As filed with the Securities and Exchange Commission on November 4, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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Form S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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IAC CAPITAL TRUST
(Exact name of registrant as specified in its governing instruments)
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<S> <C>
550 Newport Center Drive, Suite 300, Newport Beach, California 92660 (714) 720-5500
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
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JAMES E. MEAD
Senior Vice President, Chief Financial Officer and Secretary
IRVINE APARTMENT COMMUNITIES, INC.
550 Newport Center Drive
Suite 300
Newport Beach, CA 92660
(714) 720-5500
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
with copies to:
JEFFREY SMALL GREGG A. NOEL
JAMES M. LURIE SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
DAVIS POLK & WARDWELL 300 South Grand Avenue
450 Lexington Avenue Los Angeles, California 90071
New York, NY 10017 Telephone (213) 687-5000
Telephone (212) 450-4000
Approximate date of commencement of the proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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,
check the following box. [ ] _______________
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed
Amount Offering Maximum Amount of
Title of Each Class of to be Price Aggregate Offering Registration
Securities Being Registered Registered Per Unit Price(1) Fee
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Series A Preferred Securities of IAC Capital Trust.. 4,600,000 $25.00 $115,000,000 $34,849
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED NOVEMBER 4, 1997
PROSPECTUS
4,000,000 Series A Preferred Securities
IAC Capital Trust
__% Series A REIT Enhanced Trust Originated Preferred Securities(SM)
("TOPrS(SM)")
(Liquidation Amount $25 per Series A Preferred Security)
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The _____% Series A REIT Enhanced Trust Originated Preferred
Securities (the "Series A Preferred Securities") offered hereby (the
"Offering") are being sold by IAC Capital Trust, a statutory business trust
formed under the laws of the State of Delaware (the "Trust"). The proceeds
from the Offering will be used by the Trust to purchase _____% Series A
Preferred Limited Partner Interests ("Series A Preferred L.P. Units") in
Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Operating Partnership"). From time to time the Trust may issue additional
series of preferred securities (together with the Series A Preferred
Securities, the "Preferred Securities") and invest the proceeds therefrom in
additional series of preferred limited partner interests of the Operating
Partnership (together with the Series A Preferred L.P. Units, the "Preferred
L.P. Units"). Each series of Preferred Securities will represent a preferred
undivided beneficial interest in the assets of the Trust, subject to each
series priority and payment terms. Irvine Apartment Communities, Inc. (the
"Company"), a Maryland corporation and the general partner of the Operating
Partnership, and certain members of management of the Company will own all of
the common securities (the "Common Securities") representing common undivided
beneficial interests in the assets of the Trust. The Trust exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof primarily in an equivalent amount of Preferred
L.P. Units of the Operating Partnership.
(continued on next page)
Application will be made to list the Series A Preferred
Securities on the New York Stock Exchange, Inc. (the "NYSE"). Trading of the
Series A Preferred Securities on the NYSE is expected to commence within a
30-day period after the date of this Prospectus. While the Underwriters have
advised the Trust that they intend to make a market in the Series A Preferred
Securities prior to commencement of trading on the NYSE, they are under no
obligation to do so and no assurance can be given that a market for the Series
A Preferred Securities will exist prior to commencement of trading. See
"Underwriting."
------------
See "Risk Factors" beginning on page 18 for certain information
relevant to an investment in the Series A Preferred Securities, including:
o Real estate investment risks such as the effect of economic and other
conditions on cash flows from properties owned by the Operating
Partnership and apartment community property values;
o Risks associated with development or acquisition of apartment
community properties both on and off the Irvine Ranch, including land
use entitlement, construction, lease-up and financing risks;
o The Trust's ability to make distributions and other payments on the
Series A Preferred Securities is effectively dependent upon the
Operating Partnership making distributions and other payments on the
Series A Preferred L.P. Units held as trust assets. If the Operating
Partnership were not to make distributions or other payments on the
Series A Preferred L.P. Units for any reason, the Trust will not make
payments on the Series A Preferred Securities; and
o Substantial influence of The Irvine Company over the affairs of the
Operating Partnership and conflicts of interest between The Irvine
Company and the Operating Partnership.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Public (1) Discount(2) Proceeds to Trust(3)
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Per Series A Preferred Security.......... $25.00
Total(4)................................. $100,000,000
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(1) Plus accumulated distributions, if any, from .
(2) The Operating Partnership has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(3) Expenses of the Offering which are payable by the Operating Partnership
are estimated to be $ .
(4) The Trust has granted to the Underwriters an option, exercisable for a
period of 30 days after the date of the Prospectus, to purchase up to
600,000 additional Series A Preferred Securities, solely to cover
overallotments. If all such Series A Preferred Securities are purchased,
the total Price to Public, Underwriting Discount and Proceeds to Trust
will be $115,000,000, $ and $ , respectively. See
"Underwriting."
The Series A Preferred Securities offered hereby are
offered severally by the Underwriters, as specified herein, subject to
receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of the Series A
Preferred Securities will be made only in book-entry form through the
facilities of The Depository Trust Company on or about , 1997.
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Merrill Lynch & Co.
Goldman, Sachs & Co.
J.P. Morgan & Co.
Smith Barney Inc.
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The date of this Prospectus is _____________, 1997.
(SM)"Trust Originated Preferred Securities" and "TOPrS" are service marks
of Merrill Lynch & Co., Inc.
(continued from previous page)
Holders of the Series A Preferred Securities will be entitled
to receive, when, as and if declared by the Trust, out of funds legally
available therefor, cumulative cash distributions at an annual rate of %
of the liquidation amount of $25 per Series A Preferred Security, accumulating
from the date of original issuance of the Series A Preferred Securities and
payable quarterly in arrears on ______, ______, ______ and ______ of each year,
commencing on _________, 1998. Cash distributions on the Series A Preferred
Securities in arrears for more than one quarter will accumulate without
interest. The Trust, as the holder of the Series A Preferred L.P. Units, will
be entitled to receive when, as and if declared by the Operating Partnership,
acting through the Company as the sole general partner of the Operating
Partnership, out of funds legally available therefor, cumulative cash
distributions at the annual rate of __% of the stated value of $25 per Series
A Preferred L.P. Unit, accumulating from the date of original issuance of the
Series A Preferred L.P. Units and payable quarterly in arrears on _____,
_____, ______ and ____ of each year, commencing _______, 1998. Cash
distributions on the Series A Preferred L.P. Units in arrears for more than
one quarter will accumulate without interest. Accordingly, the distribution
rate and the distribution and other payment dates for the Series A Preferred
Securities will correspond to the distribution rate and the distribution and
other payment dates for the Series A Preferred L.P. Units deposited in the
Trust as trust assets. As a result, if distributions are not paid on the
Series A Preferred L.P. Units, the Trust will not make payments on the Series
A Preferred Securities.
So long as any Series A Preferred L.P. Units are outstanding
except as otherwise described herein, no distribution shall be paid or
declared on or with respect to the regular limited partner interests in the
Operating Partnership (the "Common L.P. Units"), the general partnership
interest in the Operating Partnership (the "G.P. Units") or any other series
of outstanding Preferred L.P. Units of the Operating Partnership ranking
junior as to the payment of distributions and upon liquidation, dissolution
and winding-up of the Operating Partnership to the Series A Preferred L.P.
Units (collectively, the "Junior OP Units") nor shall any sum or sums be set
aside for or applied to the purchase or redemption of the Series A Preferred
L.P. Units or any other series of outstanding Preferred L.P. Units or the
purchase, redemption or other acquisition for value of any Junior OP Units
unless, in each case, full cumulative distributions accumulated on all Series
A Preferred L.P. Units and all other outstanding series of Preferred L.P.
Units ranking on a parity with the Series A Preferred L.P. Units as to the
payment of distributions and upon liquidation, dissolution and winding-up of
the Operating Partnership have been paid in full. Distributions with respect
to the Series A Preferred Securities will be senior to distributions on the
Common Securities and will have the same priority with respect to
distributions on other series of Preferred Securities as are set forth in this
paragraph. See "Description of Series A Preferred Securities--Distributions."
The Series A Preferred L.P. Units are not redeemable prior to
_________. On or after ________, the Series A Preferred L.P. Units may be
redeemed at the option of the Operating Partnership, in whole or from time to
time in part, at a redemption price of $25 per Series A Preferred L.P. Unit,
plus accumulated and unpaid distributions, if any, to the redemption date.
The Series A Preferred L.P. Units may also be redeemed at any time upon the
occurrence of a Tax Event or Investment Company Act Event (each as defined
herein). The redemption price (other than the portion consisting of
accumulated and unpaid distributions) will be payable solely out of the sale
proceeds of capital stock of the Company, which will be contributed by the
Company to the Operating Partnership as an additional capital contribution, or
the sale proceeds of Common L.P. Units or Preferred L.P. Units (collectively,
"L.P. Units") of the Operating Partnership, and from no other source. The
Series A Preferred L.P. Units will have a stated maturity of December 31,
2092, which corresponds to the term of the Operating Partnership. Neither
the Series A Preferred L.P. Units nor the Series A Preferred Securities will
be subject to any sinking fund or be convertible into any securities of the
Company, the Operating Partnership or the Trust. See "Description of the
Series A Preferred L.P. Units--Redemption." If the Operating Partnership
redeems Series A Preferred L.P. Units, the Trust must redeem in cash Series A
Preferred Securities having an aggregate liquidation amount equal to the
aggregate stated value of the Series A Preferred L.P. Units so redeemed, at $25
per Series A Preferred Security plus accumulated and unpaid distributions
thereon (the "Redemption Price") to the date of redemption. See "Description
of the Series A Preferred Securities--Redemption."
(continued on next page)
continued from previous page
Subject to the rights of holders of other series of Preferred
L.P. Units ranking on a parity with the Series A Preferred L.P. Units, in the
event of the liquidation, dissolution or winding-up of the Operating
Partnership, whether voluntary or involuntary, the holders of Series A
Preferred L.P. Units, after payment or provision for payment of debts and
other liabilities of the Operating Partnership, will be entitled to receive
$25 per Series A Preferred L.P. Unit and all accumulated and unpaid
distributions thereon and no more. The full preferential amount payable to
holders of Series A Preferred L.P. Units and such other series of outstanding
Preferred L.P. Units upon any such liquidation, dissolution, winding-up or
termination will be paid in full before any distribution or payment is made
to holders of Junior OP Units. Liquidation payments with respect to the
Series A Preferred Securities will be senior to liquidation payments on the
Common Securities and will have the same priority with respect to liquidation
payments on other series of Preferred Securities as are set forth in this
paragraph.
Upon consummation of the Offering, the Trust will operate as an
equity real estate investment trust (a "REIT") under the Internal Revenue Code
of 1986, as amended (the "Code"). To ensure that the Trust maintains its
qualification as a REIT, ownership by any person is generally limited to 9.8%
of the outstanding Series A Preferred Securities, with certain exceptions.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES A
PREFERRED SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING THE PURCHASE
OF SERIES A PREFERRED SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed financial and other information appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus
relates to the properties of the Operating Partnership as of September 30,
1997. In addition, all property, statistical and operating data relating to
the Existing Communities (as defined herein) in this Prospectus presented as
of any date prior to, or for any period ending on or prior to, June 30, 1997
excludes data for The Villas of Renaissance (as defined herein), which the
Operating Partnership acquired on June 30, 1997. All data relating to the
Existing Communities presented as of June 30, 1997 or any later date, or for
any period ending after June 30, 1997, includes data for The Villas of
Renaissance, unless otherwise indicated. See "Recent
Developments--'Off-Ranch' Expansion." Unless otherwise indicated, all
references in this Prospectus to The Irvine Company's interest in the
Operating Partnership or its ownership of Common L.P. Units includes the
interest and ownership of its affiliates.
The Operating Partnership
Irvine Apartment Communities, L.P., a Delaware limited
partnership, is engaged in the development and operation of multifamily rental
apartment communities in California. The Operating Partnership's management
and operating decisions are under the unilateral control of Irvine Apartment
Communities, Inc., a Maryland corporation, a self-administered equity real
estate investment trust. The Operating Partnership and the Company were formed
in December 1993 to continue and expand the apartment community business of
The Irvine Company, a real estate and community development company. At
September 30, 1997, the Company had a 45.2% general partnership interest in
the Operating Partnership and was its sole managing general partner. At such
date, the limited partners of the Operating Partnership had a 54.8% interest
in the Operating Partnership, represented by the Common L.P. Units, with The
Irvine Company and certain of its affiliates owning a 54.6% limited
partnership interest in the Operating Partnership.
As of September 30, 1997, the Operating Partnership owned and
operated 14,991 units in 51 high-quality apartment communities (the "Existing
Communities") and had four additional apartment communities aggregating 1,110
units under construction (the "Communities Under Construction" and, together
with the Existing Communities, the "Properties"). Upon completion of the
Communities Under Construction, the Operating Partnership will own a total of
16,101 units in 55 apartment communities, representing an increase in units of
approximately 42% since the Company's initial public offering (the "Initial
Public Offering") in December 1993. Through July 2020, the Company and the
Operating Partnership hold the exclusive right, but not the obligation, to
acquire land from The Irvine Company, the owner and developer of the Irvine
Ranch since 1864, for development of additional apartment communities on the
Irvine Ranch. Fifty-three of the Properties aggregating 14,836 units (the
"Irvine Ranch Properties") are or will be located on the Irvine Ranch, of
which 50 constitute Existing Communities (14,068 units) and three constitute
Communities Under Construction (768 units).
In 1997, the Operating Partnership commenced an "off-Ranch"
expansion program through the acquisition of rights to purchase three
apartment community development sites located in Northern California's Silicon
Valley. The Operating Partnership has exercised its right with respect to one
of these sites and has begun construction on a 342-unit apartment community on
the site. On October 23, 1997, the Board of Directors of the Company
authorized the Operating Partnership, subject to receipt of necessary
entitlements, to exercise another of the options. Construction of an
apartment community of approximately 155 units on this site is expected to
commence in the first half of 1998. Preliminary design and jurisdictional
approvals are also in process with respect to the remaining development site.
In addition, on June 30, 1997, the Operating Partnership purchased for $127
million an existing 923-unit apartment community ("The Villas of Renaissance")
located in Northern San Diego County (the "Villas of Renaissance
Acquisition"). See "Recent Developments--'Off-Ranch' Expansion." The
Operating Partnership believes that the economic expansion being experienced
by the State of California provides the Operating Partnership with significant
growth potential beyond the Irvine Ranch.
The Irvine Ranch is located in central Orange County,
California between San Diego and Los Angeles. The western boundary of the
Irvine Ranch borders approximately six miles of the Pacific Ocean. Today, the
portion of the Irvine Ranch which is still owned by The Irvine Company covers
approximately 50,000 acres and includes the largest remaining privately-owned
undeveloped acreage in Orange County. The developed portion of the Irvine
Ranch, which includes the City of Irvine and significant parts of the cities
of Newport Beach and Tustin, is one of the largest urban master-planned
communities in the United States. The Irvine Ranch has been developed over the
past 30 years in accordance with an original master plan (the "Master Plan")
which, over time, has been refined to accord with locally approved general
plans. The Irvine Ranch is one of the major commercial, industrial, retail
and residential centers in Southern California.
The Operating Partnership believes that a variety of factors
have contributed to the strong apartment market in Orange County, the
successful operating performance of the Existing Communities located on the
Irvine Ranch and the existence of significant opportunities for the
development of additional apartment communities on the Irvine Ranch. Most
important among these factors are:
o The dominant market position of the Operating Partnership,
which owns over 85% of all apartment communities having 100 or more
units on the Irvine Ranch;
o The Operating Partnership's 23-year exclusive right to acquire land
from The Irvine Company for development of additional rental
apartment communities on the Irvine Ranch;
o The limited supply of developable land, other than on the Irvine
Ranch, adjacent to major employment centers in Orange County;
o The Irvine Company's Master Plan strategy which emphasizes
market segmentation in order to ensure adequate and appropriate
allocation of land uses which support sustained growth for the long-
term;
o The high quality of design, construction and maintenance of the
Irvine Ranch Properties and their location in or near the City of
Irvine, which was ranked by the Federal Bureau of Investigation as
among the safest cities in the United States with a population of
100,000 or more;
o The close proximity of the Irvine Ranch Properties and of future
development sites to major employment centers, the Pacific Ocean,
high quality schools, and extensive resort, recreational and open
space amenities;
o An affluent, growing population and diversified employment
base in Orange County and on the Irvine Ranch;
o The Operating Partnership's ability to defer the purchase of
land on the Irvine Ranch under its land rights agreement until site and
zoning entitlements have been obtained, the land is ready for
construction and the Operating Partnership determines favorable market
conditions exist;
o The operating efficiencies available to the Operating Partnership
because the Irvine Ranch Properties are located in a single
geographic area;
o An average of 20 years of experience of the Company's 11 most senior
members of management in the design, development, construction,
property management and financing of apartment communities; and
o The effectiveness of management's policies regarding property
management and expense control.
The Operating Partnership's intent is to develop or acquire new
apartment communities in California. The Operating Partnership has recently
commenced operations in the Silicon Valley and Northern San Diego County,
which possess strong rental demographics and economic growth prospects similar
to those on the Irvine Ranch.
The Properties
As of September 30, 1997, the Operating Partnership owned and
operated 14,991 apartment units in the Existing Communities and had four
Communities Under Construction. The Operating Partnership believes that the
Properties are high quality apartment communities with superior locations near
major employment centers and, in the case of Irvine Ranch Properties, within
master-planned villages. The Properties are located within the following
individual jurisdictions:
Number of Number of Units Percent of Total
Location Properties (1) (1) Units
- -------- -------------- --------------- ----------------
[S] [C] [C] [C]
Orange County
Irvine............... 37 9,849 61.2%
Newport Beach........ 8 2,305 14.3
Tustin............... 7 2,170 13.5
Newport Coast........ 1 512 3.2
Silicon Valley
Cupertino............ 1 342 2.1
Northern San Diego
County La Jolla...... 1 923 5.7
-- ------ -----
Total................. 55 16,101 100.0%
== ====== =====
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(1) Four of these Properties (aggregating 1,110 units) are Communities Under
Construction.
Management and Control of the Operating Partnership
As sole general partner of the Operating Partnership, the
Company has the exclusive power to manage and conduct the business of the
Operating Partnership. The Company, in turn, is governed by a Board of
Directors, which has a majority of directors unaffiliated with The Irvine
Company. Furthermore, the Board of Directors of the Company has established a
committee of such unaffiliated directors (the "Independent Directors
Committee") whose approval is required with respect to all transactions
involving the Operating Partnership or the Company on the one hand and The
Irvine Company, affiliates of The Irvine Company or Mr. Bren on the other
hand, such as the acquisition of additional apartment communities or sites
therefor from The Irvine Company.
Consent of The Irvine Company is required by the Amended and
Restated Agreement of Limited Partnership of the Operating Partnership, as
amended (the "Partnership Agreement") for, among other things, (i) to sell all
or substantially all of the assets of the Operating Partnership, (ii) for the
Company to take title to assets (other than temporarily in connection with an
acquisition prior to contributing such assets to the Operating Partnership) or
for the Company to conduct business other than through the Operating
Partnership, (iii) for the Operating Partnership to engage in any business
other than the development and ownership of apartment communities or (iv) in
connection with the liquidation of the Operating Partnership. The Partnership
Agreement requires, absent receipt of consent, that title to assets be in the
Operating Partnership in order to maintain a one-for-one exchange ratio between
Common L.P. Units and shares of common stock of the Company (the "Common
Stock"). See "Operating Partnership Agreement--Management."
At the option of The Irvine Company, (i) The Irvine Company's
54.6% limited partnership interest in the Operating Partnership is
exchangeable for Common Stock of the Company pursuant to the exchange rights
(the "Exchange Rights") set forth in the Partnership Agreement (subject to the
ownership limit applicable to The Irvine Company and certain related persons
contained in the Articles of Amendment and Restatement (the "Articles of
Incorporation") of the Company), and (ii) pursuant to the cash tender rights
(the "Cash Tender Rights"), set forth in the Partnership Agreement, The Irvine
Company's 54.6% limited partnership interest may be tendered to the Company
for cash payable solely out of the net proceeds of an offering of Common Stock
of the Company.
IAC Capital Trust
IAC Capital Trust is a statutory business trust formed on
October 31, 1997 under the Delaware Business Trust Act (the "Business Trust
Act") pursuant to a declaration of trust among the Trustees (as defined
herein), the Company and the Operating Partnership, and the filing of a
certificate of trust with the Secretary of State of the State of Delaware.
Such declaration will be amended and restated in its entirety (as so amended
and restated, the "Declaration") substantially in the form filed as an exhibit
to the Registration Statement of which this Prospectus forms a part, as of the
date the Series A Preferred Securities are initially issued. The Company and
certain members of management of the Company will acquire all of the Common
Securities of the Trust, representing common undivided beneficial interests in
all of the assets of the Trust, for an aggregate consideration of $5,000.
From time to time the Trust may issue additional series of Preferred
Securities and invest the proceeds of any such issuance in an additional
series of Preferred L.P. Units of the Operating Partnership. Each series of
Preferred Securities represents a preferred undivided beneficial interest in
the assets of the Trust, subject to its priority and payment terms. The Trust
exists solely for the purpose of (a) issuing its Preferred Securities (and, if
applicable, Excess Preferred Securities (as defined herein)), (b) issuing its
Common Securities to the persons described above and investing the proceeds
thereof in an interest bearing account in, or certificate of deposit of, a
bank, (c) investing the proceeds from the sale of each series of Preferred
Securities in a corresponding series of Preferred L.P. Units of the Operating
Partnership and (d) engaging in such other activities as are necessary,
convenient or incidental thereto. The rights of the holders of the Preferred
Securities and the Common Securities (collectively, the "Trust Securities"),
including economic rights, rights to information and voting rights, are as set
forth in the Declaration and the Business Trust Act. The Declaration does not
permit the incurrence by the Trust of any indebtedness for borrowed money or
the making of any investment other than in Preferred L.P. Units of the
Operating Partnership and as described above in connection with the investment
of the proceeds from the sale of the Common Securities. In the Declaration,
the Operating Partnership has agreed to reimburse all obligations (other than
with respect to the Trust Securities) and all costs and expenses of the Trust,
including the fees and expenses of the Trustees and any income taxes, duties
and other governmental charges, and all costs and expenses with respect
thereto, to which the Trust may become subject, except for withholding taxes.
Structure and Ownership
The following diagram depicts the ownership of the Trust and
the Operating Partnership upon consummation of the Offering.
Depiction of the ownership of the Trust and the Operating
Partnership as well as the flow of proceeds received upon consummation of
the Offering.
Tax Status of the Trust
The Trust will elect to be taxed as a REIT under the Code,
commencing with its taxable year ending December 31, 1997. If the Trust
qualifies for taxation as a REIT, then under current federal income tax laws it
generally will not be subject to federal corporate income tax on its net
income that is currently distributed to holders of its Trust Securities to the
extent it currently distributes at least 95% of its net taxable income to the
holders of its Trust Securities. Even if the Trust qualifies for taxation as
a REIT, the Trust may be subject to certain federal, state and local taxes on
its income and property and to federal income and excise tax on its
undistributed income. See "Certain Federal Income Tax Considerations."
Risk Factors
Prospective investors should carefully consider the matters
discussed under "Risk Factors" prior to making an investment decision
regarding the Series A Preferred Securities offered hereby. Some of the
significant considerations include:
o General investment risks associated with real estate,
including:
- risks associated with the development or acquisition of new
apartment communities, including the possible inability of The
Irvine Company to obtain Village Related Entitlements;
construction, lease-up and financing risks; and the
possibility that newly developed or acquired properties will
fail to perform as expected;
- the effect of local economic conditions, such as unemployment
rates, supply of and demand for apartments, and other
conditions on apartment community cash flows and values
(including the risk arising out of concentration of the
Properties in Orange County); the ability of residents to make
rent payments; the ability of a property to generate income
sufficient to meet operating expenses (including real estate
taxes) and debt service; and the current illiquidity of real
estate investments, all of which may affect the Operating
Partnership's ability to make expected distributions; and
- the potential losses in the event of a casualty loss (e.g., an
earthquake) that is not insured, insurable or economically
insurable.
o The Trust's ability to make distributions and other payments
on the Series A Preferred Securities is effectively dependent upon the
Operating Partnership making distributions and other payments on the
Series A Preferred L.P. Units held as trust assets. If the Operating
Partnership were not to make distributions or other payments on the
Series A Preferred L.P. Units for any reason, the Trust will not make
payments on the Series A Preferred Securities.
o Conflicts of interest with, and influence of, The Irvine
Company, including the substantial influence of The Irvine Company and
its three nominees to the Board of Directors of the Company over the
affairs of the Operating Partnership.
o The Irvine Company will determine which land will be
designated for rental apartment community development on the Irvine
Ranch. In addition, The Irvine Company will control the application for
initial land use approvals from local governing entities ("Village
Related Entitlements") and will also have certain approval rights with
respect to the architectural design and physical layout of rental
apartment communities.
o Potential for early termination of the Land Rights Agreement,
as amended, among the Company, the Operating Partnership, The Irvine
Company and Mr. Bren (the "Land Rights Agreement") upon the occurrence
of certain events, including the failure of the shareholders of the
Company to elect as directors of the Company those persons nominated
therefor by The Irvine Company. If the Land Rights Agreement is
terminated as a result of the occurrence of one of these events, the
Operating Partnership would no longer have an option to acquire
apartment community land sites from The Irvine Company and The Irvine
Company and Mr. Bren would no longer be prohibited from acquiring or
developing apartment communities on or off the Irvine Ranch in
competition with the Operating Partnership. Accordingly, the
termination of the Land Rights Agreement would likely have a material
adverse effect on the future development activities of the Operating
Partnership on the Irvine Ranch.
o Financing risks, including the ability of the Operating Partnership
to incur substantial indebtedness, subject to certain covenants in
the Operating Partnership's debt agreements, thereby permitting the
Operating Partnership to become more highly leveraged. This
increased leverage could result in increased debt service
requirements and adversely affect the ability of the Operating
Partnership to make required distributions on the Series A
Preferred L.P. Units, which in turn would adversely affect the
ability of the Trust to make required distributions on the Series A
Preferred Securities.
o Taxation of the Trust as a corporation if it fails to qualify as a
REIT, and the resulting decrease in the funds available for
distribution as a consequence of the Trust's liability for federal,
state and local taxes on its income in such event. In such event,
the Series A Preferred L.P. Units may be redeemed by the Operating
Partnership, in which event the Series A Preferred Securities will
also be redeemed. See "Description of the Series A Preferred
Securities--Redemption" and "Description of the Series A L.P.
Units--Redemption."
o Restrictions on ownership of more than 9.8% of the
outstanding Series A Preferred Securities (the "Ownership Limit").
o Lack of prior market for the Series A Preferred Securities.
The Offering
Issuer.............................. IAC Capital Trust, a Delaware business
trust (the "Trust").
Securities Offered.................. 4,000,000 __% Series A REIT Enhanced
Trust Originated Preferred Securities
(the "Series A Preferred Securities")
of IAC Capital Trust (4,600,000
Series A Preferred Securities if the
Underwriters' overallotment option
is exercised in full).
Assets of the Trust................. The Trust will invest the proceeds from
the sale of the Series A Preferred
Securities in Series A Preferred L.P.
Units. The assets of the Trust will
initially consist solely of the Series
A Preferred L.P. Units and the
investment made in connection with
proceeds from the sale of the Common
Securities of the Trust.
Relationship to Series A
Preferred L.P. Units................ The distribution rate and the
distribution and other payment dates
for the Series A Preferred Securities
will correspond to the distribution
rate and the distribution and other
payment dates for the Series A
Preferred L.P. Units deposited in the
Trust as trust assets. See
"Relationship Between the Preferred
Securities and the Preferred L.P.
Units."
Distributions; Dependence on
Distributions on Series A
Preferred L.P. Units................ Distributions on the Series A Preferred
Securities will accumulate from
_________________, 1997 and will be
payable at an annual rate of _____% of
the liquidation amount of $25 per
Series A Preferred Security.
Distributions will be payable quarterly
in arrears on ________, ________,
________ and _______ of each year,
commencing on _________, 1998. The
ability of the Trust to pay
distributions on the Series A Preferred
Securities is effectively dependent on
the receipt of distributions from the
Operating Partnership on the Series A
Preferred L.P. Units.
Liquidation Amount.................. Upon any dissolution, liquidation or
winding-up of the Operating
Partnership, the Trust will also
terminate and holders of Series A
Preferred Securities will be entitled
to receive, after payment or provision
for payment of liabilities of the Trust
and subject to the right of holders of
other series of Preferred Securities
ranking on a parity with the Series A
Preferred Securities, $25 per Series A
Preferred Security plus accumulated and
unpaid distributions thereon and no
more. See "Description of the Series A
Preferred Securities--Liquidation."
Redemption.......................... Except as described below, the Series A
Preferred L.P. Units are not redeemable
prior to _____. On or after ______,
the Series A Preferred L.P. Units may be
redeemed at the option of the Operating
Partnership, in whole or from time to
time in part, at a redemption price of
$25 per Series A Preferred L.P. Unit,
plus accumulated and unpaid
distributions, if any, to the
redemption date. The Series A
Preferred L.P. Units may also be
redeemed at any time upon the
occurrence of a Tax Event or Investment
Company Act Event. The redemption
price (other than the portion
consisting of accumulated and unpaid
distributions) will be payable solely
out of the sale proceeds of capital
stock of the Company, which will be
contributed by the Company to the
Operating Partnership as an additional
capital contribution, or the sale
proceeds of L.P. Units, and from no
other source. If the Operating
Partnership redeems Series A Preferred
L.P. Units, the Trust must redeem in
cash Series A Preferred Securities
having an aggregate liquidation amount
equal to the aggregate stated value of
the Series A Preferred L.P. Units so
redeemed, at $25 per Series A Preferred
Security plus accumulated and unpaid
distributions thereon to the date of
redemption. See "Description of the
Series A Preferred
Securities--Redemption" and
"Description of the Series A Preferred
L.P. Units--Redemption."
Term of Securities.................. The Series A Preferred Securities and
the Series A Preferred L.P. Units will
have a stated maturity of December 31,
2092. Unless previously redeemed, the
Series A Preferred Securities and the
Series A Preferred L.P. Units will be
redeemed for cash upon termination of
the Operating Partnership. The
Operating Partnership will terminate on
December 31, 2092, unless sooner
dissolved.
No Conversion Rights; No Sinking Fund Neither the Series A Preferred L.P.
Units nor the Series A Preferred
Securities will be subject to any
sinking fund or be convertible into any
securities of the Company, the
Operating Partnership or the Trust.
Voting Rights....................... Holders of Series A Preferred
Securities will have no voting rights
except in limited circumstances. See
"Description of the Series A Preferred
Securities--Voting Rights."
Ranking............................. The Series A Preferred L.P. Units will,
with respect to distribution rights and
rights upon liquidation, dissolution
and winding-up of the Operating
Partnership, rank (i) senior to the
G.P. Units and the Common L.P. Units and
(ii) on a parity with all other series
of Preferred L.P. Units issued by the
Operating Partnership unless the terms
of such other series specifically
provide that such series rank junior to
the Series A Preferred L.P. Units. The
Series A Preferred Securities will,
with respect to distribution rights and
rights upon liquidation, dissolution
and winding-up of the Trust, rank (i)
senior to the Common Securities and
(ii) on a parity with all other series
of Preferred Securities issued by the
Trust unless the terms of such other
series specifically provide that such
series rank junior to the Series A
Preferred Securities. See "Description
of the Series A Preferred
Securities--Ranking" and "Description
of the Series A Preferred L.P.
Units--Ranking."
Use of Proceeds..................... The proceeds from the sale of the
Series A Preferred Securities after
payment of the underwriting discount
will be invested by the Trust in Series
A Preferred L.P. Units of the Operating
Partnership. After payment of other
expenses associated with the Offering,
the Operating Partnership will use a
portion of the proceeds received by it
upon issuance of the Series A Preferred
L.P. Units to repay all indebtedness
outstanding under the Operating
Partnership's Credit Facility (as
defined herein), and the remainder of
such proceeds will be used for general
partnership purposes, including ongoing
development activities on and off the
Irvine Ranch and the possible
acquisition of additional properties
off the Irvine Ranch. See "Use of
Proceeds."
New York Stock Exchange Symbol...... " "
Summary Financial Data
The following Summary Financial Data (other than statistical
and property data) has been derived from the Operating Partnership's or the
Operating Partnership's predecessor's (the "Predecessor's") consolidated
financial statements. Information as of December 31, 1996 and 1995 and for
each of the years in the three year period ended December 31, 1996 has been
derived from the Operating Partnership's audited financial statements included
herein. Information for the year ended December 31, 1993 has been derived
from audited financial statements not included herein of the Company and the
Predecessor and is on a combined and consolidated historical basis for the
Operating Partnership and the Predecessor. Information at December 31, 1994
and 1993 has been derived from the Company's audited financial statements not
included herein and information at and for the year ended December 31, 1992
has been derived from the Predecessor's audited financial statements not
included herein. Information at September 30, 1997 and for the respective
nine month periods ended September 30, 1997 and 1996 has been derived from the
Operating Partnership's unaudited consolidated financial statements included
herein and which, in the opinion of the Operating Partnership, reflect all
adjustments considered necessary for a fair presentation. Results for the
nine month period ended September 30, 1997 are not necessarily indicative of
results for the full year. All such financial information is qualified in its
entirety by reference to, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements (including the notes
thereto) included herein.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------- ----------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
------ ------ ------ ------ ------ --------- ------
(in thousands, except property information, ratios and per unit amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Operating
Data:
Revenues:
Rental income............. $133,114 $114,000 $154,925 $133,678 $127,338 $123,101 $119,097
Other income.............. 3,093 2,317 3,162 2,079 1,585 1,659 2,097
Interest income........... 659 419 611 411 1,313 60 --
------- ------- ------- ------- ------- ------- -------
136,866 116,736 158,698 136,168 130,236 124,820 121,194
------- ------- ------- ------- ------- ------- -------
Expenses:
Property expenses......... 28,790 24,903 33,859 31,761 33,105 34,057 35,685
Real estate taxes......... 10,959 10,023 13,496 12,002 11,786 10,729 9,921
Property management
fees.................... 3,809 3,316 4,502 3,893 3,800 3,881 4,393
Interest expense, net..... 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of
deferred financing
costs................... 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Depreciation and
amortization............ 21,700 20,346 27,239 23,143 21,055 20,002 19,808
General and
administrative.......... 4,822 4,890 6,277 5,909 5,442 3,278 2,359
------- ------- ------- -------- -------- -------- --------
93,911 87,831 117,506 111,112 117,957 125,207 122,794
------- ------- ------- -------- -------- -------- --------
Income (loss) before
extraordinary item........ 42,955 28,905 41,192 25,056 12,279 (387) (1,600)
Extraordinary item--
charge related to debt
extinguishment............ -- -- -- (23,427) -- (12,487) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss).......... $ 42,955 $ 28,905 $ 41,192 $ 1,629 $ 12,279 $(12,874) $ (1,600)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per unit. $ 0.99 $ 0.75 $ 1.06 $ 0.05 $ 0.41 $ (0.43)
======== ======== ======== ======== ======== ======== ========
Statistical and Property
Data:
Total stabilized
communities (at period
end)(2)................... 51 47 48 43 43 42 42
Apartment units (at
period end)............... 14,991 13,541 13,656 12,776 11,358 11,334 10,952
Average units in
stabilized
communities(2)(3)(6)...... 13,683 11,786 12,139 11,334 11,334 10,799 10,446
Average physical
occupancy in stabilized
communities(2)(3)(6)...... 94.5% 94.8% 94.9% 94.6% 95.6% 96.3% 96.2%
Other Data:
Average monthly rent per
unit(3)(4)(6)............. $ 1,101 $ 1,012 $ 1,025 $ 996 $981 $963 $950
Capital replacements per
unit(3)(5)(6)............. $ 234 $ 247 $ 393 $ 399 $490 $482 $458
EBITDA(7).................. $ 88,486 $ 73,604 $100,564 $ 82,603 $76,103 $72,875 $68,836
Ratio of EBITDA to
interest expense(7)(8).... 4.03x 3.29x 3.41x 3.19x 2.84x 1.45x 1.40x
Cash flows provided by
(used in):
Operating activities...... $ 69,432 $ 55,748 $ 73,037 $55,403 $49,786 $10,249 $16,171
Investing activities...... $(205,807) $(44,220) $(66,616) $(128,218) $(50,918) $(23,649) $(19,285)
Financing activities...... $ 135,543 $ (8,356) $ (7,608) $73,739 $(23,316) $36,428 $3,516
</TABLE>
<TABLE>
<CAPTION>
As of As of December 31,
September 30,
1997 1996 1995 1994 1993 1992
------------- ---- ---- ----- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets...................... $1,101,826 $900,998 $853,230 $757,240 $740,120 $654,694
Total debt........................ 666,826 553,064 563,286 540,689 513,943 555,491
Total liabilities................. 706,073 580,654 588,664 566,191 527,776 564,420
Partners' capital................. 395,753 320,344 264,566 191,049 212,344 90,274
- ------------
(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Operating Partnership from December 8 through December 31, 1993.
