<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 1998
REGISTRATION NO. 333-64973
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PRIME GROUP REALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
<TABLE>
<S> <C>
MARYLAND 36-4173047
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
77 WEST WACKER DRIVE, SUITE 3900
CHICAGO, ILLINOIS 60601
(312) 917-1300
(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) 917-1300
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPIES TO:
WAYNE D. BOBERG, ESQ.
BRIAN T. BLACK, ESQ.
WINSTON & STRAWN
35 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60601
(312) 558-5600
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
Any time and from time to time after the effective date of this Registration
Statement.
---------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the Securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING SHAREHOLDERS
ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION -- DATED DECEMBER 29, 1998
PROSPECTUS
- --------------------------------------------------------------------------------
PRIME GROUP REALTY TRUST
2,000,000 Series A Cumulative Convertible Preferred
[LOGO]
Shares of Beneficial Interest
11,711,075 Common Shares of Beneficial Interest
- ----------------------------------------------------------------------------
We are a real estate company which owns and manages a portfolio of office and
industrial properties located primarily in the Chicago, Illinois metropolitan
area.
Security Capital Preferred Growth Incorporated and/or its permitted transferees
may use this prospectus to offer for sale up to 2,000,000 of our outstanding
convertible preferred shares and up to 2,000,000 of our common shares from time
to time. We may issue all or a portion of the 2,000,000 common shares upon
conversion of the convertible preferred shares.
In addition, limited partners of Prime Group Realty, L.P. may use this
prospectus to offer for sale up to an additional 9,711,075 of our common shares
from time to time. We may issue all or a portion of the 9,711,075 common shares
upon the exchange of common units of limited partner interest in Prime Group
Realty, L.P. held by these limited partners.
INVESTING IN THE CONVERTIBLE PREFERRED SHARES AND THE COMMON SHARES INVOLVES
CERTAIN RISKS. SEE "RISK FACTORS" ON PAGES 4 TO 15.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER , 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
The Offering.................................... 3
Private Securities Litigation Reform Act of 1995
Safe Harbor Cautionary Statement.............. 4
Risk Factors.................................... 4
About Prime Group Realty Trust.................. 16
Use of Proceeds................................. 17
Price Range of Common Shares and
Distributions................................. 18
Ratios of Earnings to Combined Fixed Charges and
Preferred Share Distributions................. 19
Description of Shares of Beneficial
Interest...................................... 19
<CAPTION>
PAGE
-----------
<S> <C>
Certain Provisions of Maryland Law and of Our
Declaration of Trust and Bylaws............... 32
Material Federal Income Tax
Considerations................................ 36
ERISA Considerations............................ 51
Selling Shareholders............................ 54
Plan of Distribution............................ 56
Legal Matters................................... 57
Experts......................................... 58
Where You Can Find More Information............. 58
Incorporation of Certain Documents by
Reference..................................... 59
</TABLE>
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
CONVERTIBLE PREFERRED SHARES...... 2,000,000 7% Series A Cumulative Convertible Preferred
Shares of Beneficial Interest which are held by Security
Capital Preferred Growth Incorporated as of the date of
this prospectus. The convertible preferred shares may be
offered and sold from time to time in negotiated
transactions or otherwise, at prevailing prices, prices
related to the then- current market price or at
negotiated prices. See "Plan of Distribution."
Convertible Preferred
Shares Outstanding................ As of December 28, 1998, 2,000,000 convertible preferred
shares were outstanding.
Use of Proceeds................... We will not receive any proceeds from selling
shareholders' sale of the convertible preferred shares.
Listing........................... The convertible preferred shares are not listed or
qualified for trading on any exchange or on the Nasdaq
National Market.
COMMON SHARES..................... 11,711,075 common shares which are being registered on
behalf of shareholders who may receive these common
shares either upon the conversion of convertible
preferred shares or upon the exchange of common units of
limited partner interest in Prime Group Realty, L.P.
held by them.
The common shares may be offered and sold from time to
time by the selling shareholders in transactions on the
New York Stock Exchange (the "NYSE"), in the
over-the-counter market, or on any other national
securities exchange on which the common shares are
listed or traded, in negotiated transactions or
otherwise, at prevailing prices, prices related to the
then-current market price or at negotiated prices. See
"Plan of Distribution."
Common Shares Outstanding......... As of December 28, 1998, 15,110,794 of our common shares
were outstanding, which does not include the 11,711,075
common shares offered by this prospectus, none of which
has been issued as of the date of this prospectus.
Use of Proceeds................... We will not receive any proceeds from the sale of the
common shares offered by this prospectus.
NYSE Symbol....................... The common shares are listed on the NYSE under the
symbol "PGE."
</TABLE>
3
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR
CAUTIONARY STATEMENT
THIS PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN CONTAIN
"FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995, THAT ARE BASED ON OUR CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS
ABOUT PRIME GROUP REALTY TRUST'S BELIEFS AND EXPECTATIONS, ARE FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE, EVENTS OR
RESULTS AND INVOLVE POTENTIAL RISKS AND UNCERTAINTIES. ACCORDINGLY, ACTUAL
RESULTS MAY DIFFER MATERIALLY. PRIME GROUP REALTY TRUST UNDERTAKES NO OBLIGATION
TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTS THAT MAY AFFECT THESE EXPECTATIONS, ESTIMATES OR PROJECTIONS
INCLUDE, BUT ARE NOT LIMITED TO: GENERAL ECONOMIC AND BUSINESS CONDITIONS, WHICH
WILL, AMONG OTHER THINGS, AFFECT DEMAND FOR OFFICE AND INDUSTRIAL PROPERTIES,
AVAILABILITY AND CREDITWORTHINESS OF PROSPECTIVE TENANTS, LEASE RENTS AND THE
AVAILABILITY OF FINANCING; ADVERSE CHANGES IN THE REAL ESTATE MARKETS INCLUDING,
AMONG OTHER THINGS, COMPETITION WITH OTHER COMPANIES; RISKS OF REAL ESTATE
ACQUISITION AND DEVELOPMENT; GOVERNMENTAL ACTIONS AND INITIATIVES; AND
ENVIRONMENTAL REQUIREMENTS, AND THE OTHER FACTORS DESCRIBED IN THIS PROSPECTUS
UNDER THE HEADING "RISK FACTORS."
RISK FACTORS
In addition to the other information presented or incorporated by reference
in this prospectus, you should carefully consider the following matters before
purchasing any of the convertible preferred shares or the common shares.
CONFLICTS OF INTEREST
OUR PARTNERS IN THE OPERATING PARTNERSHIP, INCLUDING SEVERAL OF OUR OFFICERS
AND TRUSTEES, HAVE THE ABILITY TO INFLUENCE THE OPERATING PARTNERSHIP. Mr.
Michael W. Reschke, through various affiliates including The Prime Group, Inc.
(collectively, "PGI"), owns a substantial indirect interest in our operating
partnership, Prime Group Realty, L.P. Therefore, conflicts may exist between the
obligations of Mr. Reschke as one of our trustees and officers and his interest
in the operating partnership through his ownership interests in PGI.
Mr. Jeffrey A. Patterson, one of our executive officers, owns a 0.4%
interest in the operating partnership. Blackstone Real Estate Advisors, L.P.
("Blackstone"), as the 40.0% owner of a joint venture (the "Primestone Joint
Venture") that owns a 31.3% interest in the operating partnership, designated
Mr. Thomas J. Saylak to be elected as one of our trustees. The Primestone Joint
Venture is between PGI, BRE/Primestone Investment L.L.C. and BRE/Primestone
Management Investors L.L.C., which are affiliates of Blackstone. Therefore,
conflicts may exist between the obligations of Mr. Patterson, as one of our
officers, and Mr. Saylak, as one of our trustees, and their respective interests
in the operating partnership.
Several entities and persons which contributed properties to us in
connection with our formation own, in total, a 7.3% interest in the operating
partnership. Each of these property contributors are controlled by or affiliated
with Mr. Edward S. Hadesman or Mr. Stephen J. Nardi. Mr. Hadesman is one of our
officers and Mr. Nardi is one of our trustees. These limited partners of the
operating partnership, and a general partner of the operating partnership that
is controlled by Mr. Nardi, may suffer different and more adverse tax
consequences than we will upon the sale or refinancing of properties contributed
by them in connection with our formation.
Further, PGI has agreed to indemnify us for amounts we may be required to
pay for tax liabilities which may be incurred by Mr. Nardi or his affiliates
upon the sale of properties they contributed to us
4
<PAGE>
in connection with our formation. Therefore, the limited partners and the
general partner controlled by Mr. Nardi may have objectives regarding the
appropriate pricing and timing of any sale or refinancing of such properties
that differ from our objectives. While we, as the managing general partner of
the operating partnership, have the ability to determine whether and on what
terms to sell or refinance an individual property, those members of our
management and our board of trustees who directly or indirectly hold common
units of partner interest in the operating partnership could have an ability to
influence us not to sell or refinance certain properties, even though a sale
might otherwise be financially advantageous to us, or may influence us to
refinance a property with a high level of debt.
MR. RESCHKE, OUR CHAIRMAN OF THE BOARD, CONTINUES TO ENGAGE IN ACTIVITIES
OUTSIDE OF PRIME, INCLUDING REAL ESTATE ACTIVITIES. Under the terms of his
employment agreement with us as our chairman of the board, Mr. Reschke is
permitted to devote a considerable portion of his time to the management of
other interests. In addition to serving as our chairman of the board, Mr.
Reschke serves 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 director of
Horizon Group Properties, Inc. (Nasdaq: HGPI). As a result of these interests
and the business time to be devoted to activities related to them, conflicts of
interest may arise between Mr. Reschke's duties and responsibilities to us and
these other interests. We could be adversely affected if these conflicts of
interest were to impair the performance of his managerial duties and
responsibilities to us.
PARTNER APPROVAL RIGHTS LIMIT OUR ABILITY TO TAKE CERTAIN ACTIONS WITH
RESPECT TO THE OPERATING PARTNERSHIP. Although we generally have the ability to
exercise full and exclusive responsibility and discretion in the management and
control of the operating partnership, provisions of the operating partnership's
partnership agreement limit our ability to make decisions on behalf of the
operating partnership. For example:
- we cannot take any action to dissolve the operating partnership without
the prior consent of the holders of more than 50.0% of the common units in
the operating partnership; and
- in connection with any extraordinary transactions, such as a merger or
consolidation, that treats partners in the operating partnership
differently than the holders of common shares, the consent of partners
holding more than 50.0% of the common units is required.
REAL ESTATE FINANCING RISKS
REQUIRED REPAYMENT OF DEBT OR OF RELATED INTEREST COULD ADVERSELY AFFECT
US. We are generally subject to the risks associated with debt financing. These
risks include:
- the risk that our cash flow will not satisfy required payments of
principal and interest;
- the risk that we cannot refinance existing indebtedness on our properties
as necessary or that the terms of the refinancing will be less favorable
to us than the terms of existing debt; and
- the risk that necessary capital expenditures for purposes such as
reletting space cannot be financed on favorable terms.
If a property is mortgaged to secure payment of indebtedness and we cannot pay
the mortgage payments, we may have to surrender the property to the lender with
a consequent loss of any prospective income and equity value from such property.
OUR ABILITY TO INCREASE OUR DEBT COULD ADVERSELY AFFECT OUR CASH
FLOW. Generally, our organizational documents do not limit the level or amount
of debt that we may incur. At September 30, 1998, we had outstanding debt of
approximately $510.1 million. If we were to become more highly leveraged, our
cash needs to fund debt service would increase accordingly. Such an increase
could
5
<PAGE>
adversely affect our financial condition and results of operations. In addition,
increased leverage could increase the risk of default on our debt obligations,
which could reduce our cash available for distribution and our asset values.
OUR ABILITY TO CONTINUE TO OBTAIN PERMANENT FINANCING CANNOT BE ASSURED. In
the past, we have financed certain acquisitions and certain development
activities in part with proceeds from our credit facility with BankBoston, N.A.
and Prudential Securities Credit Corporation, as amended. This financing has
been, and may continue to be, replaced by permanent financing. However, we may
not be able to obtain permanent financing for future acquisitions or development
activities on acceptable terms. If market interest rates were to increase at a
time when amounts were outstanding under the credit facility or under our
floating rate tax-exempt bond debt or if other variable rate debt was
outstanding, our debt interest costs would increase, causing potentially adverse
effects on our financial condition and results of operations.
ANTI-TAKEOVER PROVISIONS COULD INHIBIT A CHANGE OF CONTROL
EQUITY OWNERSHIP LIMIT COULD INHIBIT TAKEOVERS OR CHANGES OF CONTROL THAT
MIGHT BE BENEFICIAL TO OUR COMMON SHAREHOLDERS. In order to protect our REIT
status for federal income tax purposes against a prohibited concentration of
ownership among our shareholders, our declaration of trust, as restated and
supplemented, contains an ownership limit. We refer to this as the "Ownership
Limit." The Ownership Limit generally provides that no person or entity may own,
or be deemed to own by virtue of the applicable constructive ownership
provisions of the Internal Revenue Code, more than 9.9% of our outstanding
Equity Shares. "Equity Shares" means our outstanding common shares, convertible
preferred shares and 9% Series B Cumulative Redeemable Preferred Shares. The
Ownership Limitations may preclude a third party's acquisition of control of us
without the consent of our board of trustees. Consequently, shareholders may be
unable to realize a premium for their shares over the then-prevailing market
price because a premium is customarily associated with such acquisitions. See
"Description of Shares of Beneficial Interest--Restrictions on Ownership and
Transfer."
ISSUANCE OF ADDITIONAL PREFERRED SHARES COULD INHIBIT TAKEOVERS OR CHANGES
OF CONTROL THAT MIGHT BE BENEFICIAL TO OUR COMMON SHAREHOLDERS. Our declaration
of trust permits us to issue up to 30.0 million preferred shares, and to
establish the preferences and rights of any such preferred shares issued,
without shareholder approval. This capability allows our board of trustees to
authorize the issuance of preferred shares with terms and conditions which could
discourage a tender offer or other transaction in which holders of some or a
majority of the common shares might receive a premium over the then-prevailing
market price of such common shares. Of such 30.0 million preferred shares, 2.0
million have been issued as our convertible preferred shares and 4.0 million
have been issued as our redeemable preferred shares. See "Description of Shares
of Beneficial Interest--Preferred Shares."
OUR STAGGERED BOARD COULD INHIBIT TAKEOVERS OR CHANGES OF CONTROL THAT MIGHT
BE BENEFICIAL TO OUR COMMON SHAREHOLDERS. Our board of trustees is divided into
three classes of trustees that are elected to serve staggered three-year terms.
Generally, a trustee may be removed only for cause and upon the affirmative vote
of two-thirds of our outstanding common shares. The staggered terms of trustees
may reduce the possibility of a tender offer or an attempt to change control
even though a tender offer or a change of control might benefit our
shareholders. See "Certain Provisions of Maryland Law and of Our Declaration of
Trust and Bylaws--Classification of the Board of Trustees."
CERTAIN PROVISIONS OF THE PARTNERSHIP AGREEMENT COULD INHIBIT TAKEOVERS OR
CHANGES OF CONTROL THAT MIGHT BE BENEFICIAL TO OUR COMMON SHAREHOLDERS. The
operating partnership's partnership agreement generally prohibits us from
engaging in a "business combination," such as any merger, consolidation or other
combination with or into another person or in any reclassification, or any
recapitalization or change of outstanding common shares or from selling all or
substantially all of our assets, unless certain conditions are met. In
particular, the holders of common units must receive, or have the opportunity to
6
<PAGE>
receive, the same consideration per common unit as holders of common shares
receive per common share in the transaction. If holders of common units will not
be treated in such manner, then we may not engage in such transaction unless
partners holding more than 50.0% of the common units vote to approve the
business combination.
In addition, if we conducted a vote of our shareholders regarding a business
combination, we could not complete the transaction unless it would have been
approved had holders of common units been able to vote together with our
shareholders on the transaction. In other words, if our shareholders did approve
a business combination, we could not complete it unless all three of the
following conditions are met:
- we, as managing general partner of the operating partnership, conduct a
vote of all holders of common units, including both limited partner and
general partner common units;
- we vote our common units in the same proportion as our shareholders voted
their shares at the shareholder meeting; and
- the result of the common unit vote is an affirmative vote of at least that
percentage necessary for our shareholders to approve the business
combination.
These provisions of the partnership agreement could inhibit a third party from
making an acquisition proposal that it may otherwise make. The provisions may
also prevent us from completing a business combination even though we had the
requisite authority to do so under our declaration of trust.
POSSIBLE LIMITATIONS ON CHANGE OF CONTROL PURSUANT TO MARYLAND BUSINESS
COMBINATION STATUTE. Maryland law prohibits us from engaging in "business
combinations" with designated persons, including beneficial owners of 10% or
more of our outstanding voting shares ("Interested Shareholders"). These
prohibitions last for five years after the most recent date on which the
Interested Shareholder became an Interested Shareholder. Thereafter, a business
combination with the Interested Shareholder may not be completed unless
conditions specified in the statute for the protection of shareholders are
satisfied. These provisions could discourage offers from third parties to
acquire us and increase the difficulty of consummating any such offer. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of trustees prior to the time that the
Interested Shareholder becomes an Interested Shareholder. See "Certain
Provisions of Maryland Law and of Our Declaration of Trust and Bylaws--Business
Combinations."
POSSIBLE LIMITATIONS ON CHANGE OF CONTROL PURSUANT TO MARYLAND CONTROL SHARE
ACQUISITION STATUTE. Maryland's control share acquisition statute provides that
"control shares" of a Maryland REIT acquired in a "control share acquisition"
generally 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 entitle
their holder to several specified ranges of voting power in elections of
directors or trustees. If voting rights are not approved at a meeting of
shareholders, then a Maryland company generally may redeem any or all of the
control shares 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.
