Trust for any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) relating to any action alleged to
have been taken or omitted in such capacity as a trustee or an officer. The
Trust shall pay or reimburse all reasonable expenses incurred by a present or
former trustee or officer of the Trust in
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connection with any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) in which the present
or former trustee or officer is a party, in advance of the final disposition of
the proceeding, to the fullest extent permitted by, and in accordance with the
applicable requirements of, Maryland law, as applicable from time to time. The
Trust may indemnify any other persons permitted but not required to be
indemnified by Maryland law, as applicable from time to time, if and to the
extent indemnification is authorized and determined to be appropriate, in each
case in accordance with applicable law, by the Board of Trustees, the majority
of the shareholders of the Trust entitled to vote thereon or special legal
counsel appointed by the Board of Trustees. No amendment of this amendment and
restatement or repeal of any of its provisions shall limit or eliminate any of
the benefits provided to trustees and officers under this Section 9.1 in respect
of any act or omission that occurred prior to such amendment or repeal.
Section 9.2. Non-Exclusivity of Rights under this Article. The rights to
indemnification and to the advancement of expenses conferred in this Article
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, Bylaw,
agreement, vote of shareholders or disinterested Trustees or otherwise.
Section 9.3. Insurance. The Trust may, but shall not be required to,
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, director, officer, employee or
agent of another Trust, partnership, joint venture, trust or other enterprise
against any expense, liability or loss asserted against him or her in any such
capacity, or arising out of his or her status as such, whether or not the Trust
would have the power to indemnify such person against such expense, liability or
loss under Maryland law.
Section 9.4. Seal.
(a) 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. The Trustees may authorize one or more duplicate seals
and provide for the custody thereof.
(b) Whenever the Trust is required to place its seal to a document,
it shall be sufficient to meet the requirements of any law, rule or regulation
relating to a seal to place the word "(SEAL)" adjacent to the signature of the
person authorized to execute the document on behalf of the Trust.
Section 9.5. Waiver of Notice. Whenever notice is required to be given by
law, the Declaration of Trust or these Bylaws, a
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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 shareholders, Trustees
or members of a committee of Trustees need be specified in any written waiver of
notice.
Section 9.6. 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 share 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 9.7. Amendment of Bylaws. The Board of Trustees shall have the
exclusive power to amend or repeal any provision of these Bylaws and to adopt
new Bylaws; provided, however, that any amendment or repeal of this Section 9.7,
Section 3.11 hereof or Section 3.15 hereof shall require the affirmative vote of
at least two-thirds of the shareholders entitled to vote thereon. All references
to the Declaration of Trust shall include any amendments thereto.
-21-
<PAGE>
[MILES & STOCKBRIDGE LETTERHEAD]
Exhibit 5.1
-----------
November 7, 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 (the
"Act") of 14,237,000 common shares of beneficial interest, $.01 par value per
share (the "Common Shares"), and 2,105,000 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 (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. 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: /s/
------------------------
Principal
<PAGE>
EXHIBIT 8.1
FORM OF WINSTON & STRAWN TAX MATTERS OPINION
November __, 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 24, 1997, Amendment No. 3 thereto filed with the SEC on November 5,
1997, Amendment No. 4 thereto filed with the SEC on November 7, 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 November __, 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 facts
pertaining to 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 10.2
FORM OF
RIGHT OF FIRST OFFER AGREEMENT
by and between
PRIME GROUP REALTY, L.P.
a Delaware limited partnership
and
THE PRIME GROUP, INC.,
an Illinois corporation
Dated as of: November ______, 1997
<PAGE>
RIGHT OF FIRST OFFER AGREEMENT
------------------------------
THIS RIGHT OF FIRST OFFER AGREEMENT (the "Agreement") is made as of the
_____ day of November, 1997, by and between PRIME GROUP REALTY, L.P., a Delaware
limited partnership ("Purchaser") and THE PRIME GROUP, INC., an Illinois
corporation ("Seller").
WITNESSETH:
----------
WHEREAS, Seller is the fee owner of that certain parcel of unimproved real
estate comprising approximately 360 acres in the Village of Huntley, County of
Kane and State of Illinois, which parcel is legally described on Exhibit A
attached hereto and made a part hereof (the "Property"); and
WHEREAS, concurrently with the execution and delivery of this Agreement,
Purchaser is acquiring from Seller certain other developments and parcels of
land owned by Seller; and
WHEREAS, Seller desires to grant, and Purchaser desires to acquire, a right
of first offer to develop (or develop and acquire an ownership interest in) (to
"Develop") the Property, or a portion thereof, upon and subject to the terms and
conditions hereinafter set forth; and
NOW, THEREFORE, in consideration of Purchaser's acquisition of the certain
other developments and parcels of land from Seller, the mutual covenants and
agreements contained in this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller and Purchaser agree as follows:
1. Grant of Right of First Offer. Seller hereby grants to Purchaser the
exclusive right of first offer to Develop the Property (the "Right") upon the
following terms and conditions:
If, at any time prior to the termination of this Agreement Seller should
determine, in its sole discretion, that all or a portion of the Property shall
be utilized for the construction of an office or industrial facility to be owned
and leased to third parties by Seller or held by Seller for sale to a third
party, Seller shall offer Purchaser the right to Develop such office or
industrial facility before offering other parties the right to develop the
Property for such uses. Seller shall notify Purchaser of the offer (the "Offer")
in the manner provided herein for the giving of notice, which notice shall be
accompanied by a written statement setting forth the terms of the Offer, and
Purchaser shall have the right of first offer to Develop the portion of the
Property (which may be all of the Property) which is subject to the Offer (the
"Subject Parcel") on the same terms and conditions as are contained in the
Offer; provided, however, that the closing of the sale of the Subject Parcel
pursuant to the Offer shall occur no earlier than thirty (30) days after
Purchaser has been notified of the Offer. Purchaser shall give Seller written
notice of Purchaser's election to Develop the Subject Parcel pursuant to the
Offer within fifteen (15) days after Purchaser's receipt of the notice of the
Offer, and should Purchaser elect to Develop the Subject Parcel pursuant to the
Offer, Purchaser's notice of same shall be accompanied by a written statement of
the proposed terms of such development, and the development of the Subject
Parcel to Purchaser shall occur as provided in the Offer, subject to the thirty
(30) day period provided above. In the event Purchaser fails to notify Seller of
its election within said fifteen (15) day period or elects not to Develop the
Subject Parcel pursuant to the Offer,
<PAGE>
Seller shall have the right to offer the Subject Parcel to third parties or
Develop the Subject Parcel itself on the same economic terms and substantially
the same other terms as are contained in the Offer; provided, however, that in
the event the sale of the Subject Parcel to a third party pursuant to the Offer
does not close within one hundred fifty (150) days of the date of the delivery
of the Offer, Seller shall renotify Purchaser and the Subject Parcel shall again
be subject to all of the terms and provisions of this Agreement.
Notwithstanding anything to the contrary contained herein, Seller reserves
the right, and shall be entitled, at any time, to sell or otherwise convey,
dedicate or grant the Property or any portion thereof or any interest therein to
a third party or parties which intends to use the Property for any purpose
whatsoever so long as Seller does not participate in the development of such
portion of the Property that is contemplated to be used for office or industrial
purposes, and the Right shall not apply in connection with any such sale,
conveyance, dedication or grant.
2. Expiration Date. If Purchaser does not timely exercise the Right in
the manner provided herein on or before November ______, 2012 (the "Expiration
Date"), regardless of whether or not Purchaser has an opportunity to exercise
the Right, or if Purchaser elects not to exercise the Right (or is deemed to
have so elected because of its failure to timely exercise the Right) and the
Property is developed by a third-party developer, or if Seller sells or
otherwise conveys, dedicates or grants the Property to a party which intends to
use the Property for primarily non-office or non-industrial purposes, or if
Seller commences construction of improvements on the Property intended to be
used for primarily non-office or non-industrial purposes, then in any such event
this Agreement and the Right 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 Right.
3. Entry onto the Property. Upon the receipt by Purchaser of the Offer
described in Section 1 hereof, Purchaser and/or Purchaser's agents shall have
the right during the period of time when this Agreement is in effect, at
reasonable times and on reasonable advance notice to Seller, to enter onto the
Property or portion thereof set forth in the Offer for purposes of surveying the
Property and undertaking soil boring and other tests. All surveying 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 tests to Seller at no cost or expense to Seller. 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 the Property or the exercise by Purchaser of
any of its surveying and testing rights under this Section 3. In addition,
Purchaser shall keep the Property free from any liens of its surveying and
testing rights under this Section. Purchaser, at its sole cost and expense,
shall restore the Property to the same condition as existed prior to its entry
onto the Property to the same condition as existed prior to its entry onto the
Property. Notwithstanding anything to the contrary contained herein, the
provisions of this Section shall survive the term of this Agreement (regardless
-2-
<PAGE>
of whether or not the Right is exercised), as well as any closing of the sale of
the Property pursuant hereto or to any contract entered into between Seller and
Purchaser pursuant to any Offer.
4. 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.
5. Covenants Running with the Land; Specific Performance. The covenants
and agreements of Seller under this Agreement are intended to be and shall be
covenants running with the land with respect to the Property and shall be
binding upon Seller and Seller's heirs, representatives, successors and assigns.
This Agreement shall be specifically enforceable by Purchaser and by Purchaser's
heirs, representatives, successors and assigns.
6. Notices. Any notice, request, demand, instruction or other document to
be given or served hereunder or under any documents 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, 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 Trust
35 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: General Counsel
With a copy to: Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Wayne Boberg
If to Seller: The Prime Group, Inc.
35 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: President
-3-
<PAGE>
With a copy to: The Prime Group, Inc.
35 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: General Counsel
7. Successors and Assigns; No Merger. All the terms and conditions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns. The terms and provisions of this Agreement
shall survive the entity and shall not merge or be deemed to merge, into any
contract entered into between Seller and Purchaser pursuant to any Offer.
8. Severability. In the event that any term or provisions of this
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 Agreement or the application thereof to
different parties or circumstances, as the case may be, shall not be affected
thereby and this agreement shall remain in full force and effect in all other
respects.
9. Governing Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois. 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.
10. Due Authorization; Binding Agreement. Seller and Purchaser each hereby
represent and warrant to each other that the execution, delivery and performance
of this 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.
11. Consents and Approvals. Seller and Purchaser each hereby represent and
warrant to each other 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 Agreement,
except for such consents, approvals or authorizations which have been obtained.
12. Further Assurances. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use his or its best efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary and proper under applicable laws and regulations or otherwise
to consummate and effect the transactions contemplated by this Agreement
including, without limitation, obtaining all required consents and approvals,
making all required filings and applications and complying with or responding to
any requests by governmental agencies, in each case to the extent reasonably
required.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PURCHASER:
PRIME GROUP REALTY, L.P., a Delaware limited
partnership
By: PRIME GROUP REALTY TRUST,
a Maryland real estate investment trust,
its Managing General Partner
By:
---------------------------------------
Name:
--------------------------------
Title:
-------------------------------
SELLER:
THE PRIME GROUP, INC.,
an Illinois corporation
By:
---------------------------------------------
Name:
-------------------------------------
Title
-------------------------------------
-5-
<PAGE>
EXHIBIT 10.13
FORM OF
OPTION AGREEMENT
by and between
PRIME GROUP REALTY, L.P.,
a Delaware limited partnership
and
300 NORTH LASALLE L.L.C.,
an Illinois limited liability company
Dated as of: November _____, 1997
<PAGE>
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT is made as of the _____ day of November, 1997, by and
between 300 NORTH LASALLE L.L.C., an Illinois liability company ("Seller") and
PRIME GROUP REALTY, L.P., a Delaware limited partnership ("Purchaser").
WITNESSETH:
----------
WHEREAS, Seller is the fee owner of the Parcel (as hereinafter defined)
consisting of approximately 58,000 square feet of land located at 300 North
LaSalle Street in Chicago, Illinois; and
WHEREAS, Purchaser is in the process of purchasing certain developments and
other parcels of land from the Seller;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Seller and Purchaser agree as
follows:
ARTICLE I
DEFINITIONS
1.01 Certain Definitions. When used herein, the following terms shall
have the respective meanings set forth opposite each such term:
"Agreement" means this Option Agreement, including the Exhibits attached
hereto, which are by this reference incorporated herein and made a part hereof.
"Closing" means the closing of the sale and purchase of the Parcel as
evidenced by the delivery of the Deed thereto by Seller to Purchaser and the
payment of the Purchase Price to Seller. The Closing shall occur concurrently
with the execution and delivery of this Agreement.
"Deed" means a deed to be delivered by Seller to Purchaser at the Closing,
conveying the Parcel to Purchaser subject only to the Permitted Title Exceptions
relating to the property being conveyed.
"Legal Requirements" means all laws, statutes, codes, acts, ordinances,
orders, judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, orders, directions and requirements of all governments and
governmental authorities (including any local Board of Fire Underwriters) having
jurisdiction of or over the Parcel or the operation thereof.
-1-
<PAGE>
"Option" shall mean the Purchaser's option to purchase the Parcel pursuant
to the terms of this Agreement.
"Option Price" means a sum equal to 95.0% of the fair market value of the
Parcel at the time of the exercise of the Option.
"Parcel" means the real property containing approximately 58,000 square
feet of land which is legally described on Exhibit A attached hereto, together
with all improvements thereon and therein and all privileges, rights, easements,
hereditaments and appurtenances thereto belonging.
"Permitted Title Exceptions" means the matters listed and described on
Exhibit B attached hereto.
"Title Commitment" means a commitment for an ALTA Form B Owner's Title
Insurance Policy for the Parcel issued by the Title Insurer in the amount of
___________ Dollars ($______), covering title to the Parcel showing Seller as
owner of the Parcel in fee simple, subject only to the permitted Title
Exceptions and other exceptions pertaining to liens or encumbrances of a
definite or ascertainable amount with respect to the Parcel which may be removed
by the payment of money at the Closing for the Parcel and which Seller shall so
remove, and providing for full extended coverage over all general title
exceptions contained in such policies and special endorsements mutually and
reasonably agreed upon by Seller and Purchaser. In the event the Title
Commitment discloses exceptions to title other than the Permitted Title
Exceptions, Seller shall have the right to cause the Title Insurer to insure
over such exceptions so long as the manner thereof is reasonably acceptable to
Purchaser.
"Title Insurer" means _________________________________.
"Title Policy" means the title policies to be issued for the Parcel
pursuant to Title Commitment, in the amount of the Purchase Price, insuring fee
simple title to the Parcel in Purchaser as of the Closing applicable to the
Parcel, subject only to the Permitted Title Exceptions applicable thereto.
1.02 Additional Definitions. The definitions of certain other terms are
contained in the text of this Agreement.
ARTICLE II
PURCHASE AND SALE; OPTION; PURCHASE PRICE
2.01 Purchase and Sale. Upon the exercise of the Option by the Purchaser,
subject to the conditions and on the terms contained in this Agreement, Seller
agrees to sell and convey and Purchaser agrees to purchase and acquire from
Seller the Parcel, subject to the Permitted Title Exceptions applicable thereto.
-2-
<PAGE>
2.02 The Option. Purchaser shall have the right to exercise the Option at
any time commencing on or after the date of the Closing and ending on November
______, 2007. Upon Purchaser's exercise of the Option, Purchaser shall have the
right to select the date of the Closing, which date shall be reasonably
acceptable to Seller and shall be no earlier than the date which is ninety (90)
days after Purchaser's exercise of the Option and no later than November
________, 2007.
2.03 Method of Exercise. Purchaser shall exercise the Option by giving
Seller written notice of its election to exercise such Option at any time during
the applicable time periods described in Sections 2.02, in the manner provided
in Section 9.08 for the giving of notices.
2.04 Purchase Price. At the Closing, Purchaser shall pay to Seller the
Purchase Price in cash, by wire transfer of immediately available funds to a
bank account designated by Seller.
ARTICLE III
CONDITIONS PRECEDENT TO CLOSING
3.01 The obligation of Purchaser to purchase the Parcel is subject to the
condition that Seller shall perform each and every obligation of Seller under
this Agreement to be performed by Seller on or before the date of the Closing.
ARTICLE IV
CLOSING MATTERS
4.01 Possession, Closing Adjustments and Expenses.
(a) Sole and exclusive possession of the Parcel, subject to the
Permitted Title Exceptions applicable thereto shall be delivered to Purchaser
concurrently with the Closing.
(b) Following the Closing, Purchaser shall pay to Seller all rents
which Purchaser shall collect with respect to the Parcel being purchased which
are attributable to periods preceding the Closing, except that all such rents
collected by Purchaser shall first be applied to satisfy all current rents due
Purchaser; and Seller shall pay to Purchaser all rents received by Seller from
any tenant with respect to the Parcel after the Closing which are attributable
to periods succeeding the Closing.
(c) All costs for the documents delivered by Seller to Purchaser
prior to the Closing, all title charges and premiums, all state, county and
municipal transfer taxes and all fees and other charges imposed in connection
with the transaction contemplated hereby shall be paid by Purchaser. The parties
shall each be solely responsible for the fees and disbursements of their
respective counsel and other professional advisers.
-3-
<PAGE>
4.02 Closing.
(a) On or before the Closing, Seller shall deliver to Purchaser the
following:
(i) the original Deed for the Parcel, executed by Seller;
(ii) an original affidavit executed by Seller, sufficient to
exempt the transactions contemplated hereby from the
withholding tax requirement imposed by Section 1445A of
the Internal Revenue Code;
(iii) an updated Title Commitment with respect thereto dated not
earlier than fifteen (15) days prior to the Closing
showing title to the Parcel in Seller, subject only to the
Permitted Title Exemptions applicable to the Parcel; and
(iv) such other documents, instruments, certifications and
confirmations as may be reasonably required and designated
by Purchaser or the Title Insurer to fully effect and
consummate the transactions contemplated hereby.
(b) On or before the Closing, Purchaser shall deliver to Seller the
following:
(i) the Purchase Price;
(ii) an original assumption agreement executed by Purchaser,
pursuant to which Purchaser agrees to assume Seller's
obligations, from and after the Closing Date, with respect
to the Parcel, except to the extent otherwise specified by
Purchaser and Seller; and
(iii) such other documents, instruments, certifications and
confirmations as may be reasonably required and designated
by Seller or the Title Insurer to fully effect and
consummate the transactions contemplated hereby.
(c) Seller and Purchaser shall cooperate to provide original,
executed certificates complying with the provisions of state, county and local
law applicable to the determination of documentary and transfer taxes.
ARTICLE V
COVENANTS, REPRESENTATIONS AND WARRANTIES
5.01 Covenants of Seller.
-4-
<PAGE>
(a) On the Closing, Seller shall tender possession of the Parcel to
Purchaser in the same condition the Parcel was in when last inspected by
Purchaser or its agents or contractors prior to the date of this Agreement,
except for ordinary wear and tear or changes resulting from actions taken by or
on behalf of Purchaser.
(b) Seller has previously delivered or made available to Purchaser at
Seller's sole cost and expense true, correct and complete copies of the
following:
(i) the Title Commitment, disclosing no exceptions to title other
than the Permitted Title Exceptions (and liens and encumbrances
which will be removed at the Closing) or, if disclosing
exceptions to title other than the Permitted Title Exceptions
(and liens and encumbrances which will be removed at the
Closing), evidence of title insurance reasonably satisfactory to
Purchaser;
(ii) the most recent real estate tax bills pertaining to the Parcel;
and
(iii) an environmental report relating to the Parcel, in form and
content reasonably acceptable to Purchaser.
5.02 Representations and Warranties of Seller. Purchaser hereby
acknowledges that Seller has made no representations or warranties whatsoever to
Purchaser with respect to the subject matter of this Agreement or in connection
with the execution and delivery hereof.
5.03 Representations and Warranties of Purchaser. Seller hereby
acknowledges that Purchaser has made no representations or warranties whatsoever
to Seller with respect to the subject matter of this Agreement or in connection
with the execution and delivery hereof.
ARTICLE VI
INDEMNIFICATION
6.01 Seller's Indemnity. As acknowledged by Purchaser in Section 5.02
above, Seller has made no representations or warranties to Purchaser with
respect to the subject matter of this Agreement or in connection with the
execution and delivery hereof. Accordingly, Purchaser shall have no rights or
remedies against Seller by reason of any alleged inaccuracy of any such alleged
representation or warranty, and Seller shall have no indemnification obligations
hereunder with respect thereto.
6.02 Purchaser's Indemnity. Purchaser hereby agrees to indemnify, defend
and hold Seller, its partners, officers, shareholders, directors, employees and
agents harmless from and against any and all claims, losses, damages,
liabilities and expenses which arise out of, are with respect to, or are based
upon:
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<PAGE>
(i) the inaccuracy in any material respect of any representation or
warranty, or a material breach of any covenant of Purchaser
contained herein or in any certificate or instrument furnished
to Seller by or on behalf of Purchaser;
(ii) any obligations, liabilities or charges of Seller that are
expressly assumed by Purchaser; or
(iii) the operation and management of any portion of the Parcel by
or for Purchaser after the Closing.
ARTICLE VII
ADDITIONAL PROVISIONS
7.01 Amendments and Waivers. This Agreement 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.
7.02 Further Assurances. The parties each agree to do, execute,
acknowledge and deliver all such further acts, instruments assurances and to
take all such further action after the Closing as shall be necessary or
desirable to fully carry out this Agreement and to fully consummate and effect
the transaction contemplated hereby.
7.03 Survival and Benefit. All agreements, obligations and indemnities of
Purchaser hereunder shall survive for a period of one (1) year from and after
the Closing, and the same shall inure to the benefit of Seller's successors and
assigns and be binding upon Purchaser's successors and assigns.
7.04 No Third Party Benefits. This Agreement is for the sole and exclusive
benefit of the parties hereof and their respective successors and assigns, and
no third party is intended to or shall have any rights hereunder.
7.05 Purchaser's Investigation and Inspections. Any investigation or
inspection conducted by Purchaser, or any agent or representative of Purchaser,
pursuant to this Agreement or the transaction contemplated hereby, in order to
verify independently Seller's satisfaction of any conditions precedent to
Purchaser's obligations hereunder or to determine whether Seller's warranties
are true and accurate, shall not affect, or constitute a waiver by Purchaser of,
any of Seller's obligations hereunder or Purchaser's reliance thereon.
7.06 Brokerage. Each party hereby represents and warrants to that it has
not dealt with any broker or finder with the transaction contemplated hereby,
and each party hereby agrees to indemnify the other for any claim for brokerage
commission or finder's fee asserted by a person, firm or corporation claiming to
have been engaged by the indemnifying party.
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7.07 Notices. Any notice, request, demand, instructions 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,
or by overnight express courier guaranteeing next business day delivery, 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
three (3) business days after deposit in the mails or one (1) business day after
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 Trust
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Richard S. Curto
With a copy to: Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Wayne D. Boberg
If to Seller: c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Michael W. Reschke
With a copy to: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Robert J. Rudnik
7.08 Interpretation.
(a) The headings and captions herein are inserted for convenient
reference only and the same shall not limit or construe the Articles 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".
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(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 by and construed
in accordance with the laws of the State of Illinois.
(g) Time is of the essence of this Agreement.
7.9 Defaults/Remedies. Except as otherwise provided in or limited by
Section 6.01, in the event of a breach or default by Seller of any of the terms
and provisions of this Agreement, Purchaser shall have all of its rights and
remedies available at law or in equity. In the event of a breach or default by
Purchaser of any of the terms and provisions of this Agreement, Seller shall
have all of its rights and remedies available at law or in equity.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by
Seller and Purchaser each as of the date first hereinabove set forth.
PURCHASER:
PRIME GROUP REALTY, L.P.,
a Delaware limited partnership
By: PRIME GROUP REALTY TRUST,
a Maryland real estate investment trust,
its Managing General Partner
By: ______________________________
Name: ______________________________
Title:______________________________
SELLER:
300 NORTH LASALLE L.L.C.,
an Illinois limited liability company
By: ____________________________________
Name:_______________________________
Title:______________________________
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EXHIBIT 10.14
FORM OF
REGISTRATION RIGHTS AGREEMENT
AMONG
PRIME GROUP REALTY TRUST
PRIME GROUP REALTY, L.P.
THE PRIME GROUP, INC.
PRIMESTONE INVESTMENT PARTNERS L.P.
and
THE OTHER INVESTORS NAMED HEREIN
<PAGE>
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT is made as of the __ day of _____, 1997
(this "Agreement"), among PRIME GROUP REALTY TRUST, a Maryland real estate
investment trust (the "Company"), PRIME GROUP REALTY, L.P., a Delaware limited
partnership (the "Partnership"), LA SALLE 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, LA SALLE NATIONAL TRUST, N.A., not personally, but solely
as Trustee under Trust Agreement dated September 7, 1994 and known as Trust No.
11-9051, LA SALLE NATIONAL TRUST, N.A., not personally, but solely as Trustee
under Trust Agreement dated March 30, 1984 and known as Trust No. 11-107825, LA
SALLE NATIONAL TRUST, N.A., not personally, but solely as Trustee under Trust
Agreement dated August 1, 1986 and known as Trust No. 11-1358, LA SALLE NATIONAL
TRUST, N.A., not personally, but solely s Trustee under Trust Agreement dated
August 1, 1986 and known as Trust No. 11-1357, LA SALLE NATIONAL TRUST, N.A.,
not personally, but solely as Trustee under Trust Agreement dated January 17,
1974 and known as Trust No. 286-34, LA SALLE NATIONAL TRUST, N.A., not
personally, but solely as Trustee under Trust Agreement dated October 15, 1995
and known as Trust No. 11-9869, LA SALLE 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, an Illinois limited partnership,
MAC ARTHUR DRIVE PROPERTIES, an Illinois limited partnership, CLE LIMITED
PARTNERSHIP, an Illinois limited partnership, 500 LINDBERG LIMITED PARTNERSHIP,
an Illinois limited partnership, 515 HUEHL LIMITED PARTNERSHIP, an Illinois
limited partnership, 555 HUEHL LIMITED PARTNERSHIP, an Illinois limited
partnership, SKY HARBOR ASSOCIATES, an
<PAGE>
Illinois limited partnership, 1001 TECHNOLOGY WAY, LLC, an Illinois limited
liability company, THE GRANDVILLE ROAD LIMITED PARTNERSHIP, an Illinois limited
partnership, by GRANDVILLE/NORTHWESTERN MANAGEMENT CORPORATION, an Illinois
corporation, its General Partner, INDUSTRIAL BUILDING AND DEVELOPMENT COMPANY
(the foregoing other than the Company and the Partnership being hereafter
referred to collectively as a "Contributor"), PRIMESTONE INVESTMENT PARTNERS,
L.P., a Delaware limited partnership ("Primestone"), THE PRIME GROUP, INC., an
Illinois corporation ("Prime"), the affiliates of Prime set forth on Exhibit A
hereto and the Permitted Transferees (as defined below) of each of the foregoing
entities (such entities or Permitted Transferees are sometimes referred to
herein individually as an "Investor" and collectively as the "Investors").