(2) A property is stabilized at the earlier of (i) one year after completion
of construction or (ii) when it achieves 95% occupancy.
(3) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of
stabilized occupancy.
(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.
(5) Data for the year ended December 31, 1992 exclude capital replacements
totaling $534 per unit relating to a major renovation program at the
Operating Partnership's Promontory Point apartment community due to the
nonrecurring nature of the program.
(6) Excludes The Villas of Renaissance.
(7) EBITDA represents earnings before interest, depreciation and amortization
and extraordinary items. EBITDA should not be considered as an
alternative to operating income, as determined in accordance with
generally accepted accounting principles ("GAAP"), as an indicator of
the Operating Partnership's operating performance, or to cash flows
from operating activities (as determined in accordance with GAAP) as a
measure of liquidity.
(8) The Operating Partnership did not have any Preferred L.P. Units
outstanding in any of the periods indicated, and, therefore, the ratio of
EBITDA to interest expense and preferred securities distributions for each
of the periods indicated was equal to the ratio of EBITDA to interest
expense for such period.
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before making an investment in the Series A Preferred Securities.
Factors Relating to Real Estate Operations and Development
General. Real property investments are subject to varying
degrees of risk. The investment returns available from equity investments in
real estate depend in large part on the amount of income earned and capital
appreciation generated by the related properties as well as the expenses
incurred. If the Properties do not generate revenue sufficient to meet
operating expenses, including debt service and capital expenditures, the
Operating Partnership's income and ability to service its debt and other
obligations and to make distributions on its partnership interests, including
the Series A Preferred L.P. Units, will be adversely affected. In addition,
the Properties consist primarily of apartment communities located in Orange
County. Income from and the performance of the Irvine Ranch Properties may
therefore be adversely affected by the general economic climate in Orange
County, including unemployment rates and local conditions such as the supply
of and demand for apartments in the area, the attractiveness of the Irvine
Ranch Properties to residents, zoning or other regulatory restrictions,
competition from other available apartments and alternative forms of housing,
the affordability of single family homes, the ability of the Operating
Partnership to provide adequate maintenance and insurance and the potential of
increased operating costs (including real estate taxes). Certain significant
expenditures associated with an investment in real estate (such as mortgage
and other debt payments, real estate taxes and maintenance costs) generally
are not reduced when circumstances cause a reduction in revenue from the
investment. In addition, income from properties and real estate values are
also affected by a variety of other factors, such as governmental regulations
and applicable laws (including real estate, zoning and tax laws), interest
rate levels and the availability of financing. The Irvine Ranch Properties in
the aggregate historically have generated positive cash flow from operations;
however, no assurance can be given that such will be the case in the future.
In 1997, the Operating Partnership commenced an "off-Ranch"
expansion program through the acquisition of rights to purchase three
apartment community development sites located in Northern California's Silicon
Valley. The Operating Partnership commenced construction of a 342-unit
apartment community on one of such sites in May 1997 and on October 23, 1997,
the Company's Board of Directors authorized, subject to receipt of necessary
entitlements, the acquisition of another of the development sites.
Construction of an apartment community of approximately 155 units on this site
is expected to commence in the first half of 1998. On June 30, 1997, the
Operating Partnership acquired an existing 923-unit apartment community
located in Northern San Diego County. These new Properties represent the
Operating Partnership's first strategic expansion off the Irvine Ranch and the
Operating Partnership may make additional investments in California in the
future. The development, construction and operation of rental apartment
communities in such new markets may present risks different from or in addition
to the risks discussed above related to the Irvine Ranch Properties, which are
located entirely in Orange County. In addition, in contrast to acquisitions
of land pursuant to the Land Rights Agreement in which a substantial portion
of pre-development costs and expenses, including the cost and expense of
obtaining Village Related Entitlements, is borne solely by The Irvine Company,
all pre-development costs and expenses in connection with "off-Ranch"
expansion will be borne by the Operating Partnership and the Operating
Partnership will bear all risk relating to the failure to obtain entitlements.
For jurisdictions off the Irvine Ranch, local jurisdiction approvals with
respect to entitlements may impose requirements and conditions different from
those applicable to the Irvine Ranch. No assurance can be given that the
Operating Partnership will be successful in pursuing any additional "off-Ranch"
expansion or that any "off-Ranch" apartment communities will be successful.
Equity real estate investments, such as the investments made by
the Operating Partnership in the Properties and any additional properties that
may be developed or acquired by the Operating Partnership, are relatively
illiquid. Such illiquidity limits the ability of the Operating Partnership to
vary its portfolio in response to changes in economic or other conditions.
The Properties are subject to all operating risks common to
apartment ownership in general. Such risks include: the Operating
Partnership's ability to rent units at the Properties, including the 1,110
units in the Communities Under Construction; competition from other apartment
communities; excessive building of comparable properties which might adversely
affect apartment occupancy or rental rates; increases in operating costs due to
inflation and other factors, which increases may not necessarily be offset by
increased rents; increased affordable housing requirements that might
adversely affect rental rates; inability or unwillingness of residents to pay
rent increases; and future enactment of rent control laws or other laws
regulating apartment housing, including present and possible future laws
relating to access by disabled persons. If operating expenses increase, the
local rental market may limit the extent to which rents may be increased to
meet increased expenses without decreasing occupancy rates. If any of the
above occurred, the Operating Partnership's ability to meet its debt service
and other obligations and to make distributions on its partnership interests,
including with respect to the Series A Preferred L.P. Units, could be
adversely affected.
Real Estate Development and Acquisition. A primary focus of
the Operating Partnership is on development of new apartment communities on
sites acquired or that may be acquired in the future primarily from The Irvine
Company, although the Operating Partnership also plans to develop new rental
apartment communities on sites acquired or that may be acquired in the future
from third parties. The Operating Partnership has also acquired and may
continue to acquire completed rental apartment communities. See "Recent
Developments--'Off-Ranch' Expansion." The real estate development business
involves significant risks in addition to those involved in the ownership and
operation of established apartment communities, including the risks that
specific project approvals may take more time and resources to obtain than
expected, that construction may not be completed on schedule or budget and
that apartment communities may not achieve anticipated rent or occupancy
levels. In addition, if long-term debt or equity financing is not available
on acceptable terms to refinance new development or acquisitions undertaken
without long-term financing, further development activities or acquisitions
might be curtailed or cash available for debt service and other obligations
might be adversely affected.
Insurance. The Operating Partnership carries comprehensive
liability, fire, extended coverage and rental loss insurance covering all of
the Properties, with policy specifications and insured limits which the
Operating Partnership believes are adequate and appropriate under the
circumstances. There are, however, certain types of losses (such as from
earthquakes) that are not generally insured because they are either
uninsurable or not economically insurable. The Operating Partnership does not
carry earthquake insurance on any of the Properties. Should an uninsured loss
or a loss in excess of insured limits occur, the Operating Partnership could
lose its capital invested in the Property, as well as the anticipated future
revenues from the Property and, in the case of debt which is recourse to the
Operating Partnership, would remain obligated for any mortgage debt or other
financial obligations related to the Property. Any such loss would adversely
affect the Operating Partnership. The Operating Partnership believes that the
Properties are adequately insured. In addition, in light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all newly built and renovated
buildings, including apartment buildings, the current and strictest
construction standards having been adopted in 1984. Thirty-two of the 51
Existing Communities (representing approximately 68.9% of the units in the
Existing Communities) have been completed and occupied since January 1, 1985
and the Operating Partnership believes that all of the Existing Communities
were constructed, and all of the Communities Under Construction are being
constructed, in full compliance with the applicable standards existing at the
time of construction. While earthquakes have occurred from time to time in
California, the Operating Partnership has not experienced any material losses
as a result of earthquakes. No assurance can be given that this will be the
case in the future.
Ranking of Series A Preferred Securities; Dependence on Operating Partnership
The Series A Preferred L.P. Units rank junior to all existing
and future debt and other liabilities of the Operating Partnership and its
subsidiaries and senior in right of payment, and upon liquidation, dissolution
or winding-up of the Operating Partnership, to the Junior OP Units now or
hereafter issued by the Operating Partnership and on a parity with any other
series of Preferred L.P. Units hereafter issued, unless the terms of such
other series state that such Preferred L.P. Units rank junior to the Series A
Preferred L.P. Units. Each series of Preferred Securities of the Trust will
have the same rank as to other series of Preferred Securities as the
corresponding series of Preferred L.P. Units purchased by the Trust with the
proceeds from the issuance of such series of Preferred Securities has to other
series of Preferred L.P. Units. There are no terms in the Series A Preferred
Securities or the Series A Preferred L.P. Units that restrict the ability of
the Operating Partnership from incurring additional debt or other liabilities
or issuing additional series of Preferred L.P. Units. See "Description of the
Series A Preferred Securities."
The Trust's ability to make distributions and other payments on
the Series A Preferred Securities is effectively dependent upon the Operating
Partnership making distributions and other payments on the Series A Preferred
L.P. Units held as trust assets. If the Operating Partnership were not to
make distributions or other payments on the Series A Preferred L.P. Units for
any reason, the Trust will not make payments on the Series A Preferred
Securities.
The Declaration provides that the Operating Partnership shall
reimburse all obligations (other than with respect to the Trust Securities)
and all costs and expenses of the Trust, including any taxes and all costs and
expenses with respect thereto, to which the Trust may become subject, except
for withholding taxes. No assurance can be given that the Operating
Partnership will have sufficient resources to enable it to pay such debts,
obligations, costs and expenses on behalf of the Trust.
Conflicts of Interest
Control of the Company and the Operating Partnership; Influence
of Certain Directors and The Irvine Company. The Irvine Company has the right
to nominate for election to the Board of Directors of the Company (any such
person, an "Irvine Company Board Representative") three members of such Board
of Directors so long as The Irvine Company, its stockholders or its affiliates
beneficially own at least 20% of the outstanding shares of Common Stock of the
Company (including for these purposes shares issuable upon exercise of the
right set forth in the Partnership Agreement to exchange Common L.P. Units for
shares of Common Stock of the Company subject to the ownership limit
provisions applicable to The Irvine Company set forth in the Company's Articles
of Incorporation). In the event this ownership falls below 20% but is at
least 15%, The Irvine Company has the right to nominate two persons for
election to the Board of Directors; and if this ownership falls below 15% but
is at least 10%, The Irvine Company has the right to nominate one person for
election to the Board of Directors. See "Management--Executive Officers and
Directors." In addition, the Articles of Incorporation and Bylaws of the
Company(the "Bylaws") provide that a majority of the total number of directors
of the Company, including at least one Irvine Company Board Representative,
shall constitute a quorum for the transaction of business and, except as
provided below, that the affirmative vote of the majority of the directors
present at a meeting at which a quorum is present shall be the act of all of
the Board of Directors. Notwithstanding the foregoing, the approval of
directors of the Company representing more than 75% of the Board of Directors
as a whole (the "Required Directors") is required with respect to certain
actions, and certain matters relating to the Operating Partnership will
require the approval of the holders of a majority of the Common L.P. Units.
See "Management--Certain Rights of The Irvine Company with Respect to the
Company's Board of Directors." Accordingly, The Irvine Company will have
substantial influence over the affairs of the Operating Partnership, which
influence might not be consistent with the interests of other holders of L.P.
Units or the holders of the Series A Preferred Securities.
The Company has adopted certain policies and entered into
certain agreements with The Irvine Company and Mr. Bren designed to eliminate
or minimize potential conflicts of interest. The Board of Directors of the
Company has adopted a policy and has provided in the Company's Bylaws that no
transaction between the Company or the Operating Partnership on the one hand
and The Irvine Company, affiliates of The Irvine Company or Mr. Bren on the
other hand may be entered into without the approval of the Independent
Directors Committee of the Company's Board of Directors. Members of the
Independent Directors Committee are unaffiliated with The Irvine Company. In
addition, the Independent Directors Committee engages an independent
consultant to assist it in evaluating all land transactions with The Irvine
Company. However, there can be no assurance that these policies will be
successful in eliminating the influence of such conflicts and, if they are not
successful, decisions could be made that might fail to reflect fully the
interests of the Operating Partnership.
Other Business Activities of The Irvine Company. The Irvine
Company has significant business interests in developed industrial, commercial
and other properties and in the future development of such properties on the
Irvine Ranch, the value of which exceeds the value of its aggregate interest
in the Company and the Operating Partnership. The feasibility and development
of other apartment communities by the Operating Partnership on the Irvine
Ranch may be affected by the feasibility and development of commercial,
industrial and residential for-sale properties by The Irvine Company on the
Irvine Ranch. No assurance can be given that The Irvine Company will not
determine that certain potential apartment community sites on undeveloped
portions of the Irvine Ranch should be developed as single family, for-sale
homes or condominiums or as industrial or commercial properties.
The Irvine Company Controls Land Designation and the Timing of Land
Designation pursuant to the Land Rights Agreement; Inability of The Irvine
Company to Deliver Entitled Properties
Purchases of properties by the Operating Partnership from The
Irvine Company under the Land Rights Agreement may be made only with the
approval of a majority of the Independent Directors Committee. The Irvine
Company determines which land is designated for apartment community
development in accordance with the Master Plan for the Irvine Ranch, and
therefore which land is eligible for purchase by the Operating Partnership
pursuant to the Land Rights Agreement. No assurance can be given that The
Irvine Company will entitle land for development of additional apartment
communities at a rate consistent with prior development. Before an apartment
may be developed on the Irvine Ranch, the Irvine Company must obtain Village
Related Entitlements. The Irvine Company controls the application for Village
Related Entitlements and also has certain approval rights with respect to the
architectural design and physical layout of the rental apartment communities.
The applications for Village Related Entitlements will be obtained
independently by The Irvine Company. The discretionary nature of approval for
Village Related Entitlements, together with the variety of concerns which may
be raised by government officials and public interest groups during the
approval process, may adversely affect The Irvine Company's ability to entitle
future apartment sites and offer them to the Operating Partnership for
development. Thus, the Operating Partnership's ability to develop future
properties on the Irvine Ranch may be delayed, reduced or prevented.
Risk of Early Termination of the Exclusive Land Rights and Non-Competition
Arrangements with The Irvine Company and Mr. Bren
The Irvine Company and Mr. Bren have agreed not to directly or
indirectly acquire or develop, or acquire an equity ownership interest in any
entity that has an ownership interest in, any apartment community, whether on
or off the Irvine Ranch. The prohibition on The Irvine Company and Mr. Bren
from developing apartment communities on the Irvine Ranch will terminate on
July 31, 2020. The Irvine Company and Mr. Bren will remain prohibited from
engaging in any such activity off the Irvine Ranch until the date on which
both of the following conditions are satisfied: (i) no nominee of The Irvine
Company is a member of the Company's Board of Directors and (ii) The Irvine
Company and certain related persons beneficially own less than 20% of the
outstanding Common Stock of the Company in the aggregate (including for these
purposes shares of Common Stock issuable upon exchange of its Common L.P.
Units pursuant to the Exchange Rights, subject to the ownership limit provision
applicable to The Irvine Company under the Company's Articles of
Incorporation). As of September 30, 1997, The Irvine Company owned 1,216,882
shares of Common Stock of the Company and 24,019,647 Common L.P. Units
exchangeable for Common Stock of the Company on a one-for-one basis, subject
to adjustment. The Land Rights Agreement may be terminated earlier upon the
occurrence of the following events, none of which are within the control of
The Irvine Company: (i) the failure of the shareholders of the Company to
elect as directors of the Company the number of directors The Irvine Company
is entitled to nominate, (ii) the failure of the Company's Board of Directors
to elect a person designated by The Irvine Company to fill a vacancy created
by the departure from the Board (for any reason) of a director designated by
The Irvine Company and (iii) during the period that The Irvine Company has the
right to nominate three persons to the Board of Directors of the Company, the
provisions of the Company's Articles of Incorporation and Bylaws requiring the
approval of the Required Directors to take certain actions are repealed,
modified, or amended without the prior written consent of The Irvine Company.
If the Land Rights Agreement is terminated as a result of the occurrence of
one of these events, the Operating Partnership would no longer have an option
to acquire apartment community land sites from The Irvine Company and The
Irvine Company and Mr. Bren would no longer be prohibited from acquiring or
developing, or acquiring an equity ownership interest in any entity that has
an ownership interest in, apartment communities on or off the Irvine Ranch in
competition with the Operating Partnership. Accordingly, the termination of
the Land Rights Agreement would likely have a material adverse effect on the
future development activities of the Operating Partnership on the Irvine
Ranch. See "Management--Certain Rights of The Irvine Company with Respect to
the Company's Board of Directors."
Risks Associated with Debt Financing
Where possible, the Operating Partnership seeks to use leverage
to increase the rate of return on its investments and to allow the Operating
Partnership to make more investments than it otherwise could. Such use of
leverage presents an element of risk in the event that the cash flow from the
Properties is insufficient to meet the Operating Partnership's debt service
and other obligations or to make distributions with respect to its partnership
interests, including with respect to the Series A Preferred L.P. Units. In
addition, all debt and other liabilities of the Operating Partnership would
rank senior to the Series A Preferred L.P. Units, with a prior claim on the
assets of the Operating Partnership. As of September 30, 1997, the Operating
Partnership had approximately $706.1 million of total liabilities reflected on
the Operating Partnership's balance sheet.
Adverse Consequences of Failure to Qualify as a REIT
The Trust intends to operate so as to qualify as a REIT under
the Code.
Although the Trust believes that it will be organized and will
operate in such a manner, no assurance can be given that the Trust will be
able to operate in such a manner so as to qualify as a REIT under the Code or
to remain so qualified. Qualification as a REIT involves the application of
highly technical and complex Code provisions for which there are only limited
judicial or administrative interpretations. The determination of various
factual matters and circumstances not entirely within the Trust's control may
affect its ability to qualify as a REIT. In addition, no assurance can be
given that legislation, new regulations, administrative interpretations, or
court decisions will not significantly change the tax laws with respect to the
qualification as a REIT or the federal income tax consequences of such
qualification; however, the Trust is not aware of any proposal in Congress to
amend the tax laws that would materially and adversely affect the Trust's
ability to operate as a REIT.
The Trust is relying on the opinion of Davis Polk & Wardwell,
tax counsel to the Operating Partnership and the Trust, regarding various
issues affecting the Trust's ability to qualify, and retain qualification, as
a REIT. See "Legal Matters." Such legal opinions are not binding on the
Internal Revenue Service ("IRS"). See "Certain Federal Income Tax
Considerations."
If in any taxable year the Trust fails to qualify as a REIT,
the Trust would not be allowed a deduction for distributions to holders of
Preferred Securities in computing its taxable income and would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. In such event, the Series A
Preferred L.P. Units may be redeemed by the Operating Partnership, in which
event the Series A Preferred Securities will also be redeemed. See
"Description of the Series A Preferred L.P. Units--Redemption."
Notwithstanding that the Trust currently intends to operate in
a manner designed to qualify as a REIT, future economic, market, legal, tax,
or other considerations may cause the Regular Trustees (as defined herein) and
the holders of the Common Securities to determine that it is in the best
interest of the Trust to revoke the REIT election, provided that such election
may not be revoked prior to ________. The Trust would be disqualified to
elect treatment as a REIT for the four taxable years following the year of
such revocation. The Trust's ability to maintain REIT status will also be
dependent on the nature of the income derived by the Operating Partnership.
See "Certain Federal Income Tax Considerations."
Distributions to Holders of Series A Preferred Securities
REIT Requirements. To obtain the favorable tax treatment for
REITs qualifying under the Code, the Trust generally will be required each
year to distribute to holders of the Trust Securities at least 95% of its
otherwise taxable income (after certain adjustments). In addition, the Trust
will be subject to a 4% excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the
sum of 85% of its ordinary income for the calendar year, 95% of its capital
gains net income for the calendar year (unless the REIT elects to retain and
pay income tax on such gains) and any undistributed taxable income from prior
periods. Failure to comply with these requirements would result in the
Trust's income being subject to tax at regular corporate rates.
Inability of Trust to Maintain its Distribution Policy;
Dependence on Operating Partnership. The Trust's income will consist solely
of the Trust's share of the income of the Operating Partnership, and the
Trust's cash flow will consist solely of its share of distributions from the
Operating Partnership. Differences in timing between the receipt of income
and the payment of expenses in arriving at taxable income (of the Operating
Partnership) and the effect of required debt amortization payments could
require the Operating Partnership to borrow funds on a short-term basis to
meet its intended distribution policy.
The Trust's ability to make distributions on the Series A
Preferred Securities is effectively dependent upon the Operating Partnership's
ability to make distributions on the Series A Preferred L.P. Units.
Distributions by the Operating Partnership will be determined by the Board of
Directors of the Company, as general partner of the Operating Partnership.
Accordingly, there is no assurance that the Operating Partnership will declare
distributions on the Series A Preferred L.P. Units, in an amount sufficient to
permit the Trust to make full quarterly distributions on the Series A
Preferred Securities.
Ownership Limit Necessary to Maintain REIT Qualification
In order for the Trust to maintain its qualification as a REIT,
not more than 50% in value of its outstanding Trust Securities may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code)
(the "Five or Fewer Test"). In this regard, the Declaration generally
prohibits ownership of more than 9.8% of the outstanding Series A Preferred
Securities by any holder. Any change in the Ownership Limit would require an
amendment to the Declaration. Such an amendment to the Declaration would
require the affirmative vote of holders owning not less than two-thirds of the
outstanding Common Securities. Series A Preferred Securities have no voting
rights with respect to such an amendment.
The constructive ownership rules of the Code are complex and
may cause Series A Preferred Securities owned, directly or indirectly, by a
group of related individuals and/or entities to be deemed to be constructively
owned by one individual or entity. As a result, the acquisition of less than
9.8% of the Series A Preferred Securities of any series (or the acquisition of
an interest in an entity which owns Series A Preferred Securities) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.8% of the Series A
Preferred Securities, and thus subject such stock to the Ownership Limit.
Direct or constructive ownership in excess of the Ownership
Limit would cause the violative transfer or ownership to be void, and cause
such shares to be converted into Excess Preferred Securities (as defined
herein), which have limited economic rights. See "Description of Series A
Preferred Securities--Restrictions on Ownership and Transfer of Series A
Preferred Securities."
Special Event Redemption
Upon the occurrence and during the continuation of a Tax Event
or Investment Company Event, which may occur at any time, the Operating
Partnership shall, in certain circumstances, have the right to redeem the
Series A Preferred L.P. Units, in whole but not in part, in which event the
Series A Preferred Securities would be redeemed in full. See "Description of
the Series A Preferred L.P. Units--Redemption."
No Voting Rights Except in Limited Circumstances
Holders of Series A Preferred Securities will have limited
voting rights and, subject to the rights of holders of Preferred Securities to
appoint a Special Regular Trustee (as defined herein) upon the occurrence of an
Appointment Event (as defined herein), will not be able to appoint, remove or
replace, or to increase or decrease the number of, Trustees, which rights are
vested exclusively in the Common Securities. See "Description of the Series A
Preferred Securities--Voting Rights" and "Description of the Series A
Preferred L.P. Units--Voting Rights."
Certain Participation Rights of The Irvine Company
The Irvine Company, unlike shareholders of the Company and
holders of Preferred L.P. Units, generally has the right to purchase shares of
Common Stock of the Company or securities convertible, exchangeable or
exercisable for Common Stock of the Company upon the issuance of such
securities by the Company (for cash or property) and also has the right to
purchase Common L.P. Units upon the issuance of additional Common L.P. Units
by the Operating Partnership for cash (but not for property) in order to
maintain its percentage interest in the Company and the Operating Partnership
on a consolidated basis. Holders of Series A Preferred L.P. Units will not
have such purchase rights. See "Policies with Respect to Certain
Activities--Financing Policies" and "Operating Partnership Agreement--Issuance
of Additional L.P. Units."
Lack of Public Market
The Series A Preferred Securities are a new issue of securities
for which there is currently no active trading market. If any of the Series A
Preferred Securities are traded after their initial issuance, they may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities and other factors, including
general economic conditions and the financial condition of, performance of, and
prospects for, the Operating Partnership. Although the Trust intends to apply
for listing of the Series A Preferred Securities on the NYSE, there can be no
assurance as to the development of any market, or the liquidity of any market
that may develop, for the Series A Preferred Securities. Trading is expected
to commence within a 30-day period after the date of this Prospectus. The
Underwriters have informed the Trust that they intend to make a market in the
Series A Preferred Securities offered hereby; however, they are not obligated
to do so and any such market-making may be terminated at any time without
notice to the holders of the Series A Preferred Securities. See
"Underwriting."
IAC CAPITAL TRUST
The following description summarizes the material terms of the
Declaration and is qualified in its entirety by reference to the form of
Declaration which has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part.
IAC Capital Trust is a statutory business trust formed on
October 31, 1997 under the Business Trust Act pursuant to a declaration of
trust among the Trustees of the Trust, the Company and the Operating
Partnership, and the filing of a certificate of trust with the Secretary of
State of the State of Delaware. Such declaration will be amended and restated
in its entirety (as so amended and restated, the "Declaration") substantially
in the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, as of the date the Series A Preferred Securities are
initially issued. The Company and certain members of management of the Company
will acquire all of the Common Securities of the Trust, representing common
undivided beneficial interests in all of the assets of the Trusts for an
aggregate consideration of $5,000. From time to time the Trust may issue
additional series of Preferred Securities and invest the proceeds of any such
issuance in an additional series of Preferred L.P. Units of the Operating
Partnership. Each series of Preferred Securities represents a preferred
undivided beneficial interest in the assets of the Trust, subject to each
series priority and payment terms. Holders of Series A Preferred Securities
will have limited voting rights, while holders of Common Securities have the
exclusive right (subject to the terms of the Declaration) to appoint, remove
or replace the Trustees and to increase or decrease the number of Trustees,
subject to the right of holders of Preferred Securities to appoint one
additional Regular Trustee of the Trust (a "Special Regular Trustee") in
certain limited circumstances set forth in this Prospectus. The Trust exists
solely for the purpose of (a) issuing its Preferred Securities (and, if
applicable, Excess Preferred Securities), (b) issuing its Common Securities as
described above and investing the proceeds of such issuance in an interest
bearing account in, or certificate of deposit of, a bank, (c) investing the
proceeds from the sale of each series of Preferred Securities in a
corresponding series of Preferred L.P. Units of the Operating Partnership and
(d) engaging in such other activities as are necessary, convenient or
incidental thereto. The proceeds from the sale of the Common Securities of
the Trust will be invested. The rights of the holders of the Trust
Securities, including economic rights, rights to information and voting
rights, are set forth in the Declaration and the Business Trust Act.
The number of trustees (the "Trustees") of the Trust shall
initially be three. One or more of such Trustees (the "Regular Trustees")
will be an individual who is an officer of the Company. Initially, one
Regular Trustee will be appointed. The second trustee is The Bank of New
York, which is unaffiliated with the Company, the Operating Partnership and
The Irvine Company and which will serve as the property trustee (the "Property
Trustee"). The third trustee is an affiliate of The Bank of New York that has
its principal place of business in the State of Delaware (the "Delaware
Trustee"). Pursuant to the Declaration, legal title to each series of
Preferred L.P. Units purchased by the Trust will be held by the Property
Trustee for the benefit of the holders of the related series of Preferred L.P.
Units. In addition, the Property Trustee will maintain exclusive control of
one or more segregated non-interest bearing bank accounts (collectively, the
"Property Account") to hold, subject to the priority and payment terms of the
Preferred Securities, all payments in respect of the Preferred L.P. Units
purchased by the Trust for the benefit of the holders of the Preferred
Securities. The Property Trustee will promptly make distributions to the
holders of the Preferred Securities out of funds from the Property Account.
Subject to the right of holders of Preferred Securities to appoint a Special
Regular Trustee as described above, the holders of the Common Securities of
the Trust will have the exclusive right (subject to the terms of the
Declaration) to appoint, remove or replace Trustees and to increase or
decrease the number of Trustees. A Special Regular Trustee need not be an
employee or officer of, or otherwise affiliated with, the Company. The Trust
will terminate on December 31, 2092, the termination date of the Operating
Partnership, but may terminate earlier as provided in the Declaration.
The duties and obligations of the Trustees of the Trust shall
be governed by the Declaration. Under the Declaration, the Trust shall not,
and the Trustees shall cause the Trust not to, engage in any activity other
than in connection with the purposes of the Trust or other than as required or
authorized by the Declaration. In particular, the Trust shall not and the
Trustees shall not (a) invest any proceeds received by the Trust from holding
the Preferred L.P. Units purchased by the Trust but, upon declaration of a
distribution by the Regular Trustees, shall promptly distribute from the
Property Account all such proceeds to holders of the related series of
Preferred Securities pursuant to the terms of the Declaration and of such
series of Preferred Securities; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans or investments other than investments represented
by the Preferred L.P. Units and in connection with the investment of the
proceeds of the sale of the Common Securities as described above; (e) issue any
securities or other evidences of beneficial ownership of, or beneficial
interests in, the Trust other than the Trust Securities; or (f) incur any
indebtedness for borrowed money.
The books and records of the Trust will be maintained at the
principal office of the Trust and will be open for inspection by a holder of
Preferred Securities or its representative for any purpose reasonably related
to its interest in the Trust during normal business hours.
Except as provided below under "Description of Series A
Preferred Securities--Voting Rights" or under the Business Trust Act, holders
of Preferred Securities will have no voting rights. In certain circumstances
described in this Prospectus, holders of Preferred Securities shall have the
right to vote, as a single class, for the appointment of a Special Regular
Trustee who need not be an employee or officer of, or otherwise affiliated
with, the Company. The Special Regular Trustee shall have the same rights,
powers and privileges under the Declaration as the Regular Trustee.
Pursuant to the Declaration, distributions on the Series A
Preferred Securities when, as and if declared by the Regular Trustees, must be
paid on the dates payable to the extent that the Property Trustee has cash on
hand in the Property Account to permit such payment. So long as the Series A
Preferred L.P. Units are the only assets of the Trust, the funds available for
distribution to the holders of the Series A Preferred Securities will be
limited to payments received by the Property Trustee in respect of the Series
A Preferred L.P. Units that are deposited in the Trust as trust assets. If
the Operating Partnership does not make distribution payments on the Series A
Preferred L.P. Units, the Property Trustee will not make distributions on the
Series A Preferred Securities.
The Declaration provides that the Trustees may treat the person
in whose name a certificate representing the Preferred Securities of a series
is registered on the books and records of the Trust as the sole holder thereof
and of the Preferred Securities represented thereby for purposes of receiving
distributions and for all other purposes and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such certificate or
in the Preferred Securities represented thereby on the part of any person,
whether or not the Trust shall have actual or other notice thereof. Preferred
Securities of a series will be issued in fully registered form. The Series A
Preferred Securities will be represented by a global certificate registered on
the books and records of the Trust in the name of The Depository Trust Company
(the "DTC") or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal with the DTC
(or any successor depositary) for all purposes, including the payment of
distributions and receiving approvals, votes or consents under the
Declaration, and except as set forth in the Declaration with respect to the
Property Trustee, shall have no obligation to persons owning a beneficial
interest in Series A Preferred Securities ("Preferred Security Beneficial
Owners") registered in the name of and held by the DTC or its nominee; and
(ii) the rights of Preferred Security Beneficial Owners shall be
exercised only through the DTC (or any successor depositary) and shall be
limited to those established by law and agreements between such Preferred
Security Beneficial Owners and the DTC and/or its participants. With
respect to Series A Preferred Securities registered in the name of and held
by the DTC or its nominee, all notices and other communications required
under the Declaration shall be given to, and all distributions on such
Preferred Securities shall be given or made to, the DTC (or its successor).
The specific terms of the depositary arrangement with respect
to the Series A Preferred Securities are set forth under "Description of the
Series A Preferred Securities--Book-Entry Only Issuance--The Depository Trust
Company."
In the Declaration, the Operating Partnership has agreed to
reimburse all obligations (other than with respect to the Trust Securities)
and all costs and expenses of the Trust, including the fees and expenses of
its Trustees and any taxes and all costs and expenses with respect thereto, to
which the Trust may become subject, except for withholding taxes. The
foregoing obligations of the Operating Partnership under the Declaration are
for the benefit of, and shall be enforceable by, any person to whom any such
debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether
or not such Creditor has received notice thereof. Any such Creditor may
enforce such obligations of the Operating Partnership directly against the
Operating Partnership and the Operating Partnership has irrevocably waived any
right or remedy to require that any such Creditor take any action against the
Trust or any other person before proceeding against the Operating Partnership.
The Operating Partnership has agreed in the Declaration to execute such
additional agreements as may be necessary or desirable in order to give full
effect to the foregoing.
The address of the Trust is c/o Irvine Apartment Communities,
Inc., 550 Newport Center Drive, Suite 300, Newport Beach, California 92660,
telephone number (714) 720-5500.
RECENT DEVELOPMENTS
"Off-Ranch" Expansion
The Operating Partnership's intent is to develop or acquire new
apartment communities in the Silicon Valley and Northern San Diego County and
other locations in California which the Operating Partnership believes possess
rental demographics and economic growth prospects similar to those on the
Irvine Ranch. On October 23, 1997 the Board of Directors of the Company
authorized the Operating Partnership, subject to receipt of necessary
entitlements, to exercise an option for a land site located in Redwood City,
California. Construction of an apartment community of approximately 155 units
on this site is expected to commence in the first half of 1998. The site is
located just off Highway 101 (the Bayshore Freeway), approximately midway
between San Jose and San Francisco, and is immediately adjacent to the 20
million square foot San Mateo/FosterCity/Redwood City office market, in which
headquarter facilities for Oracle, Visa, Franklin Funds and Genentech are
located. Preliminary design and jurisdictional approvals are also in process
with respect to the remaining development site.
On June 30, 1997, the Operating Partnership acquired for $127
million an existing 923-unit apartment community, known as The Villas of
Renaissance, located in Northern San Diego County. Situated in La Jolla,
California, the project is located in University Town Center ("UTC") and
enjoys free access from the La Jolla Village Road/Interstate 805 interchange.
The property is within walking distance of 4.3 million square feet of office
buildings in the UTC financial district and the 1.3 million square foot UTC
regional shopping mall that is anchored by Nordstrom's, Macy's, Sears and
Robinsons-May.
Issuance of 7% Notes due 2007
On October 1, 1997, the Operating Partnership issued
$100,000,000 aggregate principal amount of 7% Notes due 2007 (the "7% Notes").