Our bylaws, as amended and restated, contain a provision exempting from the
control share acquisition statute any and all acquisitions by any person of our
shares of beneficial interest. This provision may be amended or eliminated at
any point in the future without shareholder approval. If the foregoing exemption
in our bylaws is rescinded, the control share acquisition statute could
discourage third party offers to acquire us and increase the difficulty of
consummating any such offer. See "Certain Provisions of Maryland Law and of Our
Declaration of Trust and Bylaws--Control Share Acquisitions."
7
<PAGE>
ADVERSE CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
SIGNIFICANT TAX LIABILITIES COULD RESULT IF WE FAIL TO QUALIFY AS A
REIT. We intend to qualify as a REIT for federal income tax purposes. A REIT
generally is not subject to federal income tax at the corporate level on income
which it currently distributes to its shareholders so long as it distributes at
least 95% of its taxable income (excluding any net capital gain) each year.
Many of the REIT requirements are highly technical and complex. The
determination that we qualify as a REIT requires an analysis of various factual
matters and circumstances which are not entirely within our control. The fact
that we hold our assets in partnership form through the operating partnership
further complicates the application of the REIT requirements. Furthermore,
Congress and the Internal Revenue Service might make changes to the tax laws and
regulations, and the courts might issue new rulings, that might make it more
difficult, or impossible, for us to remain qualified as a REIT.
If we fail to qualify as a REIT, we would be subject to federal income tax
at regular corporate rates. Also, unless entitled to relief under certain
statutory provisions, we would be ineligible for qualification as a REIT for
four years following the year in which we fail to qualify. Such disqualification
would lower our net earnings available for investment or distribution to
shareholders due to the additional tax liability. This likely would have a
significant adverse affect on the value of our securities. See "Material Federal
Income Tax Considerations--Taxation of Prime Group Realty Trust-- Failure to
Qualify."
OTHER TAX LIABILITIES COULD RESULT IF WE ENGAGE IN CERTAIN PROHIBITED
TRANSACTIONS. Even if we qualify as and maintain our status as a REIT, we will
be subject to certain federal, state and local taxes on our income and property.
For example, if we have net income from a "prohibited transaction," such income
will be subject to a 100.0% tax. See "Material Federal Income Tax
Considerations--Taxation of Prime Group Realty Trust--Requirements for
Qualification--Penalty Tax on Prohibited Transactions."
DISTRIBUTIONS TO OUR SHAREHOLDERS ARE AFFECTED BY MANY FACTORS. Our
distributions to shareholders are based principally on cash available for
distribution from our properties. Contractual increases in rent under the leases
of the properties and the receipt of rental revenue in connection with future
acquisitions are expected to increase our cash available for distribution to
shareholders. However, if a lessee defaults under or terminates a lease, there
could be a decrease or cessation of rental payments from the lessee. Such a
decrease could in turn decrease 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 our ability to finance future developments, acquisitions and/or expansions
without additional debt or equity financing. If we incur additional indebtedness
in the future, it will require additional funds to service such indebtedness. As
a result, amounts available to make distributions may decrease. Our
distributions are also dependent on a number of other factors, including our
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 Internal Revenue Code and such other factors as we deem
relevant. See "Material Federal Income Tax Considerations--Taxation of Prime
Group Realty Trust-- Requirements for REIT Qualification--Annual Distribution
Requirements."
HISTORICAL LOSSES; POSSIBILITY OF FUTURE LOSSES. Through the properties
which PGI contributed to us at our formation, we have had historical accounting
losses for certain fiscal years, and there can be no assurance that we will not
have similar losses in the future.
8
<PAGE>
ACQUISITION AND DEVELOPMENT RISKS
GENERAL. We intend to continue to acquire additional office and industrial
properties and anticipate that future acquisitions will be financed, in part,
through a combination of secured or unsecured financing. If we finance new
developments 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, there
is a risk that we could acquire office or industrial properties that fail to
perform in accordance with expectations. Our 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 "Our Performance and Asset Values are Subject to Real Estate Investment
Risks--General."
While we expect to continue to limit our business primarily to the Chicago
metropolitan area, and to a lesser extent the rest of the midwestern United
States, it is possible that we will expand our business to new geographic
markets in the future. In such event, we will not initially possess the same
level of familiarity with new markets as we have with our current markets. Our
lack of familiarity in such cases could adversely affect our ability to develop,
acquire, manage or lease properties in the new markets.
CASH FLOWS FROM OUR ANTICIPATED DEVELOPMENT ACTIVITIES ARE UNCERTAIN. A
portion of our anticipated cash available for distribution may be generated from
development activities. These activities are partially dependent on the
availability of development opportunities and are subject to the risks inherent
in development and general economic conditions. We may not realize such
anticipated cash flows from future development projects.
OUR PERFORMANCE AND ASSET VALUES ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS
GENERAL. Real property investments are subject to varying degrees of risk.
If our properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, our ability to make
distributions to shareholders could be adversely affected. Income from, and the
value of, our 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 our properties to potential tenants,
- competition from other office or industrial properties; and
- our ability to pay for 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 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.
Further, our 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 us to
convert a project to an attractive alternative use or to sell a project to
recoup our investment if a project was not successful. Should such an event
occur, our income and funds available for distribution would be adversely
affected.
9
<PAGE>
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL
PROPERTIES WHEN APPROPRIATE. Real estate investments generally can not be sold
quickly. Therefore, we have a limited ability to vary our portfolio promptly in
response to changes in economic or other conditions. In addition, the Internal
Revenue Code and related regulations prohibit a REIT such as us from holding
property for sale, which may affect our ability to sell properties without
adversely affecting distributions to our shareholders.
COMPETITION COULD ADVERSELY AFFECT OUR BUSINESS. We currently plan to
continue to expand, primarily through the acquisition and development of
additional office and industrial buildings, in the Chicago metropolitan area and
other midwestern markets. There are a number of office and industrial building
developers and real estate companies that compete with us in seeking properties
for acquisition, prospective tenants and land for development. All of our
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 adversely affect our 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.
GEOGRAPHIC CONCENTRATION OF OUR PROPERTIES IN THE CHICAGO METROPOLITAN AREA,
NASHVILLE, KNOXVILLE, MILWAUKEE AND COLUMBUS; LOCAL ECONOMIC CONDITIONS. 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 could
adversely affect our revenues and the values of our properties. Further, 19 of
our office properties and 40 of our industrial properties are located in the
Chicago metropolitan area. These properties represent approximately 90.1% of the
aggregate net rentable square feet of our office space and approximately 87.8%
of the aggregate net rentable square feet of our industrial space. Moreover, the
77 West Wacker Drive Building, which represents 24.0% of the annualized net rent
of our properties, is located in the Chicago central business district.
"Annualized net rent" means the monthly net rent due under a lease as determined
in accordance with Generally Accepted Accounting Principles ("GAAP"), annualized
for all leases in effect on June 30, 1998.
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 could cause a
material decline in the demand for our office or industrial space and our cash
available for distribution. Such a decline may have a material adverse effect
greater than if we had a more geographically diverse portfolio of properties.
Because we own properties in the Nashville, Tennessee; Knoxville, Tennessee;
Milwaukee, Wisconsin; and Columbus, Ohio metropolitan areas, the local economic
conditions of these areas will also affect our business.
LEASE EXPIRATIONS AND RELETTING EXPENSES COULD ADVERSELY AFFECT OUR CASH
FLOW. Some of our existing leases contain rental rates that are higher than
recently negotiated leases. These leases, as well as our other existing and
future leases, may not be renewed or, if renewed, may be renewed at lower rental
rates. Decreases in the rental rates for our properties, the failure of tenants
to renew their leases or our failure to relet any of our net rentable space
could materially adversely affect our business and our ability to make
distributions. If we are unable to promptly relet or renew the leases for all or
a substantial portion of certain space currently leased or if the rental rates
upon such renewal or reletting is significantly lower than expected rates, our
cash flow and ability to make expected distributions to shareholders would be
adversely affected.
CAPITAL IMPROVEMENT REQUIREMENTS COULD ADVERSELY AFFECT OUR CASH FLOW. Our
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 our management's expectations,
our cash available for distribution may be reduced.
10
<PAGE>
UNINSURED LOSSES COULD ADVERSELY AFFECT OUR CASH FLOW. We believe that our
properties are covered by adequate insurance provided by reputable companies,
and that our policies contain commercially reasonable deductibles and
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. If an uninsured
loss or a loss in excess of insured limits occurs, we could lose our investment
in and the cash flow from a property and may continue to be obligated on any
mortgage indebtedness or other obligations related to such property. Any such
loss could adversely affect our business and our ability to make distributions.
RISKS OF INVESTMENTS IN SECURITIES RELATED TO REAL ESTATE. We may pursue
our investment objectives through the ownership of securities of entities
engaged in the ownership of real estate. Ownership of such securities may not
entitle us to control the ownership, operation and management of the underlying
real estate. In addition, we may have no ability to control the distributions
with respect to such securities, which may adversely affect our ability to make
required distributions to shareholders. Furthermore, if we should desire to
control an issuer of securities, we may be prevented from doing so by the
limitations on the asset and gross income tests which must be satisfied in order
for us to qualify as a REIT for federal income tax purposes. See "Material
Federal Income Tax Considerations-- Taxation of Prime Group Realty Trust--REIT
Taxation" and "--Requirements for Qualification."
We also may invest in mortgages or other debt instruments secured by real
estate, either solely as an investment or as a strategy to ultimately acquire
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
our cost of funds to acquire these mortgages.
In any of these events, our Funds from Operations and our ability to make
required distributions to shareholders could be adversely affected. "Funds from
Operations" means funds from operations computed in accordance with the
resolution adopted by the Board of Governors of the National Association of Real
Estate Investment Trusts, Inc. ("NAREIT") in its March 1995 White Paper, with
the exception that we report base rents on a cash basis (i.e., based on
contractual lease terms), rather than computed on a straight-line basis in
accordance with GAAP. We believe that reporting base rents on a cash basis will
result in a more accurate presentation of our actual operating activities. Thus,
we calculate Funds from Operations as follows:
- net income (loss), computed in accordance with GAAP except that base rents
are reported on a cash basis as described above;
- adjusted for the exclusion of any gains (or losses) from debt
restructuring and sales of real property;
- plus the amortization of any assumed lease liabilities;
- plus real estate related depreciation and amortization, excluding
amortization of deferred financing costs; and
- adjusted for any unconsolidated partnerships, joint ventures and minority
interests.
11
<PAGE>
CHANGES IN LAWS AND PROPERTY TAX RATES COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Costs resulting from changes in real estate laws and property taxes
generally may be passed through to our tenants and in those cases should not
adversely affect us. Increases in taxes on income, services or transfers,
however, generally are not passed through to tenants and may adversely affect
our results of operations and our ability to make distributions to shareholders.
Similarly, changes in laws increasing the potential liability for environmental
conditions existing on properties or increasing the restrictions on discharges
or other conditions, may result in significant unanticipated expenditures, which
could adversely affect our ability to make distributions to shareholders.
CHANGES IN POLICY AND INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL
WE CAN CHANGE CERTAIN POLICIES WITHOUT SHAREHOLDER APPROVAL. Our board of
trustees determines our policies relating to the following matters:
- investing and financing;
- acquisitions;
- developments;
- expansions;
- capitalization;
- distributions; and
- operations.
Although our board of trustees has no present intention to do so, it may amend
or revise these and other policies without a vote of our shareholders. Change in
these policies could adversely affect our financial condition or results of
operations. We cannot, however, change our policy of seeking to maintain our
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.
WE CAN ENGAGE IN INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL. In the
future, we expect to acquire and develop additional real estate assets pursuant
to our investment strategies and consistent with our investment policies. Our
shareholders are not entitled to receive historical financial statements
regarding, or to vote on, any such activities. Instead, shareholders will be
required to rely entirely on the decisions of management.
DEPENDENCE ON KEY PERSONNEL. We depend on the efforts of certain of our
executive officers and trustees, particularly Mr. Reschke, our chairman of the
board, and Mr. Curto, our president and chief executive officer, for strategic
business direction and experience in the Chicago metropolitan area and other
real estate markets. While we believe that we could find replacements for these
key personnel, the loss of their services could have an adverse effect on our
operations. We have employment agreements with each of Messrs. Reschke and
Curto.
DEPENDENCE ON SIGNIFICANT TENANTS
GENERAL. Any of the following events with regard to any of our significant
tenants would disproportionately and materially adversely affect our revenues
and cash available for distribution to shareholders:
- the bankruptcy or insolvency of the tenant;
- a downturn in the business of the tenant;
- the nonrenewal of a lease by the tenant; or
- the renewal of a lease by the tenant on terms less favorable than those
contained in the expiring lease.
12
<PAGE>
BANKRUPTCY AND FINANCIAL CONDITION OF TENANTS COULD ADVERSELY AFFECT OUR
CASH FLOW. At any time, any of our tenants may seek the protection of the
bankruptcy laws, which could result in the rejection and termination of the
tenant's lease and cause a reduction in our cash available for distribution. It
is possible that some tenants will file for bankruptcy protection in the future
and, if so, that they will not affirm their leases and continue to make rental
payments in a timely manner. In addition, tenants from time to time may
experience downturns in their business which may weaken their financial
condition and result in the failure to make rental payments when due, which may
adversely affect our cash flow and our ability to make expected distributions to
our shareholders.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
OUR LACK OF CONTROL OVER THE SERVICES COMPANY COULD ADVERSELY AFFECT OUR
BUSINESS. We receive substantially all of the economic benefit of the business
carried on by Prime Group Realty Services, Inc., a Maryland corporation (the
"Services Company"), because the operating partnership receives interest on a
$4.8 million promissory note issued by the Services Company and has the right to
receive dividends on the Services Company's preferred stock, all of which is
owned by the operating partnership. However, we are not able to elect directors
or officers of the Services Company because Messrs. Reschke and Curto own all of
the Services Company's outstanding common stock. Therefore, we cannot directly
influence the operations of the Services Company or 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 us. These
policies or decisions could be adverse to our interests or lead to adverse
financial results, which could adversely impact our net operating income and
cash flow. See "About Prime Group Realty Trust--Services Company."
TAX LIABILITIES AND ADVERSE CONSEQUENCES OF REIT STATUS ON THE BUSINESS OF
THE SERVICES COMPANY. The Services Company is 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 our ability to
receive increased distributions from the Services Company without jeopardizing
our qualification as a REIT. See "--Adverse Consequences if We Fail to Qualify
as a REIT; Other Tax Liabilities."
LIABILITIES FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION. Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances at such property. The owner or operator may have to pay a
governmental entity or third parties for property damage and for investigation
and clean-up costs incurred by such parties in connection with the
contamination. These laws often impose liability without regard to whether the
owner or operator was responsible for, or even knew of, the presence of these
hazardous or toxic substances. The costs of investigation, removal or
remediation of these substances may be substantial. The presence of these
substances may adversely affect the owner's or operator's ability to rent or
sell such property or to borrow using the 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 the facility is owned or operated by such person.
Certain environmental laws also impose liability for release of
asbestos-containing materials into the air. 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. Because
of our ownership (direct or indirect), operation, management and development of
real properties, we may be considered an owner or operator of such properties or
as having arranged for the disposal or treatment of hazardous or toxic
substances. As a result, we may be potentially liable for removal or
13
<PAGE>
remediation costs, as well as certain other related costs, including
governmental penalties and injuries to persons and property.
It is possible that future laws, ordinances or regulations may impose
material environmental liabilities upon us. In addition, the current
environmental condition of our properties could be affected by tenants, by the
condition of land or operations in the vicinity of our properties, such as the
presence of underground storage tanks, or by third parties unrelated to us. Our
ability to make expected distributions to shareholders could be adversely
affected if our expenditures for compliance with the various laws and
regulations, present and future, exceeds our estimates of such items.
OTHER REGULATIONS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. Our
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. We believe
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 which could have an
adverse effect on our Funds from Operations and expected distributions.
POSSIBLE ADVERSE EFFECTS ON OUR COMMON SHARE PRICE ARISING FROM SHARES
ELIGIBLE FOR FUTURE SALE. We cannot predict the effect, if any, of future sales
of common shares, or the availability of common shares for future sales, on the
market price of the common shares. Sales of a substantial number of our common
shares, including the common shares offered by this prospectus, up to 2,579,994
common shares covered by another registration statement (registration no.
333-51935) and common shares issued upon the exercise of share options, may
adversely affect prevailing market prices for the common shares. In addition,
the perception that such sales may occur could also adversely affect the market
prices for our common shares.
In connection with our formation, organization and initial public offering,
9,067,210 common units of limited partner interest in the operating partnership
were issued to various limited partners. These common units are currently
exchangeable for common shares. However, pursuant to "lock-up agreements," these
limited partners have each agreed generally not to sell, offer to sell, contract
to sell or otherwise dispose of any common units, common shares or other shares
of our beneficial interest for a specified period of time for each limited
partner. Some of these time periods expired on November 17, 1998; the remaining
time periods will expire on November 17, 1999 (the "Holding Periods").
Prudential Securities Incorporated, on behalf of the underwriters for our
initial public offering, may release all or any portion of the securities
subject to these lock-up agreements at any time without notice. Following the
expiration of these restrictions, any common shares issued to a limited partner
upon exchange of its common units may be sold in the public market using this
prospectus or in accordance with any available exemptions from registration
under the Securities Act.