Jeffrey Patterson is referred to herein as a "Management Investor".
W I T N E S S E T H:
-------------------
WHEREAS, the Investors and the Management Investor will hold the limited
partnership interests in the Partnership set forth in Exhibit A hereto (the
"Common Units"), which Common Units may be exchanged for common shares of
beneficial interest of the Company (the "Common Shares") pursuant to certain
exchange rights set forth on Exhibit C to that certain Amended and Restated
Agreement of Limited Partnership of Prime Group Realty, L.P., dated
____________, 1997 (the "Partnership Agreement"); and
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WHEREAS, the Company has agreed to provide the Investors and the Management
Investor with certain registration rights as set forth herein;
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to and on the terms
and conditions herein set forth, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
-------------------
1.1. "Agreement" is defined in the first paragraph of this Agreement.
1.2. "Blackout Termination Right" is defined in Section 5.3(b) hereof.
1.3. "Business Day" means any day on which the New York Stock Exchange is
open for trading.
1.4. "Company" is defined in the first paragraph of this Agreement.
1.5. "Contributor" is defined in the first paragraph of this Agreement.
1.6. "Contributor Investor Group" means collectively the Contributor and
their Permitted Transferees.
1.7. "Effectiveness Period" is defined in Section 4.3 hereof.
1.8. "Eligible Securities" means all or any portion of the Common Shares
acquired by the Investors and the Management Investor upon exchange of the
Common Units. As to any proposed offer or sale of Eligible Securities, such
securities shall cease to be Eligible Securities with respect to such proposed
offer or sale when (i) a registration statement with respect to the sale of such
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securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement or (ii) such securities are permitted to be disposed of pursuant to
Rule 144(k) (or any successor provision to such Rule) under the Securities Act
as confirmed in a written opinion of counsel to the Company addressed to the
Investors and the Management Investor, (iii) such securities shall have been
otherwise transferred pursuant to Rule 144 (or any successor rule) or pursuant
to another applicable exemption under the Securities Act, new certificates for
such securities not bearing a legend restricting further transfer shall have
been delivered by the Company and such securities shall be freely transferable
to the public without registration under the Securities Act or (iv) such
securities are no longer outstanding.
1.9. "Information Blackout" is defined in Section 5.3(a) hereof.
1.10. "Investor Group" means any of the Contributor Investor Group, the
Primestone Investor Group or the Prime Investor Group.
1.11. "Investor" means any of the Contributors, the Primestone Investor
Group and the Prime Investor Group, and any of their Permitted Transferees.
1.12. "IPO" means the Company's initial public offering of Common
Shares and any other capital stock of the Company offered simultaneously with
the Common Shares.
1.13. "IPO Date" means the date of the final prospectus used by the
Company in the IPO.
1.14. "Lock-Up Agreements" means (i) the Lock-Up Agreement, dated
_________, 1997, among the Prime Investor Group and the Underwriter, (ii) the
Lock-Up Agreement, dated__________, 1997, among the Contributor and the
Underwriter, (iii) the Lock-Up Agreement,
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dated ________, 1997, among the Management Investor and the Underwriter, and
(iv) the Lock-Up Agreement, dated ________, 1997 among Primestone Investor Group
and the Underwriter.
1.15. "Management Investor" is defined in the first paragraph of this
Agreement.
1.16. "Partnership" is defined in the first paragraph of this
Agreement.
1.17. "Partnership Agreement" means that certain Amended and Restated
Agreement of Limited Partnership of Prime Group Realty, L.P., dated ________,
1997.
1.18. "Participating Investor" is defined in Section 3.3(a) hereof.
1.19. "Person" means an individual, a partnership (general or limited),
corporation, real estate investment trust, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a quasi-
governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
1.20. "Permitted Transferees" with respect to each Investor means the
Persons which qualify as Qualified Transferees under the Partnership Agreement.
1.21. "Prime" is defined in the first paragraph of this Agreement.
1.22. "Primestone" is defined in the first paragraph of this Agreement.
1.23. "Prime Investor Group" means collectively Prime, the affiliates
of Prime set forth on Exhibit A hereto and their Permitted Transferees.
1.24. "Primestone Investor Group" mean collectively Primestone and its
Permitted Transferees.
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1.25. "Primestone Registration" means at any time after the occurrence of
the Twelve Month Date the request for registration under the Securities Act and
the subsequent registration of all of the Eligible Securities requested by
Primestone to be registered.
1.26. "Registration Date" is defined in Section 2.1 hereof.
1.27. "Registration Expenses" means all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (i) the
fees, disbursements and expenses of the Company's counsel(s) (United States and
foreign), accountants and experts in connection with the registration of
Eligible Securities to be disposed of under the Securities Act; (ii) all
expenses in connection with the preparation, printing and filing of the
registration statement, any preliminary prospectus or final prospectus, any
other offering document and amendments and supplements thereto and the mailing
and delivering of copies thereof to the underwriters and dealers; (iii) the cost
of printing or producing any agreement(s) among underwriters, underwriting
agreement(s) and blue sky or legal investment memoranda, any selling agreements
and any other documents in connection with the offering, sale or delivery of
Eligible Securities to be disposed of; (iv) all expenses in connection with the
qualification of Eligible Securities to be disposed of for offering and sale
under state securities laws, including the fees and disbursements of counsel for
the underwriters in connection with such qualification and in connection with
any blue sky and legal investment surveys; (v) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of the sale of Eligible Securities to be disposed of; and (vi)
fees and expenses incurred in connection with the listing of Eligible Securities
on each securities exchange or quotation system
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on which the Common Shares are then listed; provided, however, that Registration
Expenses with respect to any registration pursuant to this Agreement shall not
include underwriting discounts or commissions attributable to Eligible
Securities, SEC or blue sky registration fees attributable to Eligible
Securities or transfer taxes applicable to Eligible Securities.
1.28. "Requesting Investor" means an Investor requesting registration of
its Eligible Securities in accordance with the terms hereof.
1.29. "Sales Blackout Period" is defined in Section 5.3(a)(iii) hereof.
1.30. "SEC" means the United States Securities and Exchange Commission.
1.31. "Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
1.32. "Selling Investor" means the Requesting Investor and each
Participating Investor or any Investor or Management Investor who has requested
registration pursuant to Section 4.1 hereof, as applicable.
1.33. "Shelf Registration Statement" is defined in Section 4.3 hereof.
1.34. "Twelve Month Date" means the date that is twelve months after
the IPO Date, and if such date is not a Business Day, the next succeeding date
that is a Business Day.
1.35. "Underwriter" means Prudential Securities Incorporated.
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ARTICLE II
EFFECTIVENESS OF REGISTRATION RIGHTS
------------------------------------
SECTION 2.1 Effectiveness of Registration Rights. This Agreement
shall become effective on the date hereof, provided, however, that the
registration of any Eligible Securities pursuant to Articles 3 and 4 hereof by
the Investors and Management Investor prior to the Twelve- Month Date (each such
dates being hereinafter referred to as a "Registration Date"), shall be subject
to the prior receipt of the written consent of the Company and the Underwriter
to the waiver of the restrictions on transfer of the Common Shares held by the
Investors or the Management Investor requesting such consent under the terms of
the Partnership Agreement and their respective Lock-Up Agreements.
ARTICLE III
REGISTRATION REQUEST
--------------------
SECTION 3.1 Request. Upon written request from an Investor
requesting that the Company effect the registration under the Securities Act of
all or part of the Eligible Securities held by such Investor, which notice may
be delivered at any time within three months prior to the Registration Date for
the applicable Investor Group and which notice shall specify the intended method
or methods of disposition of such Eligible Securities, the Company will use all
reasonable efforts to effect (at the earliest possible date) the registration,
under the Securities Act, of such Eligible Securities for disposition in
accordance with the intended method or methods of disposition stated in such
request; provided that:
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3.1. if the Company shall have previously effected a registration
with respect to Eligible Securities pursuant to Article 4 hereof, the
Company shall not be required to effect a registration pursuant to this
Article 3 until a period of one hundred twenty (120) days shall have
elapsed from the effective date of the most recent such previous
registration;
3.2. if, upon receipt of a registration request pursuant to this
Article 3, the Company is advised in writing (with a copy to the Selling
Investors) by a nationally recognized independent investment banking firm
selected by the Company to act as lead underwriter in connection with a
public offering of securities by the Company that, in such firm's opinion,
a registration at the time and on the terms requested would materially
adversely affect such public offering of securities by the Company (other
than an offering in connection with employee benefit and similar plans) (a
"Company Offering") that prior to the receipt of the notice by the
Requesting Investor had been contemplated by the Company's Board of
Trustees to be filed (and which is in fact filed) within sixty (60) days of
receipt of the notice by the Requesting Investors, the Company shall not be
required to effect a registration pursuant to this Article 3 until the
earliest of (i) three months after the completion of such Company Offering,
(ii) the termination of any blackout period, if any, required by the
underwriters to be applicable to the Selling Investors in connection with
such Company Offering and agreed to in writing by the Selling Investors,
(iii) promptly after abandonment of such Company Offering or (iv) four
months after the date of written notice requesting registration from the
Investor who initially requested registration;
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3.3. if, while a registration request is pending pursuant to this
Article 3, the Company determines in the good faith judgment of the Board
of Trustees of the Company, with the advice of counsel, that the filing of
a registration statement would require the disclosure of non-public
material information the disclosure of which would have a material adverse
effect on the Company or would otherwise adversely affect a material
financing, acquisition, disposition, merger or other comparable
transaction, the Company shall deliver a certificate to such effect signed
by its Chief Executive Officer, President, or any Executive Vice President
to the Selling Investors, and the Company shall not be required to effect a
registration pursuant to this Article 3 until the earlier of (i) the date
upon which such material information is disclosed to the public or ceases
to be material or (ii) 60 days after the Company makes such good faith
determination; and
3.4. the Company shall not be required to effect (i) more than two
registrations pursuant to this Article 3 in any calendar year per each
Investor Group and (ii) a registration of Eligible Securities, the Fair
Market Value of which on the date of the registration request (determined
as set forth in the Partnership Agreement) is less than $_______ million.
No registration of Eligible Securities under this Article 3 shall relieve
the Company of its obligation (if any) to effect registrations of Eligible
Securities pursuant to Article 4 hereof.
SECTION 3.2 Registration Expenses. With respect to the registrations
requested pursuant to this Article 3 and any registration arising from an
exercise of a Blackout Termination Right (as defined below), the Company shall
pay all Registration Expenses.
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SECTION 3.3 Other Investor Shares. (a) Upon receipt of the written notice
from a Requesting Investor, the Company shall give written notice to each other
Investor and to the Management Investor. Subject to Section 3.3(b) hereof, the
Company shall be required to cause the registration of securities for sale for
the account of any Investor or the Management Investor (the "Participating
Investor") in any registration of Eligible Securities requested pursuant to this
Article 3 who has delivered written notice to the Company within fifteen (15)
Business Days of the date of receipt by such Participating Investor of the
above-referenced written notice from the Company (which notice from the
Participating Investor to the Company shall specify the number of shares to be
disposed of and the intended method of disposition); provided, that the Company
shall not be required to cause the registration of all of the securities
requested to be registered by Participating Investors if the Requesting Investor
is advised in writing (with a copy to the Company) by a nationally recognized
independent investment banking firm selected by the Requesting Investors (or as
determined by Section 3.3(c)) that, in such firm's opinion, registration of all
of such securities would materially adversely affect the offering and sale of
Eligible Securities then contemplated by the Requesting Investor.
(b) If the Company cannot, pursuant to the terms of this Section 3.3,
register all of the shares requested to be registered, the Company shall
register the Maximum Amount (as defined below), and, other than for a Primestone
Registration, such amount shall be allocated between the Contributor Investor
Group, the Primestone Investor Group and the Prime Investor Group, pro rata
according to the number of shares for which registration was initially requested
by each Investor Group without giving any effect to any shares requested to be
registered by the
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Management Investor. The amount allocated to each Investor Group shall be
further allocated to each Selling Investor within such Investor Group pro rata
according to the number of shares for which registration was initially requested
by each Selling Investor within such Investor Group. Solely for purposes of the
preceding sentence, the Management Investor shall be treated as a Selling
Investor within the Prime Investor Group. Notwithstanding the foregoing, in the
event the Requesting Investor is Primestone requesting a Primestone
Registration, then the amount of Eligible Securities which the Contributor
Investor Group, Prime Investor Group and the Management Investor shall be
allowed to register shall be the Maximum Amount less the number of Eligible
Securities requested to be registered by Primestone in the Primestone
Registration. For purposes of this Section 3.3, "Maximum Amount" shall mean the
largest number of shares (if any) that, in the opinion of the nationally
recognized underwriter selected by the Requesting Investor (or as determined by
Section 3.3(c) hereof), for purposes of Section 3.3(a) hereof, could be offered
to the public without materially adversely affecting the offering and sale of
Eligible Securities as then contemplated by the Selling Investors.
(c) In the event that more than one Investor exercises registration
rights on the same day, the Investor who requested a registration of the larger
number of shares on such day shall be entitled to select the lead underwriter
for such registered offering (if such offering will be underwritten). In all
other cases, the first Investor to exercise registration rights with respect to
any particular registration demand shall be entitled to select the lead
underwriter for such registered offering (if such offering will be
underwritten).
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Notwithstanding this Article 3, each Selling Investor may elect, in
writing prior to the effective date of the registration statement filed in
connection with a registration under this Article 3, not to register its
Eligible Securities in connection with such registration; provided, that if such
Selling Investor is one of the Requesting Investors, such Selling Investor will
be deemed to have used one of the two rights each year to request registration
of Eligible Securities under this Article 3 allocated to the Investor Group of
which it is a member pursuant to Section 3.1(d) hereof.
ARTICLE IV
INCIDENTAL REGISTRATION
-----------------------
SECTION 4.1 Notice and Registration. If the Company proposes to
register any Common Shares, any equity securities exercisable for, convertible
into or exchangeable for Common Shares, or other securities issued by it having
terms substantially similar to Eligible Securities ("Other Securities") for
public sale under the Securities Act (whether proposed to be offered for sale by
the Company or by any other Person) on a form and in a manner which would permit
registration of Eligible Securities for sale to the public under the Securities
Act, it will give prompt written notice to the Investors and the Management
Investor of its intention to do so, and upon the written request of any Investor
or the Management Investor delivered to the Company within fifteen (15) Business
Days after the giving of any such notice (which request shall specify the number
of Eligible Securities intended to be disposed of by such Investor or Management
Investor and the intended method of disposition thereof), the Company will use
all reasonable efforts to effect, in connection with the registration of the
Other Securities, the registration under the Securities Act of all Eligible
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Securities which the Company has been so requested to register by the Selling
Investor(s), to the extent required to permit the disposition (in accordance
with the intended method or methods thereof as aforesaid) of Eligible Securities
so to be registered; provided that:
4.1. if, at any time after giving such written notice of its
intention to register any Other Securities and prior to the effective date
of the registration statement filed in connection with such registration,
the Company shall determine for any reason not to register the Other
Securities, the Company may, at its election, give written notice of such
determination to the Investors and the Management Investor and thereupon
the Company shall be relieved of its obligation to register such Eligible
Securities in connection with the registration of such Other Securities
(but not from its obligation to pay Registration Expenses to the extent
incurred in connection therewith as provided in Section 4.2 hereof),
without prejudice, however, to the rights (if any) of the Investors
immediately to request that such registration be effected as a registration
under Article 3 hereof;
4.2. The Company will not be required to effect any registration
pursuant to this Article 4 if the Company shall have been advised in
writing (with a copy to the Selling Investors) by a nationally recognized
independent investment banking firm selected by the Company to act as lead
underwriter in connection with the public offering of securities by the
Company that, in such firm's opinion, a registration of Eligible Securities
requested to be registered at that time would materially and adversely
affect the Company's own scheduled offering of Other Securities; provided,
however, that if an offering of some but not all of the Eligible Securities
requested to be registered by the Investor(s) and the
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Management Investor would not materially adversely affect the Company's
offering of Other Securities, the aggregate number of Eligible Securities
requested to be included in such offering by the Investors and the
Management Investor shall be reduced pro rata according to the total number
of Eligible Securities requested to be registered by such Persons;
4.3. The Company shall not be required to effect any registration of
Eligible Securities under this Article 4 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange
offers, subscription offers, dividend reinvestment plans or share options
or other employee benefit plans.
4.4. Notwithstanding any request under Section 4.1(a) hereof, a
Selling Investor may elect in writing prior to the effective date of a
registration under this Article 4, not to register its Eligible Securities
in connection with such registration.
4.5. No registration of Eligible Securities effected under this
Article 4 shall relieve the Company of its obligation (if any) to effect
registrations of Eligible Securities pursuant to Article 3 hereof.
SECTION 4.2 Registration Expenses. The Company shall be responsible for
the payment of all Registration Expenses in connection with any registration
pursuant to this Article 4.
SECTION 4.3 Shelf Registration Statement
(a) Shelf Registration Statement. The Company shall as promptly as
reasonably practicable subsequent to the Twelve Month Date file with the SEC a
Registration Statement for an offering to be made on a continuous basis pursuant
to Rule 415 covering all of the Eligible Securities (the "Shelf Registration
Statement"). If the Shelf Registration Statement shall be on the appropriate
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form permitting registration of such Eligible Securities for resale by Investors
in the manner or manners designated by them (including, without limitation, one
or more underwritten offerings). The Company will notify each Investor when such
Shelf Registration Statement has become effective.
The Company shall use its best efforts to cause the Shelf Registration
Statement to be declared effective under the Securities Act as promptly as
practicable after the filing of the Shelf Registration Statement and (subject to
compliance with the restrictions on registrations set forth in Articles III and
IV hereof which shall be applicable with respect to the Shelf Registration) to
keep the Shelf Registration Statement continuously effective under the
Securities Act until the date which is two and one half years from the date of
its initial effectiveness ("Effectiveness Period"), or such period ending when
all Eligible Securities covered by the Shelf Registration Statement have been
sold in the manner set forth and as contemplated in the Shelf Registration
Statement.
(b) Withdrawal of Stop Orders. If the Shelf Registration Statement
ceases to be effective for any reason at any time during the Effectiveness
Period (other than because of the sale of all of the securities registered
thereunder), the Company shall use its best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof.
(c) Supplement and Amendments. The Company shall promptly supplement
and amend the Shelf Registration Statement if required by the rules, regulations
or instructions applicable to the registration form used for such Shelf
Registration Statement, if required by the Securities Act.
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ARTICLE V
REGISTRATION PROCEDURES
-----------------------
SECTION 5.1 Registration and Qualification. If and whenever the
Company is required to use all reasonable efforts to effect the registration of
any Eligible Securities under the Securities Act as provided in Articles 3 or 4
hereof, the Company will, as promptly as is practicable:
5.1. prepare, file and use all reasonable efforts to cause to become
effective a registration statement under the Securities Act regarding the
Eligible Securities to be offered;
5.2. prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect to the
disposition of all Eligible Securities until the earlier of such time as
all of such Eligible Securities have been disposed of in accordance with
the intended methods of disposition by the Selling Investors set forth in
such registration statement or the expiration of twelve months after such
Registration Statement becomes effective;
5.3. furnish to the Selling Investors and to any underwriter of such
Eligible Securities such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus included
in such registration statement (including each preliminary prospectus and
any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such
registration statement or
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prospectus, and such other documents as the Selling Investors or such
underwriter may reasonably request;
5.4. use all reasonable efforts to register or qualify all Eligible
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as the Selling Investors
or any underwriter of such Eligible Securities shall reasonably request,
and do any and all other acts and things which may be reasonably requested
by the Selling Investors or any underwriter to consummate the disposition
in such jurisdictions of the Eligible Securities covered by such
registration statement, except the Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified, or to subject itself to
taxation in any jurisdiction where it is not then subject to taxation, or
to consent to general service of process in any jurisdiction where it is
not then subject to service of process;
5.5. use all reasonable efforts to list the Eligible Securities on
each national securities exchange or quotation system on which the Common
Shares are then listed, if the listing of such securities is then permitted
under the rules of such exchange;
5.6. (i) furnish to the Selling Investors an opinion of counsel for
the Company, addressed to them, dated the date of the closing under the
underwriting agreement, and (ii) upon such Selling Investor's request, use
all reasonable efforts to furnish to the Selling Investors a "comfort
letter" signed by the independent public accountants who have certified the
Company's financial statements included in such registration statement,
addressed to them; provided that with respect to such opinion and "comfort
letter," the following shall
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apply: (A) the opinion and "comfort letter" shall cover substantially the
same matters with respect to such registration statement (and the
prospectus included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to underwriters in
underwritten public offerings of securities and such other matters as the
Selling Investors may reasonably request; and (B) the "comfort letter" also
shall cover events subsequent to the date of such financial statements; and
5.7. notify the Selling Investors immediately upon the happening of
any event as a result of which a prospectus included in a registration
statement, relating to a registration pursuant to Article 3 or 4 hereof, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they
were made, not misleading, and at the request of the Selling Investors
prepare and furnish to the Selling Investors as many copies of a supplement
to or an amendment of such prospectus as the Selling Investors reasonably
request so that, as thereafter delivered to the purchasers of such Eligible
Securities, such prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
The Company may require the Selling Investors to furnish the Company such
information regarding the Selling Investors and the distribution of such
securities as the Company may from time to time reasonably request in writing
and as shall be required by law or by the SEC in connection with any
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registration. Failure of the Selling Investors to provide such information will
relieve the Company of its obligation to register such Selling Investor's
Eligible Securities.
SECTION 5.2 Underwriting. (a) If requested by the underwriters for any
underwritten offering of Eligible Securities pursuant to a registration
described in this Agreement, the Company will enter into and perform its
obligations under an underwriting agreement with such underwriters for such
offering, such agreement to contain such representations and warranties by the
Company and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution to the effect and to the extent
provided in Article 7 hereof and the provision of opinions of counsel and
accountants' letters to the effect and to the extent provided in Section 5.1(f)
hereof. The holders of Eligible Securities on whose behalf Eligible Securities
are to be distributed by such underwriters shall be parties to any such
underwriting agreement and the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such holders of
Eligible Securities.
(b) In the event that any registration pursuant to Article 4 hereof
shall involve, in whole or in part, an underwritten offering, the Company may
require Eligible Securities requested to be registered pursuant to Article 4
hereof to be included in such underwriting on the same terms and conditions as
shall be applicable to the Other Securities being sold through underwriters
under such registration. In such case, the holders of Eligible Securities on
whose behalf Eligible Securities are to be distributed by such underwriters
shall be parties to any such underwriting agreement. Such agreement shall
contain such representations and warranties by the Company and the Selling
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Investors and such other terms and provisions as are customarily contained in
underwriting agreements with respect to secondary distributions, including,
without limitation, indemnities and contribution to the effect and to the extent
provided in Article 7 hereof. The representations and warranties in such
underwriting agreement by, and the other agreements on the part of, the Company
to and for the benefit of such underwriters shall also be made to and for the
benefit of such holders of Eligible Securities.
SECTION 5.3 Blackout Periods. (a) At any time when a registration
statement effected pursuant to Article 3 hereof relating to Eligible Securities
is effective, upon written notice from the Company to the Selling Investors that
the Company determines in the good faith judgment of the Board of Trustees of
the Company, with the advice of counsel, that the Selling Investors' sale of
Eligible Securities pursuant to the registration statement would require
disclosure of non-public material information the disclosure of which would have
a material adverse effect on the Company (an "Information Blackout"), the
Selling Investors shall suspend sales of Eligible Securities pursuant to such
registration statement until the earliest of:
(b) the date upon which such material information is disclosed to
the public or ceases to be material;
(c) 60 days after the Company makes a good faith determination
that such material information ceases to be material; and
(d) such time as the Company notifies the Selling Investors that
sales pursuant to such registration statement may be resumed.
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(The number of days from such suspension of sales by the Selling Investors until
the day when such sales may be resumed under clause (i), (ii) or (iii) hereof is
hereinafter called a "Sales Blackout Period".)
(b) Any delivery by the Company of notice of an Information Blackout
during the 90 days immediately following effectiveness of any registration
statement effected pursuant to Article 3 hereof shall give the Investors the
right, by written notice to the Company within 20 Business Days after the end of
such Sales Blackout Period, to cancel such registration and obtain one
additional registration right during such calendar year (a "Blackout Termination
Right") under Article 3 hereof.
(c) If there is an Information Blackout and if the Investors do not
exercise their cancellation right, if any, pursuant to Section 5.3(b) hereof,
or, if such cancellation right is not available, the time period set forth in
Section 5.1(b) hereof shall be extended for a number of days equal to the number
of days in the Sales Blackout Period.
SECTION 5.4 Qualification for Rule 144 Sales. The Company will take all
actions reasonably necessary to comply with the filing requirements described in
Rule 144(c)(1) so as to enable the Investors or the Management Investor to sell
Eligible Securities without registration under the Securities Act and, upon the
written request of any Investor or the Management Investor, the Company will
deliver to such Investor or Management Investor a written statement as to
whether it has complied with such filing requirements.