The Operating Partnership used the net proceeds from the issuance of the 7%
Notes to repay outstanding borrowings under the Operating Partnership's $250
million revolving credit facility (the "Credit Facility"), most of which was
incurred in connection with the Villas of Renaissance Acquisition.
Recently Completed or Approved Irvine Ranch Land Acquisitions
On October 21, 1997, the Operating Partnership acquired a
196-unit development site from The Irvine Company pursuant to the Land Rights
Agreement. On July 25, 1997 the Board of Directors of the Company and
Independent Directors Committee approved the purchase from The Irvine Company
pursuant to the Land Rights Agreement of a 393-unit development site. The
purchase of such site is expected to occur by the end of 1997.
USE OF PROCEEDS
The net proceeds from the sale of the Series A Preferred
Securities after deducting underwriting discount are estimated to be $96.9
million ($111.4 million if the Underwriters' overallotment option is exercised
in full). Such proceeds will be invested by the Trust in Series A Preferred
L.P. Units of the Operating Partnership. After paying estimated expenses
associated with the Offering, the net proceeds to the Operating Partnership
from the issuance of the Series A Preferred L.P. Units are estimated to be
$96.3 million ($110.8 million if the Underwriters' overallotment option is
exercised in full). The Operating Partnership will use such net proceeds to
repay indebtedness outstanding under the Credit Facility and for general
partnership purposes, including ongoing development activities on and off the
Irvine Ranch and the possible acquisition of additional properties off the
Irvine Ranch. Pending such use, the net proceeds to the Operating Partnership
will be invested in income-producing short-term investments. On a pro forma
basis after giving effect to the repayment of indebtedness from the net
proceeds of the offering of the 7% Notes, as of September 30, 1997, $36.7
million would have been outstanding under the Credit Facility with an average
interest rate of 6.20% and, as of October 31, 1997, the Credit Facility had an
outstanding balance of approximately $36.0 million. Indebtedness under the
Credit Facility was incurred primarily to finance the Villas of Renaissance
Acquisition and for general partnership purposes. The Company expects to use
future borrowings under the Credit Facility for general partnership purposes,
including those described above.
OPERATING PARTNERSHIP CONSOLIDATED RATIOS OF EARNINGS TO
FIXED CHARGES AND PREFERRED L.P. UNIT DISTRIBUTIONS
The following table sets forth the consolidated ratios of earnings to fixed
charges for the Operating Partnership.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges.................... 2.42x 2.00x 2.07x 1.44x 1.25x .99x .96x
</TABLE>
For the purpose of calculating the ratio of earnings to
fixed charges, earnings consist of net earnings before income taxes,
extraordinary items and fixed charges. Fixed charges consist of interest
expense, capitalized interest and amortization of deferred financing costs.
The Operating Partnership did not have any Preferred L.P. Units
outstanding in any of the periods indicated, and, therefore, the ratio of
earnings to combined fixed charges and Preferred L.P. Unit distributions
for each of the periods indicated was equal to the ratio of earnings to
fixed charges for such period. The Trust did not have any operations in
any of the periods indicated, and, therefore, the historical ratio with
respect to the Trust is not applicable. On a pro forma basis, the ratio of
earnings to combined fixed charges and preferred securities distributions
of the Trust is expected to be 1.00x.
Prior to completion of the Company's Initial Public Offering in
December 1993, the Predecessor of the Company and the Operating Partnership
operated in a highly leveraged manner. As a result, although the Company, the
Operating Partnership and the Predecessor have historically generated positive
net cash flow, the financial statements of the Predecessor showed net losses
for the periods prior to December 8, 1993. Consequently, the computations of
the ratio of earnings to fixed charges for such periods indicate that earnings
were inadequate to cover fixed charges by approximately $0.6 million and $2.2
million for the years ended December 31, 1993 and 1992, respectively.
CAPITALIZATION OF IAC CAPITAL TRUST
The following table sets forth the capitalization of the Trust
as of October 31, 1997, and as adjusted to give effect to the issuance of
Common Securities and the offering of the Series A Preferred Securities
offered hereby after estimated underwriting discount (assuming no exercise of
the Underwriters' overallotment option). See "Use of Proceeds."
<TABLE>
<CAPTION>
October 31, 1997
---------------------------
Actual As Adjusted
------ -----------
(unaudited, in thousands)
<S> <C> <C>
Redeemable Series A Preferred Securities, no securities outstanding at
October 31, 1997; 4,000 securities outstanding as adjusted..................... $ -- $96,850
Common Securities, no securities outstanding at October 31, 1997; _____
securities outstanding as adjusted.............................................. -- 5
-------- -------
Total Capitalization............................................................ $ -- $96,855
======== =======
</TABLE>
CAPITALIZATION OF IRVINE APARTMENT COMMUNITIES, L.P.
The following table sets forth the capitalization of the
Operating Partnership as of September 30, 1997, and as adjusted to give
effect to (i) the sale on October 1, 1997 of $100,000,000 aggregate
principal amount of the Operating Partnership's 7% Notes due 2007 and the
application of the net proceeds therefrom to repay indebtedness under the
Credit Facility and (ii) the offering of the Series A Preferred Securities
offered hereby (assuming no exercise of the Underwriters' overallotment
option) and the application of the net proceeds therefrom for the purchase
of Series A Preferred L.P. Units, which proceeds after payment of
estimated expenses of the Offering will in turn be used by the Operating
Partnership to repay outstanding indebtedness under the Credit Facility and
for general partnership purposes. See "Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1997
---------------------------
Actual As Adjusted
------ -----------
(unaudited, in thousands)
<S> <C> <C>
Mortgages and Notes
7% Notes...................................................................... $ -- $99,208
Credit Facility(1)............................................................ 135,000 --
Tax-exempt mortgage bond financings........................................... 326,569 326,569
Conventional mortgage financings.............................................. 132,902 132,902
Mortgage notes payable to The Irvine Company.................................. 50,608 50,608
Tax-exempt assessment district................................................ 21,747 21,747
--------- ---------
666,826 631,034
Redeemable Series A Preferred L.P. Units, no units outstanding at September
30, 1997; 4,000 units outstanding as adjusted................................. -- 96,250(2)
Partners' Capital
43,973 partnership units outstanding at September 30, 1997 and as
adjusted:
General partner, 19,879 G.P. Units outstanding at September 30, 1997
and as adjusted........................................................... 210,685 210,685
Limited partners, 24,094 Common L.P. Units outstanding at September
30, 1997 and as adjusted....................................................... 185,068 185,068
---------- 1---------
Total Capitalization........................................................... $1,062,579 $1,123,037
========== ==========
- ----------
(1) As of October 31, 1997, the Credit Facility had an outstanding balance of
approximately $36.0 million, all of which will be repaid with the net
proceeds of the Offering. See "Use of Proceeds".
(2) Proceeds of the Offering net of underwriting discount invested in Series A
Preferred L.P. Units and net of other expenses associated with the Offering
to be paid by the Operating Partnership.
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data (other
than statistical and property data) has been derived from the Operating
Partnership's or the Predecessor's consolidated financial statements.
Information as of December 31, 1996 and 1995 and for each of the years in
the three year period ended December 31, 1996 has been derived from the
Operating Partnership's audited financial statements included herein.
Information for the year ended December 31, 1993 has been derived from
audited financial statements not included herein of the Company and the
Predecessor and is on a combined and consolidated historical basis for the
Operating Partnership and the Predecessor. Information at December 31,
1994 and 1993 has been derived from the Company's audited financial
statements not included herein and information at and for the year ended
December 31, 1992 has been derived from the Predecessor's audited financial
statements not included herein. Information at September 30, 1997 and for
the respective nine month periods ended September 30, 1997 and 1996 has
been derived from the Operating Partnership's unaudited consolidated
financial statements included herein and which, in the opinion of the
Operating Partnership, reflect all adjustments considered necessary for a
fair presentation. Results for the nine month period ended September 30,
1997 are not necessarily indicative of results for the full year. All such
financial information is qualified in its entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated
Financial Statements (including the notes thereto) included herein.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
-------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
---- ---- ---- ---- ---- ------- ----
(in thousands, except property information, ratios and per unit amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Operating
Data:
Revenues:
Rental income............. $133,114 $114,000 $154,925 $133,678 $127,338 $123,101 $119,097
Other income.............. 3,093 2,317 3,162 2,079 1,585 1,659 2,097
Interest income........... 659 419 611 411 1,313 60 --
------- ------- ------- ------- ------- ------- -------
136,866 116,736 158,698 136,168 130,236 124,820 121,194
------- ------- ------- ------- ------- ------- -------
Expenses:
Property expenses......... 28,790 24,903 33,859 31,761 33,105 34,057 35,685
Real estate taxes......... 10,959 10,023 13,496 12,002 11,786 10,729 9,921
Property management
fees.................... 3,809 3,316 4,502 3,893 3,800 3,881 4,393
Interest expense, net..... 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of
deferred financing
costs................... 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Depreciation and
amortization............ 21,700 20,346 27,239 23,143 21,055 20,002 19,808
General and
administrative.......... 4,822 4,890 6,277 5,909 5,442 3,278 2,359
-------- ------- -------- -------- -------- -------- --------
93,911 87,831 117,506 111,112 117,957 125,207 122,794
-------- ------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item........ 42,955 28,905 41,192 25,056 12,279 (387) (1,600)
Extraordinary item --
charge related to debt
extinguishment............ -- -- -- (23,427) -- (12,487) --
-------- ------- -------- -------- -------- -------- --------
Net income (loss).......... $ 42,955 $ 28,905 $ 41,192 $ 1,629 $ 12,279 $(12,874) $ (1,600)
======== ======== ======== ======== ======== ======== ========
Net income (loss) per unit. $ 0.99 $ 0.75 $ 1.06 $ 0.05 $ 0.41 $ (0.43)
======== ======== ======== ======== ======== ========
Statistical and Property
Data:
Total stabilized
communities (at period
end)(2)................... 51 47 48 43 43 42 42
Apartment units (at
period end)............... 14,991 13,541 13,656 12,776 11,358 11,334 10,952
Average units in
stabilized
communities(2)(3)(6)...... 13,683 11,786 12,139 11,334 11,334 10,799 10,446
Average physical
occupancy in
stabilized
communities(2)(3)(6)...... 94.5% 94.8% 94.9% 94.6% 95.6% 96.3% 96.2%
Other Data:
Average monthly rent per
unit(3)(4)(6)............. $1,101 $1,012 $1,025 $996 $981 $963 $950
Capital replacements per
unit(3)(5)(6)............. $234 $247 $393 $399 $490 $482 $458
EBITDA(7).................. $88,486 $73,604 $100,564 $82,603 $76,103 $72,875 $68,836
Ratio of EBITDA to
interest expense(7)(8).... 4.03x 3.29x 3.41x 3.19x 2.84x 1.45x 1.40x
Cash flows provided by
(used in):
Operating activities...... $69,432 $55,748 $73,037 $55,403 $49,786 $10,249 $16,171
Investing activities...... $(205,807) $(44,220) $(66,616) $(128,218) $(50,918) $(23,649) $(19,285)
Financing activities...... $135,543 $(8,356) $(7,608) $73,739 $(23,316) $36,428 $3,516
</TABLE>
<TABLE>
<CAPTION>
As of As of December 31,
September 30, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Total assets...................... $1,101,826 $900,998 $853,230 $757,240 $740,120 $654,694
Total debt........................ 666,826 553,064 563,286 540,689 513,943 555,491
Total liabilities................. 706,073 580,654 588,664 566,191 527,776 564,420
Partners' capital................. 395,753 320,344 264,566 191,049 212,344 90,274
- ----------
(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Operating Partnership from December 8 through December 31, 1993.
(2) A property is stabilized at the earlier of (i) one year after completion
of construction or (ii) when it achieves 95% occupancy.
(3) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of
stabilized occupancy.
(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.
(5) Data for the year ended December 31, 1992 exclude capital replacements
totaling $534 per unit relating to a major renovation program at the
Operating Partnership's Promontory Point apartment community due to the
nonrecurring nature of the program.
(6) Excludes Villas of Renaissance.
(7) EBITDA represents earnings before interest, depreciation and amortization
and extraordinary items. EBITDA should not be considered as an
alternative to operating income, as determined in accordance with GAAP,
as an indicator of the Operating Partnership's operating performance,
or to cash flows from operating activities (as determined in accordance
with GAAP) as a measure of liquidity.
(8) The Operating Partnership did not have any Preferred L.P. Units
outstanding in any of the periods indicated, and, therefore, the ratio
of EBITDA to interest expense and preferred securities distributions
for each of the periods indicated was equal to the ratio of EBITDA to
interest expense for such period.
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE OPERATING PARTNERSHIP
The following discussion should be read in conjunction with
the "Selected Consolidated Financial Data," the Consolidated Financial
Statements and the Notes thereto for the years ended December 31, 1996,
1995 and 1994 (the "Audited Financial Statements") and the Unaudited
Condensed Consolidated Financial Statements and the Notes thereto for the
nine months ended September 30, 1997 and 1996 (the "Unaudited Quarterly
Financial Statements").
Overview
The Operating Partnership is engaged in the development and
operation of multifamily rental apartment communities in California. The
Operating Partnership's management and operating decisions are under the
unilateral control of the Company. The Company operates as a REIT under the
Code. As of September 30, 1997, the Operating Partnership owned and operated
55 Properties containing 14,991 apartment units and had 1,110 units under
construction. Until July 31, 2020, the Operating Partnership has the
exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine
Ranch. See Note 7 to the Audited Financial Statements.
At September 30, 1997, the Company had a 45.2% general
partnership interest in and was the sole managing general partner of the
Operating Partnership, which began operations as of December 8, 1993, the date
of the Company's Initial Public Offering. In connection with the Initial
Public Offering, The Irvine Company transferred 42 apartment communities and a
99% interest in a limited partnership which owned one apartment community to
the Operating Partnership. At September 30, 1997, the limited partners of the
Operating Partnership had a 54.8% limited partner interest with The Irvine
Company and its affiliates having a 54.6% limited partnership interest in the
Operating Partnership.
The Trust did not have any operations prior to October 31, 1997.
Results of Operations
Nine months ended September 30, 1997 compared to nine months
ended September 30, 1996. The Operating Partnership's net income was $43.0
million for the nine months ended September 30, 1997, up from $28.9 million
for the same period of 1996. The improvement was due to the contribution of
new rental units from the Operating Partnership's acquisition and development
program, as well as an increase in revenues within its stabilized portfolio
achieved through higher rental rates slightly offset by lower occupancy and
higher operating expenses.
The following table sets forth certain operating data for the
Properties for the nine month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
Revenue and Expense Data ------------------------------
1997 1996
------------ --------
(Dollars in thousands)
<S> <C> <C>
Communities Owned and Stabilized More Than Two Years (a)
Number of communities............................................... 43 43
Number of units at end of period.................................... 11,334 11,334
Operating revenues.................................................. $104,486 $99,112
Property expenses................................................... $23,520 $21,819
Real estate taxes................................................... $8,058 $8,120
Property management fees............................................ $3,018 $2,864
Depreciation and amortization of real estate assets................. $15,438 $15,525
Communities Stabilized Less Than Two Years (b)
Number of communities............................................... 5 5
Number of units at end of period.................................... 2,207 2,207
Operating revenues.................................................. $23,679 $17,205
Property expenses................................................... $3,693 $3,084
Real estate taxes................................................... $2,166 $1,902
Property management fees............................................ $614 $453
Depreciation and amortization of real estate assets................. $4,303 $4,715
Lease-Up and Newly Acquired Communities (c)
Number of communities............................................... 3
Number of units at end of period.................................... 1,450
Operating revenues.................................................. $8,042
Property expenses................................................... $1,577
Real estate taxes................................................... $735
Property management fees............................................ $177
Depreciation and amortization of real estate assets................. $1,784
</TABLE>
- ---------------
(a) Represents "same store" communities.
(b) Represents five communities that began leasing in 1995 and reached
stabilized occupancy (95%) at various dates in 1996.
(c) Represents Baypointe and Santa Maria communities that began leasing in
1996, completed deliveries in June 1997, and reached stabilized occupancy
(95%) in July 1997 and The Villas of Renaissance (see Note 6 to the
Unaudited Quarterly Financial Statements), an apartment community acquired
by the Operating Partnership on June 30, 1997.
Operating revenues (rental and other income) increased to
$136.2 million in the first nine months of 1997, up from $116.3 million in
the same period of 1996. Operating revenues rose as a result of higher
occupancy and rental rates, as well as the contribution of newly delivered
rental units from five properties which achieved stabilization during 1996,
a newly acquired community and two new lease-up communities. In total,
these new units added $31.7 million to operating revenues in the first nine
months of 1997 compared to $17.2 million in the first nine months of 1996.
Within communities owned and stabilized more than two years, operating
revenues increased 5.4% from the first nine months of 1996, as a result of
improvement in average monthly rental rates and higher non-rental income,
slightly offset by a decrease in physical occupancy to 94.5% from 94.8%.
Average monthly rental rates increased to $1,068 in the first nine months
of 1997 from $1,007 in the year-earlier period. Healthy job growth in the
Operating Partnership's marketplace has been a key factor in the upward
trend in rental rates.
Property expenses increased to $28.8 million in the first nine
months of 1997 from $24.9 million in the first nine months of 1996. This
increase reflects the added expenses of newly delivered rental units from five
properties which achieved stabilization during 1996, a newly acquired
community and two new lease-up communities. Property expenses within
communities owned and stabilized more than two years increased by $1.7 million
to $23.5 million in the first nine months of 1997 from $21.8 million a year
ago. In the first nine months of 1997, average monthly property expenses at
these Properties increased to $231 per unit from $214 per unit in the first
nine months of 1996, primarily as a result of higher unit turnover and related
expenses in addition to preventative maintenance scheduled in preparation for
a potentially unseasonably wet winter. Properties stabilized less than two
years added $3.7 million to property expenses in the first nine months of
1997 and $3.1 million in the first nine months of 1996. Lease-up and newly
acquired properties added $1.6 million to property expenses in the first
nine months of 1997.
Real estate taxes totaled $11.0 million in the first nine
months of 1997 compared to $10.0 million in the first nine months of 1996.
Taxes increased in the first nine months of 1997 due to the addition of rental
units from lease-up properties and an acquisition.
Property management fees increased to $3.8 million in the first
nine months of 1997 from $3.3 million in the first nine months of 1996.
Management fees increased in the first nine months of 1997 due to the addition
of rental units from development, an acquisition and an increase in revenue
from communities owned and stabilized more than two years.
Net interest expense decreased to $21.9 million in the first
nine months of 1997 from $22.4 million for the same period of 1996. The
decrease was largely due to a greater amount of capitalized interest during
the 1997 period partially offset by a higher level of borrowings under the
Credit Facility. The Operating Partnership capitalizes interest on projects
actively under development using average qualifying asset balances and
applicable weighted average interest rates. The average monthly qualifying
asset balances for projects under development in the first nine months of 1997
and 1996 were approximately $66.0 million and $39.7 million, respectively.
Interest capitalized totaled $3.7 million in the first nine months of 1997
compared to $2.3 million in the same period of 1996. Interest incurred was
$25.6 million and $24.7 million for the first nine months of 1997 and 1996,
respectively.
Amortization of deferred financing costs was comparable in the
first nine months of 1997 and 1996.
Depreciation and amortization expense increased to $21.7
million in the first nine months of 1997, up from $20.3 million in the first
nine months of 1996. This increase reflects the completion and delivery of
newly developed rental units from the Operating Partnership's lease-up
properties and an acquisition.
General and administrative expense of $4.8 million was
comparable to the same nine month period of the prior year.
Years Ended December 31, 1996, 1995 and 1994. The Operating
Partnership's income before extraordinary item was $41.2 million in 1996, up
from $25.1 million in 1995 and $12.3 million in 1994. The Operating
Partnership's financial results improved in 1996 due to the contribution of
newly delivered rental units from its development program, cost reductions and
an increase in revenues within its stabilized portfolio achieved primarily
through higher occupancy and higher rental rates. In 1995, financial results
improved largely as a result of the contribution of newly delivered rental
units and operating cost reductions within the Operating Partnership's
stabilized portfolio.
The following table sets forth certain operating data for the
Properties for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Revenue and Expense Data Years Ended December 31,
------------------------
1996 1995
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Communities Stabilized More Than Two Years
Number of communities.............................................. 43 43
Number of units at end of period................................... 11,334 11,334
Operating revenues................................................. $133,287 $130,082
Property expenses.................................................. $29,466 $30,325
Real estate taxes.................................................. $10,799 $11,256
Property management fees........................................... $3,851 $3,733
Depreciation and amortization of real estate assets................ $20,757 $21,237
Communities Stabilized Less Than Two Years (a)
Number of communities.............................................. 5 5
Number of units at end of period................................... 2,207 1,442
Operating revenues................................................. $24,656 $5,675
Property expenses.................................................. $4,351 $1,436
Real estate taxes.................................................. $2,693 $746
Property management fees........................................... $647 $160
Depreciation and amortization of real estate assets................ $6,304 $1,858
Lease-Up Communities
Number of communities.............................................. 2
Number of units at end of period................................... 115
Operating revenues................................................. $144
Property expenses.................................................. $42
Real estate taxes.................................................. $4
Property management fees........................................... $4
Depreciation and amortization of real estate assets................ $26
</TABLE>
- -------------
(a) Represents five communities that began leasing in 1995 and reached
stabilized occupancy (95%) at various dates in 1996.
Operating revenues (rental and other income) increased by
16.4% to $158.1 million in 1996, up from $135.8 million in 1995. Operating
revenues in 1995 had increased by 5.3% from $128.9 million in 1994.
Operating revenues rose in 1996 as a result of higher occupancy, higher
rental rates and the contribution of newly delivered rental units from five
properties which achieved stabilization during 1996. In total, these new
units added $24.7 million to operating revenues in 1996, compared to $5.7
million in 1995. Within communities stabilized more than two years,
operating revenues increased 2.5% in 1996, primarily due to increases in
rental rates and an increase in average physical occupancy to 95.0% from
94.6% in 1995. Average monthly rental rates per unit increased 1.9% to
$1,015 in 1996, from $996 in 1995.
Operating revenues improved in 1995 from the prior year largely
as a result of the contribution of newly delivered rental units. In total,
these new units added $5.7 million to operating revenues in 1995. They made
virtually no contribution in 1994. Within communities stabilized more than
two years, operating revenues increased less than 1% in 1995, as modest
increases in rental rates were largely offset by a decline in average physical
occupancy to 94.6% from 95.6% in 1994. Average monthly rental rates per unit
increased 1.5% to $996 in 1995, from $981 in 1994.
Property expenses increased by 6.6% to $33.9 million in 1996
from $31.8 million in 1995. These expenses had decreased in 1995 by 4.1% from
$33.1 million in 1994. The increase in 1996 reflects the added expenses of
newly delivered rental units from five properties which achieved stabilization
during 1996. Property expenses within communities stabilized more than two
years decreased 2.8% to $29.5 million in 1996 from $30.3 million in 1995.
During the three years ended December 31, 1996, the Operating Partnership
achieved sustained reductions in its per-unit property expenses through
aggressive bidding of external service and purchase contracts and a series of
initiatives to enhance the efficiency of customer service and property
maintenance operations. In 1996, average monthly property expenses within
communities stabilized more than two years decreased to $217 per unit from
$223 per unit in 1995 and $243 per unit in 1994. Properties stabilized less
than two years added $4.4 million to property expenses in 1996 and $1.4
million in 1995.
Real estate taxes totaled $13.5 million in 1996, $12.0 million
in 1995 and $11.8 million in 1994. Taxes increased in 1996 due to the
addition of rental units, partially offset by a reduction in assessed values.
In 1995, the Operating Partnership's real estate taxes increased from the 1994
level due to the addition of rental units.
Property management fees increased to $4.5 million in 1996 from
$3.9 million in 1995 and $3.8 million in 1994. Management fees increased in
1996 and 1995 due to the addition of rental units and an increase in revenue
from communities stabilized more than two years.
Net interest expense increased to $29.5 million in 1996 from
$25.9 million in 1995 and $26.8 million in 1994. The increase in 1996 net
interest expense was due to new properties being placed in service. The
Operating Partnership capitalizes interest on projects actively under
development using qualifying asset balances and applicable weighted average
interest rates. Capitalized interest totaled $3.2 million in 1996 compared to
$6.8 million in 1995 and $1.3 million in 1994. In 1995, net interest expense
decreased $0.9 million from the prior year primarily due to a higher level of
capitalized interest resulting from increased construction activity, offset by
higher interest incurred as a result of the May 1995 refinancing of tax-exempt
mortgage debt and increased borrowings under bank lines of credit. Total
interest incurred was $32.7 million in 1996 and 1995, and $27.6 million in
1994.
Interest income totaled $0.6 million in 1996, $0.4 million in
1995 and $1.3 million in 1994. The changes in interest income reflect changes
in the Operating Partnership's average cash balances.
Amortization of deferred financing costs decreased by 69.1% to
$2.6 million in 1996 from $8.5 million in 1995 and $15.9 million in 1994. The
$5.9 million decrease in 1996 and $7.4 million decrease in 1995 were largely
due to the elimination of deferred financing costs through an extraordinary
charge of $23.4 million related to the refinancing of tax-exempt mortgage debt
in May 1995.
Depreciation and amortization expense increased by 17.7% to
$27.2 million in 1996, up from $23.1 million in 1995. These expenses had
increased in 1995 by 9.9% from $21.1 million in 1994. The increases in both
years reflect the completion and delivery of newly developed rental units.
General and administrative expense increased to $6.3 million in
1996, up from $5.9 million in 1995. General and administrative expense had
increased in 1995 from $5.4 million in 1994. These increases were largely the
result of increased staffing levels.
Liquidity and Capital Resources
The Operating Partnership believes that cash provided by
operations will be adequate to meet both operating requirements and payment of
distributions on its G.P. Units and L.P. Units in both the short and long term.
Liquidity. The Operating Partnership expects to meet its
long-term liquidity requirements, such as construction, scheduled debt
maturities and potential future property acquisitions, through the issuance or
refinancing of long-term debt, borrowings from financial institutions, or the
issuance of additional equity securities of the Company and/or L.P. Units.
On June 27, 1997, the Operating Partnership renewed its $250 million unsecured
Credit Facility for a three-year term. The new Credit Facility currently
bears interest at LIBOR plus 0.70% or prime. The Credit Facility provides for
the borrowing interest rates to be adjusted up or down reflecting the credit
ratings on the Operating Partnership's senior unsecured long-term
indebtedness. Availability under the Credit Facility was $115 million at
September 30, 1997 ($213.3 million after giving effect to the repayment of
outstanding borrowings with the net proceeds from the issuance of the 7%
Notes).
Additional Equity. On February 20, 1997 the Company sold, in a
public offering, 1.15 million shares of Common Stock at $27.50 per share, the
proceeds of which were contributed to the Operating Partnership for an
additional general partnership interest. Concurrently, The Irvine Company,
pursuant to its rights under the Partnership Agreement, purchased 1.39 million
additional Common L.P. Units at $26.06 per unit (which is equal to the public
offering price of the Common Stock less an amount equivalent to the
underwriting discount) which are exchangeable for Common Stock on a one for
one basis, subject to adjustment and certain limitations. The proceeds from
the two transactions totaled approximately $66.0 million and were used by the
Operating Partnership to repay all then outstanding indebtedness under its
revolving line of credit, and for general corporate purposes, including
development of new apartment communities.
Shelf Registration Statements. On May 14, 1997 the Company
filed a shelf registration statement with the Securities and Exchange
Commission providing for the issuance from time to time of up to $350 million
of common stock, preferred stock, debt securities, and warrants to purchase
common stock, preferred stock and debt securities. Concurrently, the
Operating Partnership filed a shelf registration statement with the Commission
providing for the issuance from time to time of up to $350 million of debt
securities. Proceeds raised from any securities issued under the Company's
shelf registration statement will be contributed to the Operating Partnership
and such proceeds, together with any proceeds raised from any securities
issued under the Operating Partnership's shelf registration statement will be
used for general corporate purposes, including the development of new
apartment communities, acquisitions and the repayment of existing debt. On
October 1, 1997 the Operating Partnership issued $100 million aggregate
principal amount of 7% Notes. Net proceeds of $98.3 million were used to
repay indebtedness under the Credit Facility that had been incurred primarily
to finance the Villas of Renaissance Acquisition. See Note 6 to the Unaudited
Quarterly Financial Statements.
Debt. The Operating Partnership's conventional and tax-exempt
mortgage debt bears interest at fixed interest rates, or variable rates that
have been effectively fixed through interest rate swap agreements. Interest
rates on conventional mortgage debt were reduced to then-current market rates
at the time of the Company's December 1993 Initial Public Offering through
interest rate buy-down agreements that are scheduled to expire at various dates
prior to loan maturity. A buy-down agreement relating to $35.8 million of
conventional debt expired in September 1997, and as a result, the interest
rate on that loan increased from 5.82% to 8.30%. The weighted average
effective interest rate on the Operating Partnership's debt, including the
non-cash charges of amortization of deferred financing costs, was 6.44% at
September 30, 1997. The Operating Partnership uses interest rate swap
agreements to effectively convert its floating rate tax-exempt mortgage bond
financings to a fixed-rate basis, thus reducing the impact of fluctuations in
interest rates on future income.
The following table sets forth certain information with respect
to the Operating Partnership's outstanding debt at September 30, 1997. For
additional information relating to the Operating Partnership's debt, see Note
3 to the Audited Financial Statements.
Weighted
Debt Average
Debt Structure at September 30, 1997 Balance Interest Rate
- ------------------------------------ ------- -------------
(dollars in millions)
Fixed rate debt
Conventional mortgage financings............. $132.9 6.45%
Mortgage notes payable to The Irvine Company. 50.6 5.75%
Tax-exempt mortgage bond financings.......... 326.6 5.94%
Tax-exempt assessment district debt.......... 5.6 6.27%
Total fixed rate debt...................... 515.7 6.06%
Variable rate debt
Revolver line of credit...................... 135.0 6.42%
Tax-exempt assessment district debt.......... 16.1 3.53%
------ ----
Total variable rate debt................... 151.1 6.11%
------ ----
Total debt............................... $666.8 6.07%
====== ====
<TABLE>
<CAPTION>
Weighted
Balance at Average
September 30, Remaining
Deferred Financing Costs 1997 Term
------------- ---------
(dollars in millions)
<S> <C> <C>
Interest rate buy-downs on conventional
mortgage financings............ $ 8.6 9.0 yrs
Loan origination costs and other........ 10.1 24.9 yrs
------ ----
Total.................................. $ 18.7 17.6 yrs
====== ====
</TABLE>
Operating Activities. Cash flow provided by operating
activities was $69.4 million and $55.7 million in the first nine months of
1997 and 1996, respectively. Cash provided by operating activities increased
in 1997 primarily due to higher revenues from newly developed and acquired
apartment units, as well as an increase in revenues within the Operating
Partnership's stabilized portfolio achieved through higher rental rates. Cash
flow provided by operating activities was $73.0 million, $55.4 million and
$49.8 million for the years ended 1996, 1995 and 1994, respectively. Cash
provided by operating activities increased in 1996 and 1995 compared to prior
years primarily due to higher revenues and lower per-unit operating costs in
the Operating Partnership's stabilized portfolio.
Investing Activities. Cash flow used in investing activities
was $205.8 million and $44.2 million in the first nine months of 1997 and
1996, respectively. This increase resulted from increased development
activity in the first nine months of 1997 (see "--Capital Expenditures"
below), and the acquisition of The Villas of Renaissance (see Note 6 to the
Unaudited Quarterly Financial Statements). Cash flow used in investing
activities was $66.6 million, $128.2 million and $50.9 million for the years
ended 1996, 1995 and 1994, respectively. Changes in levels of cash flows used
in investing activities for each year reflect the changing levels of real
estate development by the Operating Partnership. See "--Capital Expenditures."
Financing Activities. Cash flow provided by (used in)
financing activities was $135.5 million and ($8.4) million in the first nine
months of 1997 and 1996, respectively. The Operating Partnership received an
aggregate of approximately $66.0 million from the sale of Common L.P. Units
and the contribution by the Company of the proceeds from the sale of its
Common Stock in the first quarter of 1997. See "--Additional Equity" above.
These proceeds were used to pay down borrowings from the lines of credit. In
June 1997, the Operating Partnership borrowed $118 million under the Credit
Facility to fund the acquisition of The Villas of Renaissance. Additionally,
the Operating Partnership paid $47.5 million in distributions on its G.P.
Units and Common L.P. Units in the first nine months of 1997, compared to
$41.3 million in the first nine months of 1996. Cash flow provided by (used
in) financing activities was $(7.6) million, $73.7 million and $(23.3) million
for the years ended 1996, 1995 and 1994, respectively. Among the factors
affecting these cash flows in 1996, the Operating Partnership received an
aggregate of approximately $60.0 million from the sale of Common L.P. Units
and the contribution by the Company of the proceeds from the sale of its
Common Stock, compared to $109.3 million in 1995. These proceeds were used to
pay down borrowings from the line of credit. In 1995, the Operating
Partnership received $8.3 million of additional proceeds from the refinancing
of tax-exempt debt, while incurring loan origination costs of $9.2 million and
net borrowings from the line of credit of $15.7 million. Distributions paid
on its G.P. Units and Common L.P. Units in 1996 increased to $56.1 million
from $44.8 million in 1995. In 1994, cash flows used in financing activities
included $33.6 million in distributions paid on its G.P. Units and Common L.P.
Units, partially offset by new borrowings in excess of principal reductions of
approximately $11.1 million and net borrowings from the line of credit of $6.3
million.
Capital Expenditures
Capital Expenditures on New Development. The Operating
Partnership's major cash requirements in the next twelve months are
expected to be for the construction of new apartment communities and
possibly for acquisitions of apartment communities. Currently, the
Operating Partnership has four apartment communities under development (The
Colony, Santa Rosa II, Rancho Santa Fe and The Hamptons) that will require
total expenditures of approximately $162 million, of which $102 million had
been incurred at September 30, 1997. Funding for these developments came
from, and funding for future development activities is expected to come
from, the Credit Facility and the proceeds from this Offering. The Company
or the Operating Partnership may issue other debt or equity securities as
discussed above under "--Liquidity and Capital Resources."
Construction Information
<TABLE>
<CAPTION>
Commencement Estimated Total
of Initial Estimated
Commencement of Leasing Stabilized Costs
Apartment Community Village, City Units Construction Activity Occupancy (in millions)
- ------------------- ----------------------------- ------ --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
The Colony Newport Center, Newport Beach 245 7/96 4Q '97 1Q '99 $44
Santa Rosa II Westpark II, Irvine 207 12/96 4Q '97 3Q '98 27
Rancho Santa Fe Tustin Ranch, Tustin 316 2/97 4Q '97 1Q '99 39
The Hamptons Cupertino 342 5/97 2Q '98 1Q '99 52
----- ----
Total 1,110 $162
===== ====
</TABLE>
The timing of future construction, leasing activities and
initial stabilized occupancy and estimated costs of apartment communities
that are in development are only estimates. Actual results will depend on
numerous factors, many of which are beyond the control of the Operating
Partnership. These include the extent and timing of economic growth in the
Company's rental markets; future trends in the pricing of construction
materials and labor; entitlement decisions by local government authorities;
weather; changes in interest rate levels; and other changes in capital
markets. No assurance can be given that the timing or estimates set forth
in the foregoing table will not vary substantially from actual results.