H Group LLC holds 323,590 common units of limited partner interest in the
operating partnership as of the date of this prospectus, and we estimate that H
Group LLC may acquire up to 320,275 additional common units to the extent we
elect to maintain our option to purchase H Group LLC's second mortgage on the
office property located at 180 N. LaSalle Street in Chicago, Illinois. Any such
common units acquired by H Group LLC prior to December 15, 1998 first became
exchangeable for common shares on December 15, 1998, and any such common units
acquired by H Group LLC on or after December 15, 1998 will first become
exchangeable for common shares on December 15, 1999.
As of December 28, 1998, 15,110,794 of our common shares were outstanding,
of which 12,505,800 common shares are freely tradeable in the public market
without restriction or registration under the Securities Act by persons other
than our "affiliates." The term "affiliates" generally includes our trustees and
executive officers as well as significant shareholders. In addition, 25,000 of
our outstanding common shares consist of restricted shares granted to several of
our affiliates pursuant to employment
14
<PAGE>
or consulting agreements. The balance of our outstanding common shares,
consisting of 2,579,994 common shares that we issued in a private placement in
March 1998, when sold by their holders pursuant to an effective registration
statement (registration no. 333-51935), will generally be freely tradeable in
the public market without restriction or registration under the Securities Act.
All common shares that are issuable upon the exchange of the outstanding
common units of limited partner interest in the operating partnership or upon
the conversion of our convertible preferred shares, when sold pursuant to the
registration statement that contains this prospectus, will generally be freely
tradeable in the public market without restriction or registration under the
Securities Act except for any shares purchased by any of our affiliates. Common
shares purchased by affiliates will be subject to certain resale limitations in
the absence of registration under the Securities Act unless 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 limited amounts of restricted securities one year following
the date of acquisition of the restricted securities from us or one of our
affiliates and, after two years, permits unlimited sales by persons unaffiliated
with us.
As of the date of this prospectus, we have share options outstanding to
purchase an aggregate of 1,819,236 common shares. In addition, we have made
common share grants covering up to 30,764 of our common shares. These share
options and common share grants were granted to certain of our trustees,
executive officers and other employees under our share incentive plan. Share
options covering an additional 143,650 common shares have been granted under our
share incentive plan, subject to the approval by our shareholders of an increase
in the number of shares that are available under the plan. We filed a
registration statement with respect to the common shares issuable under our
share incentive plan on October 1, 1998. That registration statement generally
will allow common shares covered thereby, including common shares issuable upon
the exercise of share options, to be transferred or resold without restriction
under the Securities Act.
MARKET INTEREST RATES COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON
SHARES. One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rates with respect
to such shares (as a percentage of the price of such shares) relative to market
interest rates. If market interest rates go up, prospective purchasers of REIT
shares may expect a higher distribution rate. Higher interest rates would not,
however, result in more funds for us to distribute and, in fact, would likely
increase our borrowing costs and potentially decrease funds available for
distribution. Thus, higher interest rates could cause the market price of our
securities to go down. 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.
15
<PAGE>
ABOUT PRIME GROUP REALTY TRUST
GENERAL
We are a fully-integrated real estate investment company providing property
management, leasing, marketing, acquisition, development, redevelopment,
construction, finance and other related services. We have elected to be taxed as
a REIT for federal income tax purposes beginning with our taxable period ended
December 31, 1997. As of December 28, 1998, we owned 24 office properties, 46
industrial properties, one retail center and one parking facility. Our
properties are located primarily in the Chicago metropolitan area. In addition,
we own a mortgage on an office property located at 180 N. LaSalle Street,
Chicago, Illinois.
We also own approximately 225.5 acres, including a development site
containing approximately 67,000 square feet located in the Chicago central
business district held by a joint venture with a third party. In addition, we
have rights to acquire approximately 325.8 acres of developable land, including
rights to acquire two development sites located in the Chicago central business
district containing approximately 119,000 square feet. We believe that this land
can be developed with approximately 5.4 million square feet of additional office
space and over 7.6 million square feet of additional industrial space.
In terms of net rentable square feet, approximately 90.1% of our office
properties and 87.8% of our 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 92.6% of our annualized net rent. Our remaining office properties
are located in the Nashville, Tennessee; Knoxville, Tennessee; and Milwaukee,
Wisconsin metropolitan areas. Our remaining industrial properties are located in
the Columbus, Ohio metropolitan area. We believe that our properties are
well-located, have excellent highway access, attract high-quality tenants, are
well-maintained and are professionally managed. Our properties have a diverse
and stable base of tenants and have historically provided steadily increasing
rents. We believe this is due to the quality of our properties, the contractual
rent escalations contained in a number of our long term leases and the strength
of the markets in which the properties are located.
Our primary business strategy is to achieve our 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, we
generally intend to:
- own, acquire, develop, redevelop, lease, manage and operate Class A office
buildings that have below market rents and, therefore, provide the
opportunity to enhance returns as leases expire or are renewed;
- acquire distressed, underperforming and undermanaged Class B office
buildings 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;
- acquire and develop properties that underutilize their sites or where
there is excess land for future development;
- acquire properties or portfolios of properties from tax-sensitive owners
where the properties can be acquired on a tax-deferred basis using common
units of limited partner interest in the operating partnership as purchase
consideration; and
- own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing
facilities.
16
<PAGE>
Class A office buildings are 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 office buildings are buildings that have
good location, construction and tenancy and are sometimes considered to be
competitive with the lower spectrum of Class A buildings.
We believe that we can draw upon our extensive experience and long-term
presence in the Chicago metropolitan area to create a strategic advantage in
competing for future development and acquisition opportunities.
We are the managing general partner of, and currently hold 59.5% of the
economic interests in, the operating partnership. We conduct substantially all
of our business through the operating partnership, except for some office and
industrial development, leasing and property management services, which are
conducted through the Services Company.
SERVICES COMPANY
The Services Company was formed in March 1997 under the laws of the state of
Maryland to provide industrial property management, leasing, construction,
architectural and corporate advisory services. The operating partnership owns
100.0% of the nonvoting preferred stock of the Services Company, representing
95.0% of its economic value and also holds a $4.8 million promissory note issued
by the Services Company in connection with its formation. The ownership
structure of the Services Company is necessary to permit us to share in the
Service Company's income and also maintain our status as a REIT for federal
income tax purposes. We receive substantially all of the economic benefit of the
businesses carried on by the Services Company because we have the right to
receive dividends through the operating partnership's investment in the
preferred stock and interest payments on the note held by the operating
partnership. However, we do not have the right to elect the Services Company's
officers or directors and, consequently, do 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--Our Lack of
Control Over the Services Company Could Adversely Affect Our Business."
The Services Company provides 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. The Services Company's leasing division
provides leasing services to certain of our properties and other property owners
for fees that are paid as leases are executed and as the space is occupied. The
Services Company's construction management division provides construction
management services for tenant improvements, renovations and other construction
to the properties managed by us.
We were formed on July 21, 1997 as a Maryland real estate investment trust.
Our executive offices are located at 77 West Wacker Drive, Suite 3900, Chicago,
Illinois 60601, and our telephone number is (312) 917-1300.
USE OF PROCEEDS
We will not receive any proceeds from sales of the convertible preferred
shares and common shares offered by this prospectus, which we refer to
collectively as the "offered shares." We have agreed to pay all expenses of
registering the offered shares under the Securities Act on behalf of the selling
shareholders. The selling shareholders will pay any underwriting discounts,
sales commissions, fees and disbursements of counsel for the selling
shareholders and transfer taxes, if any, relating to sales of the offered
shares.
17
<PAGE>
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
Our common shares have been traded on the NYSE since November 12, 1997 under
the symbol "PGE." Set forth below, rounded to the nearest $.01, are the high and
low closing prices for the common shares since November 12, 1997, as reported by
the NYSE. Also set forth below are the cash distributions paid by us each
quarter since our formation.
<TABLE>
<CAPTION>
CASH DISTRIBUTIONS
HIGH LOW PAID(1)
---------------- --------------- ------------------
<S> <C> <C> <C>
FISCAL YEAR 1998:
First Quarter......................... $ 20 7/8 $ 19 3/16 $0.3375
Second Quarter........................ $ 21 1/8 $ 17 1/8 $0.3375
Third Quarter......................... $ 19 15/16 $ 13 1/8 $0.3375
October 1, 1998 through December 28,
1998................................ $ 16 5/8 $ 13 5/16 (2)
FISCAL YEAR 1997:
November 12, 1997 through December 31,
1997................................ $ 20 7/16 $ 19 15/16 $0.1664 (3)
</TABLE>
- ---------
(1) All distributions are per common share and common unit.
(2) On December 21, 1998, we declared a dividend of $0.3375 per common share and
common unit for the fourth quarter of 1998 to holders of record on December
31, 1998. The payment date for this dividend will be January 20, 1999.
(3) This distribution was for a partial quarter. It is equivalent to a quarterly
distribution of $0.3375 per common share and common unit.
On December 28, 1998, the last reported price for the common shares was
$14 13/16 per share. As of December 28, 1998, our 15,110,794 common shares were
held by 34 shareholders of record.
We currently pay quarterly distributions to holders of our common shares and
common units. Distributions on the common shares and common units are not
permitted unless all current and any accumulated distributions on our
convertible preferred shares and redeemable preferred shares and related
preferred units have been paid in full or set aside for payment. Future
distributions by us will be at the direction of our board of trustees. These
distributions will depend on the actual cash available for distribution, our
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code (see "Certain Federal
Income Tax Considerations--Requirements for Qualification"), and such other
factors as the board of trustees deems relevant. See "Risk Factors--Changes in
Policy and Investment Activity without Shareholder Approval."
We anticipate that our distributions will exceed earnings and profits for
income tax reporting purposes due to non-cash expenses, primarily depreciation
and amortization, we will incur. Therefore, approximately 5.5% (or $0.07 per
common share) of the distributions anticipated to be paid by us for the first 12
months subsequent to our initial public offering are expected to represent a
return of capital for federal income tax purposes. In such event, they will not
be subject to federal income tax under current law to the extent the
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 our liquidation will be increased (or decreased)
accordingly. We have determined that, for federal income tax purposes, none of
the $.16644 per common share distribution paid for the partial fourth quarter of
1997 represented a return of capital to shareholders. 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 "Material Federal Income Tax
Considerations--Taxation of Prime Group Realty Trust-- Requirements for
Qualification--Annual Distribution Requirements." The amount of distributions on
an annual basis necessary to maintain our REIT status based on pro forma taxable
income of the operating partnership for the 12 months ended December 31, 1997,
as adjusted for certain items,
18
<PAGE>
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, we 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 if We Fail to Qualify as a REIT; Other Adverse Consequences." For a
discussion of the tax treatment of distributions to holders of common shares,
see "Material Federal Income Tax Considerations."
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DISTRIBUTIONS
The following table sets forth our consolidated historical ratios of
earnings to combined fixed charges and preferred share dividends for the nine
months ended September 30, 1998 and for the period from November 17, 1997 to
December 31, 1997 and for the properties contributed to us by PGI (collectively
the "Predecessor") for the nine months ended September 30, 1997, the period
January 1, 1997 to November 16, 1997 and for the years ended December 31, 1996,
1995, 1994 and 1993.
<TABLE>
<CAPTION>
COMPANY--HISTORICAL PREDECESSOR--HISTORICAL
- ---------------------------------- ----------------------------------------------------------------------------
NINE PERIOD FROM NINE PERIOD FROM
MONTHS NOVEMBER 17, MONTHS JANUARY 1,
ENDED 1997 TO ENDED 1997 TO YEAR ENDED DECEMBER 31,
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, NOVEMBER 16, ------------------------------------------
1998 1997 1997 1997 1996 1995 1994 1993
- ----------------- --------------- --------------- --------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1.56 1.50 -- -- -- -- -- --
</TABLE>
The ratios of earnings to combined fixed charges and preferred share
dividends were computed by dividing earnings by combined fixed charges and
preferred share dividends. For this purpose, earnings consist of income (loss)
before minority interest, plus combined fixed charges. Combined fixed charges
consist of interest expense, amortization of debt issuance costs, and preferred
share dividends. The Predecessor's historical earnings were insufficient to
cover fixed charges by approximately $25.1 million, $29.1 million, $31.4
million, $29.6 million, $22.1 million and $20.8 million for the nine months
ended September 30, 1997, the period from January 1, 1997 through November 16,
1997 and for the years ended December 31, 1996, 1995, 1994 and 1993,
respectively.
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
We were 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 Maryland General Corporation Law (the "MGCL") and
by our declaration of trust and our bylaws. The following summary of the terms
of our shares of beneficial interest does not purport to be complete and is
subject to and qualified in its entirety by reference to our declaration of
trust, the Articles Supplementary to our declaration of trust relating to our 9%
Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, par
value $0.01 per share, and our bylaws, forms of which are filed or incorporated
by reference as exhibits to the registration statement of which this prospectus
is a part.
AUTHORIZED SHARES
Our declaration of trust provides that we 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. Our declaration of trust designated 2.0 million
preferred shares as 7% Series A Cumulative the Convertible Preferred Shares of
Beneficial Interest. Articles Supplementary to our declaration of trust
designated up to 4,600,000 of the preferred shares as redeemable preferred
shares (the "Articles Supplementary"). Excess Shares are to be issued
automatically upon any automatic conversion of common shares or preferred shares
which are
19
<PAGE>
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." On December 28, 1998, there were 15,110,794 common
shares issued and outstanding, 2,000,000 convertible preferred shares
outstanding and 4,000,000 redeemable preferred shares outstanding. Upon
completion of the offering of the convertible preferred shares and the common
shares covered by the prospectus and assuming that all common units of limited
partner interest in the operating partnership held by certain persons since our
formation and by H Group LLC are exchanged for common shares, we will have
outstanding:
- 4,000,000 redeemable preferred shares;
- 2,000,000 convertible preferred shares if none of the convertible
preferred shares are converted into common shares;
- no convertible preferred shares if all of the convertible preferred shares
are converted into common shares;
- 24,821,869 common shares if none of the convertible preferred shares are
converted into common shares; and
- 26,821,869 common shares if all of the convertible preferrred shares are
converted into common shares.
Under the Maryland REIT Law, a shareholder is not liable for our obligations
solely as a result of his or her status as a shareholder. Our declaration of
trust provides that no shareholder is liable for any of our debts or obligations
by reason of being a shareholder.
REDEEMABLE PREFERRED SHARES
RANK AND DIVIDENDS. Our redeemable preferred shares rank senior to our
outstanding convertible preferred shares and common shares as to the payment of
dividends and as to the distribution of assets upon liquidation, dissolution or
winding up. Subject to the preferential rights of the holders of any preferred
shares that rank senior in the payment of dividends to our redeemable preferred
shares, the holders of redeemable preferred shares are entitled to receive,
when, as and if declared by our board of trustees, out of funds legally
available for the payment of dividends, cumulative preferential dividends
payable in cash in an amount per redeemable preferred share equal to an annual
rate of $2.25 per redeemable preferred share.
Dividends on our redeemable preferred shares begin to accrue and are fully
cumulative from the date of original issuance whether or not we have funds
legally available for the payment of the dividends. The dividends are payable
quarterly, when, as and if declared by our board of trustees, in arrears on the
last day of each January, April, July and October.
LIQUIDATION PREFERENCE. In the event of our liquidation, dissolution or
winding up, whether voluntary or involuntary, the holders of redeemable
preferred shares will be entitled to receive a liquidation preference of $25.00
per redeemable preferred share, plus an amount equal to all dividends accrued
and unpaid thereon to the date of final distribution to such holders. This
distribution is subject to the prior preferences and other rights of any series
of shares of beneficial interest ranking senior to our redeemable preferred
shares upon our liquidation, distribution or winding up, and will be made before
any distribution of assets is made to holders of convertible preferred shares or
common shares and any other class or series of our shares ranking junior to our
redeemable preferred shares as to liquidation rights.
REDEMPTION. On and after June 5, 2003, we, at our option, may redeem the
redeemable preferred shares, in whole at any time, or from time to time in part,
out of funds legally available, for $25.00 per redeemable preferred share, plus
all accumulated, accrued and unpaid dividends, if any, without interest, to the
redemption date. The redemption price of our redeemable preferred shares, other
than
20
<PAGE>
any portion consisting of accrued and unpaid dividends, will be paid solely from
the proceeds from the issuance and sale by us of other of our capital shares of
beneficial interest and not from any other source. For purposes of the preceding
sentence, "capital shares of beneficial interest" means any equity securities,
both common and preferred shares, interests, participations, or other ownership
interests (however designated) and any rights, other than debt securities
convertible into or exchangeable for equity securities, or options to purchase
any of the foregoing.
If full cumulative dividends on our redeemable preferred shares and any
other class or series of shares that are on a parity with our redeemable
preferred shares as to dividends have not been declared and paid or declared and
set apart for payment:
- our redeemable preferred shares may not be redeemed in part; and
- we may not purchase or acquire redeemable preferred shares, other than
pursuant to a purchase or exchange offer made on the same terms to all
holders of redeemable preferred shares.
VOTING RIGHTS. Holders of the redeemable preferred shares do not have any
voting rights, except in the following instances. First, whenever dividends on
any of the redeemable preferred shares, or such other series or class of shares
of beneficial interest on a parity with the redeemable preferred shares as to
dividends, have been in arrears for six or more consecutive quarterly periods,
the holders of such shares will be entitled to vote for the election of two
additional trustees. This voting right will terminate when all dividends in
arrears on the redeemable preferred shares and the other shares on a parity with
the redeemable preferred shares (as discussed above) have been paid and the then
current quarterly dividend is also paid or declared and set apart for payment.
The term of office of the additional trustees elected pursuant to this
terminated voting right will also terminate.