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ARTICLE VI
PREPARATION; REASONABLE INVESTIGATION
-------------------------------------
SECTION 6.1 Preparation; Reasonable Investigation. In connection with
the preparation and filing of each registration statement registering Eligible
Securities under the Securities Act, the Company will give the Selling Investors
and the underwriters, if any, and their respective counsel and accountants,
drafts of such registration statement for their review and comment prior to
filing and such reasonable and customary access to its books and records and
such opportunities to discuss the business of the Company with its officers,
counsel and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of the Selling Investors and
such underwriters or their respective counsel, to conduct a reasonable
investigation within the meaning of the Securities Act.
ARTICLE VII
INDEMNIFICATION AND CONTRIBUTION
--------------------------------
SECTION 7.1 Indemnification. (a) In the event of any registration of
Eligible Securities hereunder, the Company and the Partnership jointly and
severally will, and hereby do, indemnify and hold harmless, each Selling
Investor, its respective directors, trustees, officers, partners, agents,
employees and affiliates and each other person who participates as an
underwriter in the offering or sale of such securities and each other Person, if
any, who controls each such Selling Investor or any such underwriter within the
meaning of the Securities Act, against any and all losses, claims, damages,
expenses or liabilities, joint or several, actions or proceedings (whether
commenced or
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threatened) in respect thereof, to which each such indemnified party may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages, expenses or liabilities (or actions or proceedings, whether commenced
or threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, and the Company and the
Partnership will reimburse each such Selling Investor and each such director,
trustee, officer, partner, agent, employee or affiliate, underwriter and
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim, damage,
expense, liability, action, or proceeding; provided, however, that (i) the
Company and the Partnership shall not be liable in any such case to the extent
that any such loss, claim, damage, expense or liability (or action or proceeding
in respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by or on behalf of such Selling Investor or underwriter specifically
stating that it is for use in the preparation thereof and (ii) the Company and
the Partnership shall not be liable to any person who participates as an
underwriter in the offering
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<PAGE>
or sale of Eligible Securities or any other person, if any, who controls or is
controlled by such underwriter within the meaning of the Securities Act, in any
such case to the extent that any such loss, claim, damage, expense or liability
(or action or proceeding in respect thereof) arises out of such underwriter's
failure to send or give a copy of the final prospectus, as the same may be then
supplemented or amended, to the person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Eligible Securities to such person if such statement
or omission was corrected in such final prospectus.
(b) Each Selling Investor severally will, and hereby does, indemnify
and hold harmless the Company, its trustees, its officers who sign the
registration statement, each Person who participates as an underwriter in the
offering or sale of such securities, and each Person, if any, who controls the
Company or any such underwriter within the meaning of the Securities Act against
any and all losses, claims, damages, expenses or liabilities, joint or several,
actions or proceedings (whether commenced or threatened) in respect thereof, to
which each such indemnified party may become subject under the Securities Act or
otherwise insofar as such losses, claims, damages, expenses or liabilities (or
actions or proceedings, whether commenced or threatened in respect thereof)
arise out of or are based upon an untrue statement or alleged untrue statement
of a material fact in or omission or alleged omission to state a material fact
in such registration statement, any preliminary prospectus, final prospectus or
summary prospectus contained therein, or any amendment or supplement thereto,
but only to the extent that such statement or omission was made in reliance upon
and in conformity with written information furnished by such Selling Investor to
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<PAGE>
the Company through an instrument duly executed by or on behalf of such Selling
Investor specifically stating that it is for use in preparation thereof.
(c) Promptly after receipt by any indemnified party hereunder of
notice of the commencement of any action or proceeding involving a claim
referred to in paragraphs (a) or (b) of this Section 7.1, the indemnified party
will notify the indemnifying party in writing of the commencement thereof; but
the omission so to notify the indemnifying party will not relieve the
indemnifying party from any liability which it may have to any indemnified party
under paragraphs (a) or (b) of this Section 7.1.
(d) If for any reason the indemnity under this Section 7.1 is
unavailable or is insufficient to hold harmless any indemnified party under
paragraphs (a) or (b) of this Section 7.1, then the indemnifying parties shall
contribute to the amount paid or payable to the indemnified party as a result of
any loss, claim, expense, damage or liability (or actions or proceedings,
whether commenced or threatened, in respect thereof), and legal or other
expenses reasonably incurred by the indemnified party in connection with
investigating or defending any such loss, claim, expense, damage, liability,
action or proceeding, in such proportion as is appropriate to reflect the
relative fault of the indemnifying party on the one hand and the indemnified
party on the other. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Selling Investor and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. If, however, the allocation provided
in the second preceding sentence is not permitted by
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applicable law, or if the allocation provided in the second preceding sentence
provides a lesser sum to the indemnified party than the amount hereinbefore
calculated, then the indemnifying party shall contribute to the amount paid or
payable by the indemnified party in such proportion as is appropriate to reflect
not only such relative fault but also the relative benefits of the indemnifying
party and the indemnified party as well as any other relevant equitable
considerations. The parties hereto agree that it would not be just and
equitable if contributions pursuant to this paragraph (d) of Section 7.1 were to
be determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
preceding sentences of this paragraph (d) of Section 7.1.
(e) Indemnification and contribution similar to that specified in this
Section 7.1 (with appropriate modifications) shall be given by the Company and
the Partnership and the Selling Investors with respect to any required
registration or other qualification of securities under any federal, state or
blue sky law or regulation of any governmental authority other than the
Securities Act.
(f) Notwithstanding any other provision of this Section 7.1, to the
extent that any director, trustee, officer, partner, agent, employee, affiliate,
or other representative (current or former) of any indemnified party is a
witness in any action or proceeding, the indemnifying party agrees to pay to the
indemnified party all expenses reasonably incurred by, or on the behalf of, the
indemnified party and such witness in connection therewith.
(g) All legal and other expenses incurred by or on behalf of any
Selling Investor in connection with investigating or defending any loss, claim,
expense, damage, liability, action or
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<PAGE>
proceeding shall be paid by the Company or the Partnership in advance of the
final disposition of such investigation, defense, action or proceeding within
twenty days after the receipt by the Company or the Partnership of a statement
or statements from the Selling Investor requesting from time to time such
payment, advance or advances. The entitlement of each Selling Investor to such
payment or advancement of expenses shall include those incurred in connection
with any action or proceeding by the Selling Investor seeking an adjudication or
award in arbitration pursuant to this Section 7.1. Such statement or statements
shall reasonably evidence such expenses incurred by the Selling Investor in
connection therewith.
(h) The termination of any proceeding by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, adversely affect the rights of any indemnified party to
indemnification hereunder or create a presumption that any indemnified party
violated any federal or state securities laws.
(i) (i) In the event that advances are not made pursuant to this
Section 7.1 or payment has not otherwise been timely made, each indemnified
party shall be entitled to seek a final adjudication in an appropriate court of
competent jurisdiction of the entitlement of the indemnified party to
indemnification or advances hereunder.
(ii) The Company, the Partnership and the Selling Investors agree
that they shall be precluded from asserting that the procedures and presumptions
of this Section 7.1 are not valid, binding and enforceable. The Company, the
Partnership and the Selling Investors further agree to stipulate in any such
court that the Company, the Partnership, and the Selling Investors are
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bound by all the provisions of this Section 7.1 and are precluded from making
any assertion to the contrary.
(iii) To the extent deemed appropriate by the court, interest
shall be paid by the indemnifying party to the indemnified party at a reasonable
interest rate for amounts which the indemnifying party has not timely paid as
the result of its indemnification and contribution obligations hereunder.
(j) In the event that any indemnified party is a party to or
intervenes in any proceeding in which the validity or enforceability of this
Section 7.1 is at issue or seeks an adjudication to enforce the rights of any
indemnified party under, or to recover damages for breach of, this Section 7.1,
the indemnified party, if the indemnified party prevails in whole in such
action, shall be entitled to recover from the indemnifying party and shall be
indemnified by the indemnifying party against, any expenses incurred by the
indemnified party. If it is determined that the indemnified party is entitled to
indemnification for part (but not all) of the indemnification so requested,
expenses incurred in seeking enforcement of such partial indemnification shall
be reasonably prorated among the claims, issues or matters for which the
indemnified party is entitled to indemnification and for such claims, issues or
matters for which the indemnified party is not so entitled.
(k) The indemnity agreements contained in this Section 7.1 shall be
in addition to any other rights (to indemnification, contribution or otherwise)
which any indemnified party may have pursuant to law or contract and shall
remain operative and in full force and effect regardless
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of any investigation made or omitted by or on behalf of any indemnified party
and shall survive the transfer of any Eligible Securities by any Investor or the
Management Investor.
ARTICLE VIII
BENEFITS OF REGISTRATION RIGHTS
-------------------------------
SECTION 8.1 Benefits of Registration Rights. Subject to the limitations of
Sections 3.1 and 4.1 hereof, each member of the Contributor Investor Group and
the Prime Investor Group, and their Permitted Transferees of Eligible Securities
may severally or jointly exercise the registration rights hereunder in such
proportion as they shall agree among themselves. No consent of any Investor
shall be required for Permitted Transferees to exercise registration rights
under this Agreement or otherwise to be entitled to the benefits of this
Agreement as applicable to all Investors. The Management Investor may not
transfer his rights under this Agreement to any other Person. The Company agrees
that monetary damages would not compensate the Investors and Management Investor
for a breach by the Company hereof and the Investors and the Management Investor
shall be entitled to specific performance of this Agreement.
ARTICLE IX
MISCELLANEOUS
-------------
SECTION 9.1 Captions. The captions or headings in this Agreement are for
convenience and reference only, and in no way define, describe, extend or limit
the scope or intent of this Agreement.
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<PAGE>
SECTION 9.2 Severability. If any clause, provision or section of this
Agreement shall be invalid or unenforceable, the invalidity or unenforceability
of such clause, provision or section shall not affect the enforceability or
validity of any of the remaining clauses, provisions or sections hereof to the
extent permitted by applicable law.
SECTION 9.3 Governing Law. This Agreement shall be construed and
enforced in accordance with the internal laws of the State of Maryland, without
reference to its rules as to conflicts or choice of laws.
SECTION 9.4 Modification and Amendment. This Agreement may not be
changed, modified, discharged or amended, except by an instrument signed by all
of the parties hereto.
SECTION 9.5 Counterparts. This Agreement may be executed in
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
SECTION 9.6 Entire Agreement. This Agreement constitutes the entire
agreement and understanding among the parties and supersedes any prior
understandings and/or written or oral agreements among them respecting the
subject matter herein.
SECTION 9.7 Notices. All notices, requests, demands, consents and other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and delivered by hand, by overnight courier delivery service
or by certified mail, return receipt requested, postage prepaid. Notices shall
be deemed given when actually received, which shall be deemed to be not later
than the next Business Day if sent by overnight courier or after five (5)
Business Days if sent by mail. Notice to Investors and Management Investor shall
be made to the address listed on the share transfer records of the Company.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement or
caused this Agreement to be executed as of the day and year first above written.
PRIME GROUP REALTY TRUST
By:
-------------------------------------
Name:
Title:
PRIME GROUP REALTY, L.P.
By: Prime Group Realty Trust
its general partner
By:
-------------------------------------
Name:
Title:
THE PRIME GROUP, INC.
By:
-------------------------------------
Name:
Title:
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<PAGE>
PRIME GROUP LIMITED PARTNERSHIP
By:
-------------------------------------
Name:
Title:
PRIMESTONE INVESTMENT PARTNERS, L.P.
By:
-------------------------------------
Its: Managing General Partner
By:
-------------------------------------
Its:
------------------------------------
LA SALLE 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:
-------------------------------------
Name:
Title:
LA SALLE 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:
-------------------------------------
Name:
Title:
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<PAGE>
LA SALLE 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:
-------------------------------------
Name:
Title:
LA SALLE 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:
-------------------------------------
Name:
Title:
LA SALLE 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:
-------------------------------------
Name:
Title:
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<PAGE>
LA SALLE 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:
-------------------------------------
Name:
Title:
LA SALLE 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:
-------------------------------------
Name:
Title:
LA SALLE 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:
-------------------------------------
Name:
Title:
310 ERA LIMITED PARTNERSHIP, an
Illinois limited partnership
By:
-------------------------------------
Name:
Title:
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<PAGE>
MAC ARTHUR DRIVE PROPERTIES, an
Illinois limited partnership
By:_____________________________
Name:
Title:
CLE LIMITED PARTNERSHIP, an
Illinois limited partnership
By:_____________________________
Name:
Title:
500 LINDBERG LIMITED PARTNERSHIP,
an Illinois limited partnership
By:_____________________________
Name:
Title:
515 HUEHL LIMITED PARTNERSHIP,
an Illinois limited partnership
By:_____________________________
Name:
Title:
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<PAGE>
555 HUEHL LIMITED PARTNERSHIP,
an Illinois limited partnership
By:_____________________________
Name:
Title:
SKY HARBOR ASSOCIATES, an
Illinois limited partnership
By:_____________________________
Name:
Title:
1001 TECHNOLOGY WAY, LLC, an
Illinois limited liability company
By:_____________________________
Name:
Title:
THE GRANDVILLE ROAD LIMITED PARTNERSHIP, an
Illinois limited partnership
by GRANDVILLE/NORTHWESTERN
MANAGEMENT CORPORATION,
an Illinois corporation, its
General Partner
By:_____________________________
Name:
Title:
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<PAGE>
INDUSTRIAL BUILDING AND
DEVELOPMENT COMPANY
By:_____________________________
Name:
Title:
_____________________________
Jeffrey Patterson
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<PAGE>
EXHIBIT A
---------
The Prime Group, Inc. ___ Common Units
Prime Group Limited Partnership ___ Common Units
CONTRIBUTOR ___ Common Units
Jeffrey Patterson ___ Common Units
Primestone Investment Partners, L.P. ___ Common Units
[Other Prime Affiliates] ___ Common Units
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EXHIBIT 10.16
FORM OF
ENVIRONMENTAL INDEMNIFICATION AGREEMENT
by and between
PRIME GROUP REALTY, L.P.,
a Delaware limited partnership
and
THE PRIME GROUP, INC.,
an Illinois corporation
Dated as of: November __, 1997
<PAGE>
ENVIRONMENTAL INDEMNIFICATION AGREEMENT
THIS ENVIRONMENTAL INDEMNIFICATION AGREEMENT ("Indemnification Agreement")
made and entered into this ____ day of November, 1997, by and between The Prime
Group, Inc., an Illinois corporation ("Indemnitor"), and Prime Group Realty,
L.P., a Delaware limited partnership ("Indemnitee");
WITNESSETH:
WHEREAS, Indemnitor and Indemnitee have heretofore entered into an
agreement for the contribution ("Formation Agreement") of certain properties,
commonly known as (i) the Chicago Enterprise Center, located in Chicago,
Illinois, (ii) the East Chicago Enterprise Center, located in East Chicago,
Indiana and (iii) the Hammond Enterprise Center, located in Hammond, Indiana
(the Chicago Enterprise Center, East Chicago Enterprise Center and Hammond
Enterprise Center, collectively known as the "Properties");
WHEREAS, as a condition to its entering into the Formation Agreement,
Indemnitee has required that Indemnitor indemnify, save, and hold Indemnitee
harmless from and against certain obligations and liabilities which may be
incurred by Indemnitee (whether as owner, occupier, or operator of the
Properties) by reason of the presence, Release or threatened Release of
Hazardous Materials (hereinafter defined) at, on, under, over, about, within or
adjacent to the Properties.
WHEREAS, this Indemnification Agreement is entered into to provide the
Indemnitee with the indemnity, protections, and assurances it requires and as an
inducement to Indemnitee to enter into the Formation Agreement;
NOW, THEREFORE, in consideration of the Properties and of the mutual
promises and agreements herein contained, the agreements and covenants contained
in the Formation Agreement, TEN DOLLARS ($10.00), and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties, intending to be legally bound, hereby agree as follows:
1. Recitals. The recitals set forth above are true and correct and are by
this reference incorporated herein.
2. Definitions. As used in this Indemnification Agreement, the terms
"Hazardous Materials" "Release" and "Environmental Laws" are defined as follows:
(a) "Hazardous Materials" means any hazardous or toxic substances,
materials or wastes, including, but not limited to, those substances, materials
and wastes listed in the United States Department of Transportation Hazardous
Materials Table (49 C.F.R. (S) 172.101) and amendments thereto or designated by
the United States Environmental Protection Agency as hazardous substances (40
C.F.R. Part 302) and such substances, materials and wastes which are or become
regulated under Environmental Law including, without limitation, any material,
waste or substance which is: (i) petroleum; (ii) asbestos; (iii) polychlorinated
biphenyls; (iv) defined or
<PAGE>
regulated as a "hazardous waste" under Environmental Law; (v) 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) 1321) or listed pursuant to section 307 of the
Clean Water Act (33 U.S.C. (S) 1317); or (vi) 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).
(b) "Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping, or disposing into
the environment, including, without limitation, the abandonment or discarding of
barrels, containers, and other closed receptacles containing any Hazardous
Materials.
(c) "Environmental Laws" mean all federal, state, local and foreign laws,
statutes, ordinances, codes, rules, standards, and regulations, now or hereafter
in effect, and in each case as amended or supplemented from time to time, and
any applicable judicial or administrative interpretation thereof, including any
applicable judicial or administrative order, consent decree or judgment,
imposing liability or standards of conduct for or relating to the regulation and
protection of human health, safety, the environment and natural resources
(including ambient air, surface water, groundwater, wetlands, land surface or
subsurface strata, wildlife, aquatic species and vegetation).
3. Indemnification. Indemnitor agrees to exonerate, indemnify, pay and
protect, defend (with counsel reasonably approved by Indemnitee), and save and
hold Indemnitee and the directors, officers, shareholders, employees, and agents
of Indemnitee harmless from and against any claims (including, without
limitation, third party claims for personal injury or real or personal property
damage), actions, administrative proceedings (including informal proceedings),
judgments, damages, punitive damages, penalties, fines, costs, liabilities
(including sums paid in settlement of claims), interest, or losses, including
reasonable attorneys' and paralegals' fees and expenses (including, without
limitation, any such fees and expenses incurred in enforcing this
Indemnification Agreement or collecting any sums due hereunder), investigation
and remediation costs, consultants' fees and experts' fees, together with all
other costs and expenses of any kind or nature (collectively, the "Costs") that
arise directly or indirectly from or in connection with the presence, suspected
presence, Release, or threatened Release of any Hazardous Material on, in or
into the air, soil, groundwater or surface water at, on, under, over, about,
within or adjacent to the Properties, or any portion thereof, as identified in
the reports identified on Exhibit A attached hereto (the "Environmental
Reports") in connection with the transportation of Hazardous Materials to or
from the Properties. The indemnification provided in this Paragraph 3 shall
specifically apply to and include claims or actions brought by or on behalf of
employees of Indemnitor. In the event Indemnitee shall suffer or incur any such
Costs, Indemnitor shall immediately pay to Indemnitee the total of all such
Costs suffered or incurred by Indemnitee upon demand by Indemnitee. Without
limiting the generality of the foregoing, the indemnification provided in this
Paragraph 3 shall specifically cover Costs, including capital, operating,
supervision and maintenance costs, incurred in connection with any investigation
or monitoring of site conditions, any clean-up, containment, remediation,
removal, or restoration work required or performed by any federal, state or
local governmental agency or political subdivision or performed by any
nongovernmental entity or person because of the presence, suspected presence,
Release or threatened Release of any Hazardous Material on, in or into the air,
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<PAGE>
soil, groundwater or surface water at, on, under, about, over, within, or
adjacent to the Properties (or any portion thereof), or elsewhere in connection
with the transportation of Hazardous Materials to or from the Properties and any
claims of third parties for loss or damage due to such Hazardous Material.
4. Remedial Work. In the event any investigation or monitoring of site
conditions or any clean-up, containment, restoration, removal, treatment,
stabilization, or other remedial work (collectively, the "Remedial Work") is
required at the Properties under any Environmental Laws, by any judicial order,
or by any governmental entity, in order to comply with any agreements affecting
the Properties because of, or in connection with, any occurrence or event
described in Paragraph 3 above, or in order to maintain the marketability of the
Properties by attaining certain cleanup standards, Indemnitor shall perform or
cause to be performed the required Remedial Work in compliance with such
Environmental Laws, agreement or standard. All required Remedial Work shall be
performed by one or more contractors, selected by Indemnitor and approved (such
approval not to be unreasonably withheld or delayed) in advance in writing by
Indemnitee, and under the supervision of a consulting engineer, selected by
Indemnitee and approved (such approval not to be unreasonably withheld or
delayed) in advance in writing by Indemnitor. All costs and expenses of such
required Remedial Work shall be paid by Indemnitor including, without
limitation, the charges of such contractor(s) and/or the consulting engineer,
and Indemnitee's reasonable consultant, attorney and paralegal fees and costs
incurred in connection with monitoring or review of such Remedial Work. In the
event Indemnitor shall fail to timely commence, or cause to be commenced, or
fail to diligently prosecute to completion, such Remedial Work, Indemnitee may,
but shall not be required to, cause such Remedial Work to be performed, and all
costs and expenses thereof, or incurred in connection therewith shall be Costs
within the meaning of Paragraph 3 above. All such Costs shall be immediately due
and payable upon demand by Indemnitee.
5. Notice of Claims. All notices, approvals, consents, requests, and
demands upon the respective parties hereto shall be in writing; sent by personal
delivery (including, without limitation, nationally recognized courier services
such as Federal Express), or by certified or registered mail, postage prepaid
and return receipt requested; and addressed as follows:
To Indemnitor: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: President
With a copy to: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: General Counsel
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<PAGE>
To Indemnitee: Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: President
With a copy to: Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Wayne D. Boberg, Esq.
or to such other address as may be furnished in writing for such purpose with a
copy to one additional person each as Indemnitor or Indemnitee shall specify in
writing.
6. Participation in Defense of Claims/Duty to Cooperate Notice of
Indemnitor. In the event that any claim, action, administrative proceeding
(including informal proceedings), or other demand is made by any governmental
agency or other third party against Indemnitee involving Costs, Indemnitor shall
cooperate with Indemnitee in any defense or other response to any such claim or
other demand. Indemnitor shall have the right to participate in the defense or
other response to any such claim or demand provided that Indemnitee shall have
the right, but not the obligation, to direct and control the defense or response
to any such claim or demand. Indemnitor's right to participate in the defense or
response to any such claim or demand shall not be deemed to limit or otherwise
modify Indemnitor's obligations under this Indemnification Agreement. Indemnitee
shall give notice to Indemnitor of any claim or demand governed by this
Paragraph 6 within a reasonable period after such claim or other demand first
becomes known to Indemnitee.
7. Subrogation of Indemnity Rights. If Indemnitor fails to perform its
obligations under Paragraph 4 above and Indemnitee performs in its stead,
Indemnitee shall be subrogated to any rights Indemnitor may have under any
indemnifications from any present, future or former owners, tenants, or other
occupants or users of the Properties (or any portion thereof) relating to the
matters covered by this Indemnification Agreement.
8. Assignment by Indemnitee. No consent by Indemnitor shall be required
for any assignment or reassignment of the rights of Indemnitee hereunder to one
or more parties.
9. Merger, Consolidation, or Sale of Assets. In the event of a
dissolution of Indemnitor or other disposition involving Indemnitor or all or
substantially all of the assets of Indemnitor to one or more persons or other
entities, the surviving entity or transferee of such assets, as the case may be,
shall deliver to Indemnitee an acknowledged instrument in recordable form
assuming all covenants, agreements, responsibilities, liabilities and
obligations of Indemnitor under this Indemnification Agreement.
10. Independent Obligations: Survival. The obligations of Indemnitor
under this Indemnification Agreement shall survive the consummation of the
Formation Agreement, and the
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<PAGE>
obligations of Indemnitor under this Indemnification Agreement are separate and
distinct from the obligations of Indemnitor under the Formation Agreement. This
Indemnification Agreement may be enforced by Indemnitee without regard to any
other rights and remedies Indemnitee may have against Indemnitor under the
Formation Agreement and without regard to any limitations on Indemnitee's
recourse as may be provided in the Formation Agreement.
11. Miscellaneous. If any term of this Indemnification Agreement or any
application thereof shall be invalid, illegal, or unenforceable, the remainder
of this Indemnification Agreement and any other application of such term shall
not be affected thereby. No delay or omission in exercising any right hereunder
shall operate as a waiver of such right or any other right. This Indemnification
Agreement shall be binding upon, inure to the benefit of, and be enforceable by
Indemnitor and Indemnitee, and their respective successors and assigns,
including, without limitation, any assignee or Indemnitee of all or any portion
of the Indemnitee's interest in the Properties. This Indemnification Agreement
shall be governed and construed in accordance with the laws of the State of
Illinois.
-5-
<PAGE>
IN WITNESS WHEREOF, Indemnitor and Indemnitee have caused this
Indemnification Agreement to be executed as of the day and year first above
written.
INDEMNITOR:
The Prime Group, Inc.,
an Illinois corporation
By:
-------------------------------
Its:
------------------------------
INDEMNITEE:
Prime Group Realty, L.P.,
a Delaware limited partnership
By:
-------------------------------
Its:
------------------------------
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<PAGE>
EXHIBIT A
Environmental Reports
---------------------
1. Removal Site Evaluation and Preliminary Assessment -- Event Two Report,
April 1997, by Carlson Environmental, regarding the Chicago Enterprise
Center
2. Feasibility Study, May 1997, by Carlson Environmental, regarding the
Chicago Enterprise Center
3. Remediation Work Plan, February 1997, by Heritage Environmental Services,
regarding the East Chicago Enterprise Center
4. Remediation Work Plan, February 1997, by Heritage Environmental Services,
regarding the Hammond Enterprise Center
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<PAGE>
Document Number: 0251361.04
11-6-97/11:37pm
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<PAGE>
EXHIBIT 10.17
FORM OF
FORMATION AGREEMENT
THIS FORMATION AGREEMENT (this "Agreement") is made and entered into as of
the___ day of ________, 1997 by and among (i) PRIME GROUP REALTY TRUST, a
Maryland real estate investment trust (the "Company"), (ii) PRIME GROUP REALTY,
L.P., a Delaware limited partnership (the "Operating Partnership"), (iii) PRIME
GROUP REALTY SERVICES, INC., a Delaware corporation ("Services Company"), (iv)
THE PRIME GROUP, INC., an Illinois corporation ("PGI"), (v) PRIME GROUP LIMITED
PARTNERSHIP, an Illinois limited partnership ("PGLP").