Capital Replacements on Stabilized Properties. Expenditures
for capital replacements totaled $3.2 million and $2.9 million in the first
nine months of 1997 and 1996, respectively. Average capital replacements per
unit for communities owned and stabilized more than two years increased to
$275 from $254 in the first nine months of 1997 and 1996, respectively, due to
the nature and timing of scheduled capital programs. Expenditures for capital
replacements in 1997 are expected to be similar to 1996 levels. Expenditures
for capital replacements within communities stabilized more than two years
totaled $4.7 million, $4.5 million and $5.6 million in 1996, 1995 and 1994,
respectively. Average capital replacements per unit within communities
stabilized more than two years were $415, $399 and $490 in 1996, 1995 and
1994, respectively. Overall, these expenditures declined over this period
reflecting greater efficiency in property enhancement activities, including
centralized purchasing of major replacement materials. The Operating
Partnership has a policy of capitalizing expenditures related to asset
acquisitions, costs which increase the value of an existing asset, or costs
which substantially extend an existing asset's useful life. Capital
replacements for communities stabilized more than two years were as follows:
Nine Months Ended
September 30, 1997
--------------------
Total Per Unit
------- --------
(in thousands)
Carpet replacements............................ $1,188 $105
Exterior painting, siding and stucco........... 669 59
Upgrades, renovations and major building items. 466 41
Appliances, water heaters and air conditioning. 170 15
Roofing, concrete and pavement................. 270 24
Equipment and other............................ 357 31
------ -----
Total.......................................... $3,120 $ 275
====== =====
Year Ended
December 31, 1996
--------------------
Total Per Unit
------- --------
(in thousands)
Carpet replacements............................. $1,462 $129
Exterior painting, siding and stucco............ 786 69
Upgrades, renovations and major building items.. 970 86
Appliances, water heaters and air conditioning.. 401 35
Roofing, concrete and pavement.................. 542 48
Equipment and other............................. 545 48
------ ----
Total........................................... $4,706 $415
====== ====
The Operating Partnership also plans to incur approximately
$5.2 million in capital expenditures over the next two years at one of its
existing apartment communities, Promontory Point. Management believes that
these capital expenditures will generate additional revenue by enhancing
the community's appeal in the luxury segment of the marketplace. In
addition, the Operating Partnership plans to incur approximately $5.0
million in capital expenditures of which $0.4 million had been incurred
through September 30, 1997 at The Villas of Renaissance which was acquired
on June 30, 1997 (see Note 6 to the Unaudited Quarterly Financial
Statements). The Operating Partnership believes these capital expenditures
will generate additional revenue by enhancing the apartment community's
appeal within the luxury segment of the marketplace. Funding for these
expenditures is expected to come from the Credit Facility and proceeds of
this Offering.
Impact of Inflation
The Operating Partnership's business is affected by general
economic conditions, including the impact of inflation and interest rates.
Substantially all of the Operating Partnership's leases allow, at time of
renewal, for adjustments in the rent payable thereunder, and thus may enable
the Operating Partnership to seek increases in rents. Substantially all
leases are for a period of one year or less. The short-term nature of these
leases generally serves to minimize the risk to the Operating Partnership of
the adverse effects of inflation. For construction, the Operating Partnership
has entered into various contracts for the development and construction of new
apartment communities. These are fixed-fee contracts and thus partially
insulate the Operating Partnership from inflationary risk.
BUSINESS AND PROPERTIES OF THE OPERATING PARTNERSHIP
General
The Operating Partnership is engaged in the development and
operation of multifamily rental apartment communities in California. The
Operating Partnership's management and operating decisions are under the
unilateral control of the Company, a self-administered equity real estate
investment trust. The Operating Partnership and the Company were formed in
December 1993 to continue and expand the apartment community business of The
Irvine Company, a real estate and community development company. At September
30, 1997, the Company had a 45.2% general partnership interest in the
Operating Partnership and was its sole managing general partner. At such
date, the limited partners of the Operating Partnership had a 54.8% interest
in the Operating Partnership, represented by the Common L.P. Units, with The
Irvine Company and certain of its affiliates owning a 54.6% limited
partnership interest in the Operating Partnership.
As of September 30, 1997, the Operating Partnership owned and
operated 14,991 units in 51 Existing Communities and had four additional
Communities Under Construction aggregating 1,110 units. Upon completion of
the Communities Under Construction, the Operating Partnership will own a total
of 16,101 units in 55 apartment communities, representing an increase in units
of approximately 42% since the Initial Public Offering in December 1993.
Through July 2020, the Company and the Operating Partnership hold the
exclusive right, but not the obligation, to acquire land from The Irvine
Company, the owner and developer of the Irvine Ranch since 1864, for
development of additional apartment communities on the Irvine Ranch.
Fifty-three of the Properties aggregating 14,836 units (the "Irvine Ranch
Properties") are or will be located on the Irvine Ranch, of which 50 constitute
Existing Communities (14,068 units) and three constitute Communities Under
Construction (768 units).
In 1997, the Operating Partnership commenced an "off-Ranch"
expansion program through the acquisition of rights to purchase three
apartment community development sites located in Northern California's Silicon
Valley. The Operating Partnership has exercised its right with respect to one
of these sites and has begun construction on a 342-unit apartment community on
the site. On October 23, 1997, the Board of Directors of the Company
authorized the Operating Partnership, subject to the receipt of necessary
entitlements, to exercise another of the options. Construction of an
apartment community of approximately 155 units on this site is expected to
commence in the first half of 1998. Preliminary design and jurisdictional
approvals are also in process with respect to the remaining development site.
In addition, on June 30, 1997, the Operating Partnership purchased for $127
million the 923-unit Villas of Renaissance located in Northern San Diego
County. See "Recent Developments--`Off-Ranch' Expansion." The Operating
Partnership believes that the economic expansion being experienced by the
State of California provides the Operating Partnership with significant
growth potential beyond the Irvine Ranch.
The Irvine Ranch is located in central Orange County,
California between San Diego and Los Angeles. The western boundary of the
Irvine Ranch borders approximately six miles of the Pacific Ocean. Today, the
portion of the Irvine Ranch which is still owned by The Irvine Company covers
approximately 50,000 acres and includes the largest remaining privately-owned
undeveloped acreage in Orange County. The developed portion of the Irvine
Ranch, which includes the City of Irvine and significant parts of the cities
of Newport Beach and Tustin, is one of the largest urban master-planned
communities in the United States. The Irvine Ranch has been developed over
the past 30 years in accordance the Master Plan which, over time, has been
refined to accord with locally approved general plans. The Irvine Ranch is
one of the major commercial, industrial, retail and residential centers in
Southern California.
The Operating Partnership believes that a variety of factors
have contributed to the strong apartment market in Orange County, the
successful operating performance of the Existing Communities located on the
Irvine Ranch and the existence of significant opportunities for the
development of additional apartment communities on the Irvine Ranch. Most
important among these factors are:
o The dominant market position of the Operating Partnership,
which owns over 85% of all apartment communities having 100 or more
units on the Irvine Ranch;
o The Operating Partnership's 23-year exclusive right to
acquire land from The Irvine Company for development of additional
rental apartment communities on the Irvine Ranch;
o The limited supply of developable land, other than on the
Irvine Ranch, adjacent to major employment centers in Orange County;
o The Irvine Company's Master Plan strategy which emphasizes
market segmentation in order to ensure adequate and appropriate
allocation of land uses which support sustained growth for the long-term;
o The high quality of design, construction and maintenance of
the Irvine Ranch Properties and their location in or near the City of
Irvine, which was ranked by the Federal Bureau of Investigation as among
the safest cities in the United States with a population of 100,000 or
more;
o The close proximity of the Irvine Ranch Properties and of
future development sites to major employment centers, the Pacific Ocean,
high quality schools, and extensive resort, recreational and open space
amenities;
o An affluent, growing population and diversified employment
base in Orange County and on the Irvine Ranch;
o The Operating Partnership's ability to defer the purchase of
land on the Irvine Ranch under its land rights agreement until site and
zoning entitlements have been obtained, the land is ready for
construction and the Operating Partnership determines favorable market
conditions exist;
o The operating efficiencies available to the Operating
Partnership because the Irvine Ranch Properties are located in a single
geographic area;
o An average of 20 years of experience of the Company's 11 most
senior members of management in the design, development, construction,
property management and financing of apartment communities; and
o The effectiveness of management's policies regarding property
management and expense control.
The Operating Partnership's intent is to develop or acquire new
apartment communities in California. The Operating Partnership has recently
commenced operations in the Silicon Valley and Northern San Diego County,
which possess strong rental demographics and economic growth prospects similar
to those on the Irvine Ranch.
Business Strategy
The Operating Partnership's primary business objective is to
deliver strong, consistent total annual returns to its partners while
enhancing the long-term growth in value of its real estate portfolio. The
Operating Partnership believes it is well positioned to meet this objective
given the size and strength of the economic regions in which it operates, the
quality of its existing apartment community portfolio and the significant
opportunities for new development within its primary market, and in similar
high growth regions of California, such as the Silicon Valley and the Northern
San Diego marketplace. Through adherence to specific operating and
development strategies, the most important of which are discussed below, the
Operating Partnership seeks to achieve growth in its funds available for
distribution through maximization of cash flow from its Existing Communities
and the development of new apartment communities.
Operating Strategies
o Provide an exceptional living environment for residents. The
Existing Communities on the Irvine Ranch have been developed and are
maintained to appeal to the highly educated, relatively affluent base of
renters attracted to the Irvine Ranch. As a result of the region's
closely managed master-planning process, the Irvine Ranch Properties are
situated amid parks and other open space, and in close proximity to
employment centers, schools, retail centers, and recreational
facilities. They provide generous amenities, are well maintained and
offer a high standard of customer service. The Operating Partnership's
success in providing an exceptional quality of life for its residents is
evidenced in part by the strong average rental rates the Existing
Communities on the Irvine Ranch command relative to average rental rates
for Orange County as a whole. In 1996, the stabilized Existing
Communities on the Irvine Ranch produced an average monthly rent of
$1,025 per unit, which was approximately $200 more than the average
monthly rent in Orange County.
o Enhance efficiency of operations. Management of the Company
selectively subcontracts on-site staffing, personnel management and
accounting functions to three independent property management firms which
enables it to focus on marketing, product pricing and positioning, and
approval of operating budgets. Management additionally directs and
tests the standards of property-level activities conducted by the firms,
including training of on-site staff.
o Capitalize on strong brand identity with enhanced marketing
and merchandising programs. The Operating Partnership has enhanced
certain of its marketing programs to broaden its already strong brand
name recognition in order to attract new residents into its portfolio
and broaden the existing resident base. The Operating Partnership's
marketing programs include: a website and a single source 800 telephone
number to provide information on the Properties; rental information
centers within major shopping centers and the University of California
at Irvine; and a targeted advertising campaign promoting the Operating
Partnership's portfolio and its strong quality of life characteristics.
Development Strategies
o Develop new communities to complement and expand the
Operating Partnership's existing rental market base. A diverse regional
economy, continuing population growth, and an attractive quality of life
all contribute to a broad and varied demand for rental housing on the
Irvine Ranch. As a result, opportunities exist for a variety of
apartment property types and amenity levels, including projects designed
for the family, luxury and senior markets, and the area's large
population of young professionals. The Operating Partnership's
development program on the Irvine Ranch seeks to capitalize on these
opportunities through market segmentation. Supported by consumer
research and focus group studies, market segmentation decisions are made
at the earliest planning stages, when new residential villages for the
Irvine Ranch are conceived and the villages' largest and most important
amenities are selected. Location of schools, recreational facilities,
retail centers, open space and views are all important considerations.
Individual development decisions--including site location, product
design, amenities and marketing programs--are also geared to appeal to
the needs and desires of the target rental market.
o Utilize experienced management to create high-quality,
well-built properties designed to sustain value. The Operating
Partnership brings considerable management expertise to all aspects of
the development, construction and leasing process. Senior management of
the Company is actively involved in new project development from the
inception of a new Irvine Ranch village and is responsible for target
market identification; design of site plans, building plans, and floor
plans; project and unit amenity selection; and site-specific
governmental approvals. In addition, the Operating Partnership directs
the bidding and contracting of all major construction activities, in
essence acting as general contractor. The Operating Partnership engages
experienced independent construction managers to act as intermediaries
with subcontractors and to manage on-site activities under the close
supervision of the Operating Partnership's internal construction group.
The Operating Partnership builds properties using only high-quality
construction materials and techniques, and believes that this higher
initial investment in quality enhances long-term value creation by
sustaining high community rental income levels and reducing long-term
expense levels.
"Off-Ranch" Expansion
While the Operating Partnership's principal focus has been on
the development of apartment communities on the Irvine Ranch, the Operating
Partnership has commenced an "off-Ranch" expansion program and will continue
to consider other opportunities to develop or acquire apartment communities in
California, that offer attractive risk-adjusted returns. The Operating
Partnership's intent is to create new market positions in the Silicon Valley
and Northern San Diego County and other locations in California which possess
strong rental demographics and economic growth prospects similar to those on
the Irvine Ranch. In addition, the three senior real estate executives at
Thompson Residential Company, Inc. ("TRC"), a privately held, Northern
California-based mutlifamily development company, have joined the Company with
primary responsibility for the Operating Partnership's "off-Ranch" California
operations. See Note 5 to the Unaudited Quarterly Financial Statements.
Irvine Ranch Master Plan
The urbanization of the Irvine Ranch began in the 1960s with
the adoption of the pioneering comprehensive Master Plan for future community
development which originally constituted a large map of the Irvine Ranch and
a series of supporting maps detailing land uses. Subsequently, The Irvine
Company worked closely with the various local jurisdictions who govern the
Irvine Ranch to adopt general plans for the future development of their
jurisdictions. The Irvine Company's overall Master Plan was refined to accord
with the approved general plans and the residential, commercial, industrial,
environmental and aesthetic balance desired by each jurisdiction. As a
result, today the Irvine Ranch Master Plan is a compilation of the various
interlocking general plans described above. The Irvine Company continuously
engages in planning activities and the Master Plan refinement process is
ongoing. The Irvine Company works closely with local government
representatives, community residents and other civic and environmental groups
to obtain the necessary local support and entitlements for its developments.
The goal of the Master Plan was and remains to create innovative urban and
suburban environments through the well-planned, coordinated development of
residential communities and employment centers (which include major business
and retail centers, and research and development and industrial parks) as well
as civic, cultural, recreational, educational and other supportive facilities,
all with an emphasis on improving the quality of life and achieving long-term
balanced regional economic growth.
The success of the Irvine Ranch as a master-planned development
is in the large part attributable to the early creation of a broad employment
base. The Irvine Company has emphasized the promotion of job creation on the
Irvine Ranch and has been involved in creating four major employment centers
on the Irvine Ranch, each easily accessible by apartment residents and the
surrounding area. The Irvine Company has been the sole developer of the
Irvine Spectrum, a 3,600-acre research, technology and employment center which
houses more than 2,200 companies and approximately 44,000 employees and
includes more than 2.0 million square feet of office and other commercial
space and over 15.5 million square feet of industrial space. The Irvine
Business Complex, which surrounds the John Wayne airport, houses over 100,000
employees and includes more than 24 million square feet of office and other
commercial space and over 14 million square feet of industrial space. Newport
Center contains over 4.4 million square feet of office space, a 1.3 million
square-foot regional mall (Fashion Island), a tennis club and two country
clubs. In addition, The Irvine Company donated land to the University of
California at Irvine, a 1,489-acre campus which currently has more than 16,000
students and 5,500 employees. The proximity of the Irvine Ranch Properties to
these employment centers makes them attractive residential locations.
Market Segmentation and the Village Concept
The Irvine Company's land use planning emphasizes market
segmentation in order to ensure adequate and appropriate allocation of land
uses which support sustained growth for the long term. Through careful
planning, design and marketing, The Irvine Company also promotes compatibility
and synergy among properties of the same type in order to maximize the
likelihood of success of new projects, to preserve and build value for existing
projects and to build sustainable long-term market value for homeowners, local
merchants and employers. In accordance with the Master Plan, The Irvine
Company has created twelve villages which are used as micro-planning areas in
an effort to facilitate the desired segmentation of products.
Each village across the Irvine Ranch has a thematic identity
which characterizes the primary features and attributes of the village and
helps to identify the target market for the Operating Partnership's product.
For example, Tustin Ranch, in the City of Tustin, is a family-oriented village
featuring an 18-hole championship golf course, athletic fields, jogging,
hiking and equestrian trails. Along the ocean is the village of Newport
Coast, an upscale community featuring ocean views and million-dollar custom
built homes. The village of Westpark, in Irvine, caters to young
professionals with growing families and offers the highly renowned public
school system and recreational facilities of the City of Irvine.
Within each village, the Operating Partnership's target market
is further defined. The primary factor which determines the appropriate
target for the Operating Partnership's product is location. For example, the
conventional product which is targeted towards young professionals is
typically located near major business centers and in close proximity to
entertainment, retail establishments and major transportation corridors. The
student product, on the other hand, is located within walking distance of a
college or university, student-oriented retail centers, and public
transportation.
Finally, the Operating Partnership specifically designs its
products to appeal to a target market. The Operating Partnership's luxury
product is typically in a unique location with ocean or golf course views.
The family products offer spacious play areas and tot lots, a children's
multi-purpose room with an activities coordinator, individual garages and
in-unit washers and dryers.
Exclusive Land Rights Agreement
The Company, the Operating Partnership and The Irvine Company
are parties to the Land Rights Agreement pursuant to which, through July 31,
2020, the Company and the Operating Partnership have the exclusive right, but
not the obligation, to acquire all land sites entitled for residential use and
designated by The Irvine Company as ready for apartment community development
in accordance with The Irvine Company's Master Plan. The determination to
exercise an option with respect to a site is made solely by the Independent
Directors Committee of the Company's Board of Directors. Under this
Agreement, the Operating Partnership has purchased ten apartment community
land sites since the Company's Initial Public Offering, seven of which are now
Existing Communities and three of which are now the Communities Under
Construction. Under the terms of the Land Rights Agreement, through July 31,
2000, the purchase price for any apartment community sites acquired may be
paid with either cash, Common Stock of the Company or Common L.P. Units, at
the option of the Company. After July 31, 2000, the choice of consideration
will revert to The Irvine Company. In no event shall the purchase price for
any apartment community land site exceed 95% of the value of such site as
determined by independent appraisals. In addition, the purchase price for
apartment sites which encompassed the first 1,800 apartment units the
Operating Partnership developed commencing in mid-1995 were set at an amount
such that each project's budgeted pro forma unleveraged return on costs for
the first 12 months following stabilized occupancy was between 10.0% and
10.5%. Six land sites have been purchased under this arrangement and as of the
date of this Prospectus future apartment sites encompassing 309 apartment
units remain to be purchased under this arrangement. The Board of Directors
of the Company has authorized the purchase pursuant to this arrangement of a
land site for the construction of a 393 unit apartment community, which
purchase is expected to close by the end of 1997. Accordingly, as of the date
of this Prospectus the purchase price for all future land sites will be no
greater than 95% of the appraised value. Independent appraisals will be
obtained by each of the Operating Partnership and The Irvine Company for all
future sites, prior to the Independent Directors Committee determining whether
the Operating Partnership will exercise its right to purchase a land site. If
the Operating Partnership elects not to exercise its option for any site, the
Operating Partnership will thereafter have a right of first refusal on the sale
of such site to a third party if the terms of such sale are more favorable
than those offered to the Operating Partnership. The determination to
exercise an option or the right of first refusal under the Land Rights
Agreement with respect to any site will be made solely by a majority of the
Independent Directors Committee.
Pursuant to the Land Rights Agreement, The Irvine Company and
Mr. Bren have agreed to conduct their apartment community development and
ownership activities on the Irvine Ranch solely through the Company and the
Operating Partnership. These restrictions terminate upon the occurrence of
certain conditions. See "Risk Factors--Risk of Early Termination of the
Exclusive Land Rights and Non-Competition Arrangements with The Irvine Company
and Mr. Bren."
The Properties
As of September 30, 1997, the Operating Partnership owned and
operated 14,991 apartment units in the Existing Communities and had four
Communities Under Construction. The Operating Partnership believes that the
Properties are high quality apartment communities with superior locations near
major employment centers and, in the case of Irvine Ranch Properties, within
master-planned villages. The Properties are located within the following
individual jurisdictions:
<TABLE>
<CAPTION>
Number of Number of Units Percent of Total
Location Properties (1) (1) Units
- -------- -------------- --------------- ----------------
<S> <C> C> C>
Orange County
Irvine............ 37 9,849 61.2%
Newport Beach..... 8 2,305 14.3
Tustin............ 7 2,170 13.5
Newport Coast..... 1 512 3.2
Silicon Valley
Cupertino......... 1 342 2.1
Northern San Diego
County La Jolla... 1 923 5.7
- -------- -- ------ -----
Total............... 55 16,101 100.0%
== ====== =====
</TABLE>
- --------
(1) Four of these Properties (aggregating 1,110 units) are Communities Under
Construction.
Existing Communities
The Existing Communities consist of 51 apartment communities of
two, three or four stories, containing 14,991 units. The Company believes
that the Existing Communities are well maintained and have no material
deferred maintenance requirements. The average age of the Existing
Communities is approximately 11 years. The oldest of the Existing Communities
was completed in 1969, and 32 of the 51 Existing Communities, totaling 10,323
units or approximately 68.9% of the units in the Existing Communities, have
been completed since January 1, 1985. The number of units per apartment
community ranges from 58 units to 923 units, with an average of approximately
294 units. Approximately 88% of the units are one- or two-bedroom apartments.
The apartment units average 946 square feet.
Excluding The Villas of Renaissance, 43 of the Existing
Communities, representing 11,334 units, achieved stabilized occupancy prior to
January 1, 1996, and for the nine months ended September 30, 1997, these
Existing Communities had an average physical occupancy rate of 94.5% and an
average monthly rent per unit of $1,068. Five Existing Communities,
containing 2,207 units, were in lease-up throughout 1995 and achieved
stabilized occupancy during 1996. For the nine months ended September 30,
1997 these five Existing Communities had an average physical occupancy of
94.5%. The Operating Partnership also acquired The Villas of Renaissance
(containing 923 units) on June 30, 1997. See "Recent
Developments--'Off-Ranch' Expansion." The two remaining Existing Communities
containing 527 units achieved stabilized (95%) occupancy in July 1997.
All of the Existing Communities offer apartment residents
numerous amenities and include extensive landscaping. Approximately 80% of
the 51 Existing Communities contain a swimming pool, spa, air conditioning and
covered parking. Additional amenities may include a fitness center,
recreational room, sauna and tennis courts. Each apartment unit includes a
patio, entry porch or balcony. Many apartment units offer one or more of
certain additional features, such as vaulted ceilings, fireplaces, enclosed
garages, refrigerators, washers and dryers and microwave ovens.
The Operating Partnership seeks to assure that the Properties
remain attractive dwellings for apartment residents and desired locations for
prospective apartment residents. Local property manager maintenance, custodial
and grounds keeping personnel perform regular maintenance and upkeep on the
Properties to preserve the enhanced physical and aesthetic attributes. The
physical appearance of, and apartment residents' satisfaction with, the
Properties and with the performance of the local property managers is
monitored and evaluated on an ongoing basis by senior management. The
following table sets forth certain information as of December 31, 1996
regarding the 48 Existing Communities which had achieved stabilized occupancy:
Stabilized Community Information(1)
<TABLE>
<CAPTION>
1996
Average Average 1996
Unit Size Monthly Average
Year Number (Square Rental Rate Physical
Community Completed of Units Feet) Per Unit Occupancy
- --------- ---------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Properties Stabilized Over Two Years:
Irvine, CA:
Amherst Court.............................. 1991 162 724 $976 94.0%
Berkeley Court............................. 1986 152 828 1,032 92.5
Cedar Creek................................ 1985 176 811 897 94.9
Columbia Court............................. 1984 58 852 975 95.2
Cornell Court.............................. 1984 109 894 1,043 95.2
Cross Creek................................ 1985 136 935 959 95.9
Dartmouth Court............................ 1986 294 896 1,032 92.6
Deerfield.................................. 1975/1983 192/96 849 879 94.8
Harvard Court.............................. 1986 112 826 978 94.5
Northwood Park............................. 1985 168 944 907 95.0
Northwood Place............................ 1986 604 954 907 95.0
Orchard Park............................... 1982 60 971 1,009 99.9
Park West.................................. 1970/71/72 256/276/348 1,004 934 94.1
Parkwood................................... 1974 296 886 921 94.1
Rancho San Joaquin......................... 1976 368 896 975 96.2
San Carlo.................................. 1989 354 1,074 1,158 96.4
San Leon................................... 1987 248 951 1,006 94.3
San Marco.................................. 1988 426 923 950 95.4
San Marino................................. 1986 200 926 981 94.6
San Mateo.................................. 1990 283 720 919 95.6
San Paulo.................................. 1993 382 1,001 934 95.0
San Remo................................... 1986/1988 136/112 963 968 94.3
Stanford Court............................. 1985 320 799 951 95.0
The Parklands.............................. 1983 121 794 1,135 99.8
Turtle Rock Canyon......................... 1991 217 1,024 1,218 96.7
Turtle Rock Vista.......................... 1976/1977 112/140 1,155 1,161 96.3
Windwood Glen.............................. 1985 196 878 916 96.5
Windwood Knoll............................. 1983 248 906 899 95.2
Woodbridge Oaks............................ 1983 120 976 1,072 99.9
Woodbridge Pines........................... 1976 220 872 935 94.6
Woodbridge Villas.......................... 1982 258 867 919 94.9
Woodbridge Willows......................... 1984 200 894 937 95.9
------ ----- ------ ----
Subtotal................................. 8,156 923 $972 95.1%
------ ----- ------ ----
Newport Beach, CA:
Bayport.................................... 1971 104 867 $991 97.0%
Bayview.................................... 1971 64 1,154 1,208 96.4
Baywood.................................... 1973/1984 320/68 1,074 1,106 96.1
Mariner Square............................. 1969 114 1,104 1,109 95.0
Newport North.............................. 1986 570 947 1,058 94.7
Promontory Point........................... 1974 520 1,056 1,566 92.7
------ ----- ------ ----
Subtotal................................. 1,760 1,020 $1,224 94.6%
------ ----- ------ ----
Tustin, CA:
Rancho Alisal.............................. 1988/1991 344/12 967 $956 93.9%
Rancho Maderas............................. 1989 266 939 1,003 94.5
Rancho Mariposa............................ 1992 238 856 973 94.4
Rancho Tierra.............................. 1989 252 1,031 1,052 95.3
Sierra Vista............................... 1992 306 852 1028 94.5
------ ----- ------ ----
Subtotal................................. 1,418 930 $1,000 94.5%
------ ----- ------ ----
Total Portfolio Stabilized Over Two Years... 11,334 939 $1,015 95.0%
------ ----- ------ ----
Properties Stabilized Less Than Two Years:
Villa Coronado............................. 1996 513 929 $1,170 92.6%
Santa Rosa................................. 1996 368 895 1,110 94.8
Santa Clara................................ 1996 378 967 1,181 95.5
Rancho Monterey............................ 1996 436 932 1,176 95.1
Newport Ridge.............................. 1996 512 951 1376 94.5
------ ----- ------ ----
Total Portfolio Stabilized Less Than Two
Years....................................... 2,207 936 $1,169 94.4%
------ ----- ------ ----
Total Stabilized Portfolio.................. 13,541 938 $1,025 94.9%
====== ===== ====== ====
</TABLE>
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(1) Excludes The Villas of Renaissance, an apartment community acquired by the
Operating Partnership on June 30, 1997. See "Recent
Developments--'Off-Ranch' Expansion."
Communities in Lease-Up and Communities Under Construction
The Operating Partnership had no communities in lease-up at
September 30, 1997. Two Existing Communities (Baypointe and Santa Maria)
began deliveries of units in the fourth quarter of 1996, with the final units
being delivered in June 1997. Each such Property had achieved stabilized
occupancy by July 20, 1997. The Operating Partnership had four Communities
Under Construction (The Colony, Santa Rosa II and Rancho Santa Fe on the
Irvine Ranch; and The Hamptons at Cupertino in Cupertino, California) at
September 30, 1997, which will comprise a total of 1,110 units upon
completion. No units in the Communities under Construction were ready for
occupancy at September 30, 1997. The Communities Under Construction will
include amenities substantially similar to those in the Existing Communities.
Management and Control of the Operating Partnership
As sole general partner of the Operating Partnership, the
Company has the exclusive power to manage and conduct the business of the
Operating Partnership. The Company, in turn, is governed by a Board of
Directors, which has a majority of directors unaffiliated with The Irvine
Company. Furthermore, the Board of Directors of the Company has established
the Independent Directors Committee, whose approval is required with respect
to all transactions involving the Operating Partnership and The Irvine
Company, affiliates of The Irvine Company or Mr. Bren, such as the acquisition
of additional apartment communities or sites therefor from The Irvine Company.
In certain circumstances, consent of The Irvine Company is
required by the Partnership Agreement. Such consent is required, among other
things, (i) to sell all or substantially all of the assets of the Operating
Partnership, (ii) for the Company to take title to assets (other than
temporarily in connection with an acquisition prior to contributing such
assets to the Operating Partnership) or for the Company to conduct business
other than through the Operating Partnership, (iii) for the Operating
Partnership to engage in any business other than the development and ownership
of apartment communities or (iv) in connection with the liquidation of the
Operating Partnership. The Partnership Agreement requires, absent receipt of
consent, that title to assets be in the Operating Partnership in order to
maintain a one-for-one exchange ratio between Common L.P. Units and shares of
Common Stock of the Company. See "Operating Partnership
Agreement--Management."
At the option of The Irvine Company, The Irvine Company's 54.6%
limited partnership interest in the Operating Partnership is exchangeable for
Common Stock of the Company pursuant to the Exchange Rights (subject to the
ownership limit applicable to The Irvine Company and certain related persons)
contained in the Company's Articles of Incorporation or pursuant to the Cash
Tender Rights may be tendered to the Company for cash payable solely out of
the net proceeds of an offering of Common Stock of the Company.
Competition
The Properties are located in developed areas. There are
numerous other rental apartment properties within and around the market area
of each Property. The number of competitive rental properties in the area
could have a material effect on the Operating Partnership's ability to rent
the apartments at the Properties and the rents charged.
Employees
As of September 30, 1997, the Company had 66 employees. None
of such employees is subject to a collective bargaining agreement and the
Operating Partnership has experienced no labor-related work stoppages. The
Operating Partnership considers its relations with its personnel to be good.
Cyclicality
The Operating Partnership's business, and the residential
housing industry in general, are cyclical. The Operating Partnership's
operations and markets are affected by local and regional factors such as
local economies, demographic demand for housing, population growth, property
taxes, energy costs, and by national factors such as short and long-term
interest rates, federal mortgage financing programs, federal income tax
provisions and general economic trends. Occupancy varies only slightly on a
seasonal basis, with the lowest occupancy typically occurring in the summer
months.
Environmental Matters
Under various federal, state and local laws, ordinances and
regulations, an owner of real property may be held liable for the costs of
removal or remediation of certain hazardous or toxic substances located on or
in the property. These laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of the
hazardous or toxic substances. The costs of any required remediation or
removal of such substances may be substantial. In addition, the owner's
liability as to any property is generally not limited under such laws,
ordinances and regulations and could exceed the value of the property and/or
the aggregate assets of the owner. The presence of such substances, or the
failure to remediate such substances properly, may also adversely affect the
owner's ability to sell or rent the property or to borrow using the property
as collateral. Under such laws, ordinances and regulations, an owner or any
entity who arranges for the disposal of hazardous or toxic substances, such as
asbestos, at a disposal facility may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
facility, whether or not the facility is owned or operated by such owner or
entity. In connection with the ownership of the Properties or the disposal of
hazardous or toxic substances, the Operating Partnership may be liable for
such costs.
The groundwater underlying portions of the City of Irvine
generally contains elevated levels of certain inorganic compounds. In
addition, two United States Marine Corps air bases where soil and groundwater
contamination have been discovered are located adjacent to the Irvine Ranch.
Although the Operating Partnership believes that contamination at one of these
bases is localized, there can be no assurances that it has not migrated onto
any of the Properties. The other base is listed on the National Priorities
List and activities from this base have resulted in groundwater contamination
in the vicinity of this base. The Operating Partnership has knowledge that
contamination from this base has migrated into the groundwater underlying some
of the Properties. The Operating Partnership believes that most of the
groundwater is located at a substantial depth under the land surface. Since
the Operating Partnership believes that the Orange County Water District
together with the Department of Defense are currently conducting and will
continue to conduct remediation activities at this base and in the area, the
Operating Partnership believes that it will not incur any remediation costs in
connection with the groundwater contamination.
Other federal, state and local laws may impose liability for
release of asbestos containing materials ("ACMs") into the air or require the
removal of damaged ACMs in the event of remodeling or renovation. There are
ACMs at 11 of the Properties, primarily in floor coverings and acoustical
ceiling materials. The Operating Partnership believes that the ACMs at these
properties are generally in good condition. Comprehensive operations and
maintenance plans have been implemented for properties where ACMs are present.
In addition, property custodial and maintenance workers are trained to deal
effectively with the maintenance of existing ACMs. The Operating Partnership
believes it is in compliance in all material respects with all federal, state,
and local laws relating to ACMs and that there are no regulatory requirements
that currently require the removal of these ACMs; however, if the Operating
Partnership were required to remove all ACMs present in its properties over a
short time frame, the cost of such removal would have a material adverse
effect on its financial condition and results of operations. The Operating
Partnership also believes that ACMs are not present in the remaining
Properties. The Irvine Ranch Water District, a municipal corporation, owns and
maintains underground cement water pipes which contain asbestos and which are
serving a number of the Properties. Since these pipes are owned and maintained
by the Irvine Ranch Water District, the Operating Partnership believes that
any potential environmental liabilities associated with these pipes will be
incurred by the Irvine Ranch Water District.
The Operating Partnership has not been notified by any
governmental authority of any material noncompliance, liability, or other
claim in connection with any of the Properties. In addition, environmental
assessments (which involve physical inspections without soil or groundwater
analyses and generally without radon testing) were obtained on all 48 Existing
Communities in 1993 or later except for two which were obtained more than five
years ago. Environmental assessments were performed on all sites under
construction prior to their purchase. The Operating Partnership is not aware
of any environmental liability relating to the Properties that it believes
would have a material adverse effect on its business, assets or results of
operations. Nevertheless, it is possible that the environmental assessments
did not reveal all environmental liabilities with respect to the Properties,
that environmental liabilities have developed with respect to the Properties
since the environmental assessments were prepared or that there are material
environmental liabilities of which the Operating Partnership is unaware with
respect to the Properties. Moreover, no assurance can be given that future
laws, ordinances or regulations will not impose material environmental
liabilities or that the current environmental condition of the Properties will
not be affected by residents and occupants of the Properties or by the uses or
condition of properties in the vicinity of the Properties, such as leaking
underground storage tanks, or by third parties unrelated to the Operating
Partnership.
Regulation
Apartment community properties are subject to various laws,
ordinances, and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas.
The Operating Partnership believes that each Property has all material permits
and approvals to operate its business. Rent control laws currently are not
applicable to any of the Properties. However, there can be no assurance that
rent control requirements will not be initiated in the future.
The Properties and any newly acquired or developed apartment
communities must comply with Title II of the Americans with Disabilities Act
(the "ADA") to the extent that such properties are "public accommodations"
and/or "commercial facilities" as defined by the ADA. Compliance with the ADA
requires removal of structural barriers to handicapped access in certain
public areas of the Properties where such removal is "readily achievable." The
ADA does not, however, consider residential properties, such as apartment
communities, to be public accommodations or commercial facilities, except to
the extent portions of such facilities, such as a leasing office, are open to
the public. The Operating Partnership believes that the Properties comply in
all material respects with all present requirements under the ADA and
applicable state laws. Noncompliance with the ADA could result in imposition
of fines or an award of damages to private litigants.
The Fair Housing Act ("FHA") requires, as part of the Fair
Housing Amendments Act of 1988, apartment communities first occupied after
March 13, 1990 to be accessible to the handicapped. Noncompliance with the FHA
could result in the imposition of fines or an award of damages to private
litigants. The Operating Partnership believes that the Properties that are
subject to the FHA are in compliance with such law.