Second, as long as any redeemable preferred shares are outstanding, in
addition to any other vote or consent of shareholders required by law or by our
declaration of trust, the affirmative vote of at least 66 2/3% of the votes
entitled to be cast by the holders of the redeemable preferred shares are
necessary for us to:
- amend, alter or repeal of any of the provisions of our declaration of
trust that materially and adversely affects the voting powers, rights or
preferences of the holders of the redeemable preferred shares, or
21
<PAGE>
- effect a share exchange that affects the redeemable preferred shares, a
consolidation with or merger of us into another entity, or a consolidation
with or merger of another entity into us, unless in each case each
redeemable preferred share will remain outstanding without a material and
adverse change to its terms and rights or will be converted into or
exchanged for cumulative redeemable preferred shares of the surviving
entity having terms comparable to those of the redeemable preferred
shares.
HOWEVER, no vote of the holders of redeemable preferred shares will be
required if, at or prior to the time the two circumstances discussed above
occur, provision is made for the redemption of all redeemable preferred shares
at the time outstanding to the extent the redemption is authorized. In other
words, the affirmative vote of the holders of at least 66 2/3% of the redeemable
preferred shares will be required to permit us to issue any class or series of
Preferred Shares having rights senior to the redeemable preferred shares as to
the payment of dividends or as to distribution of assets upon liquidation,
dissolution or winding up.
Each redeemable preferred share will have one vote per share. However, when
any other series of preferred shares has the right to vote with our redeemable
preferred shares as a single class on any matter, then the redeemable preferred
shares and other series will have with respect to such matters one vote per
$25.00 of stated liquidation preference.
GENERAL. The redeemable preferred shares have no stated maturity and will
not be subject to any sinking fund or mandatory redemption provisions, except as
described below under "--Restrictions on Ownership and Transfer".
Except as otherwise described in "--Restrictions on Ownership and Transfer,"
the redeemable preferred shares are not convertible into or exchangeable for any
other of our property or securities.
The redeemable preferred shares have traded on the NYSE since June 23, 1998
under the symbol "PGE PrB."
CONVERTIBLE PREFERRED SHARES
RANK AND DIVIDENDS. Our convertible preferred shares rank senior to the
common shares with respect to dividend rights and distributions upon
liquidation, dissolution or winding up. Subject to the preferential rights of
the holders of any preferred shares, including our redeemable preferred shares,
that rank senior in the payment of dividends to the convertible preferred
shares, the holders of convertible preferred shares are entitled to receive,
when, as and if declared by our 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:
- $1.50 per annum; or
- the regular cash dividends on the common shares, or portion thereof, into
which a convertible preferred share is convertible. These dividends will
equal the number of common shares, or portion thereof, into which a
convertible preferred share will be convertible, multiplied by the most
current quarterly dividend on a common share on or before the convertible
preferred share dividend payment date.
Dividends on our convertible preferred shares begin to accrue and are fully
cumulative from the date of original issuance, whether or not we have funds
legally available for the payment of the dividends. They are payable quarterly,
when, as and if declared by our board of trustees, in arrears on Dividend
Payment Dates. "Dividend Payment Date" means:
- the date on which we pay the dividends on the common shares, or
22
<PAGE>
- if we do not pay a common share dividend in any quarterly dividend period,
the date our board of trustees sets.
Dividends are payable in arrears to the holders of the convertible preferred
shares as they appear in our records at the close of business on the applicable
record dates, which may not be less than 10 nor more than 50 days preceding the
dividend payment dates and which will be fixed by our board of trustees.
Any dividend payment made on the convertible preferred shares will first be
credited against the earliest accrued but unpaid dividend due on the convertible
preferred shares which remains payable. Holders of convertible preferred shares
will 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, will be payable in connection
with any dividend payment or payments on the convertible preferred shares which
may be in arrears.
LIQUIDATION PREFERENCE. In the event of our liquidation, dissolution or
winding up, whether voluntary or involuntary, the holders of our convertible
preferred shares will be entitled to receive a liquidation preference of $20.00
per convertible preferred share plus an amount equal to all dividends accrued
and unpaid thereon to the date of final distribution to the holders. This
distribution is subject to the prior preferences and other rights of any series
of shares of beneficial interest ranking senior to our convertible preferred
shares as to liquidation rights, such as our redeemable preferred shares, and
will be made before any payment or distribution of our assets (whether capital
or surplus) will be made to or set apart for the holders of common shares and
any other class or series of our shares ranking junior to our convertible
preferred shares as to liquidation rights.
If, upon any liquidation, dissolution or winding up, our assets
distributable among the holders of the convertible preferred shares are
insufficient to pay in full the liquidation preference amount and liquidating
payments on any other shares of any class or series of shares on a parity with
the convertible preferred shares as to liquidation rights, then the assets will
be distributed among the holders of the convertible preferred shares and any
such other shares on a parity with them as to liquidation rights ratably in
accordance with the respective amounts that would be payable on such convertible
preferred shares and any other shares on a parity with them as to liquidation
rights if all amounts payable on them were paid in full.
The convertible preferred shares rank junior to and are subordinate to the
redeemable preferred shares as to priority for receiving liquidating
distributions upon our liquidation, dissolution or winding up.
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 as to liquidation rights, upon any liquidation,
dissolution or winding up, after payment has been made in full to the holders of
the convertible preferred shares, the holders of the convertible preferred
shares will have no other claim to our remaining assets. Any other series or
class of shares junior to the convertible preferred shares as to liquidation
rights, will, 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 will not be
entitled to share therein.
REDEMPTION. Except under limited circumstances as set forth in our
declaration of trust, we may not redeem the convertible preferred shares prior
to November 17, 2007. On and after November 17, 2007, we, at our option, may
redeem the convertible preferred shares for cash, in whole at any time, or from
time to time in part, out of funds legally available therefor at a redemption
price of $20.00 per convertible preferred share. The redemption price will
include all accumulated, accrued and unpaid dividends, if any, without interest
to the redemption date.
23
<PAGE>
If full cumulative dividends on our convertible preferred shares, and any
other class or series of shares that are on a parity with our convertible
preferred shares as to dividends, have not been declared and paid or declared
and set apart for payment:
- we may not redeem our convertible preferred shares in part, and
- we may not purchase or acquire convertible preferred shares, other than
pursuant to a purchase or exchange offer made on the same terms to all
holders of convertible preferred shares.
If we have given proper notice of redemption of any convertible preferred
shares and cash necessary for the redemption has been made available, then from
and after the redemption date, dividends on their convertible preferred shares
called for redemption will cease to accrue. In addition, these shares will no
longer be deemed to be outstanding and all rights of the holders will cease,
except their rights to convert and to receive the cash payable upon redemption.
CONVERSION. A holder of convertible preferred shares has the right, at his
or her option, to convert all or any portion of those shares into common shares
at the conversion price of $20.00 per common share. The number of common shares
issuable upon conversion and the conversion price are subject to adjustment as
set forth below. Holders of convertible preferred shares being redeemed will not
be able to convert their shares after the close of business on the fifth
business day prior to the redemption date.
Holders of convertible preferred shares at the close of business on a
dividend payment record date will be entitled to receive the dividend payable on
the dividend payment date even if they convert their shares into common shares
between those two dates. Except as provided above, we will make no payment or
allowance for unpaid dividends, whether or not in arrears, on converted shares
or for dividends on the common shares issued upon such conversion.
As more fully set forth in our declaration of trust, the conversion price is
subject to adjustments upon the occurrence of any of the following events:
- if we, after the issue date of our convertible preferred shares, (A) pay a
dividend or make a distribution on our capital shares in common shares,
(B) subdivide our outstanding common shares into a greater number of
shares, (C) combine our outstanding common shares into a smaller number of
shares or (D) issue any shares of beneficial interest by reclassification
of our common shares;
- if we issue, after the issue date of our convertible preferred shares,
rights, options or warrants to all holders of common shares entitling them
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 us a
commission, of the fair market value per common share on the record date
for the determination of shareholders entitled to receive the rights,
option or warrants;
- if we distribute to all holders of our common shares non-cash
distributions as specified in our declaration of trust; or
- if we pay consideration per common share with a value greater than the
current market price of the common shares in a tender offer.
We will not be required to make any adjustment to the conversion price
unless the adjustment equals 1% or more of the conversion price. We will carry
forward any adjustments not required to be made and take them into account in
subsequent adjustments.
If we are a party to any transaction as a result of which our common shares
are converted into the right to receive stock, securities, cash or other
property, then each convertible preferred share will be convertible into the
kind and amount of stock, securities, cash or other property which the holder of
that stock would have received if it had converted the stock immediately before
the transaction. We may not be a party to any transaction unless the terms of
the transaction are consistent with the terms described above.
24
<PAGE>
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, neither we, the operating partnership
nor any of our or its 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 the issuance and after giving effect to the issuance and the
application of the net proceeds therefrom, the entity would be reasonably
expected to not satisfy one or both of the following ratios for the fiscal
quarter immediately preceding the issuance:
- 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
- Consolidated EBITDA to Consolidated Fixed Charges of at least 1.4 to 1.0.
If we fail to satisfy one or both of the tests in the clauses above for two
consecutive quarters, the holders of convertible preferred shares will have the
right to require that we, to the extent that we have funds legally available,
repurchase any or all of each holder's convertible preferred shares. The
repurchase price will be payable in cash in an amount equal to 100% of the
liquidation preference, plus accrued and unpaid dividends whether or not
declared, if any, to the date of repurchase or the date payment is made
available, pursuant to the repurchase offer described below.
Within 15 days following the second consecutive quarter that we fail to
satisfy one or both of the tests above, we will mail by first class mail or
overnight courier a notice to all holders of convertible preferred shares
stating:
- that we failed to satisfy one or both of the tests, naming the test(s)
failed;
- that the holders of convertible preferred shares have the right to require
us to repurchase any or all convertible preferred shares then held by that
holder in cash;
- the date of repurchase, which must be a business day between 120 and 150
days from the date the notice is mailed, or a later date as may be
necessary to comply with the requirements of the Exchange Act;
- the repurchase price for the repurchase; and
- the instructions we determine that the holder must follow in order to have
its convertible preferred shares repurchased.
On the repurchase date, we will, to the extent lawful, accept for payment
convertible preferred shares or portions thereof tendered pursuant to the
repurchase offer. We will also promptly mail by first class mail or overnight
courier or by wire transfer of immediately available funds to the holder of our
convertible preferred shares, as directed by such holder, payment in an amount
equal to the repurchase price for our 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 letter
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 balance that
constitutes an accrued expense or trade payable, if and to the extent that
indebtedness would appear as a liability upon a balance sheet of any
entity prepared on a consolidated basis in accordance with GAAP; and
- to the extent not otherwise included, the guarantee of items which would
be included within this definition.
25
<PAGE>
"Total Market Capitalization" means the sum of:
- the fair market value of our outstanding common shares, assuming (X) the
full exchange of all outstanding common units of limited partner interest
in the operating partnership, except those held by us, for common shares
and (Y) the conversion of the outstanding convertible preferred shares
into common shares;
- the aggregate liquidation preference of any outstanding preferred shares
of beneficial interest other than the convertible preferred shares; and
- our Total Debt.
"Consolidated EBITDA" for any period means our consolidated net income,
before extraordinary income or gains, as reported in our financial statements
filed with the Commission increased by the sum of the following:
- all income and state franchise taxes paid or accrued according to GAAP for
the 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;
- all interest expense paid or accrued in accordance with GAAP for the
period, including financing fees and amortization of deferred financing
fees and amortization of original issue discount;
- depreciation and depletion reflected in such reported net income;
- amortization reflected in such reported net income, including, without
limitation, amortization of capitalized debt issuance costs, goodwill,
other intangibles and management fees; and
- 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:
- all interest expenses paid or accrued in accordance with GAAP for the
period, including financing fees and amortization of deferred financing
fees and amortization of original issue discount;
- preferred shares of beneficial interest dividend requirements for the
period, whether or not declared or paid; and
- regularly scheduled amortization of principal during the period, other
than any balloon payments at maturity.
VOTING RIGHTS. Holders of our convertible preferred shares do not have any
voting rights except in the following instances. First, whenever dividends on
any of our convertible preferred shares, or on any class or series of shares on
a parity with our convertible preferred shares as to dividends, have been in
arrears for two or more consecutive quarterly periods, or if we do not pay
dividends on our common shares of at least $0.3375 per share for two consecutive
quarterly dividend periods, then additional member(s) will be added to our board
of trustees. The holders of our convertible preferred shares will vote as a
single class with the holders of the shares ranking on a parity with our
convertible preferred shares (as discussed above) to elect the additional
trustee(s). This voting right will terminate when:
- all dividends in arrears on our convertible preferred shares and the other
shares on a parity with them, as discussed above, have been paid and the
then current quarterly dividend is also paid or declared and set apart for
payment or
- we have paid a common share dividend of at least $0.3375 per share for two
consecutive quarters.
26
<PAGE>
When this voting right is terminated, the term of office of the additional
Trustee(s) elected pursuant to it will also terminate.
Next, so long as any convertible preferred shares are outstanding, in
addition to any other vote or consent of shareholders required by law or by our
declaration of trust, the affirmative vote of at least 66 2/3% of the votes
entitled to be cast by the holders of our convertible preferred shares are
necessary for us to:
- amend, alter or repeal any of the provisions of our declaration of trust
that materially and adversely affects the voting powers, rights or
preferences of the holders of our convertible preferred shares; or
- effect a share exchange that affects our convertible preferred shares, a
consolidation with or merger of us into another entity, or a consolidation
with or merger of another entity into us, unless in each case each
convertible preferred share will remain outstanding without a material and
adverse change to its terms and rights or will be converted into or
exchanged for convertible preferred shares of the surviving entity having
terms comparable to those of our convertible preferred shares.
HOWEVER, no vote of the holders of convertible preferred shares will be
required if, at or prior to the time the two circumstances discussed above
occur, provision is made for the redemption of all convertible preferred shares
at the time outstanding to the extent such redemption is authorized. In other
words, the affirmative vote of the holders of at least 66 2/3% of the
convertible preferred shares will be required to permit us to issue any class or
series of Preferred Shares having rights senior to the convertible preferred
shares as to the payment of dividends or as to distribution of assets upon
liquidation, dissolution or winding up.
Each convertible preferred share will have one vote per share. However, when
any other series of preferred shares will have the right to vote with our
convertible preferred shares as a single class on any matter, then our
convertible preferred shares and such other series will have with respect to
such matters one vote per $20.00 of stated liquidation preference.
REGISTRATION RIGHTS. We granted Security Capital Preferred Growth
Incorporated ("SCPG"), the sole holder of the convertible preferred shares,
registration rights with respect to our common shares acquired by it upon
conversion of the convertible preferred shares into common shares. Pursuant to
these rights, we have prepared and filed this registration statement with the
Commission.
GENERAL. The convertible preferred shares are not entitled to the benefit
of any sinking fund.
The convertible preferred shares are not listed or qualified for trading on
any exchange or on the Nasdaq National Market.
The preceding summary of the terms of the redeemable preferred shares and
convertible preferred shares is qualified in its entirety by reference to our
declaration of trust and Articles Supplementary.
COMMON SHARES
Subject to the preferential rights of the convertible preferred shares and
redeemable preferred shares and any other class or series of shares of
beneficial interest and to the provisions of our declaration of trust regarding
the Excess Shares, convertible preferred shares and redeemable preferred shares,
holders of common shares will be entitled to receive distributions on such
shares if, as and when authorized and declared by our board of trustees out of
assets legally available therefor and to share ratably in our assets legally
available for distribution to the shareholders in the event of our liquidation,
dissolution or winding-up after payment of, or adequate provision for, all of
our known debts and liabilities. We currently pay quarterly distributions on the
common shares, which quarterly distributions commenced with the partial quarter
ending December 31, 1997 and intend to continue to pay quarterly distributions.
See "Price Range of Common Shares and Distributions."
27
<PAGE>
The convertible preferred shares are entitled to payment of distributions at
the rate declared on the common shares if the rate is greater than the stated
distribution rate on the convertible preferred shares. Accordingly, at the time
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, the convertible preferred shares and the redeemable preferred shares,
each outstanding common share entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of trustees and,
except as otherwise required by law or except as provided with respect to any
other class or series of shares of beneficial interest, the holders of such
shares will possess exclusive voting power. There is no cumulative voting in the
election of trustees, which means that the holders of a majority of the
outstanding common shares can elect all of the trustees then standing for
election, and the holders of the remaining shares will not be able to elect any
trustees.
Holders of the common shares have no conversion, sinking fund, redemption
rights, exchange rights or preemptive rights to subscribe for any of our
securities.
Subject to the provisions of our 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. Our declaration
of trust contains such a provision providing for a lesser percentage, a majority
of outstanding shares, with respect to transactions pursuant to which our 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 traded on the NYSE since November 12, 1997 under the
trading symbol "PGE."
COMMON SHARE REPURCHASE PROGRAM. On September 14, 1998, we established a
program to repurchase up to 1.55 million of our common shares in open market and
privately negotiated transactions. As of December 28, 1998 we had repurchased
474,200 common shares for an aggregate purchase price of approximately $7.3
million.
ADDITIONAL PREFERRED SHARES
Additional preferred shares may be issued from time to time, in one or more
series, as authorized by our board of trustees. Other than the redeemable
preferred shares and the convertible preferred shares offered hereby, no
preferred shares are currently issued or outstanding. Prior to the issuance of
shares of each series, our board of trustees is required by the Maryland REIT
Law and our 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 our 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 that might involve a
premium price for shareholders or otherwise be in their best interest.
28
<PAGE>
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Our declaration of trust contains restrictions on the number of our shares
of beneficial interest that shareholders may own. For us to qualify as a REIT
under the Internal Revenue Code no more than 50.0% in value of our outstanding
shares of beneficial interest may be owned, actually or constructively under the
applicable attribution rules of the Internal Revenue Code, by five or fewer
individuals 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"). 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 the entities are counted as holders for this purpose. Our
shares of beneficial interest 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.