RECITALS:
--------
A. The Company is a recently organized real estate investment trust formed
for the purpose of, among other things, acquiring substantially all of the
office and industrial real estate business and operations of PGI and its
affiliates (including, without limitation, PGI's contractual rights to acquire
additional office and industrial properties). Concurrently with the
contributions contemplated by this Agreement, the Company will issue in an
initial public offering (the "Offering") Common Shares of Beneficial Interest in
the Company (the "Common Shares").
B. The business and operations of the Company will be conducted through
the Operating Partnership and the Services Company. The Operating Partnership
will issue limited partnership interests (the "Common Units") to the Company and
to other entities, including PGLPs and/or its affiliates, in connection with
contributions contemplated hereby and the other transactions contemplated to
occur in connection with the formation of the Company and the Offering (the
"Formation Transactions").
C. PGI and PGLP [OTHERS?](collectively, the "Prime Transferors") desire to
convey to the Company and to the Operating Partnership all of their respective
right, title and interest in and to (i) the entities identified on Schedule 1
hereto (such entities being hereinafter referred to collectively as the "Prime
Entities"), together with all other interests of PGI and PGLP in and to each of
the businesses and facilities operated and owned by the Prime Entities (all of
such ownership interests in the Prime Entities and all of such other assets
being together referred to herein as the "Prime Projects") and (ii) the entities
identified on Schedule 2 hereto (such entities being hereinafter referred to
collectively as the "Prime Contribution Entities" and together with the Prime
Entities, the "Contributed Entities"), together with all other interests of PGI
and PGLP in and to each of the businesses and facilities operated and owned by
the Prime Contribution Entities (all of such ownership interests in the
Contributed Entities and all of such other assets being together referred to
herein as the "Contributed Projects").
<PAGE>
D. PGI has entered into (i) that certain option agreement dated as of
August 4, 1997 (the "Lumbermen Agreement") with Lumbermens Mutual Casualty
Company, an Illinois insurance corporation ("Lumbermen"), pursuant to which
Lumbermen granted to PGI an option to purchase all right, title and interest of
Lumbermen in the LMCC 77 Subordinate Loan Interests (as defined in the Lumbermen
Agreement) and (ii) that certain Amended and Restated Agreement dated as of July
15,1997 (the "Kemper Subordinate Agreement") 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 ("77 L.P."), K/77 Investors Limited Partnership, an Illinois limited
partnership ("K/77 L.P."), PGLP and Prime 77 Fitness Center, Inc., an Illinois
corporation; (KILICO, FKLA, KRC, FRC and KR Fitness are hereinafter referred to
as the "Kemper Parties") pursuant to which the Kemper Parties have granted to
PGI an option to purchase all right, title and interest of the Kemper Parties to
the Subordinate Loan Documents (as defined therein); such interests, among other
things, encumber the real estate commonly known as 77 West Wacker Drive,
Chicago, Illinois, owned by 77 West Wacker Limited Partnership;
E. PGI has entered into that certain (i) letter agreement dated July 18,
1997 (the Triad Agreement") with KILICO, KRC and KRC Portfolio Corp. and (ii)
Option To Purchase Partnership Interests dated as of June 17, 1994 but made
effective as of March 22, 1994, as amended by that certain First?Amendment To
Option To Purchase Partnership Interests dated as of January 21, 1997 and that
certain Second Amendment To Option To Purchase Partnership Interests dated as of
July 15, 1997) (as amended, the "Partnership Option Agreement"), pursuant to
which it has the right to acquire the partnership interests in 77 L.P. and K/77
L.P. held by one or none of the Kemper Parties and PGI has agreed to convey and
assign to the Operating Partnership, the rights to receive certain partnership
interests as hereinafter described from the applicable Kemper Parties, and the
Operating Partnership has agreed to assume the obligation to pay the purchase
price therefor as set forth in the Triad Agreement and the Partnership Option
Agreement (the Lumbermens Agreement, the Kemper Subordinate Agreement, the Triad
Agreement and the Purchase Option Agreement and the related agreements and
documents are hereinafter referred to as the "Kemper Agreements").
F. The Prime Transferors desire to convey to the Operating Partnership all
of their respective right, title and interest in substantially all the assets
and liabilities relating to their office and industrial development, leasing and
management business, which assets and liabilities are set forth on Schedules 3
and 4 attached hereto (collectively, the "Contributed Personal Property").
G. PGI has entered into that certain Contribution Agreement dated as of
July 8, 1997 with (i) 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, (ii) 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, (iii) LaSalle National Trust, N.A., not personally, but
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<PAGE>
solely as Trustee under Trust Agreement dated March 30, 1984 and known as Trust
No. 11-107825, (iv) 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, (v) 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, (vi)
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, (vii) 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, (viii) 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, (ix) 310 ERA
Limited Partnership, (x) MacArthur Drive Properties, (xi) CLE Limited
Partnership, (xii) 500 Lindberg Limited Partnership, (xiii) 515 Huehl Limited
Partnership, (xiv) 555 Huehl Limited Partnership, (xv) Sky Harbor Associates,
(xvi) 1001 Technology Way, LLC, (xvii) The Grandville Road Limited Partnership
and (xviii) Industrial Building and Development Company (collectively, the
"Contributors") pursuant to which the Contributors will contribute their
interests in such entities to the Operating Partnership in exchange for Common
Units.
H. [PGI] has entered those certain purchase agreements set forth on
Schedule 5 hereto (the "Facility Acquisition Agreements" and the parties
thereto other than PGI, the "Facility Transferors") pursuant to which [PGI] has
the contractual right to acquire the certain office and industrial facilities
owned by the Facility Transferors as set forth on Schedule 5 hereto.
I. PGI has agreed to convey and assign to the Operating Partnership or its
designee all of PGI's rights under the Facility Acquisition Agreements, and the
Operating Partnership has agreed to assume PGI's obligations under the Facility
Acquisition Agreements.
J. PGLP has entered into that certain Asset Purchase Agreement dated
________ (the "Management Purchase Agreement") with Continental Offices. Ltd.
and Continental Offices Realty Ltd. (collectively, "Continental") providing
forth requisition of certain assets of Continental, including without
limitation, the contractual rights of Continental set forth on Schedule 6
hereto (the "Management Agreements").
K. PGLP has agreed to convey and assign to the Operating Partnership or
its designee all of PGLP's rights under the Management Purchase Agreement, and
the Operating Partnership has agreed to assume PGLP's obligations under the
Management Purchase Agreement.
L. PGI has entered into those certain option agreements set forth on
Schedule 7 hereof (the "Land Option Agreements") pursuant to which it has been
granted the right to purchase the real estate indicated on Schedule 7 hereto.
M. PGI has agreed to convey and assign to the Operating Partnership or its
designee all of PGI's rights under the Land Option Agreements, and the Operating
Partnership has agreed to assume PGI's obligations under the Land Option
Agreements.
3
<PAGE>
N. PGI has prior to the date hereof consummated the transactions pursuant
to which it acquired the Prime Contribution Properties pursuant to that certain
agreement dated ____________________ (the "Acquisition Agreement") and it
desires to contribute to the Operating Partnership its contractual rights to
indemnification as set forth in the Acquisition Agreement, and the Operating
Partnership wishes to assume such rights.
O. The parties desire to enter into this Agreement to set forth their
understanding with respect to the manner in which the Company, Operating
Partnership or their designee will acquire interests in the Contributed
Projects, the Contributed Personal Property, the operations relating thereto and
the rights of PGI and PGLP under the Contributed Contracts (as hereinafter
defined) in exchange for Common Units, cash and the assumption of certain
liabilities.
AGREEMENT:
---------
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. TRANSFER OF CONTRIBUTED ENTITIES, CONTRACTUAL RIGHTS AND CERTAIN OTHER
ASSETS. As part of a single plan, on the Closing Date (as hereinafter defined)
the Prime Transferors will convey to the Company, the Operating Partnership, or
their designees, (w) their interests in the Contributed Entities, (x) the
contractual rights of PGI and PGLP under the Kemper Agreements, the Facility
Acquisition Agreements and the Management Purchase Agreement, (y) the
Contributed Personal Property and (z) the contractual rights of PGI under the
Land Option Agreements and the Acquisition Agreement (the Kemper Agreements, the
Facility Acquisition Agreements, the Management Purchase Agreement, the Land
Option Agreements and the Acquisition Agreement are hereinafter referred to
collectively as the "Contributed Contracts") in consideration for, among other
things, the issuance by the Operating Partnership of Common Units (which are
exchangeable into Common Shares subject to the terms and conditions of that
certain exchange rights agreement dated the date hereof) to the Prime
Transferors or their designees as provided in Section 3 hereof (all of the
foregoing being hereinafter collectively referred to as, the "Contributed
Assets"), the assumption by the Company, the Operating Partnership or their
designee of the liabilities associated with the Contributed Projects, the
Contributed Contracts and the other Contributed Assets referred to herein and
the cash payments required to be made in accordance with Section 4 hereof, all
in a transaction designed to meet the requirements of section 351(a) of the
Code. The Company and the Operating Partnerships will acquire the Contributed
Projects subject to the existing debt, liabilities and contractual and other
obligations of such Contributed Entities existing on the date hereof.
In furtherance of the foregoing, on the Closing Date:
4
<PAGE>
(a) PGI shall transfer to the Operating Partnership the following:
(i) the general partnership interests, the limited partnership
interests and limited liability company interests owned by PGI and set forth on
Schedules 1 and 2 hereof.
(ii) All of its right, title and interest in the Facility
Acquisition Agreements, the Kemper Agreements, the Acquisition Agreement and the
Land Option Agreements.
(iii) All of its interests in all other assets and properties of
the office and industrial real estate division of PGI and its affiliates, all as
more fully described on Schedule 3 hereto.
(b) PGLP shall transfer to the Operating Partnership the following:
(i) The general partnership interests, limited partnership
interests and limited liability company interests set forth on Schedule 1 and 2
hereof.
(ii) all of its rights under the Kemper Agreements and the
Management Purchase Agreement.
(c) PGLP shall transfer to the Company a one percent (1%) limited
partnership interest in the entities listed on Schedules 1 and 2 hereof.
2. CERTAIN DISTRIBUTIONS. On or prior to the Closing Date, the Prime
Transferors shall have the right to receive distributions from the Contributed
Entities, net of all advances to PGI by the Contributed Entities.
3. ISSUANCE OF COMMON UNITS. In partial consideration of the transfer of
the assets provided for in Section 1, on the Closing Date, the Operating
Partnership shall issue an aggregate of [__________] of its Common Units to [PGI
and PGLP]. All such Common Units shall be fully paid and nonassessable.
4. ASSUMPTION OF LIABILITIES; CERTAIN PAYMENTS.
(a) As further consideration for the transfer of the assets by the
Prime Transferors to the Company, the Operating Partnership or their designees
as provided for in Section 1, on the Closing Date the Operating Partnership will
enter into an Assignment and Assumption Agreement substantially in the form of
Exhibit A hereto pursuant to which the Operating Partnership shall assume all of
the outstanding liabilities of each Prime Transferor with respect to the
Contributed Assets (including the assets and operations of the Contributed
Projects, the Contributed Contracts and the operations of the office and
industrial real estate division of PGI), whether or not reflected on the books
and records of the Prime Transferors
5
<PAGE>
or the Contributed Entity, and whether known or unknown, accrued or unaccrued,
absolute, contingent or otherwise.
(b) In addition, on the Closing Date, the Operating Partnership or its
designee will make cash payments as described in Schedule 8 to this Agreement.
5. CLOSING DATE. The closing of the transactions contemplated by this
Agreement (the "Closing") shall occur on the day (the "Closing Date")
immediately following the day that all of the conditions precedent of the
parties under this Agreement have been met or waived by the party entitled to
the benefit thereof, but in any event no later than the date of closing of the
Offering.
6. REPRESENTATIONS AND WARRANTIES.
(a) Each of PGI and PGLP hereby represents and warrants to the Company
and the Operating Partnership as follows (except as set forth in the Disclosure
Schedule attached hereto as Schedule 9):
(i) Organization; Authority. Each of PGI and PGLP and each of the
Contributed Entities (collectively, the "Applicable Partnerships"), are
either (A) in the case of such Persons (as hereinafter defined) which are
corporations, duly incorporated, validly existing and in good standing
under the laws of its jurisdiction of incorporation or (B) in the case of
such Persons which are partnerships or trusts, a partnership or trust, as
the case may be, duly formed, validly existing and in good standing (to the
extent applicable) under the laws of its jurisdiction of formation. Each
of PGI and PGLP has the requisite authority to enter into and perform its
obligations under this Agreement. For the purposes hereof, "Person" means a
natural person, partnership, corporation, limited liability company,
association, joint stock company, trust, estate, joint venture,
unincorporated organization or other entity.
(ii) Due Authorization; Binding Agreement. The execution, delivery and
performance of this Agreement by each of PGI and PGLP has been duly and
validly authorized by all necessary action of each of PGI and PGLP. This
Agreement has been duly executed and delivered by each of PGI and PGLP, and
constitutes a legal, valid and binding obligation of each of PGI and PGLP,
enforceable against each of PGI and PGLP in accordance with the terms
hereof, except to the extent enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors rights generally or general principles of equity.
(iii) Consents and Approvals. No consent, waiver, approval or
authorization of, or filing, registration or qualification with, or notice
to, any governmental unit or any other Person (as hereinafter defined) is
required to be made, obtained or given by any Applicable Partnership in
connection with the execution, delivery and performance of this Agreement,
except for such consents, approvals or authorizations which have been
obtained or for which the failure to obtain would not have a Material
Adverse Effect.
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<PAGE>
For the purposes hereof, "Material Adverse Effect" means a material adverse
effect on the business, assets or financial condition of the Company and
its affiliates, taken as a whole.
(iv) No Violation. None of the execution, delivery or performance of
this Agreement by either of PGI or PGLP does or will, with or without the
giving of notice, lapse of time or both, (A) violate, conflict with or
constitute a default (which violation, conflict or default would result in
a Material Adverse Effect) under any term or condition of (y) the
organizational documents of any Applicable Partnership or any Significant
Agreement (as defined below) to which any Applicable Partnership is a party
or by which it is bound, or (z) any term or provision of any judgment,
decree, order, statute, injunction, rule or regulation of a governmental
unit applicable to an Applicable Partnership or (B) result in the creation
of any Lien or other encumbrance upon the interest of either of PGI or PGLP
in any Contributed Entity or the assets or properties of the Contributed
Entities. For the purposes hereof, "Liens" shall mean any mortgage, deed of
trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, encumbrance for the payment of money, lien (statutory or
otherwise), preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever, including, but
not limited to, any conditional sale or other title retention agreement or
the interest of a lessor under a capital lease.
(v) Ownership of the Contributed Entities. Other than for the
interests of the Kemper Parties which are to be acquired by the Operating
Partnership and the Company on the date hereof, each of PGI and PGLP is the
sole owner of the partnership interests of a Contributed Entity contributed
by either PGI or PGLP to the Company or the Operating Partnership (the
"Contributed Partnership Interests") and has good and valid title to such
interests, free and clear of all Liens (as hereinafter defined). The
Contributed Partnership Interests have been issued in compliance with the
partnership agreements (as then in effect) of the Contributed Entities and
were not issued in violation of any federal or state securities laws. There
are no rights, subscriptions, warrants, options, conversion rights or
agreements of any kind outstanding to purchase or to otherwise acquire any
securities or obligations of any kind convertible into any partnership
interest or other equity interests or profit participation of any kind in
the Contributed Entities or the real estate owned by them (the
"Properties")(or any part thereof).
(vi) Compliance with Laws. Each of the Prime Entities has complied
with all laws (excepting, however, Environmental Laws (as hereinafter
defined), which are specifically covered by subsection (vii) below)
applicable to the conduct of the business of the Prime Properties and the
ownership, use and operation of the Property owned by a Prime Property and
has obtained all licenses and permits required for the conduct thereof,
except where the failure to so comply or obtain could not have a Material
Adverse Effect. To the best of the knowledge of each of PGI and PGLP, (A)
such licenses and permits are in full force and effect and (B) neither PGI
nor PGLP has received any notice of violation from any federal, state or
municipal entity or notice of
7
<PAGE>
an intention by any such government entity to revoke any certificate of
occupancy or other certificate, license or permit issued by it in
connection with the use of any of the Properties owned by a Prime Entity,
that in each case has not been cured or otherwise resolved to the
satisfaction of such government entity, except where such failure or such
action could not have a Material Adverse Effect. For the purposes hereof,
"Environmental Laws" means all federal, state and local laws, ordinances
and rules of common law relating to environmental safety or health matters,
including those relating to fines, orders, injunctions, penalties, damages,
contribution, cost recovery compensation, losses or injuries resulting from
the release or threatened release of hazardous substances and the
generation, use, storage, transportation or disposal of hazardous
substances.
(vii) Environmental Matters. Except as disclosed in environmental
reports, no Prime Entity has knowingly caused or permitted any Hazardous
Material (as defined under applicable Environmental Laws) to be improperly
maintained or disposed of on, under or at the Prime Property's Property or
any part thereof in violation of any Environmental Law. To the knowledge of
each of PGI and PGLP and except for such matters as disclosed in
environmental reports and except for such matters as would not have a
Material Adverse Effect: (A) the Prime Properties are in compliance, and
have heretofore complied, with all Environmental Laws, (B) none of the
Prime Properties has received any written notice from any governmental unit
or other person that it, its current or former operations or the properties
now or heretofore owned, leased or used by it or any of its predecessors,
are not or have not been in compliance with the Environmental Laws or that
it has any material liability with respect thereto, (C) there are no
administrative, regulatory or judicial proceedings pending or threatened
against the Prime Entities pursuant to, or alleging any material violation
of, or material liability under, any Environmental Laws, (D) none of the
properties now or heretofore owned, leased or used by the Prime Entities
has been used as a disposal site for any Hazardous Materials.
(viii) Ownership of Properties. With respect to each of the Prime
Entities, said Prime Entity (A) is the sole owner of the Property as
indicated on the Schedules hereto and (B) has good, valid and marketable
title to such Property, free and clear of all Liens (as hereinafter
defined) other than the Permitted Exceptions. For purposes hereof,
"Permitted Exceptions" shall mean with respect to real property or any
interest or estate therein owned by any Persons:
A. Liens or deposits made to secure the release of such Liens,
securing taxes, the payment of which is at the time not delinquent or
the payment of which is actively being contested in good faith by
appropriate proceedings diligently pursued and for which appropriate
reserves shall have been established on the Applicable Partnership's
books in accordance with generally accepted accounting principles
consistently applied ("GAAP");
B. attachments, judgments and other similar Liens arising in
connection with court or administrative proceedings, provided that the
execution or other enforcement of such Liens is effectively stayed or
secured and the claims
8
<PAGE>
secured by such Liens are actively being contested in good faith by
appropriate proceedings diligently pursued and for which appropriate
reserves shall have been established on the Applicable Partnership's
books in accordance with GAAP;
C. zoning laws and ordinances; provided that the Prime Entities'
Property is not in violation thereof and that such laws and ordinances
do not require the demolition, vacation or cessation of the present
use of such Property or require the discontinuance of the use of all
or any material portion of such Property as an office or industrial
building;
D. any laws, ordinances, deeds of trust, mortgages, Liens,
easements, rights of way, restrictions, exemptions, reservations,
conditions, limitations, covenants, adverse rights or interests and
other matters described as exceptions on the Disclosure Schedule;
provided that the applicable Property is not in violation thereof and
the same do not require the demolition, vacation or cessation of the
present use of such Property or require the discontinuance of the use
of all or any material portion of such Property as an office or
industrial building;
E. any other easements, rights of way, restrictions, exceptions,
reservations, conditions, limitations, covenants, adverse rights or
interests, licenses, minor irregularities in title and other similar
encumbrances which do not in the aggregate have a Material Adverse
Effect;
F. any law or governmental regulation or other right of any
governmental unit, which (Y) requires the person to maintain certain
facilities or perform certain acts as a condition of its occupancy or
use of its assets and properties, or (Z) condemns, appropriates or
recaptures the person's assets or property; and
G. Liens imposed by laws, such as carriers', warehouseman's and
mechanics' liens and other similar liens arising in the ordinary
course of business which secure payment of obligations not more than
60 days past due or which are being contested in good faith by
appropriate proceedings diligently pursued, and for which adequate
reserves shall have been established as of the date hereof on the
Applicable Partnership's books in accordance with GAAP.
(ix) Tenant Leases. The rent roll described in subparagraph (xviii)
below lists each of the leases to which a Prime Entity is a party which is
currently in effect with respect to the Property owned by such Prime
Entity, as the same have been amended or modified to the date hereof. The
parties hereto acknowledge that the Disclosure Schedule does not list, and
neither PGI nor PGLP makes any representation with respect to, (A)
subleases, concessions, or license agreements which may have been entered
into by tenants or subtenants or (B) license or concession agreements which
have terms not in excess of sixty (60) days; provided that, in the case of
a sublease or assignment, each of
9
<PAGE>
PGI and PGLP represents that the tenant listed in the rent roll described
in subparagraph (xvii) below remains liable for the performance of the
lease.
(x) Absence of Undisclosed Liabilities and Contractual Obligations.
Except for liabilities arising in the ordinary course of business, since
the date of the Applicable Partnerships' most recent financial statements
and for those matters specifically and adequately accrued or reserved for
in the financial statements of the Applicable Partnerships, the Prime
Entities have no liabilities of any material nature, required by GAAP to be
included in the financial statements of such Prime Property, and which
would have, individually or in the aggregate, a Material Adverse Effect. To
the knowledge of each of PGI and PGLP, there are no Significant Agreements
of the Prime Properties other than as set forth in the Disclosure Schedule
and other than debt instruments which are reflected in the most recent
financial statements of the Applicable Partnership delivered to the
Company. For purposes hereof, "Significant Agreement" of a Prime Property
means and includes any of the following to which such Person is a party or
by which such Person or any of its assets or properties may be subject or
bound, in each such case as amended and currently in effect, inclusive of
any waivers relating thereto:
A. all agreements, instruments and documents evidencing or securing
the contractual obligations of the Prime Property that involve
annual payments in excess of $[100,000];
B. all leases where the Prime Property is the lessee (including
capital leases), contracts, agreements or commitments (whether
written or oral) that are not terminable without penalty on not
more than 90 days' notice and that involve annual gross payments
in excess of $[100,000];
C. all ground leases where the Prime Property is a ground lessee; and
D. all reciprocal easement agreements affecting the Prime
Properties.
(xi) Significant Agreements; Binding Agreements. To the knowledge of
PGI and PGLP, each of the Significant Agreements is valid and binding
obligation of the applicable Prime Entity enforceable against the Prime
Entity party thereto in accordance with its terms, except as the
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors rights
generally and general equitable principles.
(xii) Litigation. There are no claims, actions, suits or proceedings
pending, and, to the knowledge of each of PGI and PGLP, there are no
investigations pending or claims, actions, suits, proceedings or
investigations threatened, before any court, governmental unit or any
arbitrator with respect to the Prime Entities in which an adverse
determination would have a Material Adverse Effect.
10
<PAGE>
(xiii) Property Improvements. To the knowledge of each of PGI and
PGLP, the improvements at each Property owned by a Prime Property is in
good condition and repair, ordinary wear and tear excepted, and has not
suffered any material casualty or other material damage which has not been
repaired in all material respects. To the knowledge of each of PGI and PGLP
except as previously disclosed, there is no material latent or patent
structural, mechanical or other significant defect or deficiency in the
improvements owned by a Prime Entity.
(xiv) Condemnation Proceedings. No proceedings have been commenced,
or, to the knowledge of each of PGI and PGLP, threatened, by an authority
having the power of eminent domain to condemn any part of any Property
owned by a Prime Entity or any improvements thereon or, to the knowledge of
each of PGI and PGLP, any property owned by a party to a reciprocal
easement agreement affecting any Prime Entity, except such as would not
have a Material Adverse Effect.
(xv) Bankruptcy and Insolvency. To the knowledge of each of PGI and
PGLP, none of the tenants now occupying any Prime Property, is the subject
of any bankruptcy, reorganization, insolvency or similar proceedings.
(xvi) Rent Roll. The rent roll for the Property owned by a Prime
Entity, dated ______________, 1997, is true, correct and complete and there
are no prospective tenant cancellation rights, prospective renewal or
extension options or future rent abatements or unpaid tenant concessions or
other unpaid landlord obligations other than those summarized on such rent
roll, except in each case to the extent any inaccuracies would not,
individually or in the aggregate, have a Material Adverse Effect.
(xvii) Neither PGI nor PGLP is a "foreign person" within the meaning
of Section 1445 (f) of the Code nor a "foreign partner" within the meaning
of Section 1446 of the Code.
(xviii) Neither PGI nor PGLP owns, directly or indirectly, (i) five
percent (5%) or more of the total combined voting power of all classes of
stock entitled to vote, or five percent (5%) or more of the total number of
shares of all classes of stock, of any corporation that is a tenant in a
Prime Entity or (ii) an interest of five percent (5%) or more in the assets
or net income of any tenant in a Prime Entity.
(xix) To the knowledge of each of PGI and PGLP, no condition exists
which, with the giving of notice or the passage of time, or both, would
permit any party to cancel its obligations under any reciprocal easement
agreement to which any Prime Property is a party or to be relieved of its
operating covenants thereunder, except as set forth in the rent roll
described in subparagraph (xvii) above.
(xx) Neither PGI nor PGLP has received or been informed in writing
of the receipt of any written notice which is still in effect that there is
any violation of a
11
<PAGE>
condition or agreement contained in any easement, restrictive covenant or
any similar instrument or agreement affecting any Property or any portion
thereof.