Approximately 2,900 units in portions of 31 of the Operating
Partnership's Existing Communities are currently subject to resident income
limitations which generally restrict rental of the affected units to low or
moderate income residents and which, in most instances, also limit the amount
of rent that may be charged for a particular unit. A brief summary of the
basis and effect of these resident income and other limitations follows:
The development of 23 of the 31 Existing Communities was
financed with the proceeds of tax-exempt multifamily housing revenue bonds
issued by various local municipalities. These bonds were refunded in May 1995
and consolidated under one issuer, California Statewide Communities
Development Authority. Regulatory agreements applicable to such financings (a)
require that a specified percentage of the units be set aside for residents
whose incomes do not exceed a specified percentage of the area median income
and (b) in most instances, limit the rent which can be charged to a percentage
of the maximum qualifying resident income level for the affected unit. Most of
these restrictions will terminate upon the maturity date of the bond issue.
In addition to the rental restrictions imposed by the bond
regulatory agreements, many of the 23 properties and three additional
properties are also subject to resident income and rent limitations by virtue
of development and other agreements entered into with local municipalities and
private and quasi-public interest groups. These restrictions are similar in
scope and substance to the other restrictions discussed above.
Five of the 31 Existing Communities were developed with the
assistance of U.S. Department of Housing and Urban Development ("HUD")
administered programs which provided mortgage insurance to the project lender.
Certain regulatory and other agreements with HUD applicable to such financings
(a) impose resident income restrictions similar to those imposed by the bond
financing agreements, and (b) generally require the Operating Partnership to
operate the Properties in accordance with HUD's standards. With respect to one
of the properties (i.e., The Parklands), a regulatory agreement additionally
(a) limits the distribution of income from the property to 10% of the HUD
imputed equity in the property and (b) requires that any income in excess of
such 10% limit be deposited into a residual receipts account. Amounts paid
into such residual receipts account have historically been used for capital
improvements to the property, subject to HUD's consent. At the expiration of
the applicable regulatory or other agreement, any amount remaining in such
residual receipts account belongs to HUD.
Under Section 8 of the United States Housing Act of 1937, HUD
currently provides rental assistance payments to each of these five HUD
properties pursuant to certain Housing Assistance Payments ("HAP") contracts.
Under the HAP contracts, so long as the units are rented to residents whose
income levels do not exceed specified HUD guidelines, each qualifying resident
is required to pay only 30% of their adjusted monthly income as rent and HUD
pays the difference between the 30% payment and the unit's market rents as
established by HUD. The above-mentioned restrictions and limitations will
continue for the remainder of each HAP contract term, each HAP contract has an
initial term of 20 years with four 5-year renewal options exercisable at the
owners option. At September 30, 1997 the average remaining term of the HAP
contracts was approximately 6 years.
Each of the resident and income restricted units within the
Operating Partnership's portfolio has been subject to one or more of the
foregoing restrictions either since their initial occupancy or as a result of
subsequent agreements with the applicable governmental authority or other
private or quasi-public interest groups. Accordingly, the effect of these
restrictions on rental income from the Properties has been reflected in the
historical financial results of the Operating Partnership and its Predecessor.
The Operating Partnership believes that it is in material
compliance with all of the foregoing requirements. The failure of the
Operating Partnership to comply with the terms of any of the foregoing could
adversely affect the Operating Partnership's operations.
The Operating Partnership may purchase land in the future which
as a condition of purchase has the inclusion of units at below market rental
rates. Construction of such properties may be financed with tax-exempt debt.
In any case, the Operating Partnership will evaluate the economics inclusive
of any rental restriction and benefit of below-market, tax-exempt financing
prior to purchasing the land.
Factors Relating to Real Estate Operations and Development
General. Real property investments are subject to varying
degrees of risk. The investment returns available from equity investments in
real estate depend in large part on the amount of income earned and capital
appreciation generated by the related properties as well as the expenses
incurred. If the Properties do not generate revenue sufficient to meet
operating expenses, including debt service and capital expenditures, the
Operating Partnership's income and ability to service its debt and other
obligations and to make distributions on its partnership interests, including
the Series A Preferred L.P. Units, will be adversely affected. In addition,
the Properties consist primarily of apartment communities located in Orange
County. Income from and the performance of the Irvine Ranch Properties may
therefore be adversely affected by the general economic climate in Orange
County, including unemployment rates and local conditions such as the supply
of and demand for apartments in the area, the attractiveness of the Irvine
Ranch Properties to residents, zoning or other regulatory restrictions,
competition from other available apartments and alternative forms of housing,
the affordability of single family homes, the ability of the Operating
Partnership to provide adequate maintenance and insurance and the potential of
increased operating costs (including real estate taxes). Certain significant
expenditures associated with an investment in real estate (such as mortgage
and other debt payments, real estate taxes and maintenance costs) generally
are not reduced when circumstances cause a reduction in revenue from the
investment. In addition, income from properties and real estate values are
also affected by a variety of other factors, such as governmental regulations
and applicable laws (including real estate, zoning and tax laws), interest
rate levels and the availability of financing. The Irvine Ranch Properties in
the aggregate historically have generated positive cash flow from operations;
however, no assurance can be given that such will be the case in the future.
In 1997, the Operating Partnership commenced an "off-Ranch"
expansion program through the acquisition of rights to purchase three
apartment community development sites located in Northern California's Silicon
Valley. The Operating Partnership commenced construction of a 342-unit
apartment community on one of such sites in May 1997 and on October 23, 1997,
the Company's Board of Directors authorized, subject to receipt of necessary
entitlements, the acquisition of another of the development sites.
Construction of an apartment community of approximately 155 units on this site
is expected to commence in the first half of 1998. On June 30, 1997, the
Operating Partnership acquired an existing 923-unit apartment community
located in Northern San Diego County. These new Properties represent the
Operating Partnership's first strategic expansion off the Irvine Ranch and the
Operating Partnership may make additional investments in California in the
future. The development, construction and operation of rental apartment
communities in such new markets may present risks different than or in addition
to the risks discussed above related to the Irvine Ranch Properties which are
located entirely in Orange County. In addition, in contrast to acquisitions
of land pursuant to the Land Rights Agreement in which a substantial portion
of pre-development costs and expenses, including the cost and expense of
obtaining Village Related Entitlements, is borne solely by The Irvine Company,
all pre-development costs and expenses in connection with "off-Ranch"
expansion will be borne by the Operating Partnership and the Operating
Partnership will bear all risk relating to the failure to obtain entitlements.
For jurisdictions off the Irvine Ranch, local jurisdiction approvals with
respect to entitlements may impose requirements and conditions different from
those applicable to the Irvine Ranch. No assurance can be given that the
Operating Partnership will be successful in pursuing any additional "off-Ranch"
expansion or that any "off-Ranch" apartment communities will be successful.
Equity real estate investments, such as the investments made by
the Operating Partnership in the Properties and any additional properties that
may be developed or acquired by the Operating Partnership, are relatively
illiquid. Such illiquidity limits the ability of the Operating Partnership to
vary its portfolio in response to changes in economic or other conditions.
The Properties are subject to all operating risks common to
apartment ownership in general. Such risks include: the Operating
Partnership's ability to rent units at the Properties, including the 1,110
units in the Communities Under Construction; competition from other apartment
communities; excessive building of comparable properties which might adversely
affect apartment occupancy or rental rates; increases in operating costs due to
inflation and other factors, which increases may not necessarily be offset by
increased rents; increased affordable housing requirements that might
adversely affect rental rates; inability or unwillingness of residents to pay
rent increases; and future enactment of rent control laws or other laws
regulating apartment housing, including present and possible future laws
relating to access by disabled persons. If operating expenses increase, the
local rental market may limit the extent to which rents may be increased to
meet increased expenses without decreasing occupancy rates. If any of the
above occurred, the Operating Partnership's ability to meet its debt service
and other obligations and to make distributions on its partnership interests,
including with respect to the Series A Preferred L.P. Units, could be
adversely affected.
Real Estate Development and Acquisition. A primary focus of
the Operating Partnership is on the development of new apartment communities
on sites acquired or that may be acquired in the future primarily from The
Irvine Company, although the Operating Partnership also plans to develop new
rental apartment communities on sites acquired or that may be acquired in the
future from third parties. The Operating Partnership has also acquired, and
may continue to acquire, completed communities. See "Recent
Developments--`Off-Ranch' Expansion." The real estate development business
involves significant risks in addition to those involved in the ownership and
operation of established apartment communities, including the risks that
specific project approvals may take more time and resources to obtain than
expected, that construction may not be completed on schedule or budget and the
properties may not achieve anticipated rent or occupancy levels. In addition,
if long-term debt or equity financing is not available on acceptable terms to
finance new development or acquisitions undertaken without long-term
financing, further development activities or acquisitions might be curtailed
or cash available for debt service and other obligations might be adversely
affected.
Insurance. The Operating Partnership carries comprehensive
liability, fire, extended coverage and rental loss insurance covering all of
the Properties, with policy specifications and insured limits which the
Operating Partnership believes are adequate and appropriate under the
circumstances. There are, however, certain types of losses (such as from
earthquakes) that are not generally insured because they are either
uninsurable or not economically insurable. The Operating Partnership does not
carry earthquake insurance on any of the Properties. Should an uninsured loss
or a loss in excess of insured limits occur, the Operating Partnership could
lose its capital invested in the Property, as well as the anticipated future
revenues from the Property, and, in the case of debt which is recourse to the
Operating Partnership, would remain obligated for any mortgage debt or other
financial obligations related to the Property. Any such loss would adversely
affect the Operating Partnership. The Operating Partnership believes that the
Properties are adequately insured. In addition, in light of the California
earthquake risk, California building codes since the early 1970s have
established construction standards for all newly built and renovated
buildings, including apartment buildings, the current and strictest
construction standards having been adopted in 1984. Thirty-two of the 51
Existing Communities (representing approximately 68.9% of the units in the
Existing Communities) have been completed and occupied since January 1, 1985
and the Operating Partnership believes that all of the Existing Communities
were constructed, and all of the Communities Under Construction are being
constructed, in full compliance with the applicable standards existing at the
time of construction. While earthquakes have occurred from time to time in
California, the Operating Partnership has not experienced any material losses
as a result of earthquakes. No assurance can be given that this will be the
case in the future.
Legal Proceedings
None of the Operating Partnership, the Trust or the Company is
currently subject to any material litigation.
Principal Executive Offices
The principal executive offices of the Operating Partnership
are located at 550 Newport Center Drive, Suite 300, Newport Beach, California
92660. The telephone number is (714) 720-5500.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
Operating Partnership
The following is a discussion of investment policies, financing
policies, conflict of interest policies and policies with respect to certain
other activities of the Operating Partnership. The policies with respect to
these activities have been determined by the Board of Directors of the
Company, as general partner of the Operating Partnership, and may be amended
or revised from time to time at the discretion of the Board of Directors,
except that (i) the approval of the Required Directors as provided in the
Articles of Incorporation and the consent of a majority of the holders of
Common L.P. Units as provided in the Partnership Agreement are required for
the Company to take title to assets (other than temporarily in connection with
an acquisition prior to contributing such assets to the Operating Partnership)
or to conduct business other than through the Operating Partnership, or for
the Company or the Operating Partnership to engage in any business other than
the ownership, construction, development and operation of apartment
communities, (ii) changes in certain policies with respect to conflicts of
interest must be consistent with legal requirements, and (iii) the policies
with respect to competition by The Irvine Company and Mr. Bren are imposed
pursuant to a contract that cannot be amended or waived without the vote of
the Independent Directors Committee.
Investment Policies
Investments in Real Estate or Interests in Real Estate. The
Operating Partnership's business is focused solely on the ownership,
construction, development and operation of rental apartment communities and
the Company conducts all of its investment activities through the Operating
Partnership. The Operating Partnership's investment objective is to provide
stable cash flow available for quarterly cash distributions and achieve
long-term appreciation through increases in cash flows and the value of its
Properties. The Operating Partnership intends to pursue these objectives by
(i) investing capital to enhance investment returns on the Properties, (ii)
developing rental apartment communities on the Irvine Ranch for long-term
ownership and (iii) developing or purchasing rental apartment communities off
the Irvine Ranch where the Operating Partnership believes that opportunities
exist for attractive investment returns. The Operating Partnership may expand
or improve existing properties or, subject to the approval of the Required
Directors, sell such properties in whole or in part as determined by the
Company's Board of Directors. See "Business and Properties of the Operating
Partnership--Business Strategy--Development Strategies."
The Operating Partnership expects to pursue its investment
objective through the direct ownership of the Properties and future developed
properties and the ownership of interests in special purpose partnerships.
Future development or investment activities will not be limited to any
specified percentage of the Operating Partnership's assets.
Investments in Others. The Operating Partnership may also
participate with other entities in property ownership, through joint ventures
or other types of co-ownership. Equity investment may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
of the Operating Partnership.
Investments in Real Estate Mortgages. While the Operating
Partnership will emphasize equity real estate investments, it may, in its
discretion and subject to the percentage ownership limitations and gross
income tests necessary for the Company's REIT qualification, invest in
mortgage and other real estate interests including securities of other real
estate investment trusts. The Operating Partnership has not previously
invested in mortgages or securities of other real estate investment trusts and
the Operating Partnership does not presently intend to invest to a significant
extent in mortgages or securities of other real estate investment trusts.
Financing Policies
The Company, as general partner of the Operating Partnership,
currently intends to maintain a conservative ratio of debt to total market
capitalization (i.e., the market value of issued and outstanding shares of
Common Stock and L.P. Units plus total debt) and in any event not greater than
60%. The Company's ratio of debt to total market capitalization was 31.2% at
September 30, 1997 and 28.0% on a pro forma basis after giving effect to the
issuance of the 7% Notes and the Series A Preferred L.P. Units in connection
with the Offering (assuming no exercise of the Underwriters' overallotment
option). The Company, however may from time to time reevaluate borrowing
policies in light of then current economic conditions, relative costs of debt
and equity capital, market values of properties, growth and acquisition
opportunities and other factors.
The Company, as general partner of the Operating Partnership,
has established a debt policy relative to its market capitalization, a ratio
commonly employed by REITs, rather than to the book value of its assets,
because the Company believes that the book value of its assets (which to a
large extent is the depreciated value of its apartment communities) does not
accurately reflect its ability to borrow and to meet debt service
requirements. The market capitalization of the Company, however, is more
variable than book value and does not necessarily reflect the fair market
value of the underlying assets of the Operating Partnership. Although the
Company, as general partner of the Operating Partnership, will consider
factors other than market capitalization in making decisions regarding the
incurrence of debt and the issuance of Preferred L.P. Units by the Operating
Partnership (such as the estimated market value of such properties upon
refinancing, and the ability of particular properties and the Company as a
whole to generate cash flow to cover expected debt services), there can be no
assurance that the Company will maintain the ratio of debt to market
capitalization (or to any other measure of asset value) described above.
To the extent that the Board of Directors of the Company
determines to seek additional capital, the Company may raise such capital
through additional equity offerings, including the issuance of additional
series of Preferred L.P. Units to the Trust or otherwise, debt refinancing or
retention of cash flow by the Operating Partnership (after consideration of
provisions of the Code requiring the distribution by a REIT of a certain
percentage of taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or through a combination of these
sources. The Company presently anticipates that any additional borrowings
will be made through the Operating Partnership. See "Operating Partnership
Agreement." The Operating Partnership cannot incur indebtedness that is
recourse to the Company without the Company's approval. While the Company may
approve the Operating Partnership incurring additional debt that is recourse
to the Operating Partnership, the Company does not presently intend to approve
the Operating Partnership incurring additional debt that would be recourse to
the Company other than with respect to general working capital lines of credit
and general construction financing credit facilities. Borrowings may be
unsecured or may be secured by any or all assets of the Company, the Operating
Partnership, or any existing or new property and may have full or limited
recourse to all or any portion of the assets of the Company, the Operating
Partnership, or any existing or new property.
The Company, as general partner of the Operating Partnership,
has not established any limit on the number or amount of mortgages that may be
placed on any single Property or on the Operating Partnership's portfolio as
a whole.
The Operating Partnership has entered into the $250 million
Credit Facility, which is available to fund development activities, property
acquisitions and for general corporate purposes. The Company or the Operating
Partnership may also determine to issue securities including common stock,
preferred stock, L.P. Units and debt securities (any of which may be
convertible into capital stock or be accompanied by warrants to purchase
capital stock). The Company or the Operating Partnership may in the future
finance acquisitions through the exchange of properties or issuance of
additional L.P. Units, shares of Common Stock or other securities.
In the event that the Company determines to raise additional
equity capital, such capital can be raised by either the Company or the
Operating Partnership. The Board of Directors of the Company has the
authority, without shareholder approval, to issue additional shares of Common
Stock or other capital stock of the Company in any manner (and on such terms
and for such consideration) it deems appropriate, including in exchange for
property. In the event that the Company issues (whether for cash or property)
any Common Stock or securities convertible into, or exchangeable or
exercisable for, Common Stock, The Irvine Company, subject to certain limited
exceptions, including the issuance of Common Stock pursuant to any stock
incentive plan adopted by the Company or pursuant to The Irvine Company's
exercise of the Exchange Rights or the Cash Tender Rights, will have the right
to purchase Common Stock or Common L.P. Units exchangeable for Common Stock,
or such securities in order to maintain its percentage interest in the Company
and the Operating Partnership on a consolidated basis. However, shareholders
of the Company and holders of Preferred L.P. Units would have no such right.
If the Company's Board of Directors determines to raise additional equity
capital to fund investments by the Operating Partnership, the Company will
contribute such funds to the Operating Partnership as a contribution to
capital and purchase an additional general partnership interest; however,
holders of Common L.P. Units but not Preferred L.P. Units will have the right
to participate in such funding on a pro rata basis. In the event that holders
of Common L.P. Units sell their Common L.P. Units to the Company pursuant to
their Cash Tender Rights, the Company is authorized to raise the funds for
such purchase by issuing additional shares of Common Stock. In addition, the
Company may issue additional shares of Common Stock in connection with the
exchange of Common L.P. Units for shares of Common Stock pursuant to the
exercise of Exchange Rights. See "Operating Partnership Agreement."
The Company's Board of Directors also has the authority,
without approval of the holders of L.P. Units, to cause the Operating
Partnership to issue additional Common L.P. Units and additional series of
Preferred L.P. Units (including to the Trust) in any manner (and on such terms
and for such consideration) as it deems appropriate, including in exchange for
property. In the event that the Operating Partnership issues new Common or
Preferred L.P. Units or securities of the Operating Partnership convertible
into, or exchangeable or exercisable for, L.P. Units to any person other than
The Irvine Company for cash (but not property), The Irvine Company will have
the right to purchase such L.P. Units in order, and to the extent necessary,
to maintain its percentage ownership interest in the Operating Partnership.
Any such new Common L.P. Units will be exchangeable for Common Stock pursuant
to the Exchange Rights or may be tendered to the Company pursuant to the Cash
Tender Rights. See "Operating Partnership Agreement--Issuance of Additional
L.P. Units."
Disposition Policy
The Operating Partnership believes that its concentration of
Properties and strong market position are a substantial competitive advantage.
As such, the Operating Partnership has no current intention to dispose of any
of the Properties, although it reserves the right to do so.
Conflict of Interest Policies
The Company has adopted certain policies and entered into
certain agreements with The Irvine Company and Mr. Bren designed to eliminate
or minimize potential conflicts of interest. However, there can be no
assurance that these policies always will be successful in eliminating the
influence of such conflicts, and if they are not successful, decisions could
be made that might fail to reflect fully the interests of all shareholders of
the Company and holders of Preferred L.P. Units. The Board of Directors of
the Company has adopted a policy and has provided in its Bylaws that no
transaction between the Company or the Operating Partnership on the one hand
and The Irvine Company, affiliates of The Irvine Company or Mr. Bren on the
other hand may be entered into without the approval of the Independent
Directors Committee.
Exclusive Land Rights. The Irvine Company, the Company and the
Operating Partnership have entered into the Land Rights Agreement pursuant to
which through July 2020 the Company and the Operating Partnership hold the
exclusive right, but not the obligation, to acquire land from The Irvine
Company for the development of additional apartment communities on the Irvine
Ranch. The determination to acquire a land site pursuant to the Land Rights
Agreement is made solely by the Independent Directors Committee. The Irvine
Company will determine which land will be designated for rental apartment
community development. In addition, The Irvine Company will control the
application for Village Related Entitlements and will also have certain
approval rights with respect to the architectural design and physical layout
of rental apartment communities.
Non-Competition Arrangements. The Irvine Company and Mr. Bren
have agreed not to directly or indirectly acquire or develop, or acquire an
equity ownership interest in any entity that has an ownership interest in, any
apartment community, whether on or off the Irvine Ranch. The prohibition on
The Irvine Company and Mr. Bren from developing apartment communities on the
Irvine Ranch will terminate on July 31, 2020. The Irvine Company and Mr. Bren
will remain prohibited from engaging in any such activity off The Irvine Ranch
until the date on which both of the following conditions are satisfied: (i) no
nominee of The Irvine Company is a member of the Company's Board of Directors
and (ii) The Irvine Company and certain related persons beneficially own less
than 20% of the outstanding Common Stock in the aggregate (including for these
purposes shares issuable upon exchange of its Common L.P. Units pursuant to
the Exchange Rights, subject to the ownership limit provision applicable to
The Irvine Company under the Company's Articles of Incorporation). For a
description of the circumstances under which these non-competition
arrangements could be earlier terminated, see "Risk Factors--Risk of Early
Termination of the Exclusive Land Rights and Non-Competition Arrangements with
The Irvine Company and Mr. Bren." In the event the Land Rights Agreement is
terminated, The Irvine Company and Mr. Bren will no longer be restricted from
competing both on and off the Irvine Ranch with the Company or the Operating
Partnership with respect to the ownership and development of rental apartment
communities. As a result, conflicts of interest may arise between The Irvine
Company and Mr. Bren on the one hand and the Operating Partnership and the
Company on the other hand.
Policies with Respect to Other Activities
The Company has authority to offer shares of its capital stock
or other securities, to cause the Operating Partnership to issue additional
Common and Preferred L.P. Units or other securities, and to repurchase (or
cause the Operating Partnership to repurchase) or otherwise reacquire such
capital stock, L.P. Units or any other securities and may engage in such
activities in the future. Neither the Company nor the Operating Partnership
has any outstanding loans to other entities or persons, including officers and
directors of the Company. The Company may make, or may cause the Operating
Partnership in the future to make, loans to joint ventures in which they
participate in order to meet working capital needs. Neither the Company nor
the Operating Partnership has engaged in trading, underwriting or agency
distribution or sale of securities of other issuers, and neither the Company
nor the Operating Partnership has invested in the securities of other issuers
other than in the case of the Company and the Operating Partnership for the
purpose of exercising control, and neither the Company nor the Operating
Partnership intends to do so. The Company intends to make, and to cause the
Operating Partnership to make, investments in such a way that neither will be
treated as an investment company under the Investment Company Act of 1940.
At all times, the Company intends to cause the Operating
Partnership to make investments in such a manner as to be consistent with the
requirements of the Code for each of the Company and the Trust to qualify as a
REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Required Directors, with the consent of the holders
of 66 2/3% of the outstanding shares of Common Stock, determine that it is no
longer in the best interests of the Company to qualify as a REIT.
The Trust
For a discussion of the financing, investing and other policies
of the Trust, see "IAC Capital Trust."
MANAGEMENT
Executive Officers and Directors
<TABLE>
<CAPTION>
Term
Name Age Position of Offices Held Expires
- ---- --- ------------------------ -------
<S> <C> <C> <C>
Donald Bren(1)................... 65 Chairman of the Board of Directors 1999
William H. McFarland(1).......... 57 President and Chief Executive Officer and Director 1998
Richard E. Lamprecht............. 38 Senior Vice President, President, Irvine Ranch Division
James E. Mead.................... 38 Senior Vice President, Chief Financial Officer and
Secretary
William W. Thompson.............. 52 Senior Vice President, President, California Division
Alfred L. Baker.................. 49 Vice President, Marketing
Bruce N. Dorfman................. 37 Vice President, Development, California Division
Shawn Howie...................... 42 Vice President, Corporate Finance, and Controller
Robert J. Hughes................. 47 Vice President, Construction, California Division
David A. McAllister.............. 63 Vice President, Construction, Irvine Ranch Division
Kevin P. Payne................... 39 Vice President, Development, Irvine Ranch Division
Scott A. Reinert................. 38 Vice President, Operations
Anthony M. Frank(2)(4)........... 66 Director 1998
John F. Grundhofer(2)(4)......... 58 Director 1999
Bowen H. McCoy(1)(2)(3).......... 60 Director 1999
Michael D. McKee(1).............. 51 Director 2000
Jack W. Peltason(1)(2)(4)........ 74 Director 2000
John F. Seymour, Jr.(2)(3)....... 59 Director 1998
Raymond L. Watson(1)............. 71 Director 1998
</TABLE>
- ---------------
(1) Member of Executive Committee
(2) Member of Independent Directors Committee
(3) Member of Compensation Committee
(4) Member of Audit Committee
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Donald Bren. Mr. Bren has been Chairman of the Board of the
Company since its formation. He was President and Chief Executive Officer
from February 1997 to July 1997. Mr. Bren has been Chairman of the Board of
The Irvine Company since 1983. Mr. Bren is a member of the Board of Overseers
of the University of California, Irvine, and is a member of the Board of
Trustees of the California Institute of Technology, the Los Angeles County
Museum of Art and the Orange County Museum of Art.
William H. McFarland. Mr. McFarland joined the Company as
President and Chief Executive Officer in July 1997 and has been a Director of
the Company since December 1996. From 1984 to 1997, Mr. McFarland was
Executive Vice President, Land and Residential Development of The Irvine
Company and was responsible for the operations and development activities of
the predecessor prior to the Company's formation in 1993. Prior to joining
The Irvine Company in 1984, Mr. McFarland served as President and Chief
Executive Officer of the Bren Company. Prior to working for the Bren Company,
he also served as General Manager of Kaiser Aetna's Ponderosa Homes North Bay
Division and as President of the McCarthy Company. Mr. McFarland served three
years as an officer in the U.S. Marine Corps. He was elected to the
California Building Industry Foundation Hall of Fame in 1996.
Richard E. Lamprecht. Mr. Lamprecht has been Senior Vice
President, President, Irvine Ranch Division since May 1997, and prior to that
served as Vice President, Development since the Company's formation. From
1989 to 1993, Mr. Lamprecht was Vice President, Development of Irvine Pacific,
a division of the Irvine Company. From 1987 to 1989, Mr. Lamprecht was
Controller and Vice President of The Irvine Company.
James E. Mead. Mr. Mead has been Senior Vice President, Chief
Financial Officer and Secretary since December 1996. From 1994 to 1996, Mr.
Mead was Senior Vice President and Treasurer. From 1991 to 1994, Mr. Mead was
Vice President, Corporate Finance of The Irvine Company. From 1985 to 1991,
Mr. Mead was a Vice President, Corporate Finance, at J. P. Morgan & Co. in New
York.
William W. Thompson. Mr. Thompson was appointed Senior Vice
President, Off-Ranch Operations in February 1997. From 1996 to 1997, Mr.
Thompson was President of TRC and from 1984 to 1995, Mr. Thompson was a
Partner at Trammell Crow Residential, Northern California, a private developer
and operator of multifamily apartment communities.
Alfred L. Baker. Mr. Baker has been Vice President, Marketing
since January 1996. From 1992 to 1996, Mr. Baker was the principal owner of
Baker Property Advisors, a Utah real estate brokerage company. From 1986 to
1992, Mr. Baker was Vice President, Northern California at Forest City
Residential Properties Corporation, a real estate company involved in
residential development, construction and asset management in the western
United States.
Bruce N. Dorfman. Mr. Dorfman was appointed Vice President,
Development, Off-Ranch Operations in February 1997. From 1996 to 1997, Mr.
Dorfman was Vice President, Development of TRC and from 1992 to 1995, Mr.
Dorfman was Vice President, Finance at Trammell Crow Residential, Northern
California.
Shawn Howie. Mr. Howie was appointed Vice President, Corporate
Finance, and Controller in February 1997. From 1993 to 1997, Mr. Howie was
Vice President and Controller. From 1986 to 1993, Mr. Howie was a Senior
Manager at Ernst & Young LLP.
Robert J. Hughes. Mr. Hughes was appointed Vice President,
Construction, Off-Ranch Operations in February 1997. From 1996 to 1997, Mr.
Hughes was Vice President, Construction of TRC. From 1994 to 1996, Mr.
Hughes was Vice President, Construction at Trammell Crow Residential, Northern
California. From 1987 to 1993, Mr. Hughes was President of Construction at
Grancorp, a construction company specializing in apartment communities.
David A. McAllister. Mr. McAllister has been Vice President,
Construction of the Company since its formation. From 1992 to 1993, Mr.
McAllister was Director of Operations at California Pacific Homes, a division
of The Irvine Company. Prior to joining the Company, Mr. McAllister had been
employed by The Irvine Company in the residential construction area since 1979.
Kevin P. Payne. Mr. Payne has been Vice President, Development
since August 1997. From January 1997 to August 1997, Mr. Payne was Senior
Vice President and Regional Director of the West Coast Division of Kaufman &
Broad Multi-Housing Group, a company involved in multifamily development and
investment. From April 1994 to January 1997, Mr. Payne was Vice President,
Development at Kaufman & Broad. Prior to this, Mr. Payne was at Picerne
Associates from April 1990 to April 1994, where he served as Vice President of
Development.
Scott A. Reinert. Mr. Reinert has been Vice President, Asset
Management since 1994. From 1990 to 1994, Mr. Reinert was Chief Operating
Officer, Southeast, of GFS Northstar, a third party apartment management
company.
Anthony M. Frank. Mr. Frank has been a Director of the Company
since December 8, 1993. Mr. Frank has been Chairman of Acrogen, Inc. and
Director/Consultant of Transamerica HomeFirst, Inc. since 1992. Prior to
this, Mr. Frank served as Postmaster General of the United States from March
1988 to March 1992. From August 1971 through February 1988, Mr. Frank was
Chairman and Chief Executive Officer of First Nationwide Bank. He has also
served as Chairman of the Federal Home Loan Bank of San Francisco and Chairman
of the California Housing Finance Agency, and was the first Chairman of the
Federal Home Loan Mortgage Corporation Advisory Board. Mr. Frank is a
director of Temple-Inland Inc., Bedford Property Investors, Inc., General
American Investors Company, Inc., Crescent Real Estate Equities, Charles
Schwab Inc. and Financial Security Assurance, Inc.
John F. Grundhofer. Mr. Grundhofer has been a Director of the
Company since December 8, 1993. Mr. Grundhofer has been Chairman, President
and Chief Executive Officer of First Bank System, Inc., Minneapolis, Minnesota
since 1990. From 1986 to 1990, Mr. Grundhofer served as Vice Chairman and
Senior Executive Officer for Southern California with Wells Fargo Bank, N.A.
Prior to joining Wells Fargo Bank in 1978, Mr. Grundhofer spent 18 years with
Union Bank in California. In addition to serving as Chairman of First Bank
System, Mr. Grundhofer is also a Trustee of Minnesota Mutual Life Insurance
Company. Mr. Grundhofer is Chairman of the Minnesota Business Partnership,
Vice Chairman of Minnesota Meeting, a Director of the Minneapolis Institute of
Arts and of the United Way of the Minneapolis area, an Advisory Director of the
Metropolitan Economic Development Association, and a member of the Bankers
Roundtable and of the CEO Board of the School of Business Administration at
the University of Southern California.
Bowen H. McCoy. Mr. McCoy has been a Director of the Company
since December 8, 1993. Mr. McCoy has been a real estate and business
counselor with Buzz McCoy Associates, Inc. since 1990. Prior to this, Mr.
McCoy had a 28-year career with Morgan Stanley & Co. Incorporated, and was
President and Chairman of Morgan Stanley Realty, Inc. Mr. McCoy is a Trustee
of the Urban Land Institute and The Hoover Institution. He is also President
of The Real Estate Counselors and President of the Urban Land Foundation. He
has served as Chairman of the Advisory Board for Stanford University Center
for Economic Policy Research, Chairman of the Los Angeles American Red Cross
and Trustee of the Pacific School of Religion.
Michael D. McKee. Mr. McKee has been a Director of the Company
since January 1995. Mr. McKee has been Executive Vice President and Chief
Financial Officer of The Irvine Company since January 1997 and was Executive
Vice President and Chief Legal Officer of The Irvine Company from April 1994
to January 1997. Prior to joining The Irvine Company, Mr. McKee was the
managing partner of the Orange County office of Latham & Watkins, an
international law firm with which he was associated since 1979. Mr. McKee is
a member of the Board of Directors of Circus Circus Enterprises, Inc.,
Health Care Property Investors, Inc. and Realty Income Corporation.
Jack W. Peltason. Mr. Peltason has been a Director of the
Company since December 8, 1993. Mr. Peltason was President of the University
of California from 1992 until his retirement in 1995. From 1984 to 1992 Mr.
Peltason served as Chancellor for the University of California, Irvine. He is
a Professor of Political Science at University of California, Irvine and a
Fellow of the American Academy of Arts and Sciences. Mr. Peltason is a
director of AST Research, Inc. and Infotec, Inc. and a consultant to the Bren
Charitable Foundation.
John F. Seymour, Jr. Senator Seymour has been a Director of
the Company since December 8, 1993. Senator Seymour has been the Chief
Executive Officer of Southern California Housing Development Corporation since
January 1995. Previously he served as Executive Director of the California
Housing Finance Agency from December 1992 through December 1994. Prior to
that, Senator Seymour served as a United States Senator for the State of
California from January 1991 to December 1992. From April 1982 to January
1991, Senator Seymour served as a State Senator in the California state
legislature. Senator Seymour also served as a member of the Policy Advisory
Board for the Center for Real Estate and Urban Economics, University of
California, Berkeley and the National Association of Home Builders Mortgage
Roundtable and as a director of the National Council of State Housing
Agencies. Senator Seymour is a director of Inco Homes Corporation and
Countrywide Investment Trust.
Raymond L. Watson. Mr. Watson rejoined the Company as a
Director on July 25, 1997. The Board of Directors of the Company elected Mr.
Watson as a director of the Company to serve until the 1998 Annual Meeting of
the Company's shareholders. Mr. Watson previously served as a Director of the
Company from its formation in 1993 until January 1995. Mr. Watson has been
Vice Chairman of the Board of The Irvine Company since 1986. From 1973 to
1977, Mr. Watson was President and Chief Executive Officer of The Irvine
Company and he has been a member of the Executive Committee of the Board of
Directors of The Irvine Company since 1983. Mr. Watson is a member of the
Board of Directors of Pacific Mutual Life Insurance Company, Mitchell Energy
and Development Company, Tejon Ranch Company and The Walt Disney Company,
where he is also Chairman of the Executive Committee.
Board of Directors; Committees
Pursuant to the Company's Articles of Incorporation and Bylaws,
a majority of the Directors of the Company must be persons who are not (i)
affiliates, or an officer, director or employee, of The Irvine Company or (ii)
the spouse, ancestor or lineal descendant or brother or sister of Mr. Bren
("Unaffiliated Directors").
The Board of Directors has the following standing committees:
Audit Committee. The Audit Committee is responsible for making
recommendations concerning the engagement of independent public accountants,
for reviewing with the independent public accountants the plans and results of
the audit engagement, for approving professional services provided by the
independent public accountants, for reviewing the independence of the
independent public accountants, for considering the range of audit and
non-audit fees and for reviewing the adequacy of the Company's accounting
controls. As required by the Company's Bylaws, the Audit Committee consists
of three Directors, at least two of whom are Unaffiliated Directors.
The members of the Audit Committee are Messrs. Grundhofer
(Chairman), Frank and Peltason.