In general, the Ownership Limit set forth in our declaration of trust
provides that no person or entity may own, or be deemed to own by virtue of the
applicable constructive ownership provisions of the Internal Revenue Code, more
than 9.9% of our outstanding shares of beneficial interest, including the common
shares, convertible preferred shares and redeemable preferred shares (the
"Equity Shares"). The 9.9% limitation applies to the number or value of our
Equity Shares, whichever is more restrictive. The constructive ownership rules
of the Internal Revenue Code are complex, and may cause Equity Shares 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.
Our board of trustees may, but in no event will be required to, waive the
Ownership Limit or any other limit provided in our declaration of trust with
respect to a particular shareholder if the board of trustees determines that the
shareholder's ownership will not jeopardize our status as a REIT and our board
of trustees otherwise decides such action would be in our best interest. As a
condition of such waiver, the board of trustees must obtain a ruling from the
IRS or an opinion of counsel satisfactory to it with respect to preserving our
REIT status. In accordance with these provisions, we have waived the Ownership
Limit set forth in our declaration of trust with respect to the Equity Shares to
permit Security Capital Preferred Growth Incorporated to own, at any one time,
up to 16 percent, in value or number, of the total outstanding Equity Shares.
Additionally, we have waived the Ownership Limit to permit Long Leaf Partners
Realty Fund to purchase 2,600,000 common shares.
Our declaration of trust further prohibits any person from actually or
constructively owning our shares of beneficial interest that would result in us
being "closely held" under Section 856(h) of the Internal Revenue Code or
otherwise cause us to fail to qualify as a REIT. In addition, no person may
transfer any of our shares of beneficial interest if the transfer would result
in our shares of beneficial interest being owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of our shares of beneficial interest that will or may
violate any of the foregoing restrictions on transferability of ownership is
required to give notice immediately to us and provide us with any other
information as we may request in order to determine the effect of such transfer
on our status as a REIT.
If any purported transfer of our Equity Shares or any other event would
otherwise result in any person violating the Ownership Limit or any 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. The
Prohibited Transferee will acquire no right or interest in such excess shares.
Any 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
29
<PAGE>
selected by us (the "Beneficiary"). Such automatic transfer will 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 us of the transfer of Shares-in-Trust to the Share Trust
and during which we will have the right to purchase the Shares-in-Trust, the
trustee of the Share Trust will 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 our 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 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 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 us 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:
- any vote cast by a Prohibited Transferee prior to our discovery that such
Shares-in-Trust have been transferred to the Share Trust will be void and
of no force or effect; and
- the trustee will 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 inadvertently paid to the Prohibited
Transferee will be required to be repaid to the trustee for distribution to the
Beneficiary.
In addition, Shares-in-Trust held in the Share Trust will be deemed to have
been offered for sale to us at a price per share equal to the lesser of:
- the price per share in the transaction that resulted in such transfer to
the Share Trust, or in the case of a gift, the market price at the time of
the gift; and
- the market price on the date we accept such offer.
We will have the right to accept such offer for a period of 90 days.
If any attempted transfer of Equity Shares would cause our shares of
beneficial interest to be beneficially owned by fewer than 100 persons, such
transfer will be null and void in its entirety and the intended purchaser or
recipient will acquire no rights to Equity Shares.
The foregoing restrictions on transferability and ownership will not apply
if our board of trustees determines that it is no longer in our best interest 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 our shareholders. Except
as otherwise described above, any change in the Ownership Limit would require an
amendment to our declaration of trust. Subject to certain limited exceptions,
amendments to our declaration of trust require the affirmative vote of holders
owning at least two-thirds of our shares of beneficial interest outstanding and
entitled to vote thereon.
All certificates representing our Equity Shares currently bear a legend
referring to the restrictions described above.
30
<PAGE>
If the transfer restrictions discussed above 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 our option, to have
acted as agent on our behalf in acquiring such Excess Shares and to hold such
Excess Shares on our behalf.
Under our declaration of trust, every owner of more than 5%, or such lower
percentage as required by the Internal Revenue Code or Treasury Regulations, of
the outstanding Equity Shares must file, within 30 days after January 1 of each
year, a written notice with us 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
our shares. Further, each shareholder must upon demand disclose to us in writing
any information we may request in order to determine the effect, if any, of such
shareholder's actual and constructive ownership of Equity Shares on our status
as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control without the consent of our board of trustees and,
consequently, our 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 our declaration of trust.
These restrictions will not preclude settlement for transactions through the
NYSE.
31
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF OUR DECLARATION OF TRUST AND BYLAWS
The following paragraphs summarize selected provisions of Maryland law and
of our declaration of trust and bylaws. 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, our declaration of trust, the Articles
Supplementary to our declaration of trust relating to our redeemable preferred
shares and our bylaws, forms of which are incorporated by reference as exhibits
to the registration statement of which this prospectus is a part.
CLASSIFICATION OF THE BOARD OF TRUSTEES
Our declaration of trust provides that we will have seven trustees, which
number may be increased or decreased pursuant to our bylaws, but will not be
fewer than three. Our declaration of trust also provides the holders of our
convertible preferred shares and redeemable preferred shares with rights to
elect additional trustees upon the occurrence of specified defaults under the
securities. Our bylaws provide that our 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 our board of trustees may exist.
Under our declaration of trust, our board of trustees is divided into three
classes as nearly equal in size as practicable. One class held office initially
for a term expiring at the annual meeting of shareholders held on May 22, 1998.
At that meeting the two trustees comprising such class were each re-elected to a
new three-year term expiring in 2001. A second class of our board of trustees
will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1999. A third class will hold office initially for a
term expiring at the annual meeting of shareholders to be held in 2000. 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. We believe that
classification of our board of trustees will help to assure the continuity and
stability of our business strategies and policies as determined by our board of
trustees.
The classified board provision of our declaration of trust could have the
effect of making the removal of incumbent trustees more time-consuming and
difficult. This could discourage a third party from making a tender offer or
otherwise attempting to obtain control of us, even though such an attempt might
be beneficial to us and our shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in a
majority of our board of trustees. Accordingly, the classified board provision
could increase the likelihood that incumbent trustees will retain their
positions. Holders of our common shares have no right to cumulative voting for
the election of trustees. Consequently, at each annual meeting of our
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 our declaration of trust empowers our shareholders to fill vacancies
in our board of trustees that are caused by the removal of a trustee, our
declaration of trust also precludes shareholders from removing incumbent
trustees except 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 our bylaws authorizing our board
of trustees to fill vacant
32
<PAGE>
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 real estate investment trusts such
as us, certain "business combinations" between us and any Interested Shareholder
or an affiliate thereof are prohibited for five years after the most recent date
on which the Interested Shareholder became an Interested Shareholder. An
"Interested Shareholder" is:
- any person who beneficially owns ten percent or more of the voting power
of outstanding shares of the trust; and
- an affiliate or associate of the trust, who, at any time within the
two-year period prior to the date in question, was the owner of ten
percent or more of our voting power.
"Business Combination" includes a merger, consolidation, share exchange or, in
certain circumstances, an asset transfer or issuance or reclassification of
equity securities. After the five year period referred to above, any such
business combination must be recommended by the board of trustees and approved
by the affirmative vote of at least:
- 80.0% of the votes entitled to be cast by holders of our outstanding
voting shares of beneficial interest; and
- two-thirds of the votes entitled to be cast by holders of our outstanding
voting shares of beneficial interest other than shares held by the
Interested Shareholder with whom the business combination is to be
effected.
The two-thirds vote referred to in the preceding sentence is not required if,
among other things, our 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 our board of trustees prior to the time that
the Interested Shareholder becomes an Interested Shareholder. As permitted by
the MGCL, our board of trustees has opted out of the business combinations
provisions of the MGCL with respect to any business combination involving PGI,
the Primestone Joint Venture or any of the persons or entities that contributed
property to us at our formation, or any of their respective affiliates,
including Mr. Reschke. In addition, the operating partnership's 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 in the operating partnership, including the common units
held by us.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts such as
us, 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
33
<PAGE>
voting power, would entitle the acquiror to exercise voting power in electing
trustees within one of the following ranges of voting power:
- one-fifth or more but less than one-third;
- one-third or more but less than a majority; or
- 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" generally means the acquisition of issued and outstanding
control shares.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of specified 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, we may ourselves 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, 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. This redemption right is
subject to conditions and limitations as set forth in the MGCL. 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. Various 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 we are a party to the transaction or
to acquisitions approved or exempted by our declaration of trust or bylaws.
Our bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of our 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 exemption in our bylaws referred to above is rescinded, the control
share acquisition statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of completing that kind of offer.
AMENDMENT TO OUR DECLARATION OF TRUST
Our declaration of trust generally may be amended with the affirmative vote
of the holders of not less than a majority of the 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 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 Internal
34
<PAGE>
Revenue Code or the Maryland REIT Law without the affirmative vote or written
consent of the shareholders. Our declaration of trust permits such action by our
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, our
declaration of trust authorizes our board of trustees to increase or decrease
the authorized number of our shares of beneficial interest or the authorized
number of our shares of beneficial interest of any class of beneficial interest
without shareholder approval.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
Our bylaws provide that:
(a) with respect to an annual meeting of shareholders, nominations of
persons for election to our board of trustees and the proposal of business
to be considered by shareholders may be made only:
- pursuant to our notice of the meeting;
- by our board of trustees; or
- 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 our 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:
- pursuant to our notice of meeting;
- by our board of trustees; or
- 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 our declaration of trust on classification of our 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
which our shareholders might believe to be otherwise in their best interests.
MARYLAND ASSET REQUIREMENTS
To maintain our qualification as a Maryland REIT, the Maryland REIT Law
requires that we hold, either directly or indirectly, at least 75.0% of the
value of our 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.
MEETINGS OF SHAREHOLDERS
Our declaration of trust and bylaws provide for annual meetings of
shareholders to elect our board of trustees and transact any other business as
may properly be brought before the meeting. Special meetings of our shareholders
may be called by our President, our board of trustees or our Chairman of the
Board and will be called at the request in writing of the holders of 50.0% or
more of our outstanding shares of beneficial interest entitled to vote.
35
<PAGE>
Our 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations to us and our shareholders resulting from our treatment as a
REIT. Winston & Strawn has acted as our tax counsel ("Tax Counsel") in
connection with the offering and the preparation of this prospectus. This
summary should not be construed as tax advice. The discussion 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 offered shares as part
of a straddle, hedging, or conversion transaction or, except as specifically
described, 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 offered shares as "capital
assets" (generally, property held for investment) within the meaning of Section
1221 of the Internal Revenue Code.
The statements in this summary are based on current provisions of the
Internal Revenue 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 Internal Revenue Code, the Treasury Regulations promulgated thereunder
and the relevant administrative and judicial interpretations that concern REITs
are highly technical and complex, and this summary is qualified in its entirety
by such Internal Revenue 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.
This summary of Material Federal Income Tax Considerations is divided into
two parts. The first part, captioned "Taxation of Prime Group Realty Trust,"
describes our tax treatment as a REIT. The summary attempts to describe the
complex technical requirements which we must satisfy in order to qualify as a
REIT. Our failure to meet those requirements could result in our income becoming
taxable in the same manner as any regular C Corporation. The resulting tax
liability to us if we failed to meet the REIT requirements would have a
significant adverse effect on an investment in the offered shares. See
"--Taxation of Prime Group Realty Trust--Failure to Qualify" below. In addition,
even if we do qualify as a REIT, various federal income taxes may still be
imposed on us as are described in the summary. The second part of this summary
of Material Federal Considerations, captioned "Taxation of Our Shareholders,"
describes the material tax consequences to purchasers of the offered shares.
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 OFFERED SHARES AND OF OUR 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.
36
<PAGE>
TAXATION OF PRIME GROUP REALTY TRUST
GENERAL
We have elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code and the applicable Treasury Regulations, which together
set forth the requirements for qualifying as a REIT (the "REIT Requirements"),
beginning with our taxable year ended December 31, 1997. We believe that we are
organized, have operated and will continue to operate in a manner to qualify for
taxation as a REIT under the Internal Revenue Code. No assurance can be given,
however, that we have actually operated in such a manner to qualify as a REIT or
will continue to operate in a manner to remain qualified as a REIT.
Subject to the qualifications described in this summary and stated in its
opinion, Tax Counsel has given us an opinion that we are organized in conformity
with the requirements for qualification as a REIT under the Internal Revenue
Code, and our method of operation has enabled us to meet the requirements for
qualification and taxation as a REIT under the Internal Revenue Code and our
method of operation enables us to continue to meet the requirements for
qualification as a REIT. 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 us and the operating
partnership as to factual matters, including those related to our and its
businesses and properties as set forth in this prospectus. Tax Counsel has not
independently verified our representations. Moreover, our qualification and
taxation as a REIT depend upon our 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 Internal Revenue Code as
discussed below. Tax Counsel will not review our compliance with these tests on
a continuing basis. Accordingly, no assurance can be given that our actual
results of operations for any given taxable year will satisfy the requirements
for qualification and taxation as a REIT. See "--Failure to Qualify."
REIT TAXATION
For any taxable year in which we qualify for taxation as a REIT, we
generally will not be subject to federal corporate income tax on that portion of
our ordinary income or capital gain that is currently distributed to our
shareholders. The REIT provisions of the Internal Revenue Code generally allow a
REIT to deduct dividends paid to its shareholders in calculating its taxable
income. 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 we continue to qualify for taxation as a REIT, we may be subject to
federal income tax in the following circumstances:
- We will be taxed at regular corporate rates on any undistributed "REIT
taxable income" and undistributed net capital gains.
- In some circumstances, we may be subject to the corporate "alternative
minimum tax" on our items of tax preference, if any.
- If we have (A) 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 (B) other nonqualifying income from
foreclosure property, we will be subject to tax on such income at the
highest regular corporate rate (currently 35%).
37
<PAGE>
- If we have net income from prohibited transactions, this income will be
subject to a 100% tax. Prohibited transactions, in general, are sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business, other than foreclosure property.
- If we should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but nonetheless maintain our
qualification as a REIT because we meet other requirements, we will be
subject to a 100% tax on the greater of the amount by which we fail the
75% or the 95% test, multiplied by a fraction intended to reflect our
profitability.
- If we should fail to distribute for each calendar year at least the sum of
(A) 85% of our REIT ordinary income for such year, (B) 95% of our REIT
capital gain net income for such year, and (C) any undistributed taxable
income from prior periods, we will be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually
distributed. However, to the extent we elect to retain and pay income tax
on net long-term capital gains we received during the year such amounts
will be treated as having been distributed for purposes of the 4.0% excise
tax.
- If we acquire any asset from a C corporation, I.E., any corporation
subject to full corporate level tax, in a transaction in which the basis
of the asset in our hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation, and we
subsequently recognize 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 us, then, pursuant to guidelines issued by the
IRS, the C corporation from which we acquired the asset will be taxable on
the amount of gain that would have been realized if the C corporation had
liquidated on the last day before the date on which we acquired the asset.
Alternatively, we may elect, in lieu of the treatment described above, to
be subject to tax at the highest regular corporate tax rate on the excess,
if any, of (A) the fair market value of the asset as of the beginning of
the applicable Recognition Period, over (B) our adjusted basis in such
asset as of the beginning of such Recognition Period (I.E., "built-in
gain"). We 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 "--Requirements for
Qualification-- Qualified REIT Subsidiary."
If we invest in properties in foreign countries, our profits from those
investments will generally be subject to tax in the countries where such
properties are located. The precise nature and amount of any taxation will
depend on the laws of the countries where the properties are located. If we
satisfy the annual distribution requirements for qualification as a REIT and are
therefore not subject to federal corporate income tax on that portion of our
ordinary income and capital gain that is currently distributed to our
shareholders, we will generally not be able to recover the cost of any foreign
tax imposed on profits from our foreign investments by claiming foreign tax
credits against our U.S. tax liability on such profits. Moreover, a REIT is not
able to pass foreign tax credits through to its shareholders.
We use the calendar year for both federal income tax purposes and financial
reporting purposes.
REQUIREMENTS FOR REIT QUALIFICATION
To qualify as a REIT, we must have met and continue to meet the
requirements, discussed below, relating to our organization, the sources of our
gross income, the nature of our assets, and the level of distributions to our
shareholders.
38
<PAGE>
ORGANIZATIONAL REQUIREMENTS
The Internal Revenue Code requires that a REIT be a corporation, trust, or
association:
- which is managed by one or more trustees or directors;
- the beneficial ownership of which is evidenced by transferable shares or
by transferable certificates of beneficial interest;
- which would be taxable as a domestic corporation but for compliance with
the REIT requirements;
- which is neither a financial institution nor an insurance company under
the Internal Revenue Code;
- the beneficial ownership of which is held by 100 or more persons;
- 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 attribution
rules, by or for five or fewer individuals (as defined in the Internal
Revenue Code to include tax-exempt entities other than, in general,
qualified domestic pension funds); and
- which meets other tests, described below, regarding the nature of its
income and assets and distribution requirements.
The Internal Revenue Code provides that the first four conditions above must
be met during the entire taxable year and that the fifth condition 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. A corporation may
not elect to become a REIT unless its taxable year is a calendar year.
We have issued sufficient shares to enough holders to allow us to satisfy
the requirement set forth in the fifth condition above (the "100 holder"
requirement). For purposes of determining ongoing compliance with the 100 holder
requirement, Treasury Regulations require us to issue letters to some
shareholders demanding information regarding the amount of shares each such
shareholder actually or constructively owns. Although any failure by us to
comply with the shareholder demand letters requirement should not jeopardize our
REIT status, such failure would subject us to financial penalties. A list of
those shareholders failing or refusing to comply with this demand must be
maintained as part of our records. A shareholder who fails or refuses to comply
with the demand must submit a statement with its tax return disclosing the
actual ownership of the shares and other information.