(b) For the purposes of the representations and warranties made
pursuant hereto, a statement that a fact is true to "the knowledge" means, that
after reasonable investigation, none of the following Persons actually knows
such statement to be untrue: _____________, ______________, and ______________.
For purposes of this Agreement, any written notice given to the on-site property
manager of a Property shall be deemed to have been given to the Contributed
Entity and PGI.
(c) Except as specifically warranted in this Section, the Prime
Transferors make no representations and warranties to the Company or the
Operating Partnership whatsoever regarding the Contributed Entities, the assets
or properties to be acquired under the Contributed Contracts, the Facility
Acquisition Agreement, or the assets of the Contributed Entities, including, but
not limited to, THE WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, WHICH ARE SPECIFICALLY DISCLAIMED. The Operating Partnership
acknowledges that all of the assets to be conveyed by the Prime Transferors to
the Operating Partnership (and all of the assets of the Contributed Entities)
will be conveyed "as is, where is." The Prime Transferors make no representation
or warranty with respect to any asset which is the subject of any of the
Facility Acquisition Agreement.
(d) The Company hereby represents, warrants and covenants with and to
the Prime Transferors as follows:
(i) It is a real estate investment trust duly organized and
validly existing under the laws of the State of Maryland.
(ii) It has the full power and authority under the terms of its
trust agreement to execute and deliver this Agreement and to consummate the
transactions contemplated hereby.
(iii) This Agreement constitutes its valid and legally binding
obligation, enforceable against it in accordance with its terms.
(iv) On the Closing Date, the Operating Partnership and/or the
Services Company will hire all of the employees of the Prime Transferors
associated with the Contributed Projects and will assume all liabilities and
obligations to or with respect to such employees, including any accrued but
unpaid benefits, bonuses and vacation pay.
(e) The Operating Partnership hereby represents, warrants and
covenants with and to the Prime Transferors as follows:
(i) It is a limited partnership duly organized and validly
existing under the laws of the State of Delaware.
12
<PAGE>
(ii) It has full legal power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
(iii) This Agreement constitutes its valid and legally binding
obligation, enforceable against it in accordance with its terms.
(iv) The Common Units to be issued by the Operating Partnership
to the Prime Transferors pursuant to the terms of this Agreement will, when
issued in accordance herewith be duly authorized, fully paid and nonassessable.
(v) The Operating Partnership will not take any action which
would cause the transfers provided for in Section 1 not to qualify for tax-free
treatment under section 351 of the Code.
(f) All of the representations and warranties provided for in this
Section 6 shall survive the Closing Date and the delivery of the closing
documents on the Closing Date for a period of one year.
7. CONDITIONS PRECEDENT.
(a) The obligation of the Prime Transferors to consummate the
transactions contemplated hereby is subject to the satisfaction of the following
conditions (any of which may be waived by the Prime Transferors in writing):
(i) All the terms, covenants and conditions of this Agreement
to be complied with and performed by the Company or the Operating Partnership on
or before the Closing Date shall have been fully complied with and performed in
all respects.
(ii) All the representations and warranties made by the Company
and Operating Partnership herein shall be true and correct in all material
respects on and as of the Closing Date.
(iii) All consents required for the valid and effective transfer
of the assets to be transferred in accordance with Section 1 shall have been
obtained and the consent to the assumption by the Operating Partnership of the
obligations to be assumed by the Operating Partnership pursuant to Section 4
shall have been obtained, except for any approvals and consents described in
Schedule 10 to this Agreement.
(iv) There shall be no pending or threatened litigation against
any of the parties hereto concerning or relating to the transactions
contemplated hereby.
(v) The approval of all administrative agencies, if any, whose
approval of the transactions contemplated hereby is necessary or desirable shall
have been obtained.
13
<PAGE>
(vi) The Company, the Operating Partnership, PGI and the other
parties signatory thereto shall have entered into a Registration Rights
Agreement substantially in the form of Exhibit B attached hereto and made a part
hereof.
(vii) The Company, the Operating Partnership, Michael W. Reschke
and PGI shall have entered into a Non-Compete Agreement substantially in the
form of Exhibit C attached hereto and made a part hereof.
(viii) PGI shall have entered into an Indemnity Agreement
substantially in the form of Exhibit D attached hereto and made a part hereof.
(b) The obligations of the Company and the Operating Partnership to
consummate the transactions contemplated hereby are subject to the satisfaction
of the following conditions (any of which may be waived by the Company and
Operating Partnership in writing):
(i) All the terms, covenants and conditions of this Agreement
to be complied with and performed by the Prime Transferors on or before the
Closing Date shall have been fully complied with and performed in all respects.
(ii) All the representations and warranties made by the Prime
Transferors herein shall be true and correct in all material respects on and as
of the Closing Date.
(iii) All required consents necessary for the valid and
effective transfer of the assets to be transferred to the Operating Partnership
in accordance with the provisions of Section 1 shall have been obtained and the
consent to the assumption by the Operating Partnership of the obligations to be
assumed by the Operating Partnership pursuant to Section 4 shall have been
obtained, except for any approvals and consents described in Schedule 10 to this
Agreement.
(iv) The Operating Partnership shall have obtained title
insurance (or endorsed commitment) insuring that all real property owned by the
Contributed Entities, are vested in the respective entities free and clear of
all mortgages, liens and encumbrances except those reasonably acceptable to the
Operating Partnership.
(v) The conditions referred to in Sections 7(a)(iv) through
7(a)(xii) shall have been complied with or otherwise satisfied.
8. INDEMNIFICATION
(a) Each Prime Transferor hereby agrees to indemnify the Company and
the Operating Partnership for, and to hold the Company and the Operating
Partnership harmless from, the following:
14
<PAGE>
(i) Any and all liabilities, damages, losses, costs or
deficiencies resulting from any misrepresentation, breach of any warranty or
nonfulfillment of any agreement or covenant on the part of that Prime
Transferor, whether contained in this Agreement or in any document furnished in
connection with the transactions contemplated hereby; and
(ii) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and expenses incident to the foregoing, including
reasonable attorney's fees.
(b) Each of the Company and the Operating Partnership hereby agrees
to indemnify each Transferor for, and to hold each Prime Transferor harmless
from, the following:
(i) Any and all indebtedness, lease, contract or other
liabilities and obligations assumed by the Company and the Operating Partnership
in accordance with the terms hereof;
(ii) Any and all liabilities, losses, costs, damages or
deficiencies resulting from any misrepresentations, breach of any warranty or
nonfulfillment of any agreement or covenant on the part of the Company or the
Operating Partnership, whether contained in this Agreement or in any document
furnished in connection with the transactions contemplated hereby;
(iii) Any and all liabilities, damages, losses, costs or
deficiencies resulting from any act or circumstance relating to any of the
assets transferred (including the assets and operations of the Contributed
Entities and operations of PGI's office and industrial real estate division)
whenever occurring;
(iv) Any loss, claim, damage, or liability, including any loss,
claim, damage, or liability under the Securities Act of 1933, as amended, or any
applicable state securities laws, arising out of, or attributable to the
Offering, except for losses, claims, damages or liabilities arising from the
inaccuracy of information supplied in writing by PGI for inclusion in the
prospectus relating to the Offering; and
(v) Any and all actions, suits, proceedings, demands,
assessments, judgments, costs and expenses incident to any of the foregoing,
including reasonable attorneys' fees.
(c) Any party seeking indemnification ("Indemnitee") pursuant to this
Section 8 shall promptly (within 20 days of service to the Indemnitee if a third
party has commenced actual litigation against the Indemnitee) give written
notice to the party from which indemnification is sought ("Indemnitor") after
the Indemnitee has knowledge of any claim against the Indemnitor as to which
recovery may be sought against the Indemnitee pursuant to this Section 8, or of
the commencement of any legal proceedings against the Indemnitee as to such
claim after the Indemnitee has knowledge of such proceedings, whichever shall
first occur, and shall permit the Indemnitor to assume the defense of any such
claim or any litigation resulting
15
<PAGE>
from such claim. Such notice shall specify in reasonable detail the facts known
to the Indemnitee giving rise to such indemnification rights and, if possible,
an estimate of the amount of liability which could result therefrom. The right
of the Indemnitee to indemnification hereunder shall be deemed agreed to unless,
within ten days after the receipt of such notice, the Indemnitee is notified in
writing by the Indemnitor that it disputes the right to indemnification as set
forth in such notice. Failure by the Indemnitor to notify the Indemnitee of the
Indemnitor's election to defend such action within ten days after notice thereof
shall have been given to the Indemnitor, or failure to deliver notification to
the Indemnitee by the Indemnitor that the Indemnitee's right to indemnification
is being disputed, shall be deemed an acknowledgment by Indemnitor that
Indemnitee is entitled to indemnification hereunder and shall be deemed to be an
election by Indemnitor to defend such action. The Indemnitor shall not, in the
defense of such claim or any litigation resulting therefrom, consent to entry of
any judgment (except with the consent of the Indemnitee) or enter into any
settlement (except with the consent of the Indemnitee) which does not include as
an unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnitee of a full, absolute and unconditional release from all liability in
respect of such claim or litigation.
(d) If the Indemnitor shall not assume the defense of any such claim
or litigation resulting therefrom, the Indemnitee may defend against such claim
or litigation in such manner as it may deem appropriate. The Indemnitee may
settle such claim or litigation on such terms as it may deem appropriate and the
Indemnitor shall promptly reimburse the Indemnitee for the amount of such
settlement, and all expenses, legal or otherwise, incurred by the Indemnitee in
connection with the defense against, or settlement of, such claim or litigation.
If no settlement of such claim or litigation is made, the Indemnitor shall
promptly reimburse the Indemnitee for the amount of any judgment rendered with
respect to such claim or in such litigation, and of all expenses, legal or
otherwise, incurred by the Indemnitee in the defense against such claim or
litigation. Notwithstanding the foregoing, if the Indemnitor has disputed the
Indemnitee's right to indemnification in accordance with the provisions of
Section 8(c), the Indemnitor shall not be obligated to pay the Indemnitee the
amount provided for in this Section 8(d) until such dispute has been resolved
and it has been determined that the Indemnitor is required to make such
indemnification payment.
(e) The right of any party to seek indemnification hereunder shall
expire as to any claim not made on or prior to the first anniversary of the
Closing whether or not the basis for any such claim was known on such date.
9. MISCELLANEOUS.
(a) Each of the parties hereto hereby covenants and agrees that
subsequent to the Closing Date they will, at any time, and from time to time,
upon the request and at the expense of the Company, do, acknowledge and deliver,
or cause to be done, executed, acknowledged and delivered, all such further
acts, deeds, assignments, transfers, conveyances, powers of attorney and
assurances as may reasonably be required to fully effectuate the transactions
contemplated by this Agreement. Each of the Prime Transferors hereby constitutes
and appoints the Company as its true and lawful attorney-in-fact, with full
power of substitution,
16
<PAGE>
to collect for the account of the Company or the Operating Partnership, as
applicable, any receivables and other items conveyed to the Company or the
Operating Partnership, as applicable, pursuant to the provisions of Section 1,
to endorse in the name of the Prime Transferor, the Company or the Operating
Partnership, or any of them, any check received on account of any receivable,
claim or other item, to institute and prosecute in the name of a Prime
Transferor or otherwise, any and all proceedings which the Company or the
Operating Partnership may deem proper in order to collect, assert or enforce any
claim, right or title of any kind in and to any of such transferred assets.
(b) All notices, requests, demands or other communications required
or permitted under this Agreement shall be in writing and be personally
delivered against a written receipt, delivered to a reputable overnight courier,
for overnight delivery, transmitted by confirmed telephonic facsimile (fax) or
transmitted by mail, registered, express or certified, return receipt requested,
postage prepaid, addressed as follows:
If to the Company or the Operating Partnership:
Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: President
Fax: (312) 917-0460
With a copy to:
Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: General Counsel
Fax: (312) 917-1684
If to PGI or PGLP:
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Michael W. Reschke
Fax: (312) 917-1511
17
<PAGE>
With a copy to:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attn: Wayne D. Boberg
Fax: (312) 558-5700
All notices, demands and requests shall be effective upon being properly
personally delivered, upon being delivered to a reputable messenger service,
upon transmission of a confirmed fax, or upon being deposited in the United
States mail in the manner provided in this Section 9. However, the time period
in which a response to any such notice, demand or request must be given shall
commence to run from the date of personal delivery, the date of delivery by a
reputable messenger service, the date on the confirmation of a fax, or the date
on the return receipt, as applicable. If any party refuses delivery, the notice,
demand or request shall be deemed received (i) one business day after personal
delivery of the notice, demand or request was attempted or the notice, demand or
request was delivered to a reputable overnight courier or was transmitted by fax
or (ii) three business days after the notice, demand or request was deposited in
the United States mail.
(a) This Agreement may be modified or amended from time to time only
by a written instrument executed by all of the parties hereto.
(b) Captions contained in this Agreement are inserted only as a
matter of convenience and reference, and in no way define, limit, extend or
describe the scope of this Agreement, or the intent of any provision hereof. All
references to Sections herein shall refer to Sections of this Agreement unless
the context clearly requires otherwise.
(c) This Agreement shall be binding upon, and inure to the benefit
of, the parties hereto and their respective successors and assigns.
(d) This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of Illinois without regard to its conflicts
of laws rules.
(e) This Agreement represents the entire agreement of the parties
hereto with respect to the subject matter hereof.
(f) This Agreement may be executed in counterparts which, taken
together, shall constitute one and the same instrument.
[signature page follows]
18
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
PRIME GROUP REALTY TRUST
By:________________________________
Its___________________________
PRIME GROUP REALTY, L.P.
By: Prime Group Realty Group
Its General Partner
By:________________________________
Its___________________________
THE PRIME GROUP, INC.
By:________________________________
Name:______________________________
Title:_____________________________
PRIME GROUP LIMITED PARTNERSHIP
By:________________________________
Michael W. Reschke,
Managing General Partner
19
<PAGE>
SCHEDULE 1
TO
FORMATION AGREEMENT
PRIME PROPERTIES
<TABLE>
<CAPTION>
Interest Being Interest Being
Transferred Transferred Interest Being
From PGI to From PGLP to Transferred
Address of Operating Operating From PGLP to
Entity Project Partnership Partnership the Company
- -------- ---------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
20
<PAGE>
SCHEDULE 2
TO
FORMATION AGREEMENT
PRIME CONTRIBUTION PROPERTIES
<TABLE>
<CAPTION>
Interest Being Interest Being
Transferred Transferred Interest Being
From PGI to From PGLP to Transferred
Address of Operating Operating From PGLP to
Entity Project Partnership Partnership the Company
- -------- ---------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
</TABLE>
21
<PAGE>
SCHEDULE 3
TO
FORMATION AGREEMENT
CONTRIBUTED ASSETS RELATING TO
PGI'S OFFICE AND INDUSTRIAL DIVISION
22
<PAGE>
SCHEDULE 4
TO
FORMATION AGREEMENT
CONTRIBUTED LIABILITIES RELATING TO
PGI OFFICE AND INDUSTRIAL DIVISION
23
<PAGE>
SCHEDULE 5
TO
FORMATION AGREEMENT
ACQUISITION PROPERTIES
Entity Address of Project
[Salt Creek Properties]
[Continental Properties]
[Mishawauka Indiana Property]
[Wisconsin Properties]
[Nardi Properties]
24
<PAGE>
SCHEDULE 6
TO
FORMATION AGREEMENT
CONTINENTAL MANAGEMENT CONTRACTS
Entity Address of Project
25
<PAGE>
SCHEDULE 7
TO
FORMATION AGREEMENT
LAND OPTION AGREEMENTS
Entity Address of Project
26
<PAGE>
SCHEDULE 8
TO
FORMATION AGREEMENT
CERTAIN PAYMENTS
Amounts Payable to PGI or PGLP pursuant to Section [2]:
Purchase Price for the interests in
_______________ and__________ described
in Section [1(c)]: $_________
$_________
ACQUISITION COSTS
EARNEST MONEY DEPOSITS:
Facility Acquisitions
Amounts Payable to PGI or PGLP or otherwise
pursuant to Section 4(b):
CREDIT ENHANCEMENT
COMMITMENT FEE:
[_____]
REAL ESTATE
TRANSFER TAXES $_________
$_________
OFFERING COSTS AND EXPENSES:
Costs and Expenses through _/_/97 =========
TOTAL $
=========
27
<PAGE>
SCHEDULE 9
TO
FORMATION AGREEMENT
DISCLOSURE SCHEDULE
Entity Address of Project
28
<PAGE>
SCHEDULE 10
TO
FORMATION AGREEMENT
POST-CLOSING CONSENTS
29
<PAGE>
NON-COMPETITION AND RESTRICTION AGREEMENT
-----------------------------------------
THIS NON-COMPETITION AND RESTRICTION AGREEMENT (this "Agreement") is made
and entered into as of November __, 1997, by and among PRIME GROUP REALTY TRUST,
a Maryland real estate investment trust (the "Company"), PRIME GROUP REALTY,
L.P., a Delaware limited partnership (the "Operating Partnership"), THE PRIME
GROUP, INC., an Illinois corporation ("TPG"), PRIME GROUP LIMITED PARTNERSHIP,
an Illinois limited partnership ("PGLP" and, together with TPG, the "TPG
Group"), and MICHAEL W. RESCHKE, an individual ("Reschke").
W I T N E S S E T H:
-------------------
WHEREAS, the Company, through its subsidiaries and affiliates, is engaged
primarily in the business of the acquisition, development, leasing, marketing
and management of office and industrial real estate properties;
WHEREAS, on the date hereof the Company and the Operating Partnership are
entering into a series of related transactions pursuant to which, among other
things, they will acquire substantially all of the interests of the office and
industrial real estate development, leasing and management business of the TPG
Group and its affiliates (the "Formation");
WHEREAS, Reschke and the TPG Group will continue to engage in certain real
estate-related activities after the date hereof; and
WHEREAS, as a condition to the consummation of the transactions described
above, and in an effort to eliminate potential conflicts of interest that may
arise in the future as a result of the continuing activities of Reschke and the
TPG Group, the parties hereto desire, subject to certain conditions and
exceptions set forth herein, to enter into this Agreement restricting certain
activities of Reschke and the TPG Group while Reschke is Chairman of the Board
of the Company or while the TPG Group, Reschke and their Affiliates (as
hereinafter defined) own, in the aggregate, five percent (5%) or more of the
issued and outstanding common shares of beneficial interest of the Company
("Common Shares") and limited partner interests in the Operating Partnership
exchangeable into Common Shares on a fully diluted basis after giving effect to
the exchange into Common Shares of all limited partner interests in the
Operating Partnership and after taking into consideration the interests of all
general partners in the Operating Partnership.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
<PAGE>
1. Definitions. Certain capitalized terms used but not otherwise defined
herein shall have the meanings set forth below:
"Affiliate" means (i) any entity in which Reschke and the TPG Group
(either individually or collectively) own or control, directly or indirectly,
fifty percent (50%) or more of the outstanding equity interests, (ii) any entity
with respect to which Reschke and the TPG Group (either individually or
collectively) have the right or power, directly or indirectly, to cause such
entity to acquire an interest in any property within the Primary Business of the
Company without the consent or approval of a third party equity owner and (iii)
any entity with respect to which Reschke and the TPG Group (either individually
or collectively) have the right or power, directly or indirectly, to withhold
consent or approval of an acquisition by such entity of an interest in any
property within the Primary Business of the Company where such consent or
approval is required as a condition to consummation of such acquisition.
"Primary Business of the Company" means any interest in any real
property within the office and industrial real estate acquisition, ownership,
development, leasing and management business, unless and until any such business
is no longer within the primary business of the Company, as determined from time
to time by a majority vote of the independent trustees of the Company.
2. Prohibitions Relating to Office and Industrial Properties.
---------------------------------------------------------
(a) Subject to subsections 2(b) and 2(c) below, from and after the
date hereof and during the term of this Agreement, neither Reschke, the TPG
Group nor any Affiliate will own any real estate property or acquire any real
estate property or any direct or indirect interest therein (except any ownership
resulting from foreclosure of indebtedness), or manage any real estate property,
that is within the Primary Business of the Company, provided, however, that the
foregoing shall not prohibit Reschke, the TPG Group or any Affiliate from
providing any mortgage financing, from acting as lessor in a sale-leaseback
transaction, from providing any other subordinated debt with respect to any
facilities or properties of the type included within the Primary Business of the
Company or from obtaining a preferred equity position in any owner or lessee of
any such type of facilities or properties.
(b) Excluded from the restrictions set forth in subsection 2(a) are
the following properties and interests: (i) any interest in the Company or the
Operating Partnership; (ii) any activity which a majority of the independent
members of the board of trustees of the Company determine not to be competitive
with any facility or property which the Company or Operating Partnership owns or
intends to acquire; (iii) any properties in which the TPG Group or Reschke or
any Affiliate had a direct or indirect interest prior to the Formation; (iv) the
ownership by the TPG Group or
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<PAGE>
Reschke of less than five percent (5%) of any class of securities listed on a
national securities exchange or included in the Nasdaq National Market; and (v)
subject to the proviso at the end of this clause (v), any facilities or
properties acquired after the date of this Agreement in the Primary Business of
the Company, but only to the extent such facilities or properties are acquired
in connection with the acquisition of a group of facilities or properties;
provided, that in the event of any such acquisition permitted by this clause
(v), the Company or the Operating Partnership shall have the right and
opportunity to purchase the facilities or properties within the Primary Business
of the Company from Reschke, the TPG Group or any Affiliate, as applicable, at a
price equal to the fair market value thereof (as determined (1) by an
independent appraiser acceptable to both Reschke, the TPG Group or such
Affiliate, as applicable, on the one hand, and the Company or the Operating
Partnership, on the other hand, or (2) by any other means mutually acceptable to
Reschke, the TPG Group or such Affiliate, on the one hand, and the Company or
the Operating Partnership, on the other hand).
(c) The restrictions set forth in subsection 2(a) shall not prohibit
the sale, lease or other disposition, or any activities incident thereto, of any
property in which the TPG Group or Reschke or any Affiliate has an interest on
the date hereof.
3. Term. This Agreement shall be in effect from and after the date hereof
and shall continue in effect until (a) Reschke ceases to serve as Chairman of
the Board of the Company and (b) Reschke, the TPG Group and their Affiliates
cease to own five percent (5%) or more of the Common Shares of the Company and
limited partner interests in the Operating Partnership exchangeable for Common
Shares, on a fully-diluted basis after giving effect to the exchange into Common
Shares of any limited partner interests in the Operating Partnership owned by
such parties and any other party and after taking into consideration the
interests of all general partners in the Operating Partnership.
4. Reasonable Limit. The parties hereto have attempted to set forth
certain restrictions only to the extent necessary to protect the interests of
the Company. Each of Reschke and the TPG Group expressly acknowledges that the
restrictive covenant contained in subsection 2(a) above along with the
exceptions thereto contained in subsections 2(b) and 2(c) above, constitutes a
reasonable restriction. If, however, the scope of enforceability of the
restrictive covenant contained in this Agreement is disputed at any time, a
court or other trier of fact may modify and enforce the covenant to the extent
that it believes is reasonable under the circumstances existing at the time.
5. Breach of Agreement.
-------------------
(a) A party aggrieved shall notify the other party in writing of any
conflicts, disputes or claims of breach arising
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<PAGE>
under this Agreement. Within ten (10) business days after such notice is sent,
the parties shall meet, shall develop, as fully as possible, the facts relating
to the conflict, dispute or alleged breach, and shall attempt to resolve the
same, it being understood and agreed that any such resolution shall be subject
to the consent and approval of a majority of the Company's independent trustees.
If resolution of the dispute is not made to the satisfaction of the aggrieved
party within thirty (30) days after the notice is sent, the aggrieved party may
pursue its legal and equitable remedies.
(b) In the event of breach of this Agreement, each of Reschke and the
TPG Group acknowledges that the remedy at law would be inadequate and that, in
addition to monetary damages, the Company shall be entitled, after compliance
with the dispute mechanism described in subsection 5(a) above, to seek an
injunctive order restraining such breach.
6. Transferability. The parties hereto agree that this Agreement shall
inure to the benefit of the Company, and its successors and assigns and shall be
transferrable and assignable by the Company in connection with the sale or other
transfer of a controlling (50%) interest in the Company to an entity that is not
an Affiliate. Upon such transfer or assignment, this Agreement shall remain in
full force and effect, under the terms herein, between Reschke, the TPG Group
and such transferees, assignees or successors in interest. This Agreement shall
be binding upon the successors and assigns of all or substantially all of the
business of the TPG Group.
7. Waiver. The waiver by an party to this Agreement of a breach by any
party or any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach by any other party. No waiver of any provision
of this Agreement shall be effective, unless in writing and signed by the party
waiving its rights, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given, provided
further that no waiver by the Company shall be effective unless accompanied by a
certificate of an executive officer of the Company certifying that a majority of
the independent trustees of the Company have consented to and approved such
waiver.
8. Notices. All notices, requests, demands and other communications given
by any party hereto shall be in writing and shall be deemed to be duly given if
delivered, or if mailed first class, return receipt requested addressed as
follows:
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
To the Company or the To the TPG Group or any member
Operating Partnership: thereof:
Prime Group Realty Trust c/o The Prime Group, Inc.
77 West Wacker Drive 77 W. Wacker Drive
Chicago, IL 60601 Chicago, IL 60601
Attention: Chief Executive Officer Attention: Michael W. Reschke
With a copy to: With a copy to:
Prime Group Realty Trust The Prime Group, Inc.
77 West Wacker Drive 77 West Wacker Drive
Chicago, IL 60601 Chicago, IL 60601
Attention: General Counsel Attention: General Counsel
To Michael W. Reschke:
c/o The Prime Group, Inc.
77 W. Wacker Drive
Chicago, IL 60601
Attention: Michael W. Reschke
</TABLE>
9. Entire Agreement. This instrument supersedes all prior understandings
and agreements of the parties hereto and contains the entire agreement of the
parties with respect to the subject matter hereof and may not be amended or
changed, except by an agreement in writing entered into by the parties hereto.
10. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Illinois.
11. Severability. If a court of competent jurisdiction adjudicates any
one or more of provisions of this Agreement as invalid, illegal or unenforceable
in any respect, such provision(s) shall be ineffective only to the extent and
duration of such invalidity, illegality or unenforceability and such invalidity,
illegality or unenforceability shall not affect the remaining substance of such
provision or any of this Agreement's other provisions, and this Agreement shall
be construed as if it had never contained such invalid, illegal and
unenforceable provision.
12. Counterparts. 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.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Non-
Competition and Restriction Agreement to be duly executed as of the date first
above written.
COMPANY: RESCHKE AND THE TPG GROUP:
PRIME GROUP REALTY TRUST,
a Maryland real estate
investment trust __________________________
Michael W. Reschke
By: ___________________________
Its:__________________________ THE PRIME GROUP, INC.,
an Illinois corporation
PRIME GROUP REALTY, L.P.,
a Delaware limited partnership By:_______________________
Its:______________________
By: Prime Group Realty Trust,
its Managing General
Partner PRIME GROUP LIMITED
PARTNERSHIP, an Illinois
By:________________________ limited partnership
Its:_______________________
By:_________________________
Michael W. Reschke,
Managing General Partner
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<PAGE>
Exhibit 10.23
FORM OF
SERIES A PREFERRED SECURITIES
PURCHASE AGREEMENT
DATED AS OF NOVEMBER __, 1997
AMONG
SECURITY CAPITAL PREFERRED GROWTH INCORPORATED,
PRIME GROUP REALTY, L.P.
AND
PRIME GROUP REALTY TRUST
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
I. PURCHASE AND SALE OF SECURITIES......................................... 1
1.1 Sale and Issuance of Series A Preferred Shares.................... 1
1.2 Closing........................................................... 2
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 2
2.1 Organization, Good Standing and Qualification..................... 2
2.2 Power, Authority and Enforceability............................... 3
2.3 Capitalization; Registration Rights............................... 4
2.4 Valid Issuance of Series A Preferred Shares....................... 4
2.5 Compliance with Other Instruments................................. 4
2.6 No Registration Under the Securities Act.......................... 4
2.7 No General Solicitation........................................... 5
2.8 Financial Statements.............................................. 6
2.9 No Material Adverse Changes....................................... 6
2.10 Litigation........................................................ 6
2.11 Title to Properties; Leasehold Interests.......................... 7
2.12 Environmental Compliance.......................................... 11
2.13 Taxes............................................................. 13
2.14 Insurance......................................................... 14
2.15 Employees; ERISA.................................................. 14
2.16 REOC Status....................................................... 14
2.17 Legal Compliance.................................................. 14
2.18 Governmental Consent.............................................. 15
2.19 Investment Company................................................ 15
2.20 Knowledge Defined................................................. 15
III. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.......................... 15
3.1 Power, Authority and Enforceability............................... 15
3.2 Compliance with Other Instruments................................. 16
3.3 Ownership Limitations............................................. 16
3.4 Sophisticated Investor............................................ 16
3.5 Unregistered Securities........................................... 16
3.6 Access to Information............................................. 16
IV. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING..................... 16
4.1 Amendment to Amended and Restated Partnership Agreement........... 16
4.2 Series A Preferred Designation.................................... 16
4.3 Representations and Warranties.................................... 16
4.4 Performance....................................................... 17
4.5 No Material Adverse Change........................................ 17
4.6 Opinion of Company Counsel........................................ 17
4.7 Registration Rights Agreement..................................... 17
4.8 Tag-Along Agreement............................................... 17
4.9 Officer's Certificate............................................. 17
4.10 Payment of Placement Fee.......................................... 17
4.11 Proceedings....................................................... 17
4.12 Limited Waiver of Ownership Limitations........................... 18
4.13 No Injunction..................................................... 18
</TABLE>
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<TABLE>
<C> <C> <S> <C>
4.15 Consummation of the IPO .................................... 18
V. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING ........... 18
5.1 Representations and Warranties ............................. 18
5.2 Performance ................................................ 19
5.4 Officer's Certificate ...................................... 19
VI. COVENANTS ........................................................ 19
6.1 No Sale of Security......................................... 19
6.2 No General Solicitation..................................... 20
6.3 Filing of Exchange Act Reports ............................. 20
6.4 Consultation and Related Rights ............................ 20
6.5 Maintenance of REIT Status ................................. 21
6.6 Change of Control .......................................... 23
6.7 Waiver of Ownership Limitations ............................ 24
6.8 No Public Disclosure ....................................... 24
6.9 Annual Certificate of Independent Public Accountants or
Company Counsel ............................................ 24
6.10 Prohibition on Issuance of Series A Preferred Shares ....... 24
6.11 Amendment to Operating Partnership Agreement ............... 24
6.12 Standstill Provisions ...................................... 25
6.13 Certificate of Company Security Ownership .................. 29
VII. TERMINATION ...................................................... 29
7.1 Termination ................................................ 29
7.2 Notice of Termination ...................................... 30
7.3 Effect of Termination ...................................... 30
VIII. MISCELLANEOUS .................................................... 31
8.1 Survival of Warranties ..................................... 31
8.2 Successors and Assigns ..................................... 31
8.3 Governing Law .............................................. 31
8.4 Counterparts ............................................... 31
8.5 Titles and Subtitles ....................................... 31
8.6 Notices ................................................... 32
8.7 Finder's Fees .............................................. 33
8.8 Expenses ................................................... 33
8.9 Amendments and Waivers ..................................... 33
8.10 Severability ............................................... 33
8.11 Entire Agreement ........................................... 34
</TABLE>
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<PAGE>
SERIES A PREFERRED SECURITIES PURCHASE AGREEMENT
This SERIES A PREFERRED SECURITIES PURCHASE AGREEMENT (this "Agreement") is
made as of the __ day of November, 1997 by and among Prime Group Realty Trust, a
Maryland real estate investment trust (the "Company"), Prime Group Realty, L.P.,
a Delaware limited partnership (the "Operating Partnership"), and Security
Capital Preferred Growth Incorporated, a Maryland corporation (the "Investor").
W I T N E S S E T H
-------------------
WHEREAS, the Company wishes to issue and sell to the Investor Series A
Cumulative Convertible Preferred Shares of Beneficial Interest, $.01 par value
per share (the "Series A Preferred Shares"), the terms of which shall be as set
forth in the Articles of Amendment and Restatement of the Company's Declaration
of Trust (the "Declaration") to be filed with the SDAT (as defined below) in
connection with the IPO (as defined below) in substantially the form of Exhibit
A hereto, in accordance with and subject to the terms and conditions set forth
herein; and
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
agreements and warranties herein contained, the parties hereby agree as follows:
I. PURCHASE AND SALE OF SECURITIES.
1.1 Sale and Issuance of Series A Preferred Shares.
(a) The Company shall adopt and file with the State Department of
Assessments and Taxation of Maryland (the "SDAT") on or before the Closing Date
(as defined below) the Declaration.
(b) Subject to the terms and conditions of this Agreement, the
Company agrees to issue and sell to the Investor, and the Investor agrees to
purchase from the Company, that number of Series A Preferred Shares equal to the
quotient of (i) the Aggregate Purchase Price determined pursuant to Section
1.1(c) divided by (ii) the Per Share Price determined pursuant to Section
1.1(d).
(c) The aggregate purchase price (the "Aggregate Purchase Price") for
the Series A Preferred Shares issued and sold pursuant to this Agreement shall
be equal to the lesser of (i) $40 million, (ii) 21% of the gross proceeds raised
from the sale of common shares of beneficial interest of the Company, $.01 par
value per share, in the Company's Initial Public Offering (the "IPO"), or (iii)
the amount that, when divided by the Per Share Price determined pursuant to
Section 1.1(d), would result in Investor owning 9.8% of the Company's voting
securities on a fully-diluted, fully-converted basis.
<PAGE>
(d) The price per Series A Preferred Share (the "Per Share Price")
shall be equal to the gross issue price per Common Share in the IPO.
1.2 Closing.
Upon the terms and subject to the satisfaction or waiver of all the
conditions to closing set forth in this Agreement, the closing (the "Closing")
of the purchase and sale of the Series A Preferred Shares shall take place at
the offices of Winston & Strawn, 35 West Wacker Drive, Chicago, Illinois or at
such other location as may be agreed upon by the Company and the Investor. Such
Closing shall take place at 10:00 a.m., Chicago time, on the date of the closing
of the IPO, which shall be the third or fourth business day following the
pricing of the IPO, or at such other time as may be agreed upon by the Company
and the Investor (the "Closing Date"). At the Closing, the Company shall issue
and deliver to the Investor a certificate or certificates in definitive form,
registered in the name of the Investor, representing the Series A Preferred
Shares being purchased by the Investor hereunder and the Investor shall deliver
to the Company, against delivery of the certificate or certificates representing
the Series A Preferred Shares, the Aggregate Purchase Price by wire transfer of
immediately available funds payable to the Company's order.
II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
Each of the Company and the Operating Partnership represents and
warrants, as of the date of this Agreement and as of the Closing Date, that:
2.1 Organization, Good Standing and Qualification.
(a) The Company has been duly organized and is validly existing as a
real estate investment trust in good standing under the laws of the State of
Maryland with full power and authority to own, lease and operate its properties
and conduct its business as now being conducted, and has been duly qualified to
transact business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any business, so
as to require such qualification, except where the failure to so qualify would
not have a Material Adverse Effect. "Material Adverse Effect" means any material
adverse effect on the operations, assets, business, affairs, prospects,
properties, or financial or other condition of the Company, the Operating
Partnership and the Subsidiaries (as defined below) taken as a whole.
(b) The Operating Partnership has been duly formed and is validly
existing as a limited partnership in good standing under the Delaware Revised
Uniform Limited Partnership Act with partnership power and authority to own,
lease and operate its properties and conduct its business as now being conducted
and has been duly qualified to transact business and is in good standing
2
<PAGE>
under the laws of each jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a Material Adverse Effect.
(c) The subsidiaries of the Company and the Operating Partnership set
forth on Schedule 2.1 (the "Subsidiaries") have each been duly organized and are
validly existing and in good standing under the laws of their respective
jurisdictions of incorporation or formation and have full power and authority to
own, lease and operate their properties and to conduct their businesses as now
being conducted, and each Subsidiary has been duly qualified to transact
business and is in good standing under the laws of each other jurisdiction in
which it owns or leases properties, or conducts any business, so as to require
such qualification, except where the failure to be in good standing or to so
qualify would not have a Material Adverse Effect. None of the Company's or the
Operating Partnership's subsidiaries that are not included on Schedule 2.1
individually or in the aggregate constitute a "Significant Subsidiary" as
defined in Rule 1-02 of Regulation S-X.
2.2 Power, Authority and Enforceability
(a) Each of the Company and the Operating Partnership has all
requisite trust or partnership power and authority, and has taken all required
trust or partnership action necessary, to execute, deliver, and perform its
obligations under, this Agreement. The Company has all requisite trust power and
authority, and has taken all required trust action necessary, to issue and sell
the Series A Preferred Shares and the Common Shares.
(b) This Agreement has been duly executed and delivered by each of
the Company and the Operating Partnership and constitutes the legal, valid and
binding obligation of each of the Company and the Operating Partnership
enforceable against each of the Company and the Operating Partnership in
accordance with its terms, except as may be limited by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, and (ii)
equitable principles of general applicability relating to the availability of
specific performance, injunctive relief, or other equitable remedies.
2.3 Capitalization; Registration Rights.
After giving effect to the Company's adoption of the Declaration, the
authorized beneficial interests of the Company consists of 30 million preferred
shares, par value $.01 per share, of which a number equal to the number of
shares determined pursuant to Section 1.1(b) are designated as "Series A
Cumulative Convertible Preferred Shares," 60 million excess shares, $.01 par
value per share, and 100 million common shares, $.01 par value per share. All of
the issued and outstanding shares of beneficial
3
<PAGE>
interest of the Company have been duly and validly authorized and issued and are
fully paid and are nonassessable. All of the issued and outstanding partnership
interests of the Operating Partnership have been duly and validly authorized and
issued. Except as disclosed in the Company's Registration Statement on Form S-
11, Registration No. 333-33547, there are no persons with registration rights or
other similar rights with respect to any securities of the Company or the
Operating Partnership.
2.4 Valid Issuance of Series A Preferred Shares.
The Series A Preferred Shares when issued, sold and delivered in
accordance with the terms hereof for the consideration expressed herein, will be
duly and validly issued and nonassessable. The common shares of Beneficial
Interest of the Company issuable upon the conversion or redemption of the Series
A Preferred Shares (the "Common Shares"), when issued upon such conversion in
accordance with the Declaration will be duly and validly issued, fully paid and
nonassessable and, subject to the accuracy of the Investor's representations set
forth in Article III, will be issued in compliance with all applicable federal
and state securities laws.
2.5 Compliance with Other Instruments.
The execution, delivery and performance of this Agreement by the
Company and the Operating Partnership and the consummation by the Company and
the Operating Partnership of the transactions contemplated hereby do not (i)
result in a violation of the Declaration, the Company's Amended and Restated
Bylaws (the "Bylaws") or of the Operating Partnership's Amended and Restated
Agreement of Limited Partnership or (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company,
the Operating Partnership or any of the Subsidiaries is a party, or result in a
violation of any law, rule, regulation, order, judgment or decree applicable to
the Company, the Operating Partnership or any of the Subsidiaries or by which
any property or asset of the Company, the Operating Partnership or any of the
Subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect or
materially impair the Company's or the Operating Partnership's ability to
perform its obligations under this Agreement).
2.6 No Registration Under the Securities Act.
Assuming the accuracy of the Investor's representations set forth in
Article III, it is not necessary in connection with the offer, sale and delivery
of the Series A Preferred Shares and the Common Shares in the manner
contemplated by this Agreement to register the Series A Preferred Shares or the
Common Shares under the Securities Act of 1933, as amended (the "Securities
Act").
4
<PAGE>
2.7 No General Solicitation.
None of the Company, the Operating Partnership nor any of their
respective affiliates (as defined in Rule 501(b) of Regulation D under the
Securities Act, an "Affiliate") has directly, or through any agent, (i) sold,
offered for sale, solicited offers to buy or otherwise negotiated in respect of,
any security (as defined in the Securities Act) which is or will be integrated
with the sale of the Series A Preferred Shares in a manner that would require
registration under the Securities Act of the Series A Preferred Shares or (ii)
engaged in any form of general solicitation or general advertising in connection
with the offering of the Series A Preferred Shares (as those terms are used in
Regulation D under the Securities Act), or in any manner involving a public
offering within the meaning of Section 4(2) of the Securities Act.
2.8 Financial Statements.
The financial statements and supporting schedules included in the
Registration Statement are complete and correct in all material respects and
present fairly the consolidated financial position of the Company and its
consolidated Subsidiaries as of the
5
<PAGE>
dates specified and the consolidated results of their operations for the periods
specified, in each case, in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved, except as
indicated therein or in the notes thereto.
2.9 No Material Adverse Changes.
Since December 31, 1996, (i) there has been no change in the business,
operations or financial condition, of the Company, the Operating Partnership or
the Subsidiaries or in the earnings or the ability to continue to conduct
business in the usual and ordinary course of the Company, the Operating
Partnership and the Subsidiaries, whether or not arising in the ordinary course
of business, which has a Material Adverse Effect; and (ii) except for the
transactions contemplated by this Agreement or described in the Registration
Statement, there has been no transaction entered into by the Company, the
Operating Partnership or any of the Subsidiaries other than transactions in the
ordinary course of business or transactions which would not, individually or in
the aggregate, have a Material Adverse Effect; and (iii) there have not been any
changes in the Company's or the Operating Partnership's authorized capital
(except as set forth in Section 2.3 of this Agreement) or any material increases
in the debt of the Company, the Operating Partnership and the Subsidiaries
considered as one enterprise; and (iv) there has been no actual or, to the
knowledge of the Company or the Operating Partnership, threatened revocation of,
or default under, any material contract to which the Company, the Operating
Partnership or any of the Subsidiaries is a party, which could reasonably be
expected to result in a Material Adverse Effect, except for the default by Keck,
Mahin & Cate under its lease at the 77 West Wacker Drive building.
2.10 Litigation.
Except as set forth in the Registration Statement, after giving effect
to the IPO and the transactions contemplated thereby, there is no action, suit
or proceeding (whether or not purportedly on behalf of the Company, the
Operating Partnership or any of the Subsidiaries) before or by any court or
governmental agency or body, domestic or foreign, now pending, or to the
knowledge of the Company or the Operating Partnership, threatened against or
affecting the Company, the Operating Partnership or any of the Subsidiaries
which, either alone or in the aggregate, could reasonably be expected to have a
Material Adverse Effect or materially impair the Company's or the Operating
Partnership's ability to perform its obligations under this Agreement or the
compliance by the Company with the terms, conditions and provisions of the
Series A Preferred Shares or the Common Shares.
2.11 Title to Properties; Leasehold Interests.
(a) Schedule 2.11(a) sets forth a complete and accurate list and the
address of all real property owned or leased by the
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Company, the Operating Partnership or any Subsidiaries or are otherwise used in
the operation or conduct of the Company's or Operating Partnership's business
(collectively, and together with the land at each address referenced in Schedule
2.11(a) and all buildings, structures and other improvements and fixtures
located on or under such land and all easements, rights and other appurtenances
to such land, the "Company Properties"). The Company, the Operating Partnership,
or in the case of Company Properties owned by Subsidiaries that are not wholly
owned Subsidiaries of the Company, to the Company's knowledge, such
Subsidiaries, owns or own, as the case may be, good and marketable fee simple
title (or, if so indicated in Schedule 2.11(a), leasehold title) to each of the
Company Properties, in each case free and clear of any Liens, title defects,
contractual restrictions or covenants, laws, ordinances or regulations affecting
use or occupancy (including zoning regulation and building codes) or
reservations of interests in title (collectively, "Property Restrictions"),
except for (i) mortgage liens disclosed in the Registration Statement or on
Schedule 2.11(a); (ii) Property Restrictions imposed or promulgated by law or by
any Government Authority (as hereinafter defined) which are customary and
typical for similar properties and (iii) other Property Restrictions that do not
individually or in the aggregate materially impair the use or operation of any
Company Property (collectively, "Permitted Liens"). To the Company's knowledge,
none of the matters described in clauses (i), (ii) or (iii) of the immediately
preceding sentence materially interferes with, materially impairs, or is
materially violated by, the existence of any building or other structure or
improvement which constitutes a part of, or the present use, occupancy or
operation (or, if applicable, development) of, the Company Properties taken as a
whole, and such matters do not, individually or in the aggregate, have a
Material Adverse Effect. American Land Title Association policies of title
insurance (or marked title insurance commitments having the same force and
effect as title insurance policies) have been issued by national title insurance
companies insuring the fee simple or leasehold, as applicable, title of the
Company, the Operating Partnership or any Subsidiaries, as applicable, to each
of the Company Properties in amounts at least equal to the original cost
thereof, subject only to Permitted Liens and, to the Company's knowledge, such
policies are valid and in full force and effect and no claim has been made under
any such policy.
(b) Except as set forth in Schedule 2.11(b), and except for matters
which would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect, the Company has no knowledge (i) that any
currently required certificate, permit or license (including building permits
and certificates of occupancy for tenant spaces) from any Government Authority
having jurisdiction over any Company Property or any agreement, easement or
other right which is necessary to permit the lawful use, occupancy or operation
of the existing buildings, structures or other improvements which constitute a
part of any of the Company Properties or which are necessary to permit the
lawful
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use and operation of utility service to any Company Property or of any existing
driveways, roads or other means of egress and ingress to and from any of the
Company Properties has not been obtained or is not in full force and effect, or
of any pending threat of modification or cancellation of any of same, or (ii) of
any violation by any Company Property of any federal, state or municipal law,
ordinance, order, regulation or requirement, including any applicable zoning law
or building code, as a result of the use or occupancy of such Company Property
or otherwise. Except as set forth in Schedule 2.11(b), the Company has no
knowledge of uninsured physical damage to any Company Property which would
individually or in the aggregate have a Material Adverse Effect. To the
Company's knowledge, except for repairs identified in Schedule 2.11(b), each
Company Property, identified as an operating property in Schedule 2.11(a) (the
"Operating Properties"), (i) is in good operating condition and repair and is
structurally sound and free of defects, with no material alterations or repairs
being required thereto under applicable law or insurance company requirements,
and (ii) consists of sufficient land, parking areas, driveways and other
improvements and lawful means of access and utility service and capacity to
permit the use thereof in the manner and for the purposes to which it is
presently devoted, except, in such case, to the extent that failure to meet such
standards would not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.
(c) The Company has no knowledge (i) that any condemnation, eminent
domain or rezoning proceedings are pending or threatened with respect to any of
the Company Properties, (ii) that any road widening or change of grade of any
road adjacent to any Company Property is underway or has been proposed, (iii) of
any proposed change in the assessed valuation of any Company Property other than
customarily scheduled revaluations, (iv) of any special assessment made or
threatened against any Company Property, or (v) that any of the Company
Properties is subject to any so-called "impact fee" or to any agreement with any
Government Authority to pay for sewer extension, oversizing utilities, lighting
or like expenses or charges for work or services by such Government Authority,
except, in the case of each of the foregoing, to the extent that same would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(d) To the Company's knowledge, each of the Operating Properties is an
independent unit which does not rely on any facilities located on any property
not included in such Operating Property to fulfill any municipal or governmental
requirement or for the furnishing to such Operating Property of any essential
building systems or utilities, other than facilities the benefit of which inures
to the Operating Properties pursuant to one or more valid easements. Each of the
Operating Properties is served by public water and sanitary systems and all
other utilities, and, to the Company's knowledge, each of the Operating
Properties has lawful access to public roads, in all cases sufficient for the
current use and occupancy of each Operating Property. To the
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Company's knowledge, all parcels of land included in each Operating Property
that purport to be contiguous are contiguous and are not separated by strips or
gores. To the Company's knowledge, no portion of any Company Property lies in
any flood plain area (as defined, as of the date hereof, by the U.S. Army Corps
of Engineers (the "Army Corps of Engineers") or otherwise) or includes any
wetlands or vegetation or species protected by any applicable laws. None of the
Company Properties lies in any 100-year flood plain area, as established by the
Army Corps of Engineers. To the Company's knowledge, no improvements
constituting a part of any Company Property encroach on real property not
constituting a part of such Company Property. No representation set forth in
this subsection (d) shall be deemed to be untrue unless such untruths are,
individually or in the aggregate, reasonably expected to have a Material Adverse
Effect.
(e) To the knowledge of the Company, no Operating Property fails to
comply with the requirements of the Americans with Disabilities Act (the "ADA")
except for such non-compliance as the Company believes will not, individually or
in the aggregate, have a Material Adverse Effect.
(f) The Company has provided to Investor an accurate rent roll for
each Company Property as of August 31, 1997 (the "Rent Roll"), which identifies
and accurately describes each lease of space in each Company Property and is
included as Schedule 2.11(f) (collectively, the "Company Leases"). With respect
to each Company Lease for premises larger than 10,000 square feet of rentable
space as identified on Schedule 2.11(f) or if leased to a tenant or affiliate of
a tenant listed on Schedule 2.11(f) (collectively, the "Material Company
Leases"), except for matters which are not, individually or in the aggregate,
reasonably expected to have a Material Adverse Effect, (i) except as noted on
Schedule 2.11(f), each of the Material Company Leases is valid and subsisting
and in full force and effect as against the Company or Subsidiary, as
applicable, and, to the Company's knowledge, as against the tenant, and has not
been amended, modified or supplemented, (ii) except as noted on Schedule
2.11(f), the tenant under each of the Material Company Leases is in actual
possession of the premises leased thereunder, (iii) except as set forth on
Schedule 2.11(f), no tenant under any Material Company Lease is more than 30
days in arrears in the payment of regular recurring monthly rent, (iv) except as
noted on Schedule 2.11(f), none of the Company, the Operating Partnership or any
Subsidiaries has received any written notice from any tenant under any Material
Company Lease of its intention to vacate, (v) none of the Company, the Operating
Partnership or any Subsidiaries has collected payment of rent under any Material
Company Lease (other than security deposits) accruing for a period which is more
than one month in advance, (vi) no notice of default has been sent or received
by the landlord under any Material Company Lease which remains uncured as of the
date hereof, except as noted on Schedule 2.11(f), no default has occurred under
any Material Company Lease and, to the Company's knowledge, no event has
occurred and is continuing which, with
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notice or lapse of time or both, would constitute a default under any Material
Company Lease, (vii) no tenant under any of the Material Company Leases has any
purchase options or kick-out rights or is entitled to any concessions,
allowances, abatements, set-offs, rebates or refunds, (viii) except as assigned
in connection with Mortgages discussed in the Registration Statement and except
for Collateral Assignments by tenants in connection with the financing of
fixtures and inventory in the premises with bona fide institutional lenders,
none of the Material Company Leases and none of the rents or other amounts
payable thereunder has been mortgaged, assigned, pledged or encumbered by any
party thereto or otherwise, (ix) except as set forth in Rent Roll, no space of a
material size in the Company Property is occupied by a tenant rent-free, (x) no
tenant under any of the Material Company Leases has asserted any claim which is
likely to affect the collection of rent from such tenant, and (xi) the landlord
under each Material Company Lease has fulfilled all of its obligations
thereunder in respect of tenant improvements and capital expenditures. Other
than the tenants identified in the Rent Roll and parties to easement agreements,
no third party has any right to occupy or use any portion of any Company
Property with the exception of kiosk or pushcart operators if not otherwise
identified on the Rent Roll.