Executive Committee. The Executive Committee has been
delegated authority in the Company's Bylaws to act in lieu of the Board of
Directors on all matters permitted by law other than with respect to matters
which, pursuant to the Company's Articles of Incorporation and Bylaws, must be
approved by the Independent Directors Committee or by a vote of more than 75%
of the entire Board of Directors (the "Required Directors").
The members of the Executive Committee are Messrs. Bren
(Chairman), McCoy, McFarland, McKee and Watson.
Independent Directors Committee. The Independent Directors
Committee is responsible for approving all transactions between the Company or
the Operating Partnership on the one hand and The Irvine Company, its
affiliates or Mr. Bren on the other hand, including, but not limited to,
whether or not the Company or the Operating Partnership shall exercise any of
its rights under the Land Rights Agreement and the terms of any agreement
between the Company or the Operating Partnership on the one hand and The
Irvine Company, its affiliates or Mr. Bren on the other hand. In addition,
the Independent Directors Committee is responsible for selecting the
independent appraiser on behalf of the Company pursuant to the Land Rights
Agreement. Pursuant to the Company's Bylaws, the Independent Directors
Committee consists of at least five persons, each of whom is an Unaffiliated
Director and a person who has not been employed by The Irvine Company or any
of its subsidiaries within the five years preceding such person's election as
a director of the Company. The Independent Directors Committee has also
retained an independent real estate consultant to advise it with respect to
land acquisitions under the Land Rights Agreement.
The members of the Independent Directors Committee are Messrs.
Frank (Chairman), Grundhofer, McCoy, Peltason and Seymour.
Compensation Committee. The Compensation Committee determines
compensation for the Company's executive officers and administers the
Company's stock-based incentive plans. As required by the Company's Bylaws,
the Compensation Committee consists entirely of Unaffiliated Directors and
does not include any officer of the Company.
The members of the Compensation Committee are Messrs. McCoy
(Chairman) and Seymour.
Compensation Committee Interlocks and Insider Participation.
Messrs. McCoy and Seymour served on the Compensation Committee during 1996.
No Compensation Committee interlocks or insider participation existed in 1996.
The Company does not have a nominating committee.
Compensation of Directors
The Company pays its Directors who are neither officers of the
Company nor officers or directors of The Irvine Company fees for their
services as directors. Directors receive annual compensation of $30,000 plus
a fee of $1,500 for attendance (in person or by telephone) at each meeting of
the Board of Directors, plus a fee of $750 for attendance, (in person or by
telephone) at each meeting of a committee of the Board of Directors, whether or
not such Committee meeting occurs on the same day as a meeting of the Board of
Directors, plus annual compensation of $3,000 for acting as Chairperson of a
standing committee of the Board of Directors. The Company has also
established the 1993 Stock Option Plan for Directors, pursuant to which each
Director who: (i) is not an employee of the Company or any of its subsidiaries
or affiliates, (ii) is unaffiliated with The Irvine Company and Mr. Bren and
has not been employed by The Irvine Company within the preceding five years and
(iii) has not received a stock award within the preceding year under an
employee stock plan of the Company, is awarded an option to purchase 5,000
shares of the Company's Common Stock upon initial appointment or election to
the Board and an option to purchase 1,000 shares of the Company's Common Stock
at each subsequent annual meeting other than an Eligible Director as defined
in the plan first elected to the Board within the twelve months immediately
preceding and including such meeting. The exercise price of any such option
is equal to the fair market value of the Common Stock on the date of grant.
Such options are exercisable at all times during the period beginning on the
date of grant and ending on the earlier of (i) the tenth anniversary of the
date of grant or (ii) the first anniversary of the date on which the optionee
ceases to be an Eligible Director.
Certain Rights of The Irvine Company with Respect to the Company's Board of
Directors
Pursuant to the Miscellaneous Rights Agreement, The Irvine
Company, its shareholders and affiliates and Mr. Bren and his affiliates (the
"Irvine Persons") have the right, and will continue to have the right so long
as the Irvine Persons beneficially own at least 20% of the outstanding Common
Stock of the Company (including for this purpose Common Stock issuable upon
exchange of Common L.P. Units pursuant to the Exchange Rights), to nominate
three persons (each, an "Irvine Company Board Representative") for election to
the Board of Directors of the Company. In the event this ownership falls
below 20% but is at least 15%, the Irvine Persons will have the right to
nominate two persons for election to the Board of Directors; and if this
ownership falls below 15% but is at least 10%, the Irvine Persons will have
the right to nominate one person for election to the Board of Directors. In
connection with the foregoing, The Irvine Company is authorized to act for the
Irvine Persons. The three current Directors nominated by the Irvine Persons
are Messrs. Bren, McKee and Watson.
Two provisions of the Company's Bylaws give The Irvine Company
additional rights with respect to the Company's Board of Directors:
First, the Company's Bylaws provide that a majority of the
entire Board of Directors of the Company including at least one Irvine Company
Board Representative shall constitute a quorum for Board of Directors action
at any meeting.
Second, the Company's Bylaws provide that approval of more than
75% of the entire Board of Directors is required to approve (i) a change of
control (as defined therein) of the Company or the Operating Partnership; (ii)
any amendment to the Company's Articles of Incorporation or Bylaws or the
Partnership Agreement; (iii) any waiver or modification of the ownership limit
provisions of the Company's Articles of Incorporation; (iv) any merger,
consolidation, statutory share exchange or sale of all or substantially all of
the assets of the Company or the Operating Partnership; (v) subject to certain
exceptions, the issuance of equity securities of the Company; (vi) the Company
taking title to assets or conducting business other than through the Operating
Partnership, or for the Company or the Operating Partnership engaging in
another line of business; (vii) the Company or the Operating Partnership
making a general assignment for the benefit of creditors or instituting (or
consent to the institution of) proceedings in bankruptcy or for the
liquidation, dissolution, reorganization or winding-up of the Company or the
Operating Partnership; and (viii) termination of the Company's status as a
REIT for federal income tax purposes.
Executive Compensation
The following tables present compensation information for the
Company's former chief executive officer who resigned in February 1997, the
four other most highly compensated executive officers who were serving as
executive officers at the end of 1996 (including the Company's former Senior
Vice President and Treasurer who resigned in March 1997) and the Company's
former Executive Vice President and Chief Financial Officer who resigned in
December 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation Awards
------------------------------------- -------------------
All Other
Name and Restricted Stock Compensation (6)
Principal Position Year Salary (2) ($) Bonus (3) ($) Awards (4) ($) Options (5) (#) ($)
------------------ ---- -------------- ------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Steven P. Albert(7)..... 1996 $275,000 $7,563
Former Chief 1995 $174,041 $100,000 $1,746,250 100,000 $27,058
Executive Officer
and President
James E. Mead........... 1996 $200,000 $145,000 $8,250
Senior Vice President, 1995 $200,000 $140,000 $403,125 40,000 $8,250
Chief Financial 1994 $187,397 $150,000 30,000 $8,250
Officer and Secretary
Richard E. Moran
Jr.(7)................. 1996 $247,500 $82,212
Former Executive 1995 $270,000 $110,000 $403,125 50,000 $11,250
Vice President,
Chief Financial 1994 $270,000 $110,000 $11,250
Officer and Secretary
Tyler H. Rose(7)........ 1996 $180,000 $130,000 $8,250
Former Senior 1995 $154,849 $110,000 $403,125 40,000 $7,938
Vice President
and Treasurer
Richard E. Lamprecht.... 1996 $135,000 $55,000 $6,300
Vice President, 1995 $135,000 $50,000 $161,250 35,000 $4,050
Development 1994 $118,780 $60,000 $4,893
Scott A. Reinert........ 1996 $135,000 $55,000 $6,582
Vice President, 1995 $135,000 $50,000 $161,250 35,000
Asset Management 1994 $2,077 $52,659
<FN>
____________
(1) The officers listed in this table receive certain personal benefits;
however, such benefits do not exceed the lesser of $50,000 or 10% of any
such officer's salary and bonus for any period reported.
(2) The start dates for Messrs. Albert, Mead, Rose and Reinert were May 1,
1995, January 24, 1994, February 21, 1995 and December 28, 1994,
respectively.
(3) The bonuses for each year were paid in February or March of the following
year.
(4) 1995 amounts represent 25,000, 25,000, 25,000, 10,000 and 10,000
restricted stock unit awards granted to Messrs. Moran, Mead, Rose,
Lamprecht and Reinert as of March 1, 1995 and 110,000 performance unit
awards granted to Mr. Albert as of May 1, 1995. All of the foregoing
awards vest as described below based on the achievement of certain
funds available for distribution ("FAD") targets established by the
Compensation Committee. Dividend equivalents are paid on all of the
foregoing awards outstanding during the vesting period. None of the
restricted stock unit awards or performance unit awards are available
for vesting in the year in which the award was granted. 20% of a
person's award may be earned in each of the three years following the
year the award was granted and 40% of such person's award may be earned
in the fourth year following the year of grant, in each case upon the
achievement of established FAD targets. Performance and restricted
stock unit awards not earned in any year in which they are available
for vesting may be earned in a subsequent year. The number of shares
in respect of which awards granted to Messrs. Albert, Mead, Moran
Rose, Lamprecht and Reinert were outstanding as of December 31, 1996
was 110,000, 25,000, 22,951, 25,000, 10,000 and 10,000, respectively.
The value of Messrs. Albert's, Mead's, Moran's, Rose's, Lamprecht's
and Reinert's awards as of December 31, 1996 was $2,750,000, $625,000,
$573,775, $625,000, $250,000 and $250,000, respectively. Mr.
Albert's, Mr. Moran's and Mr. Rose's restricted stock unit awards
which had not previously vested and been earned were forfeited in
connection with their resignations in February 1997, December 1996 and
March 1997, respectively, though they did receive dividend equivalent
payments for dividends paid through, and in respect of, the fourth
quarter, in the case of Messrs. Albert and Rose, and third quarter, in
the case of Mr. Moran, of 1996. The Company did not grant any
restricted stock unit awards to the Named Executive Officers in 1996.
(5) Reflects options granted pursuant to the 1993 Long-Term Stock Incentive
Plan. The Company did not grant any options to the Named Executive
Officers in 1996.
(6) These amounts represent the Company's aggregate contributions to the
Company's 401(k) savings plan except that, with respect to Mr. Albert,
the 1995 amount solely represents relocation expenses, with respect to
Mr. Moran, the 1996 amount includes $22,500 of consulting payments and
$48,462 of accrued vacation pay, and with respect to Mr. Reinert, the
1994 amount solely represents relocation expenses. See "--Employment
and Termination of Employment Agreements."
(7) Mr. Albert, Mr. Moran and Mr. Rose resigned from the Company in February
1997, December 1996 and March 1997, respectively. Upon Mr. Albert's
resignation, Mr. Bren, the Chairman of the Board of Directors of the
Company, assumed the position of Chief Executive Officer and President.
William H. McFarland replaced Mr. Bren as President and Chief Executive
Officer on July 25, 1997. See "--New President and Chief Executive
Officer." Mr. Bren did not receive any compensation from the Company for
serving as Chief Executive Officer and President.
</FN>
</TABLE>
OPTION EXERCISES IN 1996 AND
DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised
Acquired on Value Unexercised Options at In-the-Money Options at
Name Exercise (1) Realized (1) December 31, 1996 (#) December 31, 1996 ($) (2)
- ---- ------------ ------------ ------------------------------- --------------------------
<S> <C> <C> <C> <C>
Steven P. Albert..... Exercisable 33,333
Unexercisable 66,667 $ 912,500
James E. Mead........ Exercisable 33,333
Unexercisable 36,667 $ 580,000
Tyler H. Rose........ Exercisable 13,333
Unexercisable 26,667 $ 355,000
Richard E.
Lamprecht........... Exercisable 26,666
Unexercisable 23,334 $ 423,125
Scott A. Reinert..... Exercisable 11,666
Unexercisable 23,334 $ 310,625
Richard E. Moran Jr.. 66,667 $472,386 0 0
<FN>
____________
(1) Other than Mr. Moran, none of the Named Executive Officers exercised any
stock options in 1996.
(2) Represents the difference between the closing price of the Company's
Common Stock on the NYSE on December 31, 1996 of $25.00 per share and the
exercise price of the options, but not less than zero.
</FN>
</TABLE>
1997 Option and Restricted Stock Unit Grants to Named Executive Officers
On February 4, 1997, the Company granted to its executive
officers options exercisable for an aggregate of 115,000 shares of Common
Stock, at an exercise price of $26.875 per share. Of such options, 25,000,
10,000 and 10,000 options were granted to Messrs. Mead, Lamprecht and Reinert,
respectively. Additionally, on April 25, 1997, 20,000 options were granted to
Mr. Lamprecht at an exercise price of $26.625. On February 4, 1997, the
Company made a restricted stock unit grant of 5,000 units to Mr. Mead and on
April 25, 1997, made a restricted stock unit grant of 10,000 units to Mr.
Lamprecht. All restricted stock units vest over a five-year period (0%, 20%,
20%, 20%, 40%); provided that certain performance targets are met. The
recipients receive dividend equivalents during the vesting periods.
New President and Chief Financial Officer
On July 15, 1997, William H. McFarland was appointed President
and Chief Executive Officer of the Company. Mr. McFarland's base salary for
1997 (on an annualized basis) will be $400,000, and he is eligible for a bonus
of 0% to 100% of his base salary, with $183,000 and $400,000 guaranteed for
1997 and 1998, respectively. In addition, Mr. McFarland received 100,000
options with an exercise price of $29.50 per share. Mr. McFarland also
received for 1997 a grant of 27,500 restricted stock units, and will receive
an annual award of 27,500 restricted stock units in each of the years 1998
through 2000 assuming continued employment. The restricted stock unit awards
will have terms similar to those described above under "--1997 Option and
Restricted Stock Unit Grants to Named Executive Officers," except that Mr.
McFarland's restricted stock unit awards do not require that any performance
targets be met and the 1998-2000 awards each vest over periods ending in 2001.
In addition, upon Mr. McFarland's death or disability or if Mr. McFarland is
terminated without cause, all unvested restricted stock unit awards will vest
immediately and all then ungranted restricted stock units will also be granted
to Mr. McFarland and will immediately vest.
Employment Agreements and Termination of Employment Agreements
Mr. Albert was appointed as Chief Executive Officer and
President of the Company on May 1, 1995. Pursuant to an offer letter, Mr.
Albert received an annualized base salary of $275,000 for 1995, subject to
increases in future years at the discretion of the Board, and is eligible to
earn an annual bonus of up to 60% of his base salary based upon both his and
the Company's performance. For 1995, Mr. Albert was guaranteed a minimum cash
bonus of $90,000 assuming his continued employment through December 31, 1995.
In addition, the letter provides that Mr. Albert will be a participant in the
Company's fringe benefits programs and long-term incentive plans. Upon hire,
he received stock options with respect to 100,000 shares of Common Stock and
performance unit awards with respect to 110,000 shares of Common Stock. If
Mr. Albert's employment had been terminated by the Company prior to December
31, 1996 for reasons other than gross misconduct, he would have been entitled
to receive a lump-sum severance payment of $182,500. On February 7, 1997, Mr.
Albert entered into a Confidentiality Agreement and General Release with the
Company whereby he resigned from the Company. Pursuant to the Agreement, Mr.
Albert will provide consulting services to the Company in exchange for 12
monthly payments of $22,917 each. Mr. Albert also received a severance
payment in the amount of $141,000, stock dividend equivalent payments for
dividends paid in respect of the fourth quarter of 1996, and the Company
agreed to continue his coverage, at the Company's expense, under the Company's
group insurance plans through February 28, 1997 and to pay him $2,500 per
month for twelve months thereafter in order to assist him with purchasing his
own benefits. In consideration of the foregoing, Mr. Albert is subject to a
confidentiality covenant and has given the Company and its owners, directors,
officers, employees, representatives and agents a general release.
On November 1, 1996, Mr. Moran entered into a
Confidentiality Agreement and General Release with the Company whereby he
resigned from the Company as of December 1, 1996. Pursuant to the
Agreement, Mr. Moran will provide consulting services to the Company in
exchange for 12 monthly payments of $22,500 each. Mr. Moran also received
$38,000 of stock dividend equivalent payments for dividends paid in respect
of the third quarter of 1996, (11)/(12)ths of his restricted stock units
available for vesting in 1996 were earned upon achievement of FAD targets
as determined by the Compensation Committee in February 1997, and the
Company agreed to continue his coverage, at the Company's expense, under
the Company's group insurance plans through December 31, 1996 and to pay
him $2,500 per month for twelve months thereafter in order to assist him
with purchasing his own benefits. In consideration of the foregoing, Mr.
Moran is subject to a confidentiality covenant and has given the Company
and its owners, directors, officers, employees, representatives and agents
a general release.
PRINCIPAL SECURITYHOLDERS
Operating Partnership
The following table sets forth certain information with
respect to beneficial ownership of Common L.P. Units by each of the
Company's directors; the Company's new Chief Executive Officer, William H.
McFarland, who became Chief Executive Officer in July 1997; each of the
four most highly compensated executive officers (including the Company's
former Senior Vice President and Treasurer) who were serving as executive
officers at the end of 1996, other than the Company's former Chief
Executive Officer; the Company's former Chief Executive Officer; the
Company's former Executive Vice President and Chief Financial Officer; all
directors and current executive officers as a group; and each person who is
known by the Operating Partnership to beneficially own five percent or more
of the Common L.P. Units and G.P. Units as of September 30, 1997.
<TABLE>
<CAPTION>
Number of Common L.P. Percent of All Common
Name Units and G.P. Units L.P. Units and G.P. Units
------------------------ -------------------------
- ----
<S> <C> <C>
Directors and Officers
Donald Bren...................................... *(1) *(1)
Anthony M. Frank................................. * *
John F. Grundhofer............................... * *
Bowen H. McCoy................................... * *
William H. McFarland............................. * *
Michael D. McKee................................. * *
Jack W. Peltason................................. * *
John F. Seymour, Jr.............................. * *
Raymond L. Watson................................ * *
Steven P. Albert(2).............................. * *
Richard E. Moran Jr.(3).......................... * *
James E. Mead.................................... * *
Tyler H. Rose(4)................................. * *
Richard E. Lamprecht............................. * *
Scott A. Reinert................................. * *
All current directors and current
executive officers as a group
(19 persons).................................... *(1) *(1)
Holders of 5% of the Common L.P. Units
and G.P. Units
Irvine Apartment Communities, Inc.
550 Newport Center Drive
Newport Beach, CA 92660......................... 19,878,643 45.2%
The Irvine Company(1)(5)
550 Newport Center Drive
Newport Beach, CA 92660......................... 24,019,647 54.6%
<FN>
____________
* Less than 1.0%
(1) Mr. Bren may be deemed the beneficial holder of the Common L.P. Units
owned by The Irvine Company due to his status as the sole stockholder and
Chairman of the Board of Directors of The Irvine Company.
(2) Mr. Albert resigned as the Chief Executive Officer and President and a
Director of the Company in February 1997.
(3) Mr. Moran resigned as the Executive Vice President, Chief Financial
Officer and Secretary of the Company in December 1996.
(4) Mr. Rose resigned as Senior Vice President and Treasurer of the Company in
March 1997.
(5) Represents Common L.P. Units owned directly or indirectly by The Irvine
Company and its affiliates.
</TABLE>
The Company
The following table sets forth certain information with respect
to beneficial ownership of the Company's Common Stock by each of the Company's
directors; the Company's new Chief Executive Officer, William H. McFarland,
who became Chief Executive Officer in July 1997; each of the four most highly
compensated executive officers (including the Company's former Senior Vice
President and Treasurer) who were serving as executive officers at the end of
1996, other than the Company's former Chief Executive Officer; the Company's
former Chief Executive Officer; the Company's former Executive Vice President
and Chief Financial Officer; all directors and current executive officers as a
group; and each person who is known by the Company to beneficially own five
percent or more of any class of the Company's voting securities as of
September 30, 1997. The Company has relied upon information supplied by its
officers, directors, and certain shareholders and upon information contained
in filings with the Commission.
<TABLE>
<CAPTION>
Percent of
Number of All Shares of
Shares of Percent of Common
Common Percent of All Stock/
Stock All Shares Number of Common Common
Beneficially of Common Common L.P. L.P. L.P.
Name Owned Stock Units Units Units(1)
- ---- ------------ ---------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Directors and Officers
Donald Bren(2)................. 183,325 (3) * -- -- *
Anthony M. Frank............... 10,000 (4) * -- -- *
John F. Grundhofer............. 9,000 (5) * -- -- *
Bowen H. McCoy................. 13,000 (4) * -- -- *
William H. McFarland........... 20,647 * -- -- *
Michael D. McKee............... 5,000 * -- -- *
Jack W. Peltason............... 8,600 (4) * -- -- *
John F. Seymour, Jr............ 8,100 (4) * -- -- *
Raymond L. Watson.............. 20,000 * -- -- *
Steven P. Albert............... 35,333 (6) * -- -- *
Richard E. Moran Jr............ 35,500 (7) * -- -- *
James E. Mead.................. 15,500 * -- -- *
Tyler H. Rose.................. 150 (8) * -- -- *
Richard E. Lamprecht........... 39,333 (9) * -- -- *
Scott A. Reinert............... 2,333 (9) * -- -- *
All current directors and
officers as a group
(19 persons)(2).............. 386,994 (10) 2.0% (10) -- -- *
5% shareholders(11)
The Irvine Company(2)(12)...... 1,216,882 6.1% 24,019,647 99.7% 57.5%
550 Newport Center Drive
Newport Beach, CA 92660
Cohen & Steers Capital
Management, Inc.(13)......... 1,925,700 9.7% -- -- 4.4%
757 Third Avenue
New York, NY 10017
LaSalle Advisors
Limited Partnership
and ABKB/LaSalle Securities
Limited Partnership(14)...... 1,314,600 6.6% -- -- 3.0%
11 South LaSalle Street
Chicago, IL 60603
Travelers Group Inc.(15)....... 1,292,219 6.5% -- -- 2.9%
388 Greenwich Street
New York, NY 10013
<FN>
____________
* Less than 1.0%
(1) Assumes all of the Common L.P. Units beneficially owned by The Irvine
Company are exchanged for shares of Common Stock, without regard to
certain ownership limit provisions set forth in the Company's Articles
of Incorporation. It is not anticipated that these ownership limit
provisions will be waived. The Irvine Company has the right, once in
every twelve month period beginning on December 8 of each year,
generally to exchange up to one third of the Common L.P. Units for
shares of Common Stock, at an exchange ratio of one Common L.P. Unit
for each share of Common Stock, subject to adjustment. The Company's
Articles of Incorporation place a limit on ownership by The Irvine
Company, Mr. Bren and their affiliates, in the aggregate, of 20% of the
outstanding Common Stock.
(2) Mr. Bren may be deemed the beneficial holder of the shares and Common
L.P. Units owned by The Irvine Company due to his status as the
majority stockholder and Chairman of the Board of Directors of The
Irvine Company. In addition, three officers of the Company not named
in the table may be deemed the beneficial owners of 74,523 Common
L.P. Units held by TRC. Assuming the exchange of all Common L.P.
Units beneficially owned by The Irvine Company for shares of Common
Stock, Mr. Bren would be deemed to beneficially own 57.9% of the
Common Stock. Assuming the exchange of all Common L.P. Units
beneficially owned by The Irvine Company and TRC, all directors and
officers as a group (19 persons) would be deemed to beneficially own
58.2% of the Common Stock.
(3) Shares are held by a trust of which Mr. Bren is trustee.
(4) Includes currently exercisable options to purchase 8,000 shares of
Common Stock at prices ranging from $15.625 to $26.75 per share
granted to each of Messrs. Frank, McCoy, Peltason and Seymour
pursuant to the 1993 Stock Option Plan for Directors.
(5) Includes 1,000 shares held in Mr. Grundhofer's Individual Retirement
Account and currently exercisable options to purchase 1,000 shares of
Common Stock at $26.75 per share granted to Mr. Grundhofer pursuant
to the 1993 Stock Option Plan for Directors.
(6) Mr. Albert resigned as the Chief Executive Officer and President and
a Director of the Company in February 1997. Since his resignation,
Mr. Albert has not made a Form 4 or 5 filing under the Securities
Exchange Act of 1934, as amended, and therefore, the Operating
Partnership has no information for Mr. Albert after such date.
(7) Mr. Moran resigned as the Executive Vice President, Chief Financial
Officer and Secretary of the Company in December 1996. Since his
resignation, Mr. Moran has not made a Form 4 or 5 filing under the
Securities Exchange Act of 1934, as amended, and therefore, the
Operating Partnership has no information for Mr. Moran after such
date.
(8) Mr. Rose resigned as Senior Vice President and Treasurer of the
Company in March 1997. Since his resignation, Mr. Rose has not made
a Form 4 or 5 filing under the Securities Exchange Act of 1934, as
amended, and therefore, the Operating Partnership has no information
for Mr. Rose after such date.
(9) All of such shares represent currently exercisable options to purchase
shares of Common Stock granted pursuant to the 1993 Long-Term Stock
Incentive Plan except for 1,000 shares of Common Stock owned by each
such person.
(10) Includes 257,495 shares of Common Stock and currently exercisable
options to purchase 152,665 shares of Common Stock under the 1993
Long-Term Stock Incentive Plan and the 1993 Stock Option Plan for
Directors.
(11) Information based on a review of Schedule 13Ds or 13Gs filed with the
Commission as of October 31, 1997.
(12) Represents Common Stock and Common L.P. Units owned by of The Irvine
Company or its subsidiaries. On September 19, 1997, The Irvine Company
announced its intention to acquire approximately 1,000,000 additional
shares of Common Stock.
(13) Based on information provided in Amendment No. 3 to a Schedule 13G
filed on February 4, 1997 by Cohen & Steers Capital Management
("Cohen & Steers"). As of December 31, 1996, Cohen & Steers had sole
dispositive power with respect to all of such shares, and sole voting
power with respect to 1,665,600 of such shares.
(14) Based on information provided in a Schedule 13G filed on February 14,
1997 by LaSalle Advisors Limited Partnership ("LALP"), ABKB/LaSalle
Securities Limited Partnership ("ABKB"), and two of their principals.
As of December 31, 1996 (i) LALP had sole voting and dispositive
power with respect to 354,700 shares, shared voting power with
respect to 131,300 shares and shared dispositive power with respect
to 361,500 shares; (ii) ABKB had sole voting and dispositive power
with respect to 122,400 shares, shared voting power with respect to
369,675 shares and shared dispositive power with respect to 476,000
shares; and (iii) each of the principals of LALP and ABKB had sole
voting and dispositive power with respect to 477,100 shares, shared
voting power with respect to 500,975 shares and shared dispositive
power with respect to 837,500 shares.
(15) Based on information provided in Amendment No. 3 to a Schedule 13G
filed on January 30, 1997 by Travelers Group Inc. ("TGI") and Smith
Barney Holdings Inc. ("SBHI"), a wholly-owned subsidiary of TGI. As
of December 31, 1996, SBHI and TGI had shared voting and dispositive
power with respect to all of such shares. Each of TGI and SBHI
disclaim beneficial ownership of all such shares.
</FN>
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with The Irvine Company
In connection with the Company's Initial Public Offering in
December 1993, in which 11,800,000 shares of Common Stock were sold to the
public, the Company, the Operating Partnership and The Irvine Company entered
into a series of transactions resulting in, inter alia, (i) the Company
becoming the sole general partner of, and holding a 39.0% partnership interest
in, the Operating Partnership; (ii) The Irvine Company and certain of its
subsidiaries becoming the sole limited partners of, and holding in the
aggregate a 61.0% partnership interest in, the Operating Partnership; (iii)
the transfer of all 43 apartment communities previously owned by The Irvine
Company and its subsidiaries to the Operating Partnership; and (iv) the
assumption by the Operating Partnership of certain debt of The Irvine Company
related to such apartment communities.
On August 9, 1995, the Company sold, pursuant to a public
offering 5,175,000 shares of Common Stock at $17.25 per share. Concurrently
with such offering, The Irvine Company, pursuant to its rights under the
Partnership Agreement, purchased 1,500,000 Common L.P. Units at $17.25 per
unit. Such Common L.P. Units are exchangeable for Common Stock on a one for
one basis, subject to adjustment and certain limitations.
On July 3, 1996, the Company sold in a direct placement
1,490,700 shares of Common Stock at $20.125 per share. Concurrently
therewith, The Irvine Company, pursuant to its rights under the Partnership
Agreement, purchased 1,490,700 Common L.P. Units at $20.125 per unit. In
addition, during 1996 the Company sold in the aggregate 13,280 shares of
Common Stock at varying prices ranging from $19.784 to $23.875 per share
pursuant to its Dividend Reinvestment and Additional Cash Investment Plan. In
connection with such sales, The Irvine Company, pursuant to its rights under
the Partnership Agreement, purchased an aggregate of 15,851 Common L.P. Units
at varying prices ranging from $19.784 to $23.875 per Common L.P. Unit. All
of the foregoing Common L.P. Units are exchangeable for Common Stock on a one
for one basis, subject to adjustment and certain limitations.
On February 20, 1997, the Company sold, pursuant to a public
offering, 1,150,000 shares of Common Stock at $27.50 per share. Currently
with such offering, The Irvine Company, pursuant to its rights under the
Partnership Agreement, purchased 1,394,194 Common L.P. Units at $26.06 per
unit (which is equal to the public offering price of the Common Stock in such
offering less an amount equivalent to the underwriting discount). In
addition, during the first nine months of 1997 the Company sold in the
aggregate 16,472 shares of Common Stock at varying prices ranging from $26.338
to $28.656 per share pursuant to its Dividend Reinvestment and Additional Cash
Investment Plan. In connection with such sales, The Irvine Company, pursuant
to its rights under the Partnership Agreement and Miscellaneous Rights
Agreement, purchased an aggregate of 19,900 Common L.P. Units and 858 shares
of Common Stock at varying prices ranging from $26.338 to $28.656. All of the
foregoing Common L.P. Units are exchangeable for Common Stock on a one for one
basis, subject to adjustment and certain limitations.
The Company and The Irvine Company have entered into an
administrative services agreement, as amended, pursuant to which The Irvine
Company provides the Company with certain administrative services, including,
but not limited to, income tax services, risk management and other support
services. During the first nine months of 1997 and in 1996, 1995 and 1994,
the Company incurred costs of approximately $95,000, $108,000, $106,000 and
$160,000, respectively, pursuant to the administrative services agreement.
The Company and The Irvine Company have also entered into a
lease pursuant to which the Company leases space from The Irvine Company.
Pursuant to the lease, $239,000, $230,000 and $179,000 was incurred in 1996,
1995 and 1994, respectively, and $182,000 was incurred in the first nine
months of 1997. Base rent payable by the Company under the lease is
approximately $242,000 per annum through 1998. The Company also incurred
parking costs to The Irvine Company of approximately $33,000, $33,000 and
$24,000 in 1996, 1995 and 1994, respectively, and $28,000 in the first nine
months of 1997. The Company also commenced renting, in November 1995, retail
space for its Leasing and Information Center from an affiliate of The Irvine
Company. Pursuant to such lease approximately $57,000, $74,000 and $11,000
was incurred in the first nine months of 1997 and in 1996 and 1995,
respectively. Base rent payable by the Company under such lease is
approximately $77,000 per annum through 1997. Additionally, the Company has
entered into a short term lease with The Irvine Company to provide for offsite
parking adjacent to one of the Company's construction sites for storing
materials and parking for laborers. The lease commenced September 1, 1996 at
$1,500 per month. The total amount incurred in 1996 was $6,000.
Two of the Operating Partnership's apartment communities are
financed by mortgage notes payable to The Irvine Company. These mortgage
notes totaled $50,608,000, $51,227,000, $52,011,000 and $52,751,000 at
September 30, 1997, December 31, 1996, 1995 and 1994, respectively. The
mortgage notes are collateralized by all-inclusive trust deeds on each of the
apartment communities financed, bore fixed interest rates of 5.75% at
September 30, 1997 and December 31, 1996, are fully amortizing, and mature in
2015 and 2024. Interest incurred on the mortgage notes payable to The Irvine
Company totaled $2,194,000 for the nine months ended September 30, 1997 and
$2,966,000, $3,010,000 and $3,055,000 for the years ended December 31, 1996,
1995 and 1994, respectively. The mortgage notes payable to The Irvine Company
"wrap around" secured first trust deed notes payable to third party financial
institutions. The secured first trust deed notes totaled $50,834,000,
$51,363,000, $52,030,000 and $52,654,000 as of September 30, 1997 and December
31, 1996, 1995 and 1994, respectively. The largest aggregate amount of
indebtedness outstanding under each note was $17,676,000 and $34,334,000
during 1996, $18,093,000 and $34,657,000 during 1995 and $18,487,000 and
$34,962,000 during 1994. As of September 30, 1997, the amount outstanding
under each note was $17,178,000 and $33,656,000.
The Company, the Operating Partnership and The Irvine Company
are parties to the Land Rights Agreement. This agreement, which extends
through July 31, 2020, provides the Company the exclusive right, but not the
obligation, to acquire additional land sites which have been entitled for
residential use and designated by The Irvine Company as ready for apartment
development in accordance with the Master Plan. The determination to exercise
an option with respect to a site is made solely by a majority of the
Independent Directors Committee of the Company's Board of Directors. In
addition, The Irvine Company and Donald Bren have agreed to conduct their
apartment community development and ownership activities on the Irvine Ranch
solely through the Operating Partnership.
Pursuant to the Land Rights Agreement, The Irvine Company and
Mr. Bren have agreed not to directly or indirectly acquire or develop, or
acquire an equity interest in any entity that has an ownership interest in,
any rental apartment community whether on or off the Irvine Ranch. This
prohibition terminates, with respect to communities on the Irvine Ranch, on
July 31, 2020, and with respect to communities off the Irvine Ranch, when (i)
no nominee of The Irvine Company is a member of the Company's Board of
Directors and (ii) The Irvine Company and certain related persons beneficially
own less than 20% of the outstanding Common Stock in the aggregate (including
for this purpose Common Stock issuable upon exchange of Common L.P. Units).
The Land Rights Agreement is subject to early termination upon
the occurrence of certain events including (i) the failure of the shareholders
of the Company to elect as directors of the Company the number of directors
which The Irvine Company is entitled to nominate to the Company's Board of
Directors, (ii) in the event of a vacancy on the Board of Directors of an
Irvine Company Board Representative, the remaining directors shall not
promptly elect a person designated by The Irvine Company to fill such vacancy
and (iii) during the period The Irvine Company has the right to nominate three
persons to the Company's Board of Directors, the provisions of the Articles of
Incorporation and the Bylaws requiring approval of the Required Directors to
take certain actions shall be repealed, modified or amended without the prior
written consent of The Irvine Company.
Under the terms of the Land Rights Agreement, through July 31,
2000, the purchase price for any apartment community sites acquired may be
paid with either cash, Common Stock or Common L.P. Units, at the option of the
Company. After July 31, 2000, the choice of consideration will revert to The
Irvine Company. In no event shall the purchase price for any community land
site exceed 95% of the value of such site as determined by independent
appraisals. In addition, the purchase price for apartment sites encompassing
the first 1,800 apartment units the Operating Partnership develops starting in
mid-1995 will be set at an amount such that each project's budgeted pro forma
unleveraged return on costs for the first 12 months following stabilized
occupancy will be between 10.0% and 10.5%. Six land sites discussed below
have been purchased under this arrangement and as of the date of this
Prospectus future apartment sites encompassing 309 apartment units remain to
be purchased under this arrangement. For a discussion of a recently approved
transaction, see "Business and Properties of the Operating
Partnership--Exclusive Land Rights Agreement."
In the third quarter of 1994, the Operating Partnership
acquired four sites for development of 1,695 units for $19,703,000 from The
Irvine Company. As partial financing for these four sites, the Operating
Partnership elected to assume $15,656,000 in tax-exempt assessment district
debt and paid $4,047,000 in cash.