As set forth in the sixth condition above, to qualify as a REIT, we must
also satisfy the requirement set forth in Section 856(a)(6) of the Internal
Revenue Code that we not be closely held. We will not be closely held so long as
at all times during the last half of any of our taxable years (other than the
first taxable year for which the REIT election is made) not more than 50% in
value of our outstanding shares of beneficial interest is owned, directly or
constructively under the applicable attribution rules of the Internal Revenue
Code, by five or fewer individuals (as defined in the Internal Revenue Code to
include tax-exempt entities, other than, in general, qualified domestic pension
funds) (the "5/50 Rule").
Although our declaration of trust contains restrictions on the ownership and
transfer of the Equity Shares (which include the convertible preferred shares),
the restrictions do not ensure that we will be able to satisfy the 5/50 Rule. If
we fail to satisfy the 5/50 Rule, our status as a REIT will terminate, and we
will not be able to prevent such termination. However, for taxable years
beginning after August 5, 1997, if we comply with the procedures prescribed in
Treasury Regulations for issuing shareholder demand letters and do not know, or
with the exercise of reasonable diligence would not have known,
39
<PAGE>
that the 5/50 Rule was violated, the requirement that we not be closely held
will be deemed to be satisfied for the year. See "--Failure to Qualify."
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 earn such proportionate share of the income of
the partnership. In addition, the partnership's assets and gross income 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, our 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 of
its property owning subsidiaries (each a "Property Partnership"), are treated as
our assets, liabilities and items of income 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.
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 Internal Revenue 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 is owned by
the REIT. However, if an existing corporation is acquired by a REIT and becomes
a "qualified REIT Subsidiary" of such REIT, all of its pre-acquisition earnings
and profits must be distributed before the end of the REIT's taxable year. Any
corporation formed directly by us to act as a general partner in any of the
Property Partnerships will be a "qualified REIT subsidiary" and thus all of such
subsidiary corporation's assets, liabilities, and items of income, deduction,
and credit will be treated as our assets, liabilities, and items of income,
deduction and credit.
INCOME TESTS
To maintain our qualification as a REIT, we must satisfy two gross income
requirements annually. First, at least 75% of our 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 some
circumstances, interest) or from some types of temporary investments. Second, at
least 95% of our 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.
Rents we receive 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 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.
40
<PAGE>
- 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.
However, we (or our affiliates) are permitted to directly perform services
that are "usually or customarily rendered" in connection with the rental
of space for occupancy only and are not otherwise considered rendered for
the convenience of the occupant of the property. A de minimis exception
allows a REIT to provide non-customary services to its tenants and not
disqualify income as rents from real property so long as the aggregate
income derived by the REIT with respect to a particular property that is
attributable to the impermissible services performed for all tenants at
the property does not exceed 1.0% of the gross income derived by the REIT
with respect to that property. For these purposes, the amount we receive
that is attributable to impermissible services may not be valued at less
than 150% of our direct cost of providing these services.
Substantially all of our gross income is attributable to investments in real
property and specifically to rents attributable to and gains from the
disposition of real property. We believe that we do not receive rents based on
the net income or profits of a tenant. Moreover, we believe that we do not
receive rents in excess of a DE MINIMIS amount (generally rent from office space
leased to PGI affiliates) from a Related Party Tenant. We also believe that we
do not 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 we took into account as personal property the
overhead cranes in use at some of our industrial properties.
The operating partnership provides services with respect to our properties,
but does not satisfy the "independent contractor" requirements described above.
To the extent necessary to preserve our status as a REIT, the operating
partnership will arrange to have services provided by independent contractors
from whom we or the operating partnership does not derive or receive any income.
The operating partnership also receives fees in exchange for the performance
of 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 we have
a significant interest in such property. We believe 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.
Our properties include a 398-space parking facility for which we, through
the operating partnership, receive fees. This parking facility is operated
through an independent contractor from whom we derive no income.
The Services Company, pursuant to contractual arrangements, performs some
management services with respect to properties not owned by us or the operating
partnership. The health club located in the 77 West Wacker Drive Building is
owned by the Services Company. The income from such services and the revenues
from the health club is 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
41
<PAGE>
qualifying income for purposes of the 95% gross income test but not for the
purposes of the 75% gross income test.
We intend to monitor the potential amount of nonqualifying income in the
future and take action to avoid jeopardizing our REIT qualification. We may for
instance transfer some nonqualifying activities to a taxable corporation such as
the Services Company, from which we 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 us 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, we
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. Particularly, 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 our total assets.
If we fail to satisfy one or both of the 75% or the 95% gross income tests
for any taxable year, we may nevertheless qualify as a REIT for such year if we
are entitled to relief under some provisions of the Internal Revenue Code. These
relief provisions will be generally available if:
- our failure to meet such test(s) was due to reasonable cause and not due
to willful neglect;
- we reported the nature and amount of each item of our income included in
the test(s) for such taxable year on a schedule attached to our return;
and
- 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, we would be
entitled to the benefit of these relief provisions. For example, if we fail to
satisfy the gross income tests because nonqualifying income that we
intentionally earn exceeds the limits on such income, the IRS could conclude
that our failure to satisfy the tests was not due to reasonable cause. As
discussed above in "--REIT Taxation" even if these relief provisions apply, we
will still be subject to a 100% tax on the greater of the amount by which we
failed the 75% or the 95% test, multiplied by a fraction intended to reflect our
profitability. See "--Failure to Qualify."
ASSET TESTS
At the close of each quarter of our taxable year, we also must satisfy three
tests relating to the nature of our assets:
- At least 75% of the value of our total assets, including our 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, cash, cash items and U.S. government
securities. For this purpose, real estate assets include 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
Prime).
- Not more than 25% of our total assets may be represented by securities
other than those in the 75% asset class.
- Of the investments included in the 25% asset class, the value of any one
issuer's securities owned by us may not exceed 5% of the value of our
total assets, and we may not own more than 10% of any one issuer's
outstanding voting securities. By virtue of our partnership interest in
the operating partnership, we will be deemed to own for purposes of the
three asset tests our 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
42
<PAGE>
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. We do
not believe that our pro rata share of the stock and securities (I.E., the
note) owned by the operating partnership in such corporation exceeds 5% of
the total value of our assets. No independent appraisals will be obtained
to support this conclusion, and Tax Counsel, in rendering its opinion as
to our qualification as a REIT, is relying on our representation that the
preferred stock and note issued by the Services Company and held by the
operating partnership does not cause us to fail the 5% value test.
After initially meeting the asset tests at the close of any quarter, we will
not lose our 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.
We intend to maintain adequate records of the value of our assets to ensure
compliance 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, we are required to distribute dividends
(other than capital gain dividends) to our shareholders each year in an amount
at least equal to:
- the sum of (A) 95% of our "REIT taxable income" (computed without regard
to the dividends paid deduction and our net capital gain) plus (B) 95% of
the net income (after tax), if any, from foreclosure property; minus
- the sum of 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 we timely file our 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 our ability to meet this distribution requirement.
To the extent that we do not distribute all of our net capital gain or
distributes at least 95%, but less than 100%, of our "REIT taxable income," as
adjusted, we 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 we should fail to distribute for each calendar year at least the sum of (A)
85% of our REIT ordinary income for such year, (B) 95% of our REIT capital gain
net income for such year, plus (C) any undistributed taxable income from prior
periods, we will be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. However, to the extent we
elect to retain and pay income tax on net long-term capital gains we received
during the year such amounts will be treated as having been distributed for
purposes of the 4.0% excise tax.
We have and intend to continue to make timely distributions sufficient to
satisfy all of the annual distribution requirements. We anticipate that we will
generally have sufficient cash or liquid assets to enable us to satisfy these
distribution requirements. It is possible that, from time to time, we 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 our "REIT
taxable income," on the other hand. In the event that such an insufficiency or
such timing differences occur, in order to
43
<PAGE>
meet the 95% distribution requirement, we may find it necessary to cause the
operating partnership to make distributions, to borrow funds, or to liquidate
assets.
If we fail to meet the 95% distribution requirement as a result of an
adjustment to our tax return by the IRS upon audit, we may retroactively cure
the failure by paying "deficiency dividends" to our shareholders in a later
year, which may then be included in our deduction for dividends paid for the
earlier year. We may thus be able to avoid being taxed on amounts distributed as
deficiency dividends; however, we 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
Our 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 our 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 our 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 our investment
objectives. Based upon such investment objectives, we believe that in general
its 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 we fail to qualify for taxation as a REIT in any taxable year and the
relief provisions do not apply, we will be subject to tax (including any
applicable alternative minimum tax) on our taxable income at regular corporate
rates. Distributions to shareholders in any year in which we fail to qualify as
a REIT will not be required and, if made, will not be deductible by us. As a
result, our failure to qualify as a REIT will reduce the cash available for
distribution by us to our shareholders. In addition, if we fail to qualify as a
REIT, all distributions to our shareholders will be taxable as ordinary dividend
income to the extent of our then current and accumulated earnings and profits,
and, subject to limitations in the Internal Revenue Code, corporate distributees
may be eligible for the dividends-received deduction. Unless entitled to relief
under specific statutory provisions, we 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 we would
be entitled to such statutory relief in all circumstances.
TAXATION OF OUR SHAREHOLDERS
TAXABLE U.S. SHAREHOLDERS
As used in this summary of Material Federal Income Tax Considerations, the
term "U.S. Shareholder" means a holder of offered shares who, for United States
federal income tax purposes:
- is a citizen or resident of the United States;
- 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;
- 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
44
<PAGE>
- is an estate subject to taxation in the United States, regardless of its
source of income.
DISTRIBUTIONS BY US
As long as we qualify as a REIT, distributions made to our U.S. Shareholders
with respect to their shares out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken into account by
them as ordinary income and will not be eligible for the dividends received
deduction for such shareholders that are corporations. Dividends that are
designated as capital gain dividends generally will be taxed as long-term
capital gains, to the extent that they do not exceed our actual net capital gain
for the taxable year, without regard to the period for which the shareholder has
held its offered shares. However, corporate shareholders may be required to
treat up to 20% of capital gain dividends as ordinary income.
In addition, any dividend declared by us in October, November or December of
any year and payable to a shareholder of record on a specific date in any such
month will be treated as both paid by us and received by the shareholder on
December 31 of such year, provided that the dividend is actually paid by us on
or before January 31 of the following calendar year. Holders of offered shares
may not include in their individual income tax returns any of our net operating
losses or capital losses. To the extent that we make distributions in excess of
current and accumulated earnings and profits, these distributions are treated
first as a tax-free return of capital to the holder of offered shares, reducing
the tax basis of such shareholder's securities by the amount of such
distribution (but not below zero), with distributions in excess of the
shareholder's tax basis taxable as capital gains, if the securities are held as
a capital asset. It is not possible to predict whether we will make
distributions in excess of current and accumulated earnings and profits which
would be taxed as a return of capital.
ELECTION TO RETAIN NET LONG-TERM CAPITAL GAIN
For our taxable years that begin on or after January 1, 1998, we may elect
to retain and pay income tax on our net long-term capital gain attributable to
such taxable year. If we make this election, our shareholders will be required
to include in their income as long-term capital gain their proportionate share
of such amount so designated by us. A shareholder will be treated as having paid
his or her share of the tax paid by us in respect of such amount so designated
by us, for which such shareholder will be entitled to a credit. Additionally,
each shareholder's adjusted basis in its shares of us will be increased by the
excess of the amount so includible in income over the tax deemed paid on such
amount. We must pay tax on our designated long-term capital gain within 30 days
of the close of any taxable year in which we designate long-term capital gain
pursuant to this rule, and we must mail a written notice containing the relevant
tax information to our shareholders within 60 days of the close of the taxable
year.
TAX CONSEQUENCES UPON CONVERSION OF CONVERTIBLE PREFERRED SHARES INTO COMMON
SHARES
Generally, except with respect to cash received in lieu of fractional
shares, no gain or loss will be recognized upon the conversion of convertible
preferred shares into common shares. The tax basis of a holder of convertible
preferred shares (a "Preferred Holder") in the common shares received will equal
that holder's tax basis in the convertible preferred shares surrendered in the
conversion reduced by any basis attributable to fractional shares deemed
received and the holding period for the convertible preferred shares will
include the Preferred Holder's holding period for the convertible preferred
shares. Based on the IRS's present advance ruling policy, cash received in lieu
of a fractional common shares upon conversion of convertible preferred shares
should be treated as a payment in redemption of the fractional share interest in
those common shares. See "--Redemption of Convertible Preferred Shares" below.
45
<PAGE>
DEEMED DIVIDENDS ON CONVERTIBLE PREFERRED SHARES
The conversion price of the convertible preferred shares may be adjusted if
we make certain distributions of shares of beneficial interest, cash, or other
property to our shareholders. While we do not presently contemplate making such
a distribution, if we make a distribution of cash or property resulting in an
adjustment to the conversion price, a Preferred Holder may be viewed as
receiving a "deemed distribution" which is taxable as a dividend under Section
301 and 305 of the Internal Revenue Code.
REDEMPTION OF CONVERTIBLE PREFERRED SHARES
The treatment to be accorded to any redemption by us of convertible
preferred shares can only be determined on the basis of particular facts as to
each Preferred Holder at the time of redemption. In general, a Preferred Holder
will recognize capital gain or loss measured by the difference between the
amount realized by the Preferred Holder upon the redemption and its adjusted tax
basis in our convertible preferred shares redeemed (provided our convertible
preferred shares are held as a capital asset) if that redemption:
- results in a "complete termination" of the Preferred Holder's share
interest in all classes of our shares of beneficial interest under Section
302(b)(3) of the Internal Revenue Code;
- is "substantially disproportionate" with respect to the holder's interest
in us under Section 302(b)(2) of the Internal Revenue Code (which
generally will not be the case if only convertible preferred shares are
redeemed, since they generally do not have voting rights); or
- is "not essentially equivalent to a dividend" with respect to the
Preferred Holder under Section 302(b)(1) of the Internal Revenue Code.
In determining whether any of these tests have been met, shares considered to be
owned by the Preferred Holder by reason of certain constructive ownership rules
set forth in the Internal Revenue Code, as well as shares actually owned, must
generally be taken into account. Because the determination as to whether any of
the alternative tests of Section 302(b) of the Internal Revenue Code will be
satisfied with respect to any particular Preferred Holder depends on the facts
and circumstances at the time when the determination must be made, prospective
investors are advised to consult their own tax advisors to determine their tax
treatment.
If the redemption does not meet any of the tests under Section 302 of the
Internal Revenue Code, then the redemption proceeds received from the
convertible preferred shares will be treated as a distribution on the
convertible preferred shares as described under "--Taxable U.S. Shareholders--
Distributions by Us." If the redemption is taxed as a dividend, the Preferred
Holder's adjusted tax basis in the convertible preferred shares will be
transferred to its other share holdings in us. If, however, the Preferred Holder
has no remaining share holdings in us, that basis could be transferred to a
related person or it may be lost.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts, generally are not subject to federal
income tax except to the extent of their receipt of "unrelated business taxable
income" as defined in Section 512(a) of the Internal Revenue Code ("UBTI"). Our
distributions to a shareholder that is a tax-exempt entity should not constitute
UBTI provided that the tax-exempt entity has financed the acquisition of its
securities with "acquisition indebtedness" within the meaning of the Internal
Revenue Code, and the securities are not otherwise used in an unrelated trade or
business of the tax-exempt entity.
46
<PAGE>
In addition, pension trusts may be required to report a portion of the
distribution that they receive from a "pension-held REIT" as UBTI. 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
"5/50 Rule" discussed above, see "--Taxation of Prime Group Realty
Trust--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 finds (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. We do not expect to be treated as a pension-held
REIT for purposes of this rule. However, because our shares will be publicly
traded, no assurance can be given that we are not or will not become a
pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The following is a discussion of some anticipated U.S. federal income tax
consequences of the ownership and disposition of offered shares applicable to
Non-U.S. Shareholders of such securities. Non-U.S. Shareholders include all
holders other than U.S. Shareholders as defined above. 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 offered 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 the offered 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 Internal Revenue 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 the offered shares is not effectively connected
with the conduct of a trade or business in the United States.
ORDINARY DIVIDENDS
Our distributions that are not attributable to gain from the sale or
exchange by us of United States real property interests and that are not
designated by us as capital gain dividends will be treated as ordinary income
dividends to the extent made out of our current or accumulated earnings and
profits. Generally, such ordinary income dividends will be subject to United
States withholding tax at the rate of 30% on the gross amount of the dividends
paid unless reduced or eliminated by an applicable United States income tax
treaty. We expect 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
us, certifying the Non-U.S. Shareholder's entitlement to treaty benefits. The
IRS has issued final regulations regarding the backup withholding rules as
applied to Non-U.S. Shareholders. These regulations alter the current system of
backup withholding compliance and are effective for distributions made after
December 31, 1999.
NON-DIVIDEND DISTRIBUTIONS
Unless the offered shares constitute a United States Real Property Interest
(a "USRPI"), distributions made by us in excess of our current and accumulated
earnings and profits will be treated first as a tax-free return of capital to
each Non-U.S. Shareholder, reducing the adjusted basis which
47
<PAGE>
such Non-U.S. Shareholder has in his offered shares for U.S. tax purposes by the
amount of such distribution (but not below zero), with distributions in excess
of a Non-U.S. Shareholder's adjusted basis in his shares being treated as gain
from the sale or exchange of such shares, the tax treatment of which is
described below. If it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of our 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 our
then current and accumulated earnings and profits.