(g) Schedule 2.11(g) sets forth a complete and accurate list of all
material commitments, letters of intent, options or similar written
understandings made or entered into by the Company or any of its Subsidiaries as
of the date hereof, (i) to sell, mortgage, pledge or hypothecate any Company
Property or Properties, which, individually or in the aggregate, constitute at
least $50 million, or to otherwise enter into a material transaction in respect
of the ownership or financing of any Company Property, or (ii) to purchase or to
acquire an option, right of first refusal or similar right in respect of any
real property, which, individually or in the aggregate, constitute at least $50
million, which, in any such case, has not yet been reduced to a written lease or
contract, and sets forth with respect to each such commitment, letter of intent
or other understanding the principal terms thereof, with the exception of the
rights of the Company to acquire vacant land, in which case Schedule 2.11(g)
shall only set forth the location where the Company has the rights to acquire
such vacant land.
(h) The Company has disclosed to Investor all adverse matters known to
the Company with respect to or in connection with the Company Properties which
arose subsequent to the period covered by the Registration Statement (including
the Company Leases and the Tenancy Leases (as defined below)), which would,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
(i) The ground leases underlying the leased Company Properties
referenced in Schedule 2.11(a) (collectively, the "Tenancy Leases") are
accurately described in Schedule 2.11(i). Each of the Tenancy Leases is valid,
binding and in full force and effect as against the Subsidiary and, to the
Company's knowledge,
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as against the other party thereto. Except as indicated in Schedule 2.11(i) or
disclosed in the Registration Statement in connection with only mortgage liens,
none of the Tenancy Leases is subject to any mortgage, pledge, Lien, sublease,
assignment, license or other agreement granting to any third party any interest
therein, collateral or otherwise, or any right to the use or occupancy of any
premises leased thereunder with the exception of sub-leases with tenants of the
centers constructed on the land. To the Company's knowledge, except as set forth
in Schedule 2.11(i), there is no pending or threatened proceeding which is
reasonably likely to interfere with the quiet enjoyment of the tenant under any
of the Tenancy Leases. Except as set forth in Schedule 2.11(i), as of the last
day of the month preceding the date hereof and as of the last day of the month
preceding the date of the Closing, no payments under any Tenancy Lease are
delinquent and no notice of default thereunder has been sent or received by the
Company, the Operating Partnership or any Subsidiaries. There does not exist
under any of the Tenancy Leases any default, and, to the Company's knowledge, no
event has occurred which, with notice or lapse of time or both, would constitute
such a default, except as would not, individually or in the aggregate, be
reasonably expected to result in a Material Adverse Effect.
(j) The Company, the Operating Partnership and all Subsidiaries
have good and sufficient title to all personal and non-real properties and
assets reflected in their books and records as being owned by them (including
those reflected in the balance sheets of the Company, the Operating Partnership
and all Subsidiaries as of December 31, 1996, except as since sold or otherwise
disposed of in the ordinary course of business), free and clear of all Liens,
except for Permitted Liens which are not, individually or in the aggregate,
reasonably expected to have a Material Adverse Effect.
2.12 Environmental Compliance.
(a) Except as disclosed in the Registration Statement, the Company,
the Operating Partnership and each of the Subsidiaries has complied and is in
compliance with all Environmental Statutes (as hereinafter defined) except as
such non-compliance would not have a Material Adverse Effect.
(b) None of the Company, the Operating Partnership or any of the
Subsidiaries intends to use any real property owned or occupied by any such
party for the purpose of handling, burying, storing, retaining, refining,
transporting, processing, manufacturing, generating, producing, spilling,
seeping, leaking, escaping, leaching, pumping, pouring, emitting, emptying,
discharging, injecting, dumping, transferring or otherwise disposing of or
dealing with Hazardous Materials.
(c) None of the Company, the Operating Partnership or any of the
Subsidiaries has any knowledge of any seepage, leak, escape, leach, discharge,
injection, release, emission, spill,
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pumping, pouring, emptying or dumping of Hazardous Materials into waters on or
adjacent to any real property owned or occupied by any such party, or onto lands
from which Hazardous Materials might seep, flow or drain into such waters.
(d) None of the Company, the Operating Partnership or any of the
Subsidiaries has any knowledge of any occurrence or circumstance that, with
notice or passage of time or both, would give rise to a claim under or pursuant
to any federal, state or local Environmental Statute pertaining to Hazardous
Materials on or originating from any real property owned or occupied by the
Company, the Operating Partnership or any of the Subsidiaries arising out of the
conduct of any such party, including without limitation pursuant to any
Environmental Statute.
(e) To the knowledge of the Company, no land owned by the Company,
the Operating Partnership or any of the Subsidiaries is included or proposed for
inclusion on the National Priorities List issued pursuant to CERCLA (as
hereinafter defined) by the United States Environmental Protection Agency (the
"EPA") or on the inventory of other potential "Problem" sites issued by the EPA
and has not otherwise been publicly identified by the EPA as a potential CERCLA
site or included or proposed for inclusion on any list or inventory issued
pursuant to any other Environmental Statute or issued by any other Governmental
Authority (as hereinafter defined).
(f) As used herein, "Hazardous Material" shall include without
limitation any flammable explosives, radioactive materials, hazardous materials,
hazardous wastes, toxic substances or related materials, asbestos or any
hazardous material as defined by any federal, state or local environmental law,
ordinance, rule or regulation, including without limitation the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. (S)(S) 9601 et seq. ("CERCLA"), the Hazardous Materials Transportation
Act, as amended, 49 U.S.C. (S)(S) 1801 et seq., the Resource Conservation and
Recovery Act, as amended, 42 U.S.C. (S)(S) 9601 et seq., the Emergency Planning
and Community Right-to-Know Act of 1986, 42 U.S.C. (S)(S) 11001 et seq., the
Toxic Substances Control Act, 15 U.S.C. (S)(S) 2601 et seq., the Federal
Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. (S)(S) 136 et seq., the
Clean Air Act, 42 U.S.C. (S)(S) 7401 et seq., the Clean Water Act (Federal Water
Pollution Control Act), 33 U.S.C. (S)(S) 1251 et seq., the Safe Drinking Water
Act, 42 U.S.C. (S)(S) 300F to 300j-11, and the Occupational Safety and Health
Act, 29 U.S.C. (S)(S) 651 et seq., as any of the above statutes may be amended
from time to time, and in the regulations adopted and publications promulgated
pursuant to each of the foregoing (individually, an "Environmental Statute") or
by any federal, state or local governmental authority having or claiming
jurisdiction over the properties and assets described in the Company's periodic
reports filed pursuant to the Exchange Act (a "Governmental Authority").
2.13 Taxes.
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(a) The Company, the Operating Partnership and the Subsidiaries have
filed or caused to be filed all federal, state, local, foreign and other tax
returns, reports, information returns and statements (except for returns,
reports, information returns and statements the failure to file which will not
result in any Material Adverse Effect) required to be filed by them. The
Company, the Operating Partnership and the Subsidiaries have paid or caused to
be paid all taxes (including interest and penalties) that are shown as due and
payable on such returns or claimed by any taxing authority to be due and payable
with respect to such returns, except those which are being contested by them in
good faith by appropriate proceedings and in respect of which adequate reserves
are being maintained on their books in accordance with generally accepted
accounting principles consistently applied. The Company, the Operating
Partnership and the Subsidiaries do not have any material liabilities for taxes
other than those incurred in the ordinary course of business and in respect of
which adequate reserves are being maintained by them in accordance with
generally accepted accounting principles consistently applied. Federal and state
income tax returns for the Company, the Operating Partnership and the
Subsidiaries have not been audited by the Internal Revenue Service or state
authorities. No deficiency, assessment with respect to or proposed adjustment of
the Company's, the Operating Partnership's or any of the Subsidiaries' federal,
state, local, foreign or other tax returns is pending or, to the best of the
Company's, the Operating Partnership's or any of the Subsidiaries' knowledge,
threatened. There is no tax lien, whether imposed by any federal, state, local
or other tax authority, outstanding against the assets, properties or business
of the Company, the Operating Partnership or any of the Subsidiaries. There are
no applicable taxes, fees or other governmental charges payable by the Company,
the Operating Partnership or any of the Subsidiaries in connection with the
execution and delivery of this Agreement or the issuance by the Company of the
Series A Preferred Shares or the Common Shares.
(b) The Company has qualified, and will elect, to be taxed as a real
estate investment trust pursuant to Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"), for its taxable year ending
December 31, 1997, and the Company expects under present law to so qualify in
the future.
(c) The Operating Partnership is not a publicly traded partnership
that is taxed as a corporation under Section 7704 of the Code.
2.14 Insurance.
The Company, the Operating Partnership and each of the Subsidiaries
carries or is entitled to the benefits of insurance in such amounts and covering
such risks as is reasonably sufficient under the circumstances or is customary
in the industry and all such insurance is in full force and effect.
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2.15 Employees; ERISA.
The Company and the Operating Partnership have good relationships with
their employees and have not had any substantial labor problems. Neither the
Company nor the Operating Partnership has any knowledge as to any intentions of
any key employee or any group of employees to leave the employ of the Company or
the Operating Partnership. Other than as disclosed in the Registration
Statement, neither the Company nor the Operating Partnership has established,
sponsored, maintained, made any contributions to or been obligated by law to
establish, maintain, sponsor or make any contributions to any "employee pension
benefit plan" or "employee welfare benefit plan" (as such terms are defined in
ERISA), including, without limitation, any "multi-employer plan." Each of the
Company and the Operating Partnership is in compliance with all applicable laws
relating to the employment of labor, including provisions relating to wages,
hours, equal opportunity, collective bargaining and the payment of Social
Security and other taxes, and with ERISA, except where the failure to so comply
would not have a Material Adverse Effect.
2.16 REOC Status.
The Operating Partnership is, at all times since its creation has
been, and will continue to be a real estate operating company ("REOC") (as such
term is defined in 29 CFR 2510.3-101(e)).
2.17 Legal Compliance.
(a) Each of the Company, the Operating Partnership and each of the
Subsidiaries is in compliance with all applicable laws, rules, regulations,
orders, licenses, judgments, writs, injunctions, decrees or demands of any court
or administrative body, domestic or foreign, or of any other governmental agency
or instrumentality, domestic or foreign, except to the extent that failure to
comply would not have a Material Adverse Effect. The Company, the Operating
Partnership and each of the Subsidiaries have all necessary permits, licenses
and other authorizations required to conduct their businesses as currently
conducted, and as proposed to be conducted, except where the failure to have
such permits, licenses or other authorizations would not have a Material Adverse
Effect.
(b) Except as disclosed in the Registration Statement, there are no
adverse orders, judgments, writs, injunctions, decrees or demands of any court
or administrative body, domestic or foreign, or of any other governmental agency
or instrumentality, domestic or foreign, outstanding against the Company, the
Operating Partnership or any of the Subsidiaries which could reasonably be
expected to result in a Material Adverse Effect.
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2.18 Governmental Consent.
Other than such consents, approvals, authorizations, declarations or
filings as have already been obtained or made or which will be made at or prior
to the Closing Date, no consent, approval or authorization of, or declaration or
filing with, any governmental authority on the part of the Company is required
for the valid execution and delivery of this Agreement or performance hereunder
or the valid offer, issue, sale and delivery of the Series A Preferred Shares
pursuant to this Agreement.
2.19 Investment Company.
The Company is not an "investment company", as defined in the
Investment Company Act of 1940, as amended, nor is the Company controlled by an
"investment company."
2.20 Knowledge Defined.
As used herein the phrase "to the Company's knowledge" or words of
similar import means the actual knowledge of the individuals listed on Schedule
2.20.
III. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.
The Investor represents and warrants, as of the date of this
Agreement and as of the Closing Date, that:
3.1 Power, Authority and Enforceability.
(a) The Investor is a corporation duly incorporated, validly existing
and in good standing under the laws of the state of Maryland. The Investor has
the requisite corporate power and authority, and has taken all required
corporate action necessary, to execute, deliver, and perform its obligations
under, this Agreement and to purchase the Series A Preferred Shares hereunder.
(b) This Agreement has been duly executed and delivered by the
Investor and constitutes the legal, valid and binding obligation of the Investor
enforceable against the Investor in accordance with its terms, except as may be
limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium,
and other laws of general application affecting enforcement of creditors' rights
generally, and (ii) equitable principles of general applicability relating to
the availability of specific performance, injunctive relief, or other equitable
remedies.
3.2 Compliance with Other Instruments.
The execution, delivery and performance of this Agreement by the
Investor and the consummation by the Investor of the transactions contemplated
hereby do not (i) result in a violation of the Investor's Articles of
Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an
event which with
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notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Investor is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
applicable to the Investor or by which any property or asset of the Investor is
bound or affected (except for such conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, materially impair the Investor's ability to
perform its obligations under this Agreement).
3.3 Ownership Limitations.
The Investor has received a copy of the Declaration and understands
the restrictions on transfer and ownership of the Company's shares of beneficial
interest included therein related to the qualification by the Company as a real
estate investment trust for federal income tax purposes pursuant to Sections 856
through 860 of the Code.
3.4 Sophisticated Investor.
In the normal course of its business or its investing activities, the
Investor invests in or purchases securities similar to the Series A Preferred
Shares and it has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of purchasing the
Series A Preferred Shares. The Investor is aware that it may be required to
bear the economic risk of an investment in the Series A Preferred Shares for an
indefinite period of time and it is able to bear such risk for an indefinite
period.
3.5 Unregistered Securities.
The Investor understands and acknowledges and agrees that the Series A
Preferred Shares and Common Shares have not been registered under the Securities
Act or any other applicable securities law and, unless so registered, may not be
offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act or any other applicable
securities law, pursuant to an exemption therefrom or in a transaction not
subject thereto.
3.6 Access to Information.
The Investor has had access to such financial and other information
concerning the Company or any of its affiliates and the Series A Preferred
Shares as it deemed necessary in connection with its decision to purchase any of
the Series A Preferred Shares, including an opportunity to ask questions and
request information from the Company.
IV. CONDITIONS OF THE INVESTOR'S OBLIGATIONS AT CLOSING.
The Investor's obligations at the Closing under Section 1.2 of this
Agreement are subject to the satisfaction or waiver by the Investor on or before
the Closing of each of the following conditions:
4.1 Amendment to Amended and Restated Partnership Agreement.
At or prior to the Closing, the amendments to the Amended and Restated
Partnership Agreement contemplated by Section 6.10 shall have been adopted.
4.2 Series A Preferred Designation.
At or prior to the Closing, the Declaration shall have been filed with
and accepted for recording by the SDAT.
4.3 Representations and Warranties.
The representations and warranties of each of the Company and the
Operating Partnership contained in Article II shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of the Closing.
4.4 Performance.
Each of the Company and the Operating Partnership shall have performed
and complied in all material respects with all agreements, obligations and
conditions contained in this Agreement that are required to be performed or
complied with by it on or before the Closing Date.
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4.5 No Material Adverse Change.
After the date of this Agreement and through the Closing Date, there
shall not have occurred any change or event that has had a Material Adverse
Effect.
4.6 Opinion of Company Counsel.
The Investor shall have received from Winston & Strawn, counsel for
the Company, an opinion in form and substance reasonably satisfactory to the
Investor.
4.7 Registration Rights Agreement.
Simultaneous with the Closing, the Company and the Investor shall have
entered into a Registration Rights Agreement in substantially the form attached
hereto as Exhibit B.
4.8 Tag-Along Agreement.
Simultaneous with the Closing, the Investor shall have entered into a
Tag-Along Agreement with the other parties named therein in substantially the
form attached hereto as Exhibit C.
4.9 Officer's Certificate.
Each of the Company and the Operating Partnership shall have delivered
to the Investor on the Closing Date a certificate or certificates signed by an
authorized officer of such entity to the effect that the facts required to exist
by Sections 4.1, 4.2, 4.3, 4.4, 4.5, 4.12 and 4.13 continue to exist on the
Closing Date.
4.10 Payment of Placement Fee.
At or prior to the Closing, the Company shall have entered into a
letter agreement with Security Capital Markets Group Incorporated in the form
attached hereto as Exhibit D and shall have paid, or shall simultaneously pay, a
placement fee equal to 1% of the Aggregate Purchase Price to Security Capital
Markets Group Incorporated.
4.11 Proceedings.
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incidental thereto, shall be
reasonably satisfactory in form and substance to the Investor; and the Investor
shall have received copies of all documents which the Investor may reasonably
request in connection with said transactions and copies of the records of all
proceedings of the Company in connection therewith in form and substance
reasonably satisfactory to the Investor.
4.12 Limited Waiver of Ownership Limitations.
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Subject to the Company's receipt of a certificate (the "Certificate")
from the Investor in form and substance acceptable to the Company containing the
representations and undertakings of the nature set forth in Section 4.7 of the
Declaration, the Board of Trustees of the Company shall have duly adopted a
resolution in form and substance reasonably satisfactory to the Investor,
thereby waiving the application of the Ownership Limit defined therein to the
Investor and its Affiliates to the extent provided in such resolution.
4.13 No Injunction
There shall not be in effect any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated hereby and there shall be no
actual or threatened action, suit, arbitration, inquiry, proceedings or
investigation by or before any Governmental Authority, court or agency of
competent jurisdiction, which would reasonably be expected to materially impair
the ability of the Company to consummate the transactions contemplated hereby or
to issue the Series A Preferred Shares or the Common Shares.
4.14 Consummation of the Formation Transactions.
The Company shall have consummated the Formation Transactions (as defined
in the Registration Statement) and the gross issue price per common Share in the
IPO shall not exceed the product of 11.0 times Fully Diluted Pro Forma 1998
Funds from Operations per Share. "Fully Diluted Pro Forma 1998 Funds from
Operations per Share" means (x) the Company's estimated "Funds from Operations,"
computed in accordance with the resolution adopted by the Board of Governors of
the National Association of Real Estate Investments Trusts, Inc. in its March
1995 White Paper, except with base rents reported on a cash basis rather than a
straight-line GAAP basis, for the 12 months ended June 30, 1998 divided by (y)
the number of outstanding common shares of beneficial interest of the Company
(assuming all securities exchangeable for, exercisable for, or convertible into
common shares of beneficial interest are so exchanged, exercised or converted).
4.15 Consummation of the IPO.
The Company shall have closed the IPO on or before December 31, 1997.
V. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING.
The obligations of the Company under Section 1.2 of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions:
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5.1 Representations and Warranties.
The representations and warranties of the Investor contained in
Article III shall be true on and as of the Closing with the same effect as
though such representations and warranties had been made on and as of the date
of the Closing.
5.2 Performance.
The Investor shall have performed and complied with all agreements,
obligations and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the date of the Closing.
5.3 No Injunction
There shall not be in effect any order, decree or injunction of a
court or agency of competent jurisdiction which enjoins or prohibits
consummation of the transactions contemplated hereby and there shall be no
actual or threatened action, suit, arbitration, inquiry, proceedings or
investigation by or before any Governmental Authority, court or agency of
competent jurisdiction, which would reasonably be expected to materially impair
the ability of the Investor to consummate the transactions contemplated hereby.
5.4 Officer's Certificate.
The Investor shall have delivered to the Company and the Operating
Partnership on the Closing Date a certificate or certificates signed by an
authorized officer of the Investor to the effect that the circumstances
described in the Certificate and the facts required to exist by Sections 5.1,
5.2 and 5.3 continue to exist on the Closing Date.
VI. COVENANTS.
6.1 No Sale of Security.
None of the Company, the Operating Partnership or any Affiliate of
either party will sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in the Securities Act) which
would be integrated with the sale of the Series A Preferred Shares or the Common
Shares in a manner which would require registration under the Securities Act of
the Series A Preferred Shares or the Common Shares.
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6.2 No General Solicitation.
None of the Company, the Operating Partnership or any Affiliate of
either party will solicit any offer to buy or offer to sell the Series A
Preferred Shares or the Common Shares by means of any form of general
solicitation or general advertising (as those terms are used in Regulation D
under the Securities Act) or in any manner involving a public offering within
the meaning of Section 4(2) of the Securities Act.
6.3 Filing of Exchange Act Reports.
After the date of this Agreement, the Company will timely file all
documents required to be filed with the Commission pursuant to Section 13 or 15
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and so
long as any of the Series A Preferred Shares or the Common Shares remain issued
and outstanding, shall provide to the Investor copies of all such documents,
including, without limitation, all financial statements of the Company required
to be filed with the Commission.
6.4 Consultation and Related Rights.
For so long as the Investor holds at least 50% of the Series A
Preferred Shares that it held immediately after the Closing Date (or 50% of the
Common Shares that the Investor could have obtained at that time upon conversion
of such Series A Preferred Shares whether or not such shares are then
convertible), the Investor shall have the right to directly participate (within
the meaning of 29 CFR 2510.3-101(d)(3)(ii)) in the management of the Company and
the Operating Partnership through and by the following rights and powers:
(a) The right to be consulted on the appointment and dismissal of (i)
the chief executive officer, the chief operating officer and the
chief financial officer (or any person fulfilling similar duties)
and the public accountants and public auditors for the Company
and its subsidiaries and (ii) the managing general partner, the
chief executive officer, the chief operating officer and the
chief financial officer, or any person or persons fulfilling
similar duties, and the public auditors and public accountants
for the Operating Partnership and its subsidiaries.
(b) The right to inspect the books and records of the Company and the
Operating Partnership.
(c) The right to be consulted concerning the development of the
Company's and the Operating Partnership's and their subsidiaries'
annual strategic plan that incorporates a specific business
strategy, an operating agenda, investment and disposition
objectives, and capitalization and funding strategies.
(d) The right to be consulted concerning the annual operating and
capital budgets of the Company and the Operating Partnership and
their subsidiaries.
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(e) The right to be consulted concerning Major Transactions. "Major
Transactions" means (i) any acquisition or disposition of any
assets in any single transaction or any series of related
transactions where the aggregate purchase price paid or received
by the Company, the Operating Partnership or their subsidiaries
exceeds $50,000,000, or, in the case of dispositions, where the
purchase price received does not approximate the fair market
value of the asset sold, (ii) additional financings in excess of
$50,000,000 and (iii) a determination by the Company's Board of
Trustees to terminate the Company's status as a real estate
investment trust pursuant to Sections 856 through 860 of the
Code.
Notwithstanding the foregoing, the Company shall have no obligation to comply
with any advice offered by the Investor in any consultation referred to in this
Section 6.3.
Investor agrees that any information obtained through the foregoing
consultation rights which is not public shall be kept confidential, and shall
not be disclosed to any persons other than the directors, officers, employees,
financial advisors, legal advisors, and accountants of Investor who reasonably
need to have access to such information and who are advised of the confidential
nature of such information and agree to maintain the confidentiality of such
information; provided that the foregoing obligation of Investor shall not (a)
relate to any information that (i) is or becomes generally available other than
as a result of unauthorized disclosure by Investor or by persons to whom
Investor has made such information available, or (ii) is or becomes available to
Investor on a non-confidential basis from a third party that is not, to
Investor's knowledge, bound by any other confidentiality agreement with the
Company or its Subsidiaries, or (b) prohibit disclosure of any information if
required by law, rule, regulation, court order, or other legal or governmental
process.
6.5 Maintenance of REIT Status.
(a) So long as any of the Series A Preferred Shares or the Common
Shares remain issued and outstanding, the Company will continue
to be taxed as a real estate investment trust pursuant to
Sections 856 through 860 of the Code.
(b) If the Company shall fail to continue to be taxed as a real
estate investment trust pursuant to Sections 856 through 860 of
the Code (a "REIT-Repurchase Event"), the Investor shall have the
right to require the Company, to the extent the Company shall
have funds legally available therefor, to repurchase any or all
of the Series A
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Preferred Shares or the Common Shares held by the Investor at a
repurchase price payable in cash in an amount equal to 115% of the
liquidation preference thereof, plus accrued and unpaid dividends
whether or not declared, if any (the "REIT-Repurchase Payment"), to
the date of repurchase or the date payment is made available (the
"REIT-Repurchase Date"), pursuant to the offer described in
subsection (c) below (the "REIT-Repurchase Offer").
(c) Within 15 days following the Company becoming aware that a REIT-
Repurchase Event has occurred, the Company shall mail by first class
mail or overnight courier a notice to the Investor stating (A) that a
REIT-Repurchase Event has occurred and that the Investor has the
right to require the Company to repurchase any or all of the Series A
Preferred Shares or the Common Shares then held by the Investor in
cash, (B) the date of repurchase (which shall be a business day, no
earlier than 30 days and no later than 60 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), (C) the repurchase price
and (D) the instructions determined by the Company, consistent with
this subsection, that the Investor must follow in order to have the
Series A Preferred Shares or the Common Shares repurchased.
(d) On the REIT-Repurchase Date, the Company, to the extent lawful, shall
accept for payment Series A Preferred Shares or Common Shares or
portions thereof tendered by the Investor or an affiliate of the
Investor pursuant to the REIT-Repurchase Offer and promptly mail by
first class mail or overnight courier or by wire transfer of
immediately available funds to the Investor, as directed by the
Investor, in an amount equal to the REIT-Repurchase Payment in
respect of all Series A Preferred Shares or Common Shares or portions
thereof so tendered.
(e) Notwithstanding anything else herein, to the extent they are
applicable to any REIT-Repurchase Offer, the Company will comply with
any federal and state securities laws, rules and regulations and all
time periods and requirements shall be adjusted accordingly.
(f) Notwithstanding the provisions of this Section 6.4, in no event shall
the Company be required to repurchase any Series A Preferred Shares
at any time that such repurchase is prohibited by the
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Declaration or the Company's debt instruments.
6.6 Change of Control
(a) If a Change of Control (as defined in the Declaration) occurs (a
"Change of Control Repurchase Event"), the Investor shall have the
right to require the Company, to the extent the Company shall have
funds legally available therefor, to redeem any or all of the Series A
Preferred Shares or the Common Shares held by the Investor 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 "Change of Control"), to the date
of repurchase or the date payment is made available (the "Change of
Control Date"), pursuant to the offer described in subsection (c)
below (the "Change of Control-Repurchase Offer").