In March 1995, the Operating Partnership acquired a 512-unit
development site known as Newport Ridge for $9,542,000 from The Irvine
Company. As partial financing for the acquisition of the site, The Company
elected to assume $4,184,000 in tax-exempt assessment district debt. The
balance of $5,358,000 was paid through the issuance of 336,432 additional
Common L.P. Units in the Operating Partnership to The Irvine Company. In
November 1995, the Operating Partnership acquired a 300-unit development site
known as Baypointe from The Irvine Company for $4,190,000, of which $2,223,000
was paid in cash and $1,967,000 was paid through the issuance of 113,372
additional Common L.P. Units in the Operating Partnership to The Irvine
Company. The L.P. Units are exchangeable for Common Stock of the Company on a
one for one basis, subject to adjustment and certain limitations.
In March 1996, the Operating Partnership acquired a 227-unit
development site known as Santa Maria for $3,343,000 from The Irvine Company.
As partial financing for the acquisition of the site, the Operating
Partnership elected to assume $2,771,000 in tax-exempt assessment district
debt. The balance of $572,000 was paid through the issuance of 28,358
additional Common L.P. Units in the Operating Partnership to The Irvine
Company. In July 1996, the Operating Partnership acquired a 245-unit
development site known as The Colony for $3,545,000 from The Irvine Company.
The purchase price for this site consisted of the issuance of 115,544
additional Common L.P. Units in the Operating Partnership and $1,143,000 in
cash. In December 1996, the Operating Partnership acquired a 207-unit
development site known as Santa Rosa II for $5,999,000 from The Irvine
Company. The purchase price was paid through the issuance of 244,857
additional Common L.P. Units in the Operating Partnership. The foregoing
Common L.P. Units are exchangeable for Common Stock of the Company on a one
for one basis, subject to adjustment and certain limitations.
On February 10, 1997, the Operating Partnership acquired a
316-unit development site known as Rancho Santa Fe for $8,408,000 from The
Irvine Company. The purchase price was paid through the issuance of 313,439
additional Common L.P. Units in the Operating Partnership. Pursuant to the
terms of this acquisition a portion of the purchase price is refundable,
through the forfeiture of a portion of such Common L.P. Units, if the
apartment community to be constructed on the site does not achieve a 10%
unleveraged return on costs for the first twelve months following stabilized
occupancy. On October 21, 1997, the Operating Partnership acquired a 196-unit
development site for $5.7 million from The Irvine Company. The purchase price
was paid through the issuance of 179,433 additional Common L.P. Units in the
Operating Partnership. Pursuant to the terms of the acquisition, a portion of
the purchase price is refundable through the forfeiture of a portion of such
Common L.P. Units, if the apartment community to be constructed on the site
does not achieve a 10% unleveraged return on costs for the first twelve months
following stabilized occupancy. The foregoing Common L.P. Units are
exchangeable for Common Stock of the Company on a one for one basis, subject
to adjustment and certain limitations.
Independent appraisals were obtained for each of the sites
referred to above, prior to the Independent Directors Committee determining
that the Operating Partnership would exercise its right to purchase such land
sites. If the Operating Partnership elects not to exercise its option for any
site, the Operating Partnership will thereafter have a right of first refusal
on the sale of such site to a third party if the terms of such sale are more
favorable than those offered to the Operating Partnership. The determination
to exercise an option or the right of first refusal under the Land Rights
Agreement with respect to any site will be made solely by a majority of the
Independent Directors Committee.
Three directors of the Company, Messrs. Bren, Watson and McKee,
are affiliated with The Irvine Company. Mr Bren is Chairman of the Board and
the majority stockholder of The Irvine Company. Mr. Watson is Vice Chairman
of the Board of The Irvine Company. Mr. McKee is Executive Vice President and
Chief Financial Officer of The Irvine Company.
Other Transactions
Mr. Grundhofer is Chairman, President and Chief Executive
Officer of First Bank System, Inc. which, through an affiliate, is a member
of the bank syndicate that has provided the Operating Partnership's $250
million Credit Facility. This facility replaced various prior facilities
in which this bank also participated. $36.0 million was outstanding under
the Credit Facility as of October 31, 1997. Based on this bank's
percentage participation in the Credit Facility (and the predecessor
facilities), the Company estimates that the amount of interest and fees
paid to the affiliate totaled $271,000 during the first nine months of 1997
and $245,000, $388,000 and $96,000 for 1996, 1995 and 1994, respectively.
In addition, an affiliate of First Bank System, Inc. acts as trustee for
the 7% Notes and will receive customary compensation therefor.
DESCRIPTION OF THE SERIES A PREFERRED SECURITIES
The Common Securities and the Series A Preferred Securities
will be issued pursuant to the terms of the Declaration. The following
summarizes the material terms and provisions of the Common Securities and the
Series A Preferred Securities and is qualified in its entirety by reference to
the Business Trust Act and the Declaration, which has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
General
The Declaration authorizes the Trust to issue up to 25 million
Preferred Securities in one or more series, including the Series A Preferred
Securities, up to 10,000 Common Securities and up to 25 million securities of
a class designated Excess Preferred Securities issuable in one or more series
as described below under "Restrictions on Ownership and Transfer of the Series
A Preferred Securities." The Regular Trustees have the authority to establish
the terms of each series of Preferred Securities, including the preferences,
conversion and other rights, voting powers, restrictions, limitations as to
distributions, qualifications and terms and conditions of redemption, if any,
by amending the Declaration. Such amendments do not require any vote or
action of the holders of the Preferred Securities except as otherwise set
forth in the Declaration or as required by law or the rules of any stock
exchange or automated quotation system on which the Preferred Securities are
listed. The Preferred Securities of a series represent preferred undivided
beneficial interests in the assets held by the Trust, and the Common
Securities represent common undivided beneficial interests in the assets of
the Trust. All of the Common Securities will be owned, directly or
indirectly, by the Company and certain members of the management of the
Company. The Series A Preferred Securities will have equivalent terms to the
Series A Preferred L.P. Units. The Declaration does not permit the issuance
by the Trust of any securities or other evidences of beneficial ownership of,
or beneficial interests in, the Trust other than the Preferred Securities
which have terms substantially equivalent to the related series of Preferred
L.P. Units of the Operating Partnership, the Excess Preferred Securities and
the Common Securities, the incurrence of any indebtedness for borrowed money
by the Trust or the making of any investment other than in Preferred L.P.
Units of the Operating Partnership and, with respect to the investment of the
proceeds of the sale of the Common Securities, in an interest bearing account
at, or certificate of deposit of, a bank. Pursuant to the Declaration, the
Property Trustee will own and hold the Preferred L.P. Units of the Operating
Partnership as trust assets for the benefit of the holders of the related
series of Preferred Securities.
Application will be made to list the Series A Preferred
Securities on the NYSE under the symbol "_____". If approved for listing,
trading of the Series A Preferred Securities on the NYSE is expected to
commence within 30 days after the date of this Prospectus. While the
Underwriters have advised the Trust that they intend to make a market in the
Series A Preferred Securities prior to commencement of trading on the NYSE,
they are under no obligation to do so and no assurance can be given that a
market for the Series A Preferred Securities will exist prior to commencement
of trading.
Common Securities
Subject to the preferential rights of the Series A Preferred
Securities (and the related series of Excess Preferred Securities as described
below) and such preferential rights as may be granted by the Regular Trustees
in connection with the future issuance of Preferred Securities (and any
related series of Excess Preferred Stock as described below), holders of
Common Securities are entitled to one vote per security on all matters to be
voted on by holders of Common Securities and are entitled to receive ratably
such distributions as may be declared on the Common Securities by the Regular
Trustees in their discretion from funds legally available therefor. In the
event of the liquidation, dissolution or winding-up of the Trust, after
payment of all obligations and any liquidation amount with respect to the
Preferred Securities (and any related series of Excess Preferred Securities as
described below), each holder of Common Securities is entitled to receive,
ratably with each other holder of Common Securities, all remaining assets of
the Trust available for distribution to the holders of Common Securities.
Holders of Common Securities have no subscription, redemption, conversion or
preemptive rights. Matters submitted for approval to holders of Common
Securities generally require a majority vote of the Common Securities present
and voting thereon. The holders of Common Securities have the exclusive right
(subject to the terms of the Declaration) to appoint, remove or replace
Trustees and to increase or decrease the number of Trustees, subject to the
right of holders of the Series A Preferred Securities (and any other series of
Preferred Securities having a similar right which is then exercisable) to
appoint a Special Regular Trustee upon the occurrence of an Appointment Event.
The outstanding shares of Common Securities are fully paid and nonassessable.
Restrictions on Ownership and Transfer of Series A Preferred Securities
Ownership Limit Provisions. The Declaration contains certain
restrictions on the number of Series A Preferred Securities that individual
holders may own. For the Trust to qualify as a REIT under the Code, no more
than 50% in value of the outstanding Trust Securities may be owned, directly
or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year) or during a proportionate part of a shorter taxable year. The Trust
Securities must also be beneficially owned by 100 or more persons during at
least 335 days of a taxable year or during a proportionate part of a shorter
taxable year. Because the Trust expects to qualify as a REIT, the Declaration
contains restrictions on the acquisition of Series A Preferred Securities
intended to ensure compliance with these requirements.
Subject to certain exceptions specified in the Declaration
no holder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8%, (the "Ownership Limit") of the
issued and outstanding Series A Preferred Securities. The Regular Trustees
may, with a ruling from the IRS or an opinion of counsel satisfactory to
it, waive the Ownership Limit with respect to a holder if such holder's
ownership will not then or in the future jeopardize the Trust's status as a
REIT.
If Series A Preferred Securities in excess of the Ownership
Limit are issued or transferred to any person, or Series A Preferred
Securities which would cause the Trust to be beneficially owned by fewer than
100 persons are transferred to any person, such issuance or transfer shall be
null and void and the intended transferee will acquire no rights to the stock.
In addition, Series A Preferred Securities owned, or deemed to
be owned, or transferred to a holder in excess of the Ownership Limit will
automatically be exchanged for a series of a separate class of preferred
securities of the Trust ("Excess Preferred Securities") that shall be deemed
to have been transferred to a person as trustee of a trust for the exclusive
benefit of one or more charitable organizations designated by the Regular
Trustees. While Excess Preferred Securities are held in trust, the trustee of
the trust will be deemed to hold the Excess Preferred Securities for the
exclusive benefit of the charitable beneficiary, the intended original
transferee-holder will acquire no rights to such securities except as
described below, and the trustee of the trust will have all distribution and
voting rights pertaining to the transferred securities. Upon liquidation,
dissolution or winding-up of the Trust, the intended original
transferee-holder's ratable share of the Trust's assets would be limited to
the price paid by the original transferee-holder for the Series A Preferred
Securities in the purported transfer that resulted in the Excess Preferred
Securities or, if no value was given, the price per security equal to the
closing market price on the date of the purported transfer that resulted in
the Excess Preferred Securities.
Excess Preferred Securities are not transferable except as
hereinafter described. The original transferee-holder may, at any time the
Excess Preferred Securities are held in trust as provided above, transfer the
Excess Preferred Securities to any person whose ownership of such Preferred
Securities would be permitted under the Ownership Limit, at a price per
security not in excess of the lesser of (i) the price per security paid by the
original transferee-holder for the Series A Preferred Securities that resulted
in the Excess Preferred Securities or, if no value was given, the price per
security equal to the closing market price on the date of the purported
transfer that resulted in the Excess Preferred Securities or (ii) the price
per security received by the original transferee-holder in the transfer to the
person whose ownership of such securities would be permitted under the
Ownership Limit. Immediately upon transfer to such permitted transferee, the
Excess Preferred Securities will automatically be exchanged for Series A
Preferred Securities. In addition, the Trust (or its designee) would have the
right, for a period of 90 days during the time the Excess Preferred Securities
are held in trust, to purchase all or any portion of the Excess Preferred
Securities from the original transferee-holder at a price per security equal
to the lesser of (i) the price per security paid by the original
transferee-holder in the transaction that created such Excess Preferred
Securities (or, in the case of a devise or gift, the closing market price at
the time of such devise or gift) and (ii) the closing market price for the
security on the date the Trust (or its designee) exercises its option to
purchase. The 90-day period begins on the date of the violative transfer if
the original transferee-holder gives notice to the Trust of the transfer or
(if no such notice is given) the date the Regular Trustees determine that a
violative transfer has been made.
The Ownership Limit will not be automatically removed even if
the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration
limitation is increased. Any change in the Ownership Limit would require an
amendment to the Declaration. Such an amendment to the Declaration would
require the approval of the Regular Trustees and the affirmative vote of
holders owning not less than 66(2)/(3)% of the outstanding Common Securities.
No vote of holders of Preferred Securities will be required in connection with
any such act.
All certificates representing Series A Preferred Securities
will bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution
provisions of the Code, more than 0.5% (or such other percentage between 0.5%
and 5%, as determined by the Regular Trustees) of the outstanding Series A
Preferred Securities must file an affidavit with the Trust containing the
information specified in the Declaration within 30 days after January 1 of
each year. In addition, each holder of Series A Preferred Securities shall
upon demand be required to disclose to the Trust in writing such information
with respect to the direct, indirect and constructive ownership of Series A
Preferred Securities as the Regular Trustees deem necessary to comply with the
provisions of the Code applicable to a REIT or to comply with the requirements
of any taxing authority or governmental agency.
If the Trust authorizes the issuance of any other series of
Preferred Securities in the future, the Regular Trustees will at the time of
authorization establish ownership limits applicable to such series to ensure
compliance with the REIT qualification provisions of the Code.
Ranking
The Series A Preferred Securities will, with respect to
distribution rights and rights upon liquidation, dissolution and winding-up of
the Trust, rank (i) senior to the Common Securities and (ii) on a parity with
all other series of Preferred Securities issued by the Trust unless the terms
of such other series specifically provide that such series rank junior to the
Series A Preferred Securities.
Distributions
Subject to the rights of holders of other series of Preferred
Securities ranking on a parity with the Series A Preferred Securities as to
the payment of distributions which may from time to time be issued by the
Trust, holders of Series A Preferred Securities will be entitled to receive,
when, as and if the Regular Trustees declare a distribution on the Series A
Preferred Securities, out of funds legally available therefor, cumulative cash
distributions at the rate per annum of % of the stated liquidation amount
of $25 per Series A Preferred Security. The amount of distributions payable
for any period will be computed on the basis of a 360-day year of twelve
30-day months and for any period shorter than a full quarterly period for
which distributions are computed, the amount of the distribution payable will
be computed on the basis of the actual number of days elapsed in such a 30-day
month.
Distributions on the Series A Preferred Securities will be
cumulative, will accumulate from the original date of issuance and will be
payable quarterly in arrears, on , , and
of each year (if such day is a Business Day) commencing on , 1998.
Distributions on the Series A Preferred Securities will accumulate whether or
not the Trust has earnings, whether or not there are funds legally available
for the payment of such distributions and whether or not such distributions
are declared and will accumulate to the extent they are not paid as of the
date on which they first become payable. Accumulated and unpaid distributions
will not bear interest.
If declared by the Regular Trustees as provided above,
distributions on the Series A Preferred Securities must be paid on the dates
payable to the extent that the Property Trustee has cash on hand in the
Property Account to permit such payment. So long as the Series A Preferred
L.P. Units are the sole assets of the Trust, the funds available for
distribution to the holders of the Series A Preferred Securities will be
limited to payments received by the Property Trustee in respect of the Series
A Preferred L.P. Units that are deposited in the Trust as trust assets. See
"Description of the Series A Preferred L.P. Units." If the Operating
Partnership does not make a distribution on the Series A Preferred L.P. Units,
the Property Trustee will not make distributions on the Series A Preferred
Securities. Under the Declaration, if and to the extent the Operating
Partnership does make a distribution on the Series A Preferred L.P. Units
deposited in the Trust, the Property Trustee upon declaration of a
distribution by the Regular Trustees are obligated to make distributions on
the Series A Preferred Securities on a pro rata basis.
So long as the Series A Preferred Securities are outstanding,
no distribution shall be paid or declared on or with respect to the Common
Securities or any other series of outstanding Preferred Securities ranking
junior as to the payment of distributions and upon liquidation, dissolution
and winding-up of the Trust to the Series A Preferred Securities
(collectively, the "Junior Securities") nor shall any sum or sums be set aside
for or applied to the purchase or redemption of the Series A Preferred
Securities or any other series of outstanding Preferred Securities or the
purchase, redemption or other acquisition for value of any Junior Securities
unless, in each case, full cumulative distributions accumulated on all Series
A Preferred Securities and all other series of Preferred Securities
outstanding ranking on a parity with the Series A Preferred Securities as to
the payment of distributions and upon liquidation, dissolution or winding-up
of the Trust have been paid in full, provided that the foregoing will not
prohibit distributions payable solely in Junior Securities and the purchase of
Preferred Securities of any series as described under "--Restrictions on
Ownership and Transfer of Series A Preferred Securities." All distributions
declared on the Series A Preferred Securities and any other series of
Preferred Securities outstanding ranking on a parity with the Series A
Preferred Securities as to the payment of distributions and upon liquidation,
dissolution or winding-up of the Trust shall be declared pro rata so that the
amount of distributions declared per Series A Preferred Securities and such
other series of Preferred Securities shall in all cases bear to each other the
same ratio that the respective distribution rights per Series A Preferred
Security and such other series of Preferred Securities (which shall not
include any accumulation in respect of unpaid distributions for prior
distribution periods if such other series of Preferred Securities do not have
cumulative distribution rights) bear to each other. Holders of Series A
Preferred Securities shall not be entitled to any distributions, whether
payable in cash, property or otherwise, in excess of the full cumulative
distributions described herein.
Distributions on the Series A Preferred Securities will be made
to the holders thereof as they appear on the books and records of the Trust on
the relevant record dates, which, as long as the Series A Preferred Securities
remain in book-entry form, will be one Business Day (as defined herein) prior
to the relevant distribution payment date. Distributions on the Series A
Preferred Securities will be paid through the Property Trustee who will hold
amounts received in respect of the Series A Preferred L.P. Units in the
Property Account for the benefit of the holders of the Series A Preferred
Securities. Subject to any applicable laws and regulations and the provisions
of the Declaration, each such payment to the Series A Preferred
Securityholders will be made as described under "--Book-Entry Only
Issuance--The Depository Trust Company" below. In the event that the Series A
Preferred Securities do not continue to remain in book-entry only form, the
Regular Trustees shall have the right to select relevant record dates, which
shall be more than one Business Day prior to the relevant payment dates. The
Declaration provides that the payment dates and record dates for the Series A
Preferred Securities shall be the same as the payment dates and record dates
for the Series A Preferred L.P. Units. All distributions paid with respect
to the Series A Preferred Securities shall be paid on a pro rata basis to the
holders thereof entitled thereto. If any date on which distributions are to
be made on the Series A Preferred Securities is not a Business Day, then
payment of the distribution to be made on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on such date. "Business Day" shall mean any day other than
Saturday, Sunday or any other day on which banking institutions in New York,
New York are permitted or required by any applicable law to close.
Redemption
Upon the repayment of the Series A Preferred L.P. Units,
whether at their stated maturity, upon termination of the Operating
Partnership, upon redemption or otherwise, the proceeds from such repayment or
payment will be promptly applied to redeem Series A Preferred Securities
having an aggregate liquidation amount equal to the aggregate stated value of
the Series A Preferred L.P. Units so repaid, upon not less than 30 nor more
than 60 days' notice, at the Redemption Price. In the event fewer than all
outstanding Series A Preferred Securities are to be redeemed, Series A
Preferred Securities registered in the name of and held by DTC or its nominee
will be redeemed as described under "--Book-Entry Only Issuance--The
Depository Trust Company" below. The Operating Partnership will terminate on
December 31, 2092, unless sooner dissolved.
The Series A Preferred Securities have a stated maturity of
December 31, 2092 (see "Liquidation" below) and will not be subject to any
sinking fund. Since the Series A Preferred L.P. Units may be redeemed
upon the occurrence of a Special Event, the Series A Preferred Securities
would also be redeemed. See "Description of the Series A Preferred L.P.
Units--Redemption." In addition, the Series A Preferred Securities may be
mandatorily purchased by the Trust as described under "--Restrictions on
Ownership and Transfer of Series A Preferred Securities."
Redemption Procedures
The Trust may not redeem fewer than all the outstanding Series
A Preferred Securities unless all accumulated and unpaid distributions have
been paid on all Series A Preferred Securities for all quarterly distribution
periods terminating on or prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Series
A Preferred Securities (which notice will be irrevocable) then by 12:00 noon,
New York City time, on the redemption date and provided that the Operating
Partnership has paid to the Property Trustee a sufficient amount of cash in
connection with the related repayment or maturity of the Series A Preferred
L.P. Units, the Trust will irrevocably deposit with the depositary funds
sufficient to pay the applicable Redemption Price and will give the depositary
irrevocable instructions and authority to pay the Redemption Price to the
holders of the Series A Preferred Securities. See "--Book-Entry Only
Issuance--The Depository Trust Company." If notice of redemption shall have
been given and funds deposited as required, then, immediately prior to the
close of business on the date of such deposit, distributions will cease to
accumulate on the Series A Preferred Securities called for redemption, such
Series A Preferred Securities shall no longer be deemed to be outstanding and
all rights of holders of such Series A Preferred Securities so called for
redemption will cease, except the right of the holders of such Series A
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price. Neither the Trustees nor the Trust shall be required
to register or cause to be registered the transfer of any Series A Preferred
Securities which have been so called for redemption. If any date fixed for
redemption of Series A Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date fixed for redemption. If the Operating Partnership fails to
repay Series A Preferred L.P. Units at their stated maturity, upon termination
of the Operating Partnership, upon redemption or otherwise as required by the
terms of the Series A Preferred L.P. Units or if payment of the Redemption
Price in respect of Series A Preferred Securities is improperly withheld or
refused and not paid by the Property Trustee, distributions on such Series A
Preferred Securities will continue to accumulate, from the original redemption
date of the Series A Preferred Securities to the date of payment, in which
case the actual payment date will be considered the date fixed for redemption
for purposes of calculating the Redemption Price.
Notice of redemption will be mailed by the Regular Trustees on
behalf of the Trust, postage prepaid, not less than 30 nor more than 60 days
prior to the redemption date, addressed to the respective holders of record of
the Series A Preferred Securities to be redeemed at their respective addresses
as they appear on the transfer records of the Trust. No failure to give or
defect in such notice shall affect the validity of the proceedings for the
redemption of any Series A Preferred Securities except as to the holder to
whom notice was defective or not given. Each notice shall state: (i) the
redemption date; (ii) the redemption price; (iii) the number of Series A
Preferred Securities to be redeemed; (iv) the place or places where the Series
A Preferred Securities is to be surrendered for payment of the Redemption
Price; and (v) that distributions on the Series A Preferred Securities to be
redeemed will cease to accumulate on such redemption date. If fewer than all
of the Series A Preferred Securities held by any holder are to be redeemed,
the notice mailed to such holder shall also specify the number of Series A
Preferred Securities to be redeemed from such holder.
The holders of Series A Preferred Securities at the close of
business on a distribution record date will be entitled to receive the
distribution payable with respect to such Series A Preferred Securities on the
corresponding distribution payment date notwithstanding the redemption thereof
between such distribution record date and the corresponding distribution
payment date or the Trust's default in the payment of the distribution due.
Except as provided above, the Trust will make no payment or allowance for
unpaid distributions, regardless of whether in arrears, on Series A Preferred
Securities called for redemption.
If a partial redemption of the Series A Preferred Securities
would result in the delisting of the Series A Preferred Securities by any
national securities exchange or other organization on which the Series A
Preferred Securities are then listed, the Operating Partnership will only
redeem the Series A Preferred L.P. Units in whole and, as a result, the Trust
may only redeem the Series A Preferred Securities in whole.
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Company, the Operating
Partnership or any of its subsidiaries may at any time and from time to time
purchase outstanding Series A Preferred Securities by tender, in the open
market or by private agreement unless at such time, the Operating Partnership
would be prohibited from purchasing or redeeming Series A Preferred L.P. Units
as described in the fourth paragraph under "Description of Series A Preferred
L.P. Units--Distributions."
Liquidation
Subject to the rights of holders of other series of Preferred
Securities ranking on a parity with the Series A Preferred Securities, in the
event of any voluntary or involuntary dissolution, liquidation, winding-up or
termination of the Trust, the holders of the Series A Preferred Securities at
the date of liquidation, dissolution, winding-up or termination of the Trust
will be entitled to receive solely out of the assets of the Trust, after
satisfaction of liabilities of creditors (to the extent not satisfied by the
Operating Partnership as provided in the Declaration), an amount in cash equal
to the liquidation amount of $25 per Series A Preferred Security plus
accumulated and unpaid distributions thereon to the date of payment (such
amount being the "Liquidation Distribution") and no more. Any such payment
will be made solely out of the sale proceeds of capital stock of the Company,
which will be contributed by the Company to the Operating Partnership as an
additional capital contribution, or the sale proceeds of L.P. Units of the
Operating Partnership.
If upon any liquidation, dissolution, winding-up or termination
of the Trust, there are insufficient assets to permit full payment to holders
of Series A Preferred Securities and any other series of outstanding Preferred
Securities ranking on a parity upon liquidation, dissolution, winding-up or
termination of the Trust with the Series A Preferred Securities, the holders
of Series A Preferred Securities and such other series of Preferred Securities
shall be paid ratably in proportion to the full distributable amounts to which
holders of Series A Preferred Securities and such other series of Preferred
Securities are respectively entitled upon liquidation, dissolution, winding-up
or termination. The full preferential amount payable to holders of Series A
Preferred Securities and such other series of outstanding Preferred Securities
upon any such liquidation, dissolution, winding-up or termination will be paid
in full before any distribution or payment is made to holders of Junior
Securities. Neither the consolidation or merger of the Trust with or into any
trust, corporation or other entity (or of any trust, corporation or other
entity with or into the Trust) nor the sale, lease or conveyance of all or
substantially all of the property of the Trust shall be deemed to constitute a
liquidation, dissolution, winding-up or termination of the Trust.
Pursuant to the Declaration, the Trust shall terminate: (i)
on December 31, 2092, unless sooner dissolved as provided in the
Declaration, (ii) upon termination of the Operating Partnership on December
31, 2092, unless sooner dissolved, or (iii) when Preferred Securities of
all series shall have been called for redemption and the amounts necessary
for redemption thereof shall have been paid to the holders of Trust
Securities in accordance with the terms of the Trust Securities.
Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or
into, or convey, transfer or lease its assets substantially as an entirety
to, any corporation or other entity, except as described below. The Trust
may, at the request of the holders of the Common Securities and with the
consent of the Regular Trustees, but without the consent of the holders of
the Preferred Securities, the Property Trustee or the Delaware Trustee
consolidate, amalgamate, merge with or into, any trust, partnership,
corporation or other entity organized under the laws of any State of the
United States or the District of Columbia; provided, that (i) if the Trust
is not the survivor, such successor entity either (x) expressly assumes all
of the obligations of the Trust under the Trust Securities or (y)
substitutes for the Preferred Securities of each series outstanding other
securities having substantially the same terms as the such Preferred
Securities (the "Successor Securities"), so long as each series of
Successor Securities rank the same as the Preferred Securities rank with
respect to distributions and payments upon liquidation, dissolution or
winding-up, (ii) the Company and the Operating Partnership expressly
acknowledge a trustee of such successor entity possessing the same powers
and duties as the Property Trustee as the holder of the Preferred
Securities but only if in the opinion of nationally recognized independent
counsel to the Trust experienced in matters under the Investment Company
Act of 1940, as amended (the "1940 Act"), such action is necessary so that
the successor entity will not be required to register as an "investment
company" under the 1940 Act, (iii) the Preferred Securities or any
Successor Securities are listed, or any Successor Securities will be listed
upon notification of issuance, on any national securities exchange or with
another organization on which the Preferred Securities are then listed or
quoted, (iv) such merger, consolidation or amalgamation does not cause the
Preferred Securities (including any Successor Securities) to be downgraded
by any nationally recognized statistical rating organization or (v) such
merger, consolidation, amalgamation does not adversely affect the powers,
special rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect.
Voting Rights
Except as provided below, under "--Modification and Amendment
of the Declaration" and as otherwise required by the Business Trust Act and
the Declaration, the holders of the Series A Preferred Securities will have
no voting rights. In any matter in which the Series A Preferred Securities
are entitled to vote, each Series A Preferred Security shall be entitled to
one vote.
If the Trust fails to make distributions in full on the
Series A Preferred Securities for six consecutive quarterly distribution
periods, (an "Appointment Event"), then the holders of Series A Preferred
Securities (voting separately as a class with all other series of Preferred
Securities upon which like voting rights have been conferred and are
exercisable) will be entitled, by the vote of holders of such Preferred
Securities representing a majority in aggregate liquidation amount of such
outstanding Preferred Securities, to appoint a Special Regular Trustee (who
need not be an officer or an employee of or otherwise affiliated with the
Company or the Operating Partnership) who shall have the same rights,
powers and privileges under the Declaration as the Regular Trustee. Any
holder of Series A Preferred Securities (other than the Company or the
Operating Partnership or any of their affiliates) shall have the right to
nominate any person to be appointed as Special Regular Trustee. For
purposes of determining whether the Trust has failed to pay distributions
in full for six consecutive quarterly distribution periods, distributions
shall be deemed to remain in arrears, notwithstanding any payments in
respect thereof, until full cumulative distributions have been or
contemporaneously are paid with respect to all quarterly distribution
periods terminating on or prior to the date of payment of such cumulative
distributions. Not later than 30 days after such right to appoint a
Special Regular Trustee arises, the Regular Trustee will convene a meeting
for the purpose of appointing a Special Regular Trustee. If the Regular
Trustee fails to convene such meeting within such 30-day period, the
holders of Series A Preferred Securities and any other series of Preferred
Securities upon which like voting rights have been conferred and are
exercisable representing in the aggregate 20% in liquidation amount of such
outstanding Preferred Securities will be entitled to convene such meeting.
The provisions of the Declaration relating to the convening and conduct of
the meetings of the holders will apply with respect to any such meeting.
If, at any such meeting, holders of less than a majority in aggregate
liquidation amount of Preferred Securities of all series entitled to vote
for the appointment of a Special Regular Trustee vote for such appointment,
no Special Regular Trustee shall be appointed. Any Special Regular Trustee
may be removed without cause at any time by holders of Preferred Securities
representing a majority in liquidation amount of the Preferred Securities
and holders of Series A Preferred Securities representing 20% in
liquidation amount of the Series A Preferred Securities shall be entitled
to convene a meeting for such purpose. Any Special Regular Trustee
appointed shall cease to be a Special Regular Trustee if the Appointment
Event pursuant to which the Special Regular Trustee was appointed and all
other Appointment Events have been cured and cease to be continuing.
If any proposed amendment or modification of the Declaration
would materially and adversely affect the powers, special rights,
preferences or privileges of the Series A Preferred Securities, then the
holders of outstanding Series A Preferred Securities will be entitled to
vote on such amendment or modification separately as a class, and such
amendment or modification shall not be effective except with the approval
of the holders of at least 66- 2/3% in liquidation amount of the
outstanding Series A Preferred Securities; provided, however, that any such
amendment or modification that would authorize, create or issue any
additional series of Preferred Securities on a parity with or junior to the
Series A Preferred Securities as to distributions or upon liquidation,
dissolution, winding-up or termination of the Trust shall be deemed not to
materially and adversely affect such powers, special rights, preferences or
privileges; and, provided, further, if holders of Series A Preferred
Securities have a right to vote as provided in this paragraph but such
amendment or modification arises out of, or is substantially similar to, an
amendment or modification of the Partnership Agreement as described in the
following paragraph and with respect to which the Property Trustee is
required to obtain the direction of holders of Series A Preferred
Securities as described below, then, to the extent permitted by applicable
law, no separate vote pursuant to the Declaration shall be required and the
vote obtained in connection with the Property Trustee seeking the direction
of holders of Series A Preferred Securities shall constitute complete and
sufficient action with respect to such amendment or modification of the
Declaration.
In the event the consent or vote of the Property Trustee as
the holder of the Series A Preferred L.P. Units of the Operating
Partnership is required with respect to any amendment or modification the
Partnership Agreement, the Property Trustee shall request the direction of
the holders of the Series A Preferred Securities with respect to such
amendment or modification and shall vote with respect to such amendment or
modification as directed by a majority in liquidation amount of the Series
A Preferred Securities voting together as a single class; provided,
however, that where any such amendment or modification under the
Partnership Agreement would require the consent of holders of Series A
Preferred L.P. Units representing a specified percentage greater than a
majority in liquidation amount of the Series A. Preferred L.P. Units, the
Property Trustee may only give such consent at the direction of the holders
of Series A Preferred Securities representing such specified percentage of
the aggregate liquidation amount of the Series A Preferred Securities; and,
provided, further, that the Property Trustee shall be under no obligation
to take any such action in accordance with the directions of the holders of
the Series A Preferred Securities unless the Property Trustee has obtained
an opinion of nationally recognized independent tax counsel recognized as
expert in such matters to the effect that the Trust will not as a result of
such action lose its status as REIT under the Code.
Any required approval or direction of holders of Series A
Preferred Securities may be given at a separate meeting of holders of Series A
Preferred Securities convened for such purpose, at a meeting of all of the
holders of Preferred Securities or pursuant to written consent. The Regular
Trustees will cause a notice of any meeting at which holders of Series A
Preferred Securities are entitled to vote, or of any matter upon which action
by written consent of such holders is to be taken, to be mailed to each holder
of record of Series A Preferred Securities. Each such notice will include a
statement setting forth (i) the date of such meeting or the date by which such
action is to be taken, (ii) a description of any resolution proposed for
adoption at such meeting on which such holders are entitled to vote or of such
matter upon which written consent is sought and (iii) instructions for the
delivery of proxies or consents.
No vote or consent of the holders of Series A Preferred
Securities will be required for the Trust to redeem and cancel Preferred
Securities of any series.
Notwithstanding that holders of Series A Preferred Securities
are entitled to vote or consent under any of the circumstances described
above, any of the Series A Preferred Securities at such time that are owned by
the Company, the Operating Partnership or by any entity directly or indirectly
controlling or controlled by or under direct or indirect common control with
the Company or the Operating Partnership shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
The procedures by which persons owning Series A Preferred
Securities registered in the name of and held by DTC or its nominee may
exercise their voting rights are described under "--Book-Entry Only
Issuance--The Depository Trust Company" below.
Subject to the right of holders of Series A Preferred
Securities to appoint a Special Regular Trustee upon the occurrence of an
Appointment Event, holders of the Series A Preferred Securities will have no
rights to increase or decrease the number of Trustees or to appoint, remove or
replace a Trustee, which rights are vested exclusively in the holders of the
Common Securities.
Conversion Rights
Except as otherwise provided under "--Restrictions on Ownership
and Transfer of Series A Preferred Securities," the Series A Preferred
Securities are not convertible into or exchangeable or exercisable for any
other property or securities of the Trust, the Company or the Operating
Partnership.
Modification and Amendment of the Declaration
The Declaration may be modified and amended on approval of the
Regular Trustees, provided, that, (i) if any proposed modification or
amendment provides for, or the Regular Trustees otherwise propose to effect,
(A) any action that would adversely affect the powers, preferences or special
rights of the Preferred Securities, whether by way of amendment to the
Declaration or otherwise, or (B) the dissolution, winding-up or termination of
the Trust other than pursuant to the terms of the Declaration, then, subject
to the provisions of the third paragraph under "--Voting Rights" above, the
holders of the outstanding Preferred Securities, voting together as a class
will be entitled to vote on such amendment or proposal and such amendment or
proposal shall not be effective except with the approval of at least 66 2/3%
in liquidation amount of the Preferred Securities, provided that if any
amendment or proposal referred to in clause (A) above would adversely affect
only a particular series of Preferred Securities, then only the affected class
will be entitled to vote on such amendment or proposal and such amendment or
proposal shall not be effective except with the approval of 66 2/3% in
liquidation amount of such series of Preferred Securities.