If the offered shares constitute a USRPI, such distributions will be subject
to 10% withholding and taxed pursuant to the Foreign Investment in Real Property
Tax Act of 1980 ("FIRPTA") at a rate of 35% to the extent such distributions
exceed a Non-U.S. Shareholder's basis in his offered shares. The offered shares
will not constitute a USRPI so long as we are 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. We believe
that we will be a "domestically controlled REIT," and therefore that the offered
shares will not be treated as USRPIs under FIRPTA. However, because the offered
shares will be publicly traded, no assurance can be given that we are or will
continue to be a "domestically-controlled REIT."
If we did not constitute a "domestically-controlled REIT," the offered
shares would be treated as USRPIs subject to United States taxation under FIRPTA
unless:
- the offered shares are "regularly traded" (as defined in the applicable
Treasury regulations); and
- the Non-U.S. Shareholder's interest, after application of constructive
ownership rules, in us is 5.0% or less at all times during the five years
preceding the sale or exchange.
CAPITAL GAINS DIVIDENDS
As long as we continue to qualify as a REIT, distributions made by us that
are attributable to gain from the sale or exchange by us of any USRPI will be
taxed to a Non-U.S. Shareholder under 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. We will be
required to withhold tax from any distribution to a Non-U.S. Shareholder that
could be designated by us as a USRPI capital gain dividend in an amount equal to
35% of the gross 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 we designate 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.
Pursuant to Treasury Regulations effective through December 31, 1999,
dividends paid to an address in a country outside the United States are
generally presumed to be paid to a resident of such country for purposes of
determining the applicability of withholding requirements discussed above and
the applicability of any treaty rate. Under revised Treasury Regulations
effective January 1, 2000, different presumptions and procedures apply to
determine whether or not a dividend is subject to withholding and whether a
possibly reduced treaty rate of withholding is available. In addition, new rules
apply to dividends to foreign entities, including partnerships and other
pass-through entities.
48
<PAGE>
Distributions in excess of our current or accumulated earnings and profits to a
Non-U.S. Shareholder, to the extent they are not subject to 30% withholding or
are subject to a lower treaty rate, may nevertheless be subject to separate
withholding at a rate of 10% nevertheless under the rules of Internal Revenue
Code Section 1445. Non-U.S. Shareholders should discuss these new complex
withholding rules with their tax advisors.
DISPOSITION OF SHARES OF OUR BENEFICIAL INTEREST
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
offered shares generally will not be subject to United States taxation unless
the offered shares constitute a USRPI within the meaning of FIRPTA (as described
above).
If the offered shares were treated as USRPI so that gain on the sale or
exchange of the offered shares would be 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. Any such gain
would be 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 offered shares (including us) would be
required to withhold and remit to the IRS 10% of the purchase price.
Additionally, in such case, distributions on the offered shares to the extent
they represent a return of capital or capital gain from the sale of the offered
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:
- if the Non-U.S. Shareholder's investment in the offered shares 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
- 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% withholding tax on the amount of such
individual's capital gain.
ESTATE TAX
Offered shares 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.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
We will report to our 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:
- is a corporation or falls within other exempt categories and, when
required, can demonstrate this fact; or
49
<PAGE>
- 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 us 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, we 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 us. See "--Taxation of Non-U.S.
Shareholders." The IRS has issued final regulations regarding the backup
withholding rules as applied to Non-U.S. Shareholders. These regulations alter
the current system of backup withholding compliance and are effective for
distributions made after December 31, 1999.
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.
OTHER TAX CONSIDERATIONS
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX CONSEQUENCES
Prospective holders should recognize that our present federal income tax
treatment 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
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 us or our shareholders. Revisions in federal income tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in the offered shares.
STATE AND LOCAL TAXES
We and our 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 us and our 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 offered
shares.
50
<PAGE>
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Internal
Revenue Code that may be relevant to a prospective purchaser, including, with
respect to the discussion contained in "--Our Status 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 Internal Revenue 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 Internal Revenue Code, and governmental plans
and church plans that are exempt from ERISA and Section 4975 of the Internal
Revenue Code but that may be subject to state law requirements.
A FIDUCIARY MAKING THE DECISION TO INVEST IN CONVERTIBLE PREFERRED SHARES OR
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 INTERNAL REVENUE CODE, AND (TO THE EXTENT NOT
PRE-EMPTED) STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF
CONVERTIBLE PREFERRED SHARES OR COMMON SHARES BY SUCH PLAN OR IRA. Plans should
also consider the entire discussion under the heading "Material Federal Income
Tax Considerations." Material contained in that section is relevant to any
decision by an employee benefit plan, tax-qualified retirement plan or IRA to
purchase our convertible preferred shares or common shares.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in convertible
preferred shares or common shares is consistent with its fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require:
- an ERISA Plan's investments to be prudent and in the best interests of the
ERISA Plan, its participants and beneficiaries;
- 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;
- an ERISA Plan's investments to be authorized under ERISA and the terms of
the governing documents of the ERISA Plan; and
- that the fiduciary not cause the ERISA Plan to enter into transactions
prohibited under Section 406 of ERISA.
In determining whether an investment in convertible preferred shares or 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 our
business, the length of our 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 employees (a "Non-ERISA
51
<PAGE>
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 Internal Revenue Code and permitted under
applicable state law.
OUR STATUS UNDER ERISA
A prohibited transaction may occur if our assets are deemed to be assets of
the investing Plans and "parties in interest," as defined in ERISA, or
"disqualified persons," as defined in Section 4975 of the Internal Revenue Code,
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 Internal
Revenue 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, preferred stock, common shares of beneficial
interest of a REIT or preferred shares of beneficial interest of a REIT. The
Regulations provide an exception to the look-through rule for equity interests
that are "publicly-offered securities." The Regulations provide another
exception to the look-through rule for equity interests in an entity that is an
"operating company."
Under the Regulations, a "publicly-offered security" is a security that is:
- freely transferable;
- part of a class of securities that is widely held; and
- 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.
We anticipate that our common shares will meet the criteria of the
publicly-offered securities exception to the look-through rule for the following
reasons:
- We anticipate that our 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 our status as a REIT.
- We believe that our common shares will be held by 100 or more investors
and that at least 100 or more of these investors will be independent of us
and of one another.
- Our 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
52
<PAGE>
Exchange Act within 120 days after the end of our fiscal year during which
the offering of such securities to the public occurs.
Accordingly, we believe that if a Plan purchases common shares, our assets
should not be deemed to be Plan assets. Therefore, a person who exercises
authority or control with respect to our assets should not be treated as a Plan
fiduciary for purposes of the prohibited transaction rules of ERISA and Section
4975 of the Internal Revenue Code.
Under the Regulations, an "operating company" is an entity that is primarily
engaged, directly or through a majority owned subsidiary or subsidiaries, in the
production or sale of a product or service other than the investment of capital.
An entity is a "real estate operating company" for a twelve-month period if:
- on any date in that period, at least 50 percent of its assets, valued at
costs (other than short-term investments pending long-term commitment or
distribution to investors), are invested in real estate which is managed
or developed and with respect to which the entity has the right to
substantially participate directly in the management or development
activities; and
- during the twelve month period, the entity in the ordinary course of its
business is engaged directly in real estate management or development
activities.
We believe that we qualify as an "operating company," because all of our
majority owned subsidiaries meet the definition of "real estate operating
company". Accordingly, we believe that if a Plan purchases convertible preferred
shares, our assets should not be deemed to be Plan assets. Therefore, a person
who exercises authority or control with respect to our assets should not be
treated as a Plan fiduciary for purposes of the prohibited transaction rules of
ERISA and Section 4975 of the Internal Revenue Code.
53
<PAGE>
SELLING SHAREHOLDERS
The table below sets forth certain information concerning the selling
shareholders, including the number of offered shares beneficially owned by each
selling shareholder. Because the selling shareholders may sell all or some of
their offered shares, no estimate can be made of the number owned, beneficially
or otherwise, by each selling shareholder upon completion of the offering of the
offered shares described in this prospectus. There is no assurance that the
selling shareholders will sell any of the offered shares. If any are sold, each
selling shareholder will receive all of the net proceeds from the sale of his,
her or its respective offered shares. The offered shares represent approximately
43.7% of the total common shares, assuming conversion of all outstanding
convertible preferred shares into common shares and exchange of all outstanding
common units of limited partner interest in the operating partnership for common
shares. Selling shareholders may include Merrill Lynch International Private
Finance Limited, a Delaware corporation, and pledgee of SCPG, or any donees or
other pledgees of the selling shareholders after the date of this prospectus.
<TABLE>
<CAPTION>
NUMBER OF CONVERTIBLE NUMBER OF COMMON
PREFERRED SHARES SHARES BENEFICIALLY
BENEFICIALLY OWNED OWNED AND OFFERED
NAME OF SELLING SHAREHOLDER AND OFFERED HEREBY(1) HEREBY(2)
- ------------------------------------------------ --------------------- ---------------------
<S> <C> <C>
SCPG............................................ 2,000,000 2,000,000
Edward S. Hadesman
Trust dated May 22, 1992(3)(4)................ -- 388,677
Grandville/Northwestern
Management Corporation(3)..................... -- 9,750
Carolyn B. Hadesman
Trust dated May 21, 1992(3)................... -- 54,544
Lisa Hadesman 1991 Trust(3)..................... -- 169,053
Cynthia Hadesman 1991 Trust (3)................. -- 169,053
Tucker B. Magid(3)(5)........................... -- 33,085
Frances S. Shubert(3)........................... -- 28,805
Grandville Road
Property, Inc.(3)............................. -- 7,201
Sky Harbor Associates(3)........................ -- 62,149
Jeffrey A. Patterson(3)(6)...................... -- 110,000
Primestone Investment
Partners, L.P.(3)(7).......................... -- 7,944,893
Prime Group Limited
Partnership(3)(8)............................. -- 47,525
Ray R. Grinvalds(3)(8).......................... -- 5,216
Warren H. John(3)(8)............................ -- 37,259
H Group LLC(9).................................. -- 643,865
---------- -----------
TOTAL....................................... 2,000,000 11,711,075
---------- -----------
---------- -----------
</TABLE>
- ---------
(1) On the date of this prospectus, SCPG owns all of the outstanding convertible
preferred shares. The 2,000,000 convertible preferred shares were purchased
from us in a private transaction in November 1997 and are currently
convertible into 2,000,000 common shares. If SCPG and/or its permitted
transferees sell in the offering all of the convertible preferred shares and
any common shares received upon any conversion of the convertible preferred
shares, then SCPG and any such transferees will own no convertible preferred
shares or common shares.
(2) The common shares covered by the registration statement of which this
prospectus is a part, which we refer to as the "offered common shares", are
being registered for the account of the selling
54
<PAGE>
shareholders who may receive such common shares upon (A) any conversion of
the convertible preferred shares in accordance with their terms or (B) any
exchange of common units of limited partner interest in accordance with
their terms and the operating partnership's partnership agreement. Holders
of the convertible preferred shares have the right, at their option, to
convert all or any portion of such shares into common shares. See
"Description of Shares of Beneficial Interest--Convertible Preferred
Shares." Generally, each common unit of limited partner interest held by the
persons or entities which acquired them as part of our formation is
currently exchangeable for one common share or, at our option, for cash
equal to the fair market value of a common share at the time of the
exchange. For purposes of this column, we have assumed that (X) all
convertible preferred shares will be converted into common shares and (Y)
all common units of limited partner interest will be tendered for exchange
by the applicable selling shareholder and that we will exchange common
shares, rather than cash, for such tendered common units.
(3) This person or entity acquired their common units of limited partner
interest as part of our formation. These common units are currently
exchangeable for common shares.
(4) Edward S. Hadesman has been one of our executive officers since November
1997.
(5) Tucker B. Magid has been one of our executive officers since November 1997.
(6) Jeffrey A. Patterson has been one of our executive officers since November
1997.
(7) Primestone Investment Partners, L.P. has agreed not to sell, offer, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise
sell or dispose of 3,375,000 of its common units of limited partner
interest, without the consent of Prudential Securities Incorporated, on
behalf of the underwriters for our initial public offering, until November
17, 1999. In limited circumstances, Primestone Investment Partners, L.P. is
not required to comply with the restrictions referred to in the preceding
sentence.
(8) This holder has agreed not to sell, offer, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of its or
his common units of limited partner interest without the consent of
Prudential Securities Incorporated, on behalf of the underwriters for our
initial public offering, until November 17, 1999.
(9) H Group LLC holds 323,590 common units of limited partner interest as of the
date of this prospectus, and we estimate that H Group LLC may acquire up to
320,275 additional common units to the extent we elect to maintain our
option to purchase H Group LLC's second mortgage on the office property
located at 180 N. LaSalle Street in Chicago, Illinois. Any such common units
acquired by H Group LLC prior to December 15, 1998 first became exchangeable
for common shares on December 15, 1998, and any such common units acquired
by H Group LLC on or after December 15, 1998 will first become exchangeable
for common shares on December 15, 1999.
55
<PAGE>
PLAN OF DISTRIBUTION
We will not receive any proceeds from this offering by the selling
shareholders. Any of the selling shareholders may from time to time, in one or
more transactions, or a series of transactions, offer and sell all or a portion
of the offered common shares on the NYSE, in the over-the-counter market, or on
any other national securities exchange or trading system on which the common
shares are listed or traded. The selling shareholders may from time to time, in
one or more transactions, or a series of transactions, offer and sell all or a
portion of the convertible preferred shares or the offered common shares in
negotiated transactions, in underwritten transactions or otherwise, at prices
then prevailing or related to the then current market price or at negotiated
prices. The offering price of the offered shares from time to time will be
determined by the selling shareholders and, in the case of the offered common
shares, at the time of such determination, may be higher or lower than the
market price of the common shares on the NYSE or other exchange or trading
system on which the common shares are admitted for trading privileges.
In connection with an underwritten offering of the offered shares,
underwriters or agents may receive compensation in the form of discounts,
concessions or commissions from a selling shareholder or from purchasers of
offered shares for whom they may act as agents. Underwriters may sell offered
shares to or through dealers, and such dealers may receive compensation in the
form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agents. Under
agreements that may be entered into by us, underwriters, dealers and agents who
participate in the distribution of offered shares may be entitled to
indemnification by us against certain liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments which such
underwriters, dealers or agents may be required to make in respect thereof. The
offered shares may be sold directly or through broker-dealers acting as
principal or agent, or pursuant to a distribution by one or more underwriters on
a firm commitment or best-efforts basis. Each of the selling shareholders has
the right to accept or reject, in whole or in part, any proposed purchase of the
offered shares made directly or through agents.
The methods by which the offered shares may be sold include:
- a block trade in which the broker-dealer so engaged will attempt to sell
the offered shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such broker-dealer
for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- in the case of the offered common shares, an exchange distribution in
accordance with the rules of the NYSE or other exchange or trading system
on which the common shares are admitted for trading privileges;
- privately-negotiated transactions;
- through put or call transactions relating to the offered shares;
- through short-sales of the offered shares;
- pursuant to Rule 144 or otherwise; and
- underwritten transactions.
The selling shareholders and any underwriters, dealers, or agents
participating in the distribution of the offered shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the offered shares by the selling shareholders and any commissions
received by any such broker-dealers may be deemed to be underwriting commissions
under the Securities Act.
56
<PAGE>
When a selling shareholder elects to make a particular offer of offered
shares, a prospectus supplement, if required, will be distributed which will
identify any underwriters, dealers or agents and any discounts, commissions and
other terms constituting compensation from such selling shareholder and any
other required information.
In order to comply with the securities laws of certain states, if
applicable, the offered shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the offered shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
We have registered the offered shares as required under the terms of certain
agreements between us and the selling shareholders. We have agreed to pay all
costs and expenses incurred in connection with the registration under the
Securities Act of the offered shares, including without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for us, fees and disbursements of all independent certified accountants
and fees and expenses incurred in connection with listing the offered common
shares on NYSE. The selling shareholders will pay any underwriting discounts,
sales and commissions, fees and disbursements of counsel for the selling
shareholders and transfer taxes, if any. We also have agreed to indemnify each
of the selling shareholders and their respective officers and directors, and
each person who controls (within the meaning of the Securities Act) such selling
shareholder, against certain losses, claims, damages, liabilities and expenses
arising under the securities laws in connection with this offering. Each of the
selling shareholders has agreed to indemnify us, our officers and trustees that
sign the registration statement, our underwriters, if any, and each person who
controls (within the meaning of the Securities Act) us, against certain losses,
claims, damages, liabilities and expenses arising under the securities laws in
connection with this offering with respect to certain written information
furnished to us by such selling shareholder.
LEGAL MATTERS
Legal matters relating to Maryland law, including the validity of the
issuance of our convertible preferred shares and our common shares offered
hereby, will be passed upon for us by Miles & Stockbridge P.C., Baltimore,
Maryland. In addition, the description of federal income tax consequences
contained in this prospectus under "Material 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 us
as to material federal income tax considerations. Governor James R. Thompson,
Chairman of Winston & Strawn, is one of our trustees.