(b) Within 15 days following the Company becoming aware that a Change of
Control Repurchase Event has occurred, the Company shall mail by first
class mail or overnight courier a notice to the Investor stating (A)
that a Change of Control Repurchase Event has occurred and that the
Investor has the right to require the Company to repurchase any or all
of the Series A Preferred Shares or the Common Shares then held by the
Investor in cash, (B) the date of repurchase (which shall be a
business day, no earlier than 30 days and no later than 60 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), (C) the
repurchase price and (D) the instructions determined by the Company,
consistent with this subsection, that the Investor must follow in
order to have the Series A Preferred Shares or the Common Shares
repurchased.
(c) On the Change of Control Repurchase Date, the Company, to the extent
lawful, shall accept for payment Series A Preferred Shares or Common
Shares or portions thereof tendered by the Investor or an affiliate of
the Investor pursuant to the Change of Control Repurchase Offer and
promptly mail by first class mail or overnight courier or by wire
transfer of immediately available funds to the Investor, as directed
by the Investor, in an amount equal to the Change of Control
Repurchase Payment in respect of all Series A Preferred Shares or
Common Shares or portions thereof so tendered.
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(d) Notwithstanding anything else herein, to the extent they are
applicable to any Change of Control Repurchase Offer, the Company
will comply with any federal and state securities laws, rules and
regulations and all time periods and requirements shall be
adjusted accordingly.
(e) Notwithstanding the provisions of this Section 6.5, in no event
shall the Company be required to repurchase any Series A
Preferred Shares at any time that such repurchase is prohibited
by the Declaration or the Company's debt instruments.
6.7 Waiver of Ownership Limitations.
So long as any of the Series A Preferred Shares remain issued and
outstanding or the Investor owns more than 9.9% of the Company's outstanding
common shares of beneficial interest, the Company shall not reverse or rescind
the waiver required to be granted pursuant to Section 4.12 of this Agreement.
6.8 No Public Disclosure.
Neither the Company nor any affiliate of the Company will make any
public disclosure concerning the transactions contemplated by this Agreement
unless the Investor has had a reasonable time to review such disclosure. Unless
in the reasonable opinion of counsel to the Company that such disclosure is
required by applicable law, neither the Company nor any affiliate of the Company
will make any such public disclosure without the Investor's prior written
consent.
6.9 Annual Certificate of Independent Public Accountants or Company
Counsel.
So long as any of the Series A Preferred Shares or the Common Shares
remain outstanding, the Company shall, on an annual basis no later than March 31
of each year, cause its independent public accountants or a nationally
recognized law firm to provide the Investor an opinion in form and substance
reasonably satisfactory to the Investor.
6.10 Prohibition on Issuance of Series A Preferred Shares.
The Company will not issue any Series A Preferred Shares to any party
other than the Investor or any direct or indirect transferee and then only in
compliance with the terms of the Declaration.
6.11 Amendment to Operating Partnership Agreement.
The Company and Operating Partnership shall use their best efforts to
amend the Agreement of Limited Partnership in order to effect the transactions
contemplated hereby.
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6.12 Standstill Provisions.
(a) During the Standstill Period (as defined below), except as
provided in Section 6.11(a)(iii), each Security Capital Investor will not, and
will cause each of its controlled Affiliates not to, and will use its reasonable
best efforts to cause each of its other Affiliates not to, directly or
indirectly:
(i) act in concert with any other person or Group by becoming a
member of a 13D Group (as defined below), other than any 13D Group comprised
exclusively of Investor and one or more of its Affiliates;
(ii) sell, transfer, pledge (other than pledges made to
commercial lending institutions securing indebtedness for borrowed money) or
otherwise dispose of (collectively, "Transfer") any Series A Preferred Shares or
Common Shares to any person if the acquisition of such capital stock by such
person would violate the provisions of Section 4.1 of the Declaration; provided
that this Section shall not prohibit Transfers (A) between the Investor and an
Affiliate of the Investor or (B) between one or more Affiliates of the Investor;
(iii) so long as the sum of (i) the aggregate number of common
shares of beneficial interest held by all Security Capital Investors and (ii)
the aggregate number of common shares of beneficial interest into which the
Series A Preferred Shares held by all Security Capital Investors are convertible
(assuming that all such Series A Preferred Shares are immediately convertible)
is greater than 9.9% of the Company's outstanding common shares of beneficial
interest, purchase or otherwise acquire any common shares of beneficial interest
or other securities of the Company if, after giving effect to such purchase or
acquisition, the Security Capital Investors and their Affiliates (and any
persons that are members of a 13D Group of which any Security Capital Investor
or any of their Affiliates may be a member, notwithstanding the provisions of
clause (i) above) collectively would Beneficially Own more than 20% of the
outstanding common shares of beneficial interest of the Company; provided that
the Security Capital Investors shall not be deemed to have breached this
covenant solely as a result of a decrease in the aggregate number of common
shares of beneficial interest outstanding.
(iv) solicit or propose to effect or negotiate any merger,
consolidation, other business combination, liquidation, sale of the Company or
all or substantially all of the assets of the Company and its subsidiaries or
any other change of control of the Company or similar extraordinary transaction;
(v) except with respect to seeking representation on the Board
of Trustees of the Company or a change in the size of the Board of Trustees as
provided in Section 6.11(a)(vi), solicit, initiate or participate in any
"solicitation" of "proxies" or
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become a "participant" in an "election contest" (as such terms are defined or
used in Regulation 14A under the 1934 Act, disregarding clause (iv) of Rule 14a-
1(1)(2) and including an exempt solicitation pursuant to Rule 14a-2(b)(i); call,
or in any way participate in a call for, any special meeting of stockholders of
the Company (or take any action with respect to acting by written consent of the
stockholders of the Company); request, or take any action to obtain or retain
any list of holders of any securities of the Company; or initiate or propose any
stockholder proposal or participate in the making of, or solicit stockholders of
the Company for the approval of, one or more stockholder proposals; provided
that Investor shall not be prohibited from communicating with a security holder
who is engaged in any "solicitation" of "proxies" or who is a "a participant" in
any "election contest";
(vi) seek representation on the Board of Trustees of the Company or a
change in the size of the Board of Trustees other than in accordance with the
provisions of the Series A Preferred Shares following a default in the payment
of dividends thereon for two or more quarters;
(vii) Transfer any capital stock of such Security Capital Investor or
any capital stock of any Affiliate of such Security Capital Investor that owns
any capital stock of the Company, or Transfer any options, warrants, convertible
securities, or other similar rights to acquire any capital stock of such
Security Capital Investor or any such Affiliate, if, after giving effect
thereto, the Beneficial Owner of such shares of capital stock of the Company
would (A) Beneficially Own more than 20% of the outstanding common shares of
beneficial interest of the Company or (B) violate the provisions of Section 4.1
of the Declaration;
(viii) request the Company or any of its trustees, officers,
employees or agents to amend or waive the provisions of this Section 6.11 or
seek to challenge the legality or effect thereof; or
(ix) assist, advise, encourage or act in concert with any person with
respect to, or seek to do, any of the foregoing.
(b) As used in this Section, the following terms have the respective
meanings set forth below:
"Affiliate" shall have the meaning ascribed thereto in Rule 12b-2
promulgated under the 1934 Act, as such rule is in effect on the date hereof.
"Beneficially Own" shall mean, with respect to any security, having direct
or indirect (including through any Affiliate) "beneficial ownership" of such
security, as determined pursuant to Rule 13d-3 under the 1934 Act, including
pursuant to any agreement, arrangement or understanding, whether or not in
writing. "Beneficial Ownership" and "Beneficial Owner" shall have
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correlative meanings. As used with respect to the common shares of beneficial
interest of the Company, the term shall include any common shares of beneficial
interest issuable, without regard to any requirement of notice or the passage of
time or the occurrence of any event, pursuant to any options, warrants, or other
convertible or exchangeable securities held by the applicable person, its
Affiliates, or any member of a 13D Group of which such person is a member.
"Covered Transaction" shall mean any merger, consolidation, other business
combination, liquidation, sale of the Company or all or substantially all of the
assets of the Company and its subsidiaries or any other change of control of the
Company or similar extraordinary transaction, other than any transaction in
which the Company is the surviving and acquiring corporation and in which the
business or assets so acquired do not, or would not reasonably be expected to,
have a value greater than 50% of the assets of the Company (on a consolidated
basis) prior to such transaction.
"Group" shall mean a "group" as such term is used in Section 13(d)(3) of
the 1934 Act.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"person" shall mean any individual, corporation, partnership, limited
liability company, joint venture, trust, unincorporated organization, or other
form of business or legal entity.
"Prime Investor" shall mean The Prime Group, Inc., an Illinois corporation
("Prime"), and any Affiliate thereof.
"Security Capital Investor" shall mean the Investor and any person
controlled (as such term is defined in Rule 12b-2 under the 1934 Act), directly
or indirectly, by Security Capital Group Incorporated, to which any Series A
Preferred Shares or Common Shares are transferred and to which the rights under
this Agreement are assigned, by the Investor or another Security Capital
Investor, and which agrees to be bound by the terms of this Agreement.
"Standstill Period" shall mean the period beginning on the date hereof and
ending on the first date following the date on which the aggregate Beneficial
Ownership by the Security Capital Investors and their Affiliates (and any
persons that are members of a 13D Group of such Security Capital Investors or
any of their Affiliates are members, notwithstanding the provisions of clause
(i) of Section 6.11(a)) of common shares of beneficial interest of the Company
shall have been less than 9.9% of the number of outstanding common shares of
beneficial interest of the Company (treating any common shares of beneficial
interest issuable under options, warrants, or other convertible or exchangeable
securities Beneficially Owned by such Security Capital Investors, their
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Affiliates, and any member of such a 13D Group as being outstanding for this
purpose) for a continuous period of 180 days. Notwithstanding the foregoing, the
Standstill Period also shall be terminated on the earliest of:
(i) the acquisition by any person or Group other than a Security
Capital Investor or any Affiliate thereof or a Prime Investor of
Beneficial Ownership of 20% or more of the outstanding common shares
of beneficial interest of the Company, on a fully diluted basis;
(ii) the fifteenth business day after the written submission by any
person or Group other than a Security Capital Investor or Affiliate of
a proposal to the Company (including to the Board or any agent,
representative or Affiliate of the Company) with respect to, or
otherwise expressing an interest in pursuing, a Covered Transaction;
provided that, except as described in the next paragraph, the
Standstill Period shall not terminate pursuant to this clause (ii) if,
within such period, the Board of Trustees determines that such
proposal is not in the best interest of the Company and its
stockholders and for so long as the Board continues to reject such
proposal as a result of such determination.
If any Security Capital Investor desires to tender any common shares
of beneficial interest into a tender offer made by a third party,
which tender offer has not been approved by the Board of Trustees,
such Security Capital Investor shall provide a notice (the "Tender
Notice") to the Company of its intent and the number of shares it
wishes to tender (the "Tender Shares") in the tender offer. The
Company shall have ten business days from the date of the Tender
Notice to elect to purchase all, but not less than all, of the Tender
Shares at a price equal to the price offered in such tender offer. If
the Company so elects to purchase the Tender Shares, the closing of
such purchase shall be no later than 15 business days after the date
of the Tender Notice. If the Company does not so elect to purchase the
Tender Shares, the Security Capital Investor may tender the Tender
Shares into the tender offer;
(iii) any breach by the Company of this Agreement that is neither
cured nor desisted from within 30 days of receipt of written notice of
such breach and which would reasonably be expected to materially
adversely affect a Security Capital Investor; or
(iv) if and whenever the Company shall be in arrears in the payment of
dividends on the Series A Preferred Shares for two consecutive
quarters (which shall, with respect to any such quarterly dividend,
mean that any
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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 its common shares of beneficial
interest in an amount per share at least equal to $1.35 (subject to
adjustment). Whenever all arrears in dividends on the Series A
Preferred Shares 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 Corporation has paid dividends on the
Company's common shares of beneficial interest in an amount per share
at least equal to $1.35 (subject to adjustment) for two consecutive
quarters, the Standstill Period shall be reinstated, unless the
Standstill Period is terminated pursuant to any other provisions of
this Section.
"13D Group" shall mean any group of persons acquiring, holding,
voting, or disposing of capital stock of the Company that would be required
under Section 13(d) of the 1934 Act and the rules and regulations thereunder (as
in effect, and based on legal interpretations thereof existing, on the date
hereof) to file a statement on Schedule 13D with the Securities and Exchange
Commission as a "person" within the meaning of Section 13(d)(3) for the 1934 Act
if such group Beneficially Owned capital stock representing more than 5% of any
class of capital stock of the Company then outstanding.
6.13 Certificate of Company Security Ownership.
Upon the Company's written request, within 30 days after December 31
of each year, the Investor shall provide to the Company written notice stating
the name and address of the Investor, the number of Series A Preferred Shares,
Common Shares or other stock of the Company owned by the Investor or its
Affiliates, and a description of the manner in which such shares are owned,
together with such other additional information as the Company may reasonably
request in order to determine the effect, if any, of such ownership on the
Company's status as a REIT and to ensure compliance with its undertakings, if
any, set forth in the Certificate.
VII. TERMINATION
7.1 Termination. This Agreement may be terminated as follows:
(a) Mutual Consent. With the mutual written consent of the Investor and
the Company; or
(b) By the Company. By the Company, if by the Closing Date any of the
conditions provided in Article V shall not have been satisfied, complied with or
performed in any material respect, and
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the Company shall not have waived the failure of satisfaction, noncompliance, or
nonperformance; or
(c) By the Investor. By the Investor, if by the Closing Date any of the
conditions provided in Article IV shall not have been satisfied, complied with
or performed in any material respect, and the Investor shall not have waived the
failure of satisfaction, noncompliance, or nonperformance; or
(d) Automatic Termination. Automatically if the Closing Date shall not
have occurred on or before December 31, 1997, or such later date as shall have
been agreed to in writing by the Company and the Investor.
7.2 Notice of Termination. In the event of any termination pursuant to
Section 7.1 (other than pursuant to Section 7.1(a) or Section 7.1(d)), written
notice setting forth the reasons for termination shall promptly be given by the
terminating party to the other in writing.
7.3 Effect of Termination.
(a) In the event of termination of this Agreement, no party hereto shall
have any liability to any other party to this Agreement, except as provided in
this Section 7.3 and except that nothing herein shall relieve any party from
liability for any breach of this Agreement.
(b) If this Agreement shall have been terminated for any reason other than
(i) the Investor's failure to perform any material obligation under this
Agreement or (ii) the reasons described in Section 7.3(c), then the Company
shall promptly, and in no event later than two days after such termination,
reimburse the Investor for its reasonable out-of-pocket expenses, including fees
and disbursements of counsel.
(c) Notwithstanding the termination of this Agreement, if the IPO is
consummated after December 31, 1997, the Investor shall have the right (but not
the obligation) to participate in the IPO.
VIII. MISCELLANEOUS
8.1 Survival of Warranties.
The representations and warranties of the Company, the Operating
Partnership and the Investor contained in or made pursuant to Articles II or III
of this Agreement shall survive the Closing hereunder through and until one year
following the Closing, except for the warranties and representations of the
Company contained in Section 2.13 which shall survive until the expiration of
the applicable statute of limitations. The covenants contained in or made
pursuant to Article VI of this Agreement shall survive the Closing indefinitely,
except for any provisions which expire by their terms. The representations and
warranties contained in this
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Agreement shall in no way be affected by any investigation of the subject matter
thereof made by or on behalf of the Investor or the Company.
8.2 Successors and Assigns.
Except as otherwise provided herein, the terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto. Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement. Except as specifically
provided hereby, the Investor shall not be permitted to assign any of its rights
hereunder to any third party, provided, however, that the Investor's rights
hereunder may be assigned to another entity controlled directly or indirectly by
Security Capital Group Incorporated that agrees in writing to be bound by the
terms of this Agreement.
8.3 Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois, without giving effect to the conflict of law
provisions thereof.
8.4 Counterparts.
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.
8.5 Titles and Subtitles.
The title and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
8.6 Notices.
Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given (a)
upon personal delivery to the party to be notified, (b) on the fifth business
day after deposit with the United States Post Office, by registered or certified
mail, postage prepaid, (c) on the next business day after dispatch via
nationally recognized overnight courier or (d) upon confirmation of transmission
by facsimile, all addressed to the party to be notified at the address indicated
for such party below, or at such other address as such party may designate by
ten (10) days' advance written notice to the other parties. Notices should be
provided in accordance with this Section at the following addresses:
If to the Investor, to:
31
<PAGE>
Security Capital Preferred Growth Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Attention: Daniel F. Miranda
David E. Rosenbaum
Facsimile (312) 345-5888
with a copy to:
Philip J. Niehoff
Mayer, Brown & Platt
190 South LaSalle
Chicago, IL 60603
Facsimile: (312) 701-7711
If to the Company or the Operating Partnership, to:
Richard S. Curto
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Facsimile: (312)782-5867
with a copy to:
Robert J. Rudnik
Prime Group Realty Trust
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Facsimile (312) 917-1684
and a copy to:
Wayne D. Boberg
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Facsimile: (312) 558-5700
8.7 Finder's Fees.
Each party represents that it neither is nor will be obligated for any
finders' fee or commission in connection with this transaction, except that the
Company shall pay a placement fee equal to 1% of the Purchase Price to Security
Capital Markets Group Incorporated, a broker-dealer affiliate of the Investor.
The Investor agrees to indemnify and hold harmless the Company from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Investor or any of its officers, employees or
representatives is responsible. The Company agrees to indemnify and hold
harmless the Investor from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending against
such
32
<PAGE>
liability or asserted liability) for which the Company or any of its officers,
employees or representatives is responsible.
8.8 Expenses.
Except as described in Article VII or in this Section 8.8, each party
shall pay all costs and expenses that it incurs with respect to the negotiation,
execution, delivery and performance of this Agreement. If any action at law or
in equity is necessary to enforce or interpret the terms of this Agreement, the
Amended and Restated Agreement of Limited Partnership or the Declaration, the
prevailing party shall be entitled to reasonable attorneys' fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
8.9 Amendments and Waivers.
Any term of this Agreement may be amended, and the observance of any
term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investor. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
securities purchased under this Agreement at the time outstanding (including
securities into which such securities are convertible), each future holder of
all such securities, and the Company.
8.10 Severability.
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
8.11 Entire Agreement.
This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and no party shall be liable or bound to
any other party in any manner by any warranties, representations or covenants
except as specifically set forth herein.
[SIGNATURE PAGE FOLLOWS]
33
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SECURITY CAPITAL PREFERRED
GROWTH INCORPORATED
By:
-----------------------------------
Name:
--------------------------------
Its:
--------------------------------
PRIME GROUP REALTY, L.P.
By: Prime Group Realty Trust, its
managing general partner
By:
-----------------------------------
Name:
--------------------------------
Its:
--------------------------------
PRIME GROUP REALTY TRUST
By:
-----------------------------------
Name:
--------------------------------
Its:
--------------------------------
<PAGE>
EXHIBIT 10.30
FORM OF
SUBSCRIPTION
AGREEMENT
---------
ARTICLE I
---------
Subscription and Purchase
-------------------------
Section 1.1. Subscription. The undersigned hereby subscribes for and
agrees to purchase ______ Common Units (as defined in that certain Amended and
Restated Agreement of Limited Partnership of Prime Group Realty, L.P., a
Delaware limited partnership) of Prime Group Realty L.P., a Delaware limited
partnership (the "Company"), for a purchase price of $___________ per Common
Unit, for an aggregate purchase price of $85,000,000 on the terms and conditions
described herein.
Section 1.2. Contribution Agreement. This subscription is made pursuant
to that certain Contribution Agreement dated October __, 1997 by and among The
Prime Group, Inc., BRE/Primestone Investment Management, L.L.C., and
BRE/Primestone Investment L.L.C.
ARTICLE II
----------
Representations and Warranties
------------------------------
The undersigned makes the following representations and warranties with the
intent that the same may be relied upon by the Company.
(a) Not a Registered Offering. The undersigned understands that the
Common Units have not been and are not being registered either with the
Securities and Exchange Commission ("SEC") or with the governmental entity
charged with regulating the offer and sale of securities under the securities
laws and regulations of the state of residence of the undersigned, and are being
offered and sold pursuant to the exemption from registration provided in the
Securities Act of 1933, as amended (the "1933 Act"), and exemptions provided in
the "Blue Sky" laws of the state of residence of the undersigned, and that no
governmental agency has recommended or endorsed the Common Units or made any
finding or determination relating to the adequacy or accuracy or the fairness
for investment of the Common Units.
(b) Risk Factors. The undersigned understands and has evaluated the
risks involved in investments in general and in an investment in the Company in
particular. The undersigned recognizes that the Company is newly-organized and
formed and, therefore, has no financial or operating history and an investment
in the Company is a speculative undertaking.
(c) Purchase for Investment. The undersigned is subscribing for the
Common Units solely for his or her own account, for investment purposes and not
with a view to, or with any intention of, a distribution, sale, subdivision or
for the account of any other individual, corporation, firm or person.
(d) Accredited Investor. The undersigned is an Accredited Investor (as
such term is defined in Rule 501 of Regulation D promulgated under the
Securities Act of 1933, as amended).
(e) Independent Investigation. The undersigned has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of an investment in the Common Units. In making its
decision to purchase the Common Units that are herein subscribed for, the
undersigned has relied solely upon independent investigations made by it. The
undersigned is not relying on the Company with respect to any tax or other
economic considerations involved in this investment. To the extent the
undersigned has deemed it appropriate, the undersigned has consulted with his or
her own attorneys with respect to all matters concerning this investment.
(f) Restrictions on Transfer. The undersigned understands and agrees
that because the offer and sale of the Common Units subscribed for herein have
not been registered under federal or state securities laws, none of the Common
Units acquired may at any time be sold or otherwise disposed of by the
undersigned unless they are registered under the 1933 Act or there is applicable
to such sale or other disposition one of the exemptions from registration set
forth in the 1933 Act, the rules and regulations of the SEC thereunder and
applicable state law. The undersigned further understands and agrees that there
are various
<PAGE>
contractual restrictions to the transfer of the Common Units including, without
limitation, those set forth in the Amended and Restated Agreement of Limited
Partnership of the Company.
ARTICLE III
-----------
Miscellaneous Provisions
------------------------
Section 3.1. Indemnity. The undersigned agrees to indemnify and hold
harmless the Company and each other person, if any, who controls or is
controlled by it, within the meaning of Section 15 of the 1933 Act, against any
and all loss, liability, claim, damage and expense whatsoever (including, but
not limited to, any and all expenses whatsoever reasonably incurred in
investigating, preparing or defending against any litigation commenced or
threatened or any claim whatsoever) arising out of or based upon (a) any false
representation or warranty or breach or failure by the undersigned to comply
with any covenant or agreement made by the undersigned herein or in any other
document furnished by the undersigned to any of the foregoing in connection with
this transaction, (b) any action for securities law violations instituted by the
undersigned which is resolved by judgment against the undersigned and (c) the
disposition of any of the Common Units which the undersigned will receive
contrary to the undersigned's declaration, representations and warranties in
this Agreement.
Section 3.2. Notices And Addresses. All notices required to be given
under this Agreement shall be in writing and shall be mailed by certified or
registered mail, hand delivered or delivered by next business day courier. Any
notice to be sent to the Company shall be mailed to the principal place of
business of the Company or at such other address as the Company may specify in a
notice sent to the undersigned. All notices to the undersigned shall be mailed
or delivered to the address set forth on the signature page to this Agreement or
to such other address as the undersigned may hereafter notify the Company of in
writing. Notices shall be effective on the date three days after the date of
mailing or, if hand delivered or delivered by next day business courier, on the
date of delivery, provided, however, that notices to the Company shall be
effective upon receipt.
Section 3.3. Governing Law. This Agreement is governed by and to be
construed in accordance with the laws of the State of Illinois without regard to
conflict of laws principles.
Section 3.4. Successors And Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto, and each of their respective
legal representatives and successors. This Agreement is not transferable or
assignable by the undersigned or the Company.
Section 3.5. Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which shall
constitute one instrument.
Section 3.6. Modifications To Be In Writing. This Agreement constitutes
the entire understanding of the parties hereto and no amendment, restatement,
modification or alteration will be binding unless the same is in writing signed
by the party against whom any such amendment, restatement, modification or
alteration is sought to be enforced.
Section 3.7. Captions. The captions are inserted for convenience of
reference only and shall not affect the construction of this Agreement.
Section 3.8. Validity And Severability. If any provision of this
Agreement is held invalid or unenforceable, such decision shall not affect the
validity or enforceability of any other provision of this Agreement, all of
which other provisions shall remain in full force and effect.
Section 3.9. Statutory References. Each reference in this Agreement to a
particular statute or regulation, or a provision thereof, shall be deemed to
refer to such statute or regulation, or provision thereof, or to any similar or
superseding statute or regulation, or provision thereof, as is from time to time
in effect.
-2-
<PAGE>
SIGNATURE PAGE
--------------
The undersigned has executed this Agreement on this _____ day of
__________________, 1997.
Primestone Investment Partners, L.P.
By: BRE Investment, L.L.C.
A General Partner
By:
-----------------------------------------
Its:
-----------------------------------------
By:
-----------------------------------------
A General Partner
By:
-----------------------------------------
Its:
-----------------------------------------
* * * * *
-3-
<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
--------------------------------------------------------------------------------------
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
Preferred share dividend 1,400 2,800
------------------------------
Adjusted Funds From Operations $ 22,000 $ 40,664
==============================
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 3.46 3.23
==============================
Excess (deficit) of Funds From Operations to Combined
Fixed Charges and Preferred Share Dividends $ 15,647 $ 28,086
==============================
</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
----------------------------------------------------------------------------------------
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 21.1
Subsidiaries of Registrant
Prime Group Realty, L.P., a Delaware limited partnership
Prime Group Realty Services, Inc., a Maryland corporation
In addition, the Company has interests in 52 entities which are formed in
one of Delaware, Illinois, Indiana or Tennessee and which hold title or
interests in the Company's properties.
<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. 4 to the Registration Statement (Form S-11) and
related Prospectus of Prime Group Realty Trust for the registration of
14,237,000 of its common shares of beneficial interest.
ERNST & YOUNG LLP
Chicago, Illinois
November 7, 1997