57
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of December 31, 1997 and for the period from November
17, 1997 to December 31, 1997 and the combined financial statements of the
Predecessor Properties as of December 31, 1996 and for the period from January
1, 1997 to November 16, 1997, and for each of the two years in the period ended
December 31, 1996 included in our Annual Report on Form 10-K (as amended by Form
10-K/A), the statement of revenue and certain expenses of Continental Office
Towers for the year ended December 31, 1996 and the statement of revenue and
certain expenses of 180 North LaSalle Street for the year ended December 31,
1996, included in our Current Report on Form 8-K dated December 15, 1997 (as
amended by Form 8-K/A filed on February 27, 1998), the statement of revenue and
certain expenses of 2675 Mayfair for the period from January 1, 1997 to
September 30, 1997, included in our Current Report on Form 8-K dated December
30, 1997 (as amended by Form 8-K/A dated December 15, 1997 filed on February 27,
1998), the statement of revenue and certain expenses of 33 North Dearborn for
the year ended December 31, 1996 included in our Current Report on Form 8-K
dated January 14, 1998 (as amended by Form 8-K/A filed on March 31, 1998), the
statement of revenue and certain expenses of Commerce Point for the year ended
December 31, 1996 included in our Current Report on Form 8-K dated February 20,
1998 (as amended by Form 8-K/A filed on May 5, 1998), the statement of revenue
and certain expenses of 208 South LaSalle for the year ended December 31, 1997
and the statement of revenue and certain expenses of 122 South Michigan Avenue
for the year ended December 31, 1997 included in our Current Report on Form 8-K
dated March 31, 1998, the statement of revenue and certain expenses of 6400
Shafer Court for the year ended December 31, 1997 and the statement of revenue
and certain expenses of Two Century Centre for the year ended December 31, 1997
included in our Current Report on Form 8-K dated May 29, 1998, as set forth in
their reports which are incorporated in this prospectus by reference. Our
financial statements and statements of revenue and certain expenses are
incorporated by reference in reliance on their reports, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected without charge
and copied upon payment of the prescribed fee at 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:
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and 7 World Trade Center, 13th Floor, New York, New York 10048. Such material
can also be obtained from the Commission's worldwide web site at
http://www.sec.gov. Our outstanding common shares are listed on the NYSE under
the symbol "PGE" and all such reports, proxy statements and other information
filed by us with the NYSE may be inspected at the NYSE's offices at 20 Broad
Street, New York, New York 10005.
We have filed with the Commission a registration statement, of which this
prospectus is a part, on Form S-3 under the Securities Act and the rules and
regulations promulgated thereunder with respect to the offered shares. This
prospectus does not contain all the information included in the registration
statement and the exhibits and financial statements thereto, portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this prospectus or in any document incorporated by
reference herein or therein, 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 us and
our convertible preferred shares and common shares offered hereby, reference is
hereby made to the registration statement and such exhibits and schedules.
58
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have filed the documents listed below with the Commission under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and these
documents are incorporated herein by reference:
- Our Annual Report on Form 10-K/A for the year ended December 31, 1997;
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30, and September 30, 1998; and
- Our Current Reports on Form 8-K dated January 14, 1998 (as amended on Form
8-K/A filed on March 31, 1998), February 20, 1998 (as amended on Form
8-K/A filed on May 5, 1998), March 19, 1998, March 31, 1998 (as amended on
Form 8-K/A filed on June 15, 1998), and May 29, 1998, and our two Current
Reports on Form 8-K/A filed on February 27, 1998.
Any documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this prospectus and prior to the
termination of the offering of the offered shares to which this prospectus
relates shall be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing such documents. Incorporating
documents by reference means that we are making these documents a part of this
prospectus by referring to them and declaring that you should consider them to
be part of this prospectus as if they were fully copied in this prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein,
in an accompanying prospectus supplement (if any) or in any other subsequently
filed document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus, or in an accompanying prospectus
supplement (if any).
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents) will be provided by us without
charge to each person, including any beneficial owner, to whom this prospectus
are delivered upon written or oral request. Requests should be directed to the
Secretary/ General Counsel, Prime Group Realty Trust, 77 West Wacker Drive,
Chicago, Illinois, 60601, telephone number (312) 917-1300.
59
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO]
PRIME GROUP REALTY TRUST
2,000,000 Series A Cumulative Convertible
Preferred Shares of Beneficial Interest
11,711,075 Common Shares
of Beneficial Interest
---------------------
PROSPECTUS
---------------------
December , 1998
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO GIVE YOU
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS TO YOU OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF
GIVEN OR MADE, YOU MUST NOT REPLY UPON SUCH INFORMATION OR REPRESENTATIONS AS
HAVING BEEN AUTHORIZED BY US OR ANY OF THE SELLING SHAREHOLDERS. THIS PROSPECTUS
IS NOT AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE CONVERTIBLE PREFERRED SHARES AND THE COMMON SHARES OFFERED BY
THIS PROSPECTUS, NOR IS IT AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO
BUY THE CONVERTIBLE PREFERRED SHARES AND 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 59,528
NYSE listing fee.................................................. 40,989
Printing and engraving expenses................................... 150,000
Legal fees and expenses........................................... 150,000
Accounting and due diligence fees and expenses.................... 225,000
Miscellaneous..................................................... 5,000
---------
Total......................................................... $ 630,517
---------
---------
</TABLE>
All expenses of registration incurred in connection with the offering are being
borne by Prime, but all selling and other expenses incurred by an individual
selling shareholder will be borne by such selling shareholder.
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
The declaration of trust and bylaws authorize Prime 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 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.
Prime's officers and trustees are also indemnified pursuant to the operating
partnerships, partnership agreement and their respective employment agreements.
Prime purchased an insurance policy which purports to insure the officers
and trustees of Prime 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.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Amendment and Restatement of Declaration of Trust of Prime Group Realty Trust as filed as an
exhibit to Prime's 1997 Annual Report on Form 10-K and incorporated herein by reference
3.2 Articles Supplementary to the Articles of Amendment and Restatement of Declaration of Trust of Prime
Group Realty Trust as filed as an exhibit to Prime's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 and incorporated herein by reference
3.3 Amended and Restated Bylaws of Prime Group Realty Trust as filed as an exhibit to Prime's 1997 Annual
Report on Form 10-K and incorporated herein by reference
3.4 Amended and Restated Agreement of Limited Partnership of Prime Group Realty, L.P. (the "Amended and
Restated Agreement of Limited Partnership") as filed as an exhibit to Prime's 1997 Annual Report on Form
10-K and incorporated herein by reference
3.5 Amendment No. 1 to the Amended and Restated Agreement of Limited Partnership dated as of December 15,
1998 as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No.
333-51599) and incorporated herein by reference
3.6 Amendment No. 2 to the Amended and Restated Agreement of Limited Partnership dated as of December 15,
1998 as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No.
333-51599) and incorporated herein by reference
3.7 Amendment No. 3 to the Amended and Restated Agreement of Limited Partnership dated as of January 15,
1998 as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No.
333-51599) and incorporated herein by reference
3.8 Amendment No. 4 to the Amended and Restated Agreement of Limited Partnership dated as of February 13,
1998 as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No.
333-51599) and incorporated herein by reference
3.9 Amendment No. 5 to the Amended and Restated Agreement of Limited Partnership dated as of March 13, 1998
as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No. 333-51599)
and incorporated herein by reference
3.10 Amendment No. 6 to the Amended and Restated Agreement of Limited Partnership dated as of March 25, 1998
as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No. 333-51599)
and incorporated herein by reference
3.11 Amendment No. 7 to the Amended and Restated Agreement of Limited Partnership dated as of April 15, 1998
as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No. 333-51599)
and incorporated herein by reference
3.12 Amendment No. 8 to the Amended and Restated Agreement of Limited Partnership dated as of May 15, 1998 as
filed as an exhibit to Amendment No. 2 to Prime's Registration Statement on Form S-11 (No. 333-51599)
and incorporated herein by reference
3.13 Amendment No. 9 to the Amended and Restated Agreement of Limited Partnership dated as of June 5, 1998 as
filed as an exhibit to Prime's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference
3.14 Amendment No. 10 to the Amended and Restated Agreement of Limited Partnership dated as of June 15, 1998
as filed as an exhibit to Prime's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and
incorporated herein by reference
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.15 Amendment No. 11 to the Amended and Restated Agreement of Limited Partnership dated as of July 15, 1998
as filed as an exhibit to Post-Effective Amendment No. 1 to Prime's Registration Statement on Form S-11
(No. 333-51935) and incorporated herein by reference
3.16 Amendment No. 12 to the Amended and Restated Agreement of Limited Partnership dated as of August 14,
1998 as filed as an exhibit to Post-Effective Amendment No. 1 to Prime's Registration Statement on Form
S-11 (No. 333-51935) and incorporated herein by reference
3.17 Amendment No. 13 to the Amended and Restated Agreement of Limited Partnership dated as of September 15,
1998 as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-11 (No.
333-51935) and incorporated herein by reference
3.18* Amendment No. 14 to the Amended and Restated Agreement of Limited Partnership dated as of October 15,
1998
3.19 Amendment No. 15 to the Amended and Restated Agreement of Limited Partnership dated as November 16, 1998
as filed as an exhibit to Amendment No. 1 to Prime's Registration Statement on Form S-3 (No. 333-64973)
and incorporated herein by reference
3.20 Amendment No. 16 to the Amended and Restated Agreement of Limited Partnership dated as of December 15,
1998 as filed as an exhibit to Post-Effective Amendment No. 3 to Prime's Registration Statement on Form
S-3 (No. 333-51935) and incorporated herein by reference.
5.1* Opinion of Miles & Stockbridge regarding the validity of the convertible preferred shares and common
shares being registered
8.1 Opinion of Winston & Strawn regarding tax matters
12.1 Computation of Ratios of Earnings to Fixed Charges and Preferred Share Distributions as filed as an
exhibit to Prime's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 and
incorporated herein by reference
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
24.1* Powers of Attorney (included on signature page in Part II of initial filing)
</TABLE>
- ---------
* Previously filed.
ITEM 17. UNDERTAKINGS.
(a) 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.
II-3
<PAGE>
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
this registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) herein do
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by
the undersigned registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in the registration
statement.
(2) To remove from registration by means of a post-effective amendment
any of the offered shares being registered which remain unsold at the
termination of the offering.
(3) That for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that the shall be deemed to be the initial
bona fide offering thereof.
(c) The registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in the Registration Statement 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-4
<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-3 and has duly caused this amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago, State of Illinois, on December 29,
1998.
<TABLE>
<S> <C> <C>
PRIME GROUP REALTY TRUST
By: /s/ RICHARD S. CURTO
-----------------------------------------
Richard S. Curto
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to registration statement has been signed below on December 29, 1998
by the following persons in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ ----------------------------------------------
<C> <S>
MICHAEL W. RESCHKE*
- ------------------------------ Chairman of the Board, Trustee
Michael W. Reschke
/s/ RICHARD S. CURTO
- ------------------------------ President and Chief Executive Officer
Richard S. Curto (principal executive officer), Trustee
WILLIAM M. KARNES*
- ------------------------------ Executive Vice President and Chief Financial
William M. Karnes Officer (principal financial officer)
ROY P. RENDINO* Senior Vice President--Finance and Chief
- ------------------------------ Accounting Officer (principal accounting
Roy P. Rendino officer)
JACQUE M. DUCHARME*
- ------------------------------ Trustee
Jacque M. Ducharme
STEPHEN J. NARDI*
- ------------------------------ Trustee
Stephen J. Nardi
CHRISTOPHER J. NASSETTA*
- ------------------------------ Trustee
Christopher J. Nassetta
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------ ----------------------------------------------
<C> <S>
THOMAS J. SAYLAK*
- ------------------------------ Trustee
Thomas J. Saylak
JAMES R. THOMPSON*
- ------------------------------ Trustee
James R. Thompson
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ RICHARD S. CURTO
-------------------------
Richard S. Curto,
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
Exhibit 8.1
Winston & Strawn Tax Opinion
December 29, 1998
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 counsel to Prime Group Realty Trust, a
Maryland real estate investment trust (the "Company"), in connection with the
registration of 11,711,075 of its Common Shares of Beneficial Interest, $.01 par
value per share (the "Common Shares") and 2,000,000 of its Series A Cumulative
Convertible Preferred Shares of Beneficial Interest, $.01 par value per share
(the "Series A Preferred Shares") as set forth in the Company's Registration
Statement, initially filed on Form S-11 (File No. 333-64973) with the Securities
and Exchange Commission ("SEC") on September 30, 1998 (the "Registration
Statement"), as subsequently amended by Amendment No. 1 thereto filed on Form
S-3 on November 23, 1998, Amendment No. 2 thereto filed on December 17, 1998,
Amendment No. 3 thereto filed on December 29, 1998 and the Prospectus
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 opinions concerning (i) whether, commencing
with the Company's initial taxable year ended December 31, 1997, the Company has
been and is organized in conformity with the requirements for qualification and
taxation 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"), (iii) whether the
Company's proposed method of operation enables it to continue to meet the
requirements for qualification and taxation as a REIT and (iv) whether the
discussion in the Prospectus under the heading "Material 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 or Series A
Preferred Shares.
<PAGE>
Prime Group Realty Trust
December 29, 1998
Page 2
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 form of the Amended and Restated Declaration of Trust of
the Company (the "Charter"), the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty Trust, L.P. (the "Operating Partnership"), as
amended, 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 May 20, 1998, as reaffirmed on the date hereof,
executed by a duly authorized officer of the Company, setting forth certain
factual representations relating to the formation, ownership, operation, future
method of operation, and compliance with the REIT and partnership provisions of
the Code of the Company, the Operating Partnership, each of the Property
Partnerships, and Prime Group Realty Services, Inc. (the "Services Company").
We have further relied on and assumed the truth and correctness of (i) the
Company's representations in the Agreement of Limited Partnership of the
Operating Partnership and (ii) the certificates of public officials with respect
to the formation of certain limited partnerships. Moreover, for the purpose of
rendering our opinion, we have assumed that no partner in the Operating
Partnership or any of the Property Partnerships will elect to be excluded from
all or part of subchapter K of the Code.
For the purposes of rendering this opinion, we have not made an
independent investigation of the facts set forth in any of the aforementioned
documents, including without limitation the Prospectus and the Officer's
Certificate. We have consequently relied upon your representations that the
information presented in such documents or otherwise furnished to us accurately
and completely describes all material facts relevant to this opinion.
In rendering this opinion, we have assumed that the transactions
contemplated by the Prospectus will be consummated in accordance with the
operative documents, and such documents accurately reflect the material facts of
such transactions. In addition, the opinions set forth herein are based on the
correctness of the following specific assumptions: (i) the Company, the
Operating Partnership, the Property Partnerships, and the Services Company will
each be operated in the manner described in the relevant partnership agreement
or other organizational documents and in the Prospectus and in accordance with
applicable laws; and (ii) each partner in the Operating Partnership and in each
of the Property Partnerships has been motivated in acquiring its respective
partnership interest by such partner's anticipation of economic rewards apart
from tax considerations.
<PAGE>
Prime Group Realty Trust
December 29, 1998
Page 3
Our opinion is based upon the current provisions of the Code, Treasury
Regulations promulgated thereunder, current 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 (i) commencing with
the Company's initial taxable year ending December 31, 1997, the Company has
been and is organized in conformity with the requirements for qualification as a
REIT, (ii) the Company's method of operation has enabled it to meet the
requirements for qualification and taxation as a REIT under the Code, (iii) the
Company's proposed method of operation will enable it to continue to meet the
requirements for qualification as a REIT, and (iv) the discussion in the
Prospectus under the heading "Material 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 or Series A 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.
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.
<PAGE>
Prime Group Realty Trust
December 29, 1998
Page 4
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 captions "Material 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,
/s/ Winston & Strawn
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Amendment No. 3 to Form S-3 No. 333-64973) and
related Prospectus of Prime Group Realty Trust for the registration of
2,000,000 Series A Cumulative Convertible Preferred Shares of Beneficial
Interest and 11,711,075 Common Shares of Beneficial Interest and to the
incorporation by reference therein of our reports indicated below with
respect to the financial statements indicated below included in Prime Group
Realty Trust's filings as indicated below, filed with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Date of Auditors'
Financial Statements Report Filing
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consolidated financial statements of Prime Group March 27, 1998 1997 Annual Report on
Realty Trust at December 31, 1997, and for the period Form 10-K, as amended
from November 17, 1997 to December 31, 1997 and the by Form 10-K/A
combined financial statements of the Predecessor
Properties at December 31, 1996, and for the period
from January 1, 1997 to November 16, 1997 and for the
two years in the period ended December 31, 1996
Statement of revenue and certain expenses of December 5, 1997 Current Report on Form
Continental Office Towers for the year ended December 8-K, as amended by Form
31, 1996 8-K/A dated December 15, 1997
(filed on February 27, 1998)
Statement of revenue and certain expenses of December 2, 1997 Current Report on Form
180 North LaSalle Street for the year ended December 8-K, as amended by Form
31, 1996 8-K/A dated December 15, 1997
(filed on February 27, 1998)
Statement of revenue and certain expenses of 2675 December 4, 1997 Current Report on Form
Mayfair for the period from January 1, 1997 to 8-K dated December 30,
September 30, 1997 1997, as amended by the
Form 8-K/A dated
December 15, 1997 (filed
on February 27, 1998)
Statement of revenue and certain expenses of 33 North November 24, 1997 Current Report on Form
Dearborn for the year ended December 31, 1996 8-K, as amended by Form
8-K/A dated January 14,
1998
Statement of revenue and certain expenses of Commerce December 20, 1997 Current Report on Form
Point for the year ended December 31, 1996 8-K, as amended by Form
8-K/A dated February
20, 1998
Statement of revenue and certain expenses of 208 January 30, 1998 Current Report on Form
South LaSalle for the year ended December 31, 1997 8-K dated March 31,
1998
<PAGE>
Statement of revenue and certain expenses of 122 January 30, 1998 Current Report on Form
South Michigan Avenue for the year ended December 31, 8-K dated March 31,
1997 1998
Statement of revenue and certain expenses of 6400 April 16, 1998 Current Report on Form
Shafer Court for the year ended December 31, 1997 8-K dated May 29, 1998
Statement of revenue and certain expenses of Two April 23, 1998 Current Report on Form
Century Centre for the year ended December 31, 1997 8-K dated May 29, 1998
</TABLE>
Ernst & Young LLP
Chicago, Illinois
December 29, 1998