Notwithstanding any other provision in the Declaration, in the
event the holders of Series A Preferred Securities have the right to vote with
respect to a matter pursuant to the Declaration which voting right arises out
of, or is substantially similar to, a matter arising under the Partnership
Agreement on which the Property Trustee is required to obtain the direction of
holders of Series A Preferred Securities as described above, then, to the
extent permitted by applicable law, no separate vote pursuant to the
Declaration shall be required and the vote obtained in connection with the
Property Trustee seeking the direction of holders of the Series A Preferred
Securities shall constitute complete and sufficient action with respect to
such matter under the Declaration.
Notwithstanding the foregoing, (i) no amendment or modification
may be made to the Declaration unless the Regular Trustees shall have obtained
(A) either a ruling from the Internal Revenue Service or a written unqualified
opinion of nationally recognized independent tax counsel recognized as expert
in such matters to the effect that such amendment will not cause the Trust to
lose its status as REIT under the Code and (B) a written unqualified opinion
of nationally recognized independent counsel experienced in such matters to
the effect that such amendment will not cause the Trust to be an "investment
company which is required to be registered under the 1940 Act; (ii) certain
specified provisions of the Declaration may not be amended without the consent
of all of the holders of the Trust Securities, (iii) no amendment which
adversely affects the rights, powers and privileges of the Property Trustee
shall be made without the consent of the Property Trustee, (iv) the Article of
the Declaration relating to the obligation of the Company and certain members
of management of the Company to purchase the Common Securities may not be
amended without the consent of all holders of Common Securities, (v) the
Article of the Declaration relating to the obligation of the Operating
Partnership to pay certain obligations and expenses of the Trust as described
under "IAC Capital Trust" may not be amended without the consent of the
Operating Partnership, (vi) the rights of holders of Common Securities under
the Declaration to increase or decrease the number of, and to appoint, replace
or remove, Trustees (other than a Special Regular Trustee) shall not be
amended without the consent of each holder of Common Securities and (vii) the
rights of holders of Series A Preferred Securities under the Declaration to
appoint or remove a Special Regular Trustee shall not be amended without the
consent of each holder of Series A Preferred Securities.
The Declaration further provides that it may be amended without
the consent of the holders of the Trust Securities to (i) cure any ambiguity,
(ii) correct or supplement any provision in the Declaration that may be
defective or inconsistent with any other provision of the Declaration, (iii)
to add to the covenants, restrictions or obligations of the Company or the
Operating Partnership, and (iv) to conform to changes in, or a change in
interpretation or application of certain 1940 Act requirements by the
Commission, which amendment does not adversely affect the rights, preferences
or privileges of the holders of Preferred Securities.
Book-Entry Only Issuance--The Depository Trust Company
DTC will act as securities depositary for the Series A
Preferred Securities. The Series A Preferred Securities will be issued only
as fully registered securities registered in the name of DTC or its nominee.
One or more fully-registered global Series A Preferred Securities certificates
(each a "Series A Preferred Securities Global Certificate"), representing the
total aggregate number of Series A Preferred Securities, will be issued and
will be deposited with DTC.
The laws of some jurisdictions require that certain purchasers
of securities take physical delivery of securities in definitive form. Such
laws may impair the ability to transfer beneficial interests in a global
Series A Preferred Security.
DTC is a limited-purpose trust company organized under the
New York Banking Law, a "banking organization" within the meaning of the
New York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement
among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for
physical movement of securities certificates. Direct Participants include
securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC
is owned by a number of its Direct Participants and by the NYSE, the
American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its Participants are on file with the Securities and
Exchange Commission.
Upon issuance of a Series A Preferred Securities Global
Certificate, DTC will credit on its book-entry registration and transfer
system the number of Series A Preferred Securities represented by such Series
A Preferred Securities Global Certificate to the accounts of institutions that
have accounts with DTC. Ownership of beneficial interests in a Series A
Preferred Securities Global Certificate will be limited to Participants or
persons that may hold interests through Participants. The ownership interest
of each actual purchaser of each Preferred Security ("Beneficial Owner") is in
turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchases, but Beneficial Owners are expected to receive written confirmations
providing details of the transactions, as well as periodic statements of their
holdings, from the Direct or Indirect Participants through which the
Beneficial Owners purchased Series A Preferred Securities. Transfers of
ownership interests in the Series A Preferred Securities are to be
accomplished by entries made on the books of Participants acting on behalf of
Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the
Series A Preferred Securities; DTC's records reflect only the identity of the
Direct Participants to whose accounts such Series A Preferred Securities are
credited, which may or may not be the Beneficial Owners. The Participants
will remain responsible for keeping account of their holdings on behalf of
their customers. So long as DTC, or its nominee, is the owner of a Series A
Preferred Securities Global Certificate, DTC or such nominee, as the case may
be, will be considered the sole owner and holder of record of the Series A
Preferred Securities represented by such Series A Preferred Securities Global
Certificate for all purposes.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed
by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than
all of the Series A Preferred Securities are being redeemed, DTC will reduce
the amount of interest of each Direct Participant in the Series A Preferred
Securities in accordance with its procedures.
Although voting with respect to the Series A Preferred
Securities is limited, in those instances in which a vote is required, neither
DTC nor Cede & Co. itself will consent or vote with respect to the Series A
Preferred Securities. Under its usual procedures, DTC would mail an Omnibus
Proxy to the Trust as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Series A Preferred Securities are credited
on the record date (identified in a listing attached to the Omnibus proxy).
Distribution payments on the Series A Preferred Securities
represented by a Preferred Series Global Certificate will be made by the
Property Trustee to DTC. DTC's practice is to credit Direct Participants'
accounts on the relevant payment date in accordance with their respective
holdings shown on DTC's records unless DTC has reason to believe that it will
not receive payments on such payment date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices and will be the responsibility of such Participants and not of DTC,
the Trust or the Operating Partnership, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of distributions
to DTC is the responsibility of the Trust, disbursement of such payments to
Direct Participants is the responsibility of DTC, and disbursement of such
payments to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.
Except as provided herein, a Beneficial Owner in a global
Series A Preferred Security certificate will not be entitled to receive
physical delivery of Series A Preferred Securities. Accordingly, each
Beneficial Owner must rely on the procedures of DTC to exercise any rights
under the Series A Preferred Securities.
DTC may discontinue providing its services as securities
depository with respect to the Series A Preferred Securities at any time by
giving reasonable notice to the Trust. Under such circumstances, if a
successor securities depository is not obtained, Series A Preferred Security
certificates will be required to be printed and delivered. Additionally, the
Trust may decide to discontinue use of the system of book-entry transfers
through DTC (or a successor depository). In that event, certificates for the
Series A Preferred Securities will be printed and delivered.
The information in this section concerning DTC and DTC's
book-entry system has been obtained from sources that the Trust and the
Operating Partnership believe to be reliable. Neither the Trust nor the
Operating Partnership has any responsibility for the performance by DTC or its
Participants of their respective obligations as described hereunder or under
the rules and procedures governing their respective operations.
Registrar, Transfer Agent and Paying Agent
In the event the Series A Preferred Securities do not remain in
book-entry only form, the following provisions will apply:
Payment of distributions and payments on redemption of the
Series A Preferred Securities will be payable, the transfer of the Series A
Preferred Securities will be registrable, and Series A Preferred Securities
will be exchangeable for Series A Preferred Securities of other denominations
of a like aggregate liquidation amount, at the principal corporate trust
office of the Property Trustee in The City of New York; provided that payment
of distributions may be made at the option of the Regular Trustees on behalf
of the Trust by check mailed to the address of the persons entitled thereto
and that the payment on redemption of any Series A Preferred Security will be
made only upon surrender of such Series A Preferred Security to the Property
Trustee.
The Bank of New York or one of its affiliates will act as
registrar and transfer agent for the Series A Preferred Securities. The Bank
of New York will also act as paying agent and, with the consent of the Regular
Trustees, may designate additional paying agents.
Registration of transfers of Series A Preferred Securities will
be effected without charge by or on behalf of the Trust, but upon payment
(with the giving of such indemnity as the Trust or the Operating Partnership
may require) in respect of any tax or other governmental charges that may be
imposed in relation to it.
In the event of any redemption in part, the Trust shall not be
required to (i) issue, register the transfer of or exchange any Series A
Preferred Securities during a period beginning at the opening of business 15
days before any selection for redemption of Series A Preferred Securities and
ending at the close of business on the earliest date on which the relevant
notice of redemption is deemed to have been given to all holders of Series A
Preferred Securities to be redeemed and (ii) register the transfer of or
exchange any Series A Preferred Securities so selected for redemption, in
whole or in part, except the unredeemed portion of any Series A Preferred
Securities being redeemed in part. Holders of Series A Preferred Securities
to be redeemed shall surrender such Series A Preferred Securities at the place
designated in the notice of redemption and shall be entitled to the redemption
price and any accumulated and unpaid distributions payable upon such
redemption following such surrender.
Information Concerning the Property Trustee
The Property Trustee undertakes to perform only such duties as
are specifically set forth in the Declaration and shall exercise the same
degree of care as a prudent individual would exercise in the conduct of his or
her own affairs. Subject to such provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Declaration at
the request of any holder of Preferred Securities, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
might be incurred thereby. The Property Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Property Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
The Company, the Operating Partnership and certain of their
affiliates may maintain a deposit account and banking relationship with the
Property Trustee.
Governing Law
The Declaration and the Trust Securities will be governed by,
and construed in accordance with, the internal laws of the State of Delaware.
Miscellaneous
The Regular Trustees are authorized and directed to take such
action as they deem reasonable in order that the Trust (i) will not be deemed
to be an "investment company" required to be registered under the 1940 Act and
(ii) that the Trust will be classified for United States federal income tax
purposes as a REIT. In this connection, the Regular Trustees are authorized
to take any action, not inconsistent with applicable law, the certificate of
trust or the Declaration, that the Regular Trustees determine in their
discretion to be reasonable and necessary or desirable for such purposes, as
long as such action does not adversely affect the interests of holders of the
Trust Securities.
DESCRIPTION OF THE SERIES A PREFERRED L.P. UNITS
The Series A Preferred L.P. Units will be issued pursuant to
the Partnership Agreement. The following summarizes the material terms and
provisions of the Series A Preferred L.P. Units and is qualified in its
entirety by reference to the Partnership Agreement, which has been filed as an
exhibit to the registration statement of which this Prospectus forms a part.
General
The Operating Partnership is authorized to issue up to 25
million Preferred L.P. Units in one or more series. The General Partner has
the authority to establish the terms of each series, including the
preferences, conversion, and other rights, voting powers, restrictions,
limitations as to distributions, qualifications, and terms and conditions of
redemption, if any, by amending the Partnership Agreement. Such an amendment
does not require any vote or action by the holders of L.P. Units, except as
provided under applicable law.
Ranking
The Series A Preferred L.P. Units will, with respect to
distribution rights and rights upon liquidation, dissolution and winding-up of
the Operating Partnership, rank (i) senior to the G.P. Units and the Common
L.P. Units and (ii) on a parity with all other series of Preferred L.P. Units
issued by the Operating Partnership unless the terms of such other series
specifically provide that such series rank junior to the Series A Preferred
L.P. Units.
Distributions
Subject to the rights of holders of other series of Preferred
L.P. Units ranking on a parity with the Series A Preferred L.P. Units as to
the payment of distributions, the Trust, as the holder of the Series A
Preferred L.P. Units, will be entitled to receive, when, as and if declared by
the Operating Partnership, acting through the Company as the sole general
partner of the Operating Partnership, out of funds legally available for the
payment of distributions, cumulative cash distributions at the rate per annum
of ___% of the stated value of $25 per Series A Preferred L.P. Unit.
Distributions will be cumulative, will accumulate from the original date of
issuance and will be payable quarterly in arrears, on , ,
and of each year (if such day is a Business Day), commencing on _____,
1998. The amount of distributions payable for any period will be computed on
the basis of a 360-day year of twelve 30-day months and for any period shorter
than a full quarterly period for which distributions are computed, the amount
of the distribution payable will be computed on the basis of the actual number
of days elapsed in such a 30-day month.
Distributions on the Series A Preferred L.P. Units will be made
to the Property Trustee as the holder of record of the Series A Preferred L.P.
Units on the relevant record dates, which, as long as the Series A Preferred
Securities remain in book-entry form, will be one Business Day prior to the
relevant distribution payment date. In the event that the Series A Preferred
Securities do not continue to remain in book-entry only form, the Operating
Partnership shall have the right to select relevant record dates, which shall
be more than one Business Day prior to the relevant payment dates. The
Declaration provides that the payment dates or record dates for the Series A
Preferred Securities shall be the same as the payment dates and record dates
for the Series A Preferred L.P. Units. If any date on which distributions are
to be made on the Series A Preferred L.P. Units is not a Business Day, then
payment of the distribution to be made on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and
effect as if made on such date.
No distributions on the Series A Preferred L.P. Units shall
be declared or paid or set apart for payment by the Operating Partnership
at such time as the terms and provisions of any agreement of the Operating
Partnership, including any agreement relating to its indebtedness,
prohibits such declaration, payment or setting apart for payment or
provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration
or payment shall be restricted or prohibited by law. The Credit Facility
provides that the Operating Partnership may make distributions to its
partners to the extent necessary to enable the Company to make dividend
payments to its shareholders as required for the Company to maintain its
status as a REIT under the Code.
Distributions on the Series A Preferred L.P. Units will
never accumulate regardless of whether or not the Operating Partnership has
earnings, whether or not there are funds legally available for the payment
of such distributions, and whether or not such distributions are declared
and will accumulate to the extent that they are not paid as of the date on
which they first become payable. Accumulated and unpaid distributions will
not bear interest. So long as any Series A Preferred L.P. Units are
outstanding, no distribution shall be paid or declared on or with respect
to the Common L.P. Units or the G.P. Units or any other series of
outstanding Preferred L.P. Units ranking junior as to the payment of
distributions and upon liquidation, dissolution and winding-up of the
Operating Partnership to the Series A Preferred L.P. Units (collectively,
"Junior OP Units"), nor shall any sum or sums be set aside for or applied
to the purchase or redemption of the Series A Preferred L.P. Units or any
other series of outstanding Preferred L.P. Units or the purchase,
redemption or other acquisition for value of any Junior OP Units unless, in
each case, full cumulative distributions accumulated on all Series A
Preferred L.P. Units and all other series of outstanding Preferred L.P.
Units ranking on a parity with the Series A Preferred L.P. Units as to the
payment of distributions and upon liquidation, dissolution or winding-up of
the Operating Partnership have been paid in full, provided that the
foregoing will not prohibit distributions payable solely in Junior OP
Units, the exchange of Common L.P. Units for Common Stock of the Company
in accordance with the Exchange Rights set forth in the Partnership
Agreement, the repurchase of Common L.P. Units in connection with the
exercise by the holders thereof of the Cash Tender Rights set forth in the
Partnership Agreement, the exchange of Common L.P. Units for G.P. Units
as provided in the Partnership Agreement or the repayment, return,
forfeiture and cancellation of Common L.P. Units issued in connection with
land acquisitions by the Operating Partnership as and to the extent
provided pursuant to the purchase agreement relating to any such
acquisition. All distributions declared on the Series A Preferred L.P.
Units and any other series of outstanding Preferred L.P. Units ranking on
a parity with the Series A Preferred L.P. Units as to the payment of
distributions and upon liquidation, dissolution and winding-up of the
Operating Partnership shall be declared pro rata so that the amount of
distributions per unit declared per Series A Preferred L.P. Unit and such
other series of Preferred L.P. Units shall in all cases bear to each other
the same ratio that the respective distribution rights per unit of Series A
Preferred L.P. Units and such other series of Preferred L.P. Units (which
shall not include any accumulation in respect of unpaid distributions for
prior distribution periods if such other series of Preferred L.P. Units do
not have a cumulative distribution rights) bear to each other. Holders of
Series A Preferred L.P. Units shall not be entitled to any distributions,
payable in cash, property or otherwise, in excess of the full cumulative
distributions described herein.
Liquidation
Subject to the rights of holders of other series of
Preferred L.P. Units ranking on a parity with the Series A Preferred L.P.
Units, upon any voluntary or involuntary dissolution, liquidation, winding-
up or termination of the Operating Partnership, the holders of the Series A
Preferred L.P. Units will be entitled to receive out of the assets of the
Operating Partnership legally available for distribution, after payment or
provision for debt and other liabilities of the Operating Partnership an
amount equal to the stated value of $25 per Series A Preferred L.P. Unit,
plus accumulated and unpaid distributions thereon to the date of payment
and no more. If upon any such liquidation, dissolution, winding-up or
termination, there are insufficient assets to permit full payment to the
holders of Series A Preferred L.P. Units and any other series of
Outstanding Preferred L.P. Units ranking on a parity upon liquidation,
dissolution, winding-up or termination of the Operating Partnership with
the Series A Preferred L.P. Units, the holders of Series A Preferred L.P.
Units and such other series of Preferred L.P. Units shall be paid ratably
in proportion to the full distributable amount to which holders of Series A
Preferred L.P. Units and such other series of Preferred L.P. Units are
respectively entitled upon liquidation, dissolution, winding-up or
termination. The full preferential amount payable to holders of the Series
A Preferred L.P. Units and such other series of outstanding Preferred L.P.
Units upon any such liquidation, dissolution, winding-up or termination
will be paid in full before any distribution or payment is made to the
holders of Junior OP Units. Neither the consolidation or merger of the
Operating Partnership with or into any corporation, trust, or other entity
(or of any corporation, trust or entity with or into the Operating
Partnership) nor the sale, lease, or conveyance of all or substantially all
of the property or business of the Operating Partnership shall be deemed to
constitute a liquidation, dissolution, winding-up or termination of the
Operating Partnership.
Redemption
Except in the case of a Special Event (as defined herein),
the Series A Preferred L.P. Units may not be redeemed prior to _____. On
or after such date, the Operating Partnership shall have the right to
redeem the Series A Preferred L.P. Units, in whole or in part, from time
to time, upon not less than 30 nor more than 60 days' notice, at a
redemption price equal to $25 per Series A Preferred L.P. Unit plus
accumulated and unpaid distributions to the date of payment. Except in
connection with a dissolution, liquidation, winding-up or termination of
the Operating Partnership as described under "Liquidation" above, the
redemption price of the Series A Preferred L.P. Units (other than the
portion thereof consisting of accumulated but unpaid distributions) is
payable solely out of the sale proceeds of capital stock of the Company,
which will be contributed by the Company to the Operating Partnership as an
additional capital contribution, or L.P. Units of the Operating
Partnership and from no other source. Unless previously redeemed, the
Series A Preferred L.P. Units will be redeemed for cash upon termination
of the Operating Partnership. Unless sooner dissolved, the Operating
Partnership will terminate on December 31, 2092, which is the stated
maturity date of the Series A Preferred L.P. Units.
If, at any time, a Tax Event or Investment Company Event or
(each, a "Special Event") shall occur and be continuing, the Operating
Partnership shall have the right to redeem the Series A Preferred L.P.
Units in whole but not in part, as set forth below, provided, however,
that, if at the time there is available to the Operating Partnership or the
Trust the opportunity to eliminate, within a 90-day period, the Special
Event by taking some ministerial action (collectively, "Ministerial
Actions"), such as filing a form or making an election, or pursuing some
other similar reasonable measure, which in the sole judgment of the
Company, as general partner of the Operating Partnership, has or will cause
no adverse effect on the Trust, the Operating Partnership, the Company or
the holders of the Preferred Securities and will involve no material cost,
the Operating Partnership and the Trust will pursue such measure in lieu of
such redemption, provided further that the Operating Partnership shall have
no right to redeem the Series A Preferred L.P. Units while the Operating
Partnership or the Regular Trustees on behalf of the Trust are pursuing any
such Ministerial Action. The Operating Partnership shall have the right,
upon not less than 30 nor more than 60 days' notice, to redeem the Series A
Preferred L.P. Units in whole for cash as provided in the preceding
paragraph within 90 days following the occurrence of such Special Event
(subject to extension for the number of days Ministerial Actions are
pursued).
"Investment Company Event" means that the Operating
Partnership and the Regular Trustees shall have received an opinion of
nationally recognized independent counsel experienced in practice under the
1940 Act, that as a result of the occurrence of a change in law or
regulation or a change in interpretation or application of law or
regulation by any legislative body, court, governmental agency or
regulatory authority (a "Change in 1940 Act Law"), there is more than an
insubstantial risk that the Trust is or will be considered an "investment
company" which is required to be registered under the 1940 Act, which
Change in 1940 Act Law becomes effective on or after the date of this
Prospectus.
"Tax Event" means that the Operating Partnership and the
Regular Trustees shall have received an opinion of nationally recognized
independent tax counsel experienced in such matters that there is more than an
insubstantial risk that the Trust does not qualify, or within 90 days of the
date of such opinion will no longer qualify, as a REIT under the Code for any
reason whatsoever.
If the Operating Partnership gives a notice of redemption in
respect of Series A Preferred L.P. Units (which notice will be irrevocable)
then, by 12:00 noon, New York City time, on the redemption date, the Operating
Partnership will deposit irrevocably in trust for the benefit of the Series A
Preferred L.P. Units being redeemed funds sufficient to pay the applicable
redemption price and will give irrevocable instructions and authority to pay
such redemption price to the holders of the Series A Preferred L.P. Units. If
notice of redemption shall have been given and funds deposited as required,
then upon the date of such deposit, distributions will cease to accumulate on
the Series A Preferred L.P. Units called for redemption, such Series A
Preferred L.P. Units will not longer be deemed to be outstanding and all
rights of holders of such Series A Preferred L.P. Units so called for
redemption will cease, except the right of the holders of such Series A
Preferred L.P. Units to receive the applicable redemption price, but without
interest on such redemption price. If any date fixed for redemption of Series
A Preferred L.P. Units is not a Business Day, then payment of the redemption
price payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay) except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date fixed for redemption.
If payment of the redemption price in respect of the Series A Preferred L.P.
Units is improperly withheld or refused and not paid by the Operating
Partnership, distributions on such Series A Preferred L.P. Units will continue
to accumulate from the original redemption date to the date of payment, in
which case the actual payment date will be considered the date fixed for
redemption for purposes of calculating the applicable redemption price. If
fewer than all of the Series A Preferred L.P. Units are to be redeemed, the
Series A Preferred L.P. Units to be redeemed shall be selected by lot or pro
rata (as nearly as practicable without creating fractional units) or in some
other equitable manner determined by the Operating Partnership.
In the event of any redemption in part, the Operating
Partnership shall not be required to (i) issue, register the transfer of or
exchange any Series A Preferred L.P. Units during a period beginning at the
opening of business 15 days before any selection for redemption of Series A
Preferred L.P. Units and ending at the close of business on the earliest date
on which the relevant notice of redemption is deemed to have been given to all
holders of Series A Preferred L.P. Units to be redeemed and (ii) register the
transfer of or exchange any Series A Preferred L.P. Units so selected for
redemption, in whole or in part, except the unredeemed portion of any Series A
Preferred L.P. Units being redeemed in part. Holders of Series A Preferred
L.P. Units to be redeemed shall surrender such Series A Preferred L.P. Units
at the place designated in the notice of redemption and shall be entitled to
the redemption price and any accumulated and unpaid distributions payable upon
such redemption following such surrender.
The Operating Partnership may not redeem fewer than all the
outstanding Series A Preferred L.P. Units unless all accumulated terminating
on or prior to the date of redemption.
Notice of redemption will be mailed by the Operating
Partnership, postage prepaid, not less than 30 nor more than 60 days prior to
the redemption date, addressed to the respective holders of record of the
Series A Preferred L.P. Units to be redeemed at their respective addresses as
they appear on the transfer records of the Operating Partnership. No failure
to give or defect in such notice shall affect the validity of the proceedings
for the redemption of any Series A Preferred L.P. Units except as to the
holder to whom notice was defective or not given. Each notice shall state:
(i) the redemption date; (ii) the redemption price; (iii) the number of Series
A Preferred L.P. Units to be redeemed; (iv) the place or places where the
Series A Preferred L.P. Units is to be surrendered for payment of the
redemption price; and (v) that distributions on the Series A Preferred L.P.
Units to be redeemed will cease to accumulate on such redemption date. If
fewer than all of the Series A Preferred L.P. Units held by any holder are to
be redeemed, the notice mailed to such holder shall also specify the number of
Series A Preferred L.P. Units to be redeemed from such holder.
The holders of Series A Preferred L.P. Units at the close of
business on a distribution record date will be entitled to receive the
distribution payable with respect to such Series A Preferred L.P. Units on the
corresponding distribution payment date notwithstanding the redemption thereof
between such distribution record date and the corresponding distribution
payment date or the Operating Partnership's default in the payment of the
distribution due. Except as provided above, the Operating Partnership will
make no payment or allowance for unpaid distributions, regardless of whether
in arrears, on Series A Preferred L.P. Units called for redemption.
The Series A Preferred L.P. Units have a stated maturity of
December 31, 2092, and will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any other securities of the
Company or the Operating Partnership.
Voting Rights
Holders of the Series A Preferred L.P. Units will not have any
voting rights, except as set forth below and as otherwise required by law and
the Partnership Agreement. In any matter in which the Series A Preferred L.P.
Units is entitled to vote, each Unit shall be entitled to one vote.
If any proposed amendment or modification of the Partnership
Agreement would materially and adversely affect the powers, special rights,
preferences or privileges of the Series A Preferred L.P. Units, then the
holders of outstanding Series A Preferred L.P. Units will be entitled to vote
on such amendment or modification as a class, and such amendment or
modification shall not be effective except with the approval of the holders of
at least 66 2/3% in stated value of the outstanding Series A Preferred L.P.
Units; provided, however, that any such amendment or action that would
authorize, create or issue any additional series of Preferred L.P. Units
ranking on a parity with or junior to the Series A Preferred L.P. Units as to
distributions or upon liquidation, dissolution, winding-up or termination of
the Operating Partnership shall be deemed not to materially and adversely
effect such powers, special rights, preferences or privileges.
Miscellaneous
Upon issuance, the Series A Preferred L.P. Units will be fully
paid and non-assessable. The holders of Series A Preferred L.P. Units will
have no preemptive rights.
RELATIONSHIP BETWEEN THE PREFERRED SECURITIES
AND THE PREFERRED L.P. UNITS
As set forth in the Declaration, the Trust exists for the sole purpose of (a)
issuing its Preferred Securities (and, if applicable, Excess Preferred
Securities), (b) issuing its Common Securities as described herein and
investing the proceeds of such issuance in an interest bearing account at, or
a certificate of, a bank, (c) investing the proceeds from the sale of each
series of Preferred Securities in a corresponding series of Preferred L.P.
Units of the Operating Partnership and, with respect to the proceeds received
from the issuance of the Common Securities, in an interest bearing account in,
or a certificate of deposit of, a bank, and (d) engaging in such other
activities as are necessary, convenient or incidental thereto.
As long as distributions and other payments are made on the
Series A Preferred L.P. Units, such payments will be sufficient to cover
distributions and other payments due on the Series A Preferred Securities
primarily because (i) the aggregate stated value of Series A Preferred L.P.
Units held as trust assets will be equal to the aggregate liquidation amount
of the Series A Preferred Securities; (ii) the distribution rate and
distribution and other payment dates on the Series A Preferred L.P. Units will
match the distribution rate and distribution and other payment dates on the
Series A Preferred Securities; (iii) the Declaration provides that the
Operating Partnership shall reimburse all obligations (other than with respect
to the Trust Securities) and all costs and expenses of the Trust, including
any taxes and all costs and expenses with respect thereto, to which the Trust
may become subject, except for withholding taxes; and (iv) the Declaration
further provides that the Trustees shall not cause or permit the Trust, among
other things, to engage in any activity that is not consistent with the
limited purposes of the Trust. With respect to clause (iii) above, however,
no assurance can be given that the Operating Partnership will have sufficient
resources to enable it to pay such obligations, costs and expenses on behalf
of the Trust.
OPERATING PARTNERSHIP AGREEMENT
The following summary of certain provisions of the Partnership
Agreement, including the descriptions of certain provisions set forth
elsewhere in this Prospectus, is qualified in its entirety by reference to the
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
Management
The Operating Partnership is organized as a Delaware limited
partnership pursuant to the terms of the Partnership Agreement. Generally,
pursuant to the Partnership Agreement, the Company, as the sole general
partner of the Operating Partnership, will have full, exclusive and complete
responsibility and discretion in the management, operation and control of the
Operating Partnership, including the ability to cause the Operating
Partnership to enter into certain major transactions including acquisitions,
refinancings and the selection of property managers and any changes in the
Operating Partnership's distribution policies. The Board of Directors of the
Company will manage the affairs of the Operating Partnership. The Irvine
Company has the right to nominate three persons for election to the Board of
Directors so long as The Irvine Company, its stockholders or its affiliates
beneficially own at least 20% of the outstanding shares of Common Stock
(including for these purposes shares issuable upon exercise of Exchange Rights
set forth in the Partnership Agreement subject to the ownership limit
provision of the Company's Articles of Incorporation applicable to The Irvine
Company). In the event that this ownership falls below 20% but is at least
15%, The Irvine Company will have the right to nominate two persons for
election to the Board of Directors; and if this ownership falls below 15% but
is at least 10%, The Irvine Company will have the right to nominate one person
for election to the Board of Directors. Dispositions of properties are
subject to the condition that there will be sufficient cash distributed to
partners of the Operating Partnership to allow, subject to certain
limitations, all such partners (including the Company) to pay may tax
liabilities arising from the disposition and on the distribution itself.
The consent of a majority of the outstanding Common L.P. Units
will be required with respect to certain extraordinary actions involving the
Operating Partnership including (i) the amendment, modification or termination
of the Partnership Agreement, (ii) a general assignment for the benefit of
creditors or the appointment of a custodian, receiver or trustee for any of
the assets of the Operating Partnership, (iii) the institution of any
proceeding for bankruptcy of the Operating Partnership, (iv) the transfer of
any general partnership interest in the Operating Partnership, including
through any merger, consolidation or liquidation of the Company, subject to
certain exceptions, (v) the admission of any additional or substitute general
partner in the Operating Partnership; (vi) for the Company to take title to
assets (other than temporarily in connection with an acquisition prior to
contributing such assets to the Operating Partnership) or to conduct business
other than through the Operating Partnership; and (vii) for the Company or the
Operating Partnership to engage in any business other than the ownership,
construction, development and operation of apartment communities. The
Partnership Agreement requires, absent receipt of consent, that title to
assets be in the Operating Partnership in order to maintain a one-for-one
exchange ratio between Common L.P. Units and shares of Common Stock. If such
consent is obtained, the Company and The Irvine Company agree to negotiate in
good faith to amend the Partnership Agreement, including the mechanics for
calculating the exchange ratio, in order to reflect such direct ownership of
assets by the Company.
In addition, until such time as the Company owns 90% or more of
the total Common L.P. Units in the Operating Partnership, the consent of the
limited partners holding a majority interest in the Common L.P. Units will
also be required with respect to the liquidation of the Operating Partnership,
the sale or other transfer of all or substantially all of the assets of the
Operating Partnership and certain mergers and business combinations resulting
in the complete disposition of all Common L.P. Units.
Holders of Preferred L.P. Units will have no voting rights
except as described under "Description of the Series A Preferred L.P.
Units--Voting Rights."
The Company has unilateral control over the Operating
Partnership but The Irvine Company and its nominees to the Company's Board of
Directors will have substantial influence over the affairs of the Company and
thus the Operating Partnership. The Partnership Agreement prohibits the
Operating Partnership from lending money to any Irvine Person.
Transfer of L.P. Units
The Preferred L.P. Units held by the Trust as trust assets may
not be transferred except to a successor entity as provided under "Description
of Series A Preferred Securities--Merger, Consolidation or Amalgamation of the
Trust."
The Partnership Agreement provides that limited partners may
transfer their Common L.P. Units subject to certain limitations. Other than
transfers to or among The Irvine Company or affiliates of The Irvine Company,
transfers resulting from a dividend or other distribution by The Irvine
Company to its stockholders or pledges securing loans made by financial
institutions, holders of Common L.P. Units may only transfer their Common L.P.
Units to a purchaser who is an accredited investor within the meaning of
Regulation D under the Securities Act.
In addition, no transfer of Common L.P. Units by the limited
partners may be made in violation of certain regulatory and other restrictions
set forth in the Partnership Agreement. Any other transfers may be made only
with the prior written consent of the Company as the sole general partner of
the Operating Partnership. Other than with respect to transfers to or among
The Irvine Company or affiliates of The Irvine Company, transfers resulting
from a dividend or other distribution by The Irvine Company to its
stockholders or pledges securing loans made by financial institutions, the
Exchange Rights and the Cash Tender Rights will no longer be applicable to
Common L.P. Units so transferred and the transferee will not have any rights
to nominate persons to the Board of Directors of the Company.
Issuance of Additional L.P. Units
As general partner of the Operating Partnership, the Company
has the ability to cause the Operating Partnership to issue additional G.P.
Units and L.P. Units in the Operating Partnership. In addition, in the event
of the exercise of an option or the delivery of stock pursuant to the 1993
Stock Plan, the 1996 Stock Plan, the 1993 Stock Plan for Directors and the
Company's Dividend Reinvestment and Additional Cash Investment Plan, the
Operating Partnership will issue additional G.P. Units to the Company. See
"Policies With Respect to Certain Activities--Financing Policies" for certain
participation rights granted to The Irvine Company in connection with
issuances of L.P. Units.
Exchange Rights
The Irvine Company and certain related persons have the right
(subject to the ownership limit provision of the Company's Articles of
Incorporation applicable to The Irvine Company), exercisable once in each
twelve-month period, to exchange up to one-third of the number of Common L.P.
Units owned by them for shares of Common Stock or if The Irvine Company and
certain related persons own 6,149,000 Common L.P. Units or less, then they
may, subject to such ownership limit provision, exchange all of their Common
L.P. Units for shares of Common Stock. As of October 31, 1997, The Irvine
Company and its affiliates owned 24,199,080 Common L.P. Units in the
aggregate. The exchange ratio is one share of Common Stock for each Common
L.P. Unit, subject to adjustment in certain events, including the Company
paying a dividend or making a distribution on the Common Stock in shares of
Common Stock and subdivisions and combinations of the Common Stock. Common
L.P. Units that are acquired by the Company pursuant to the exercise of
Exchange Rights will be converted automatically into G.P. Units in the
Operating Partnership.
The exercise of Exchange Rights is subject to (i) the
expiration or termination of the applicable waiting period, if any, under
the Hart-Scott-Rodino Antitrust Improvement Act of 1976, and (ii) the
satisfaction of the applicable ownership limit provision of the Articles of
Incorporation, after giving effect to the exchange. For purposes of
determining the number of Common L.P. Units which may be exchanged for
shares of Common Stock pursuant to the Exchange Rights at any point in
time, there shall be taken into account the number of issued and
outstanding shares of Common Stock which are beneficially owned by The
Irvine Company and its affiliates at such time. Accordingly, beneficial
ownership by The Irvine Company and its affiliates of shares of Common
Stock reduces the number of Common L.P. Units which may be exchanged
pursuant to the Exchange Rights at any point in time.
Cash Tender Rights
The Irvine Company and certain related persons have the right,
exercisable once in any twelve-month period, subject to certain limitations,
to sell to the Company for cash up to one-third of the number of Common L.P.
Units owned by them or if The Irvine Company and certain related persons own
6,149,000 Common L.P. Units or less, then they may tender all of their Common
L.P. Units to the Company. Common L.P. Units that are acquired by the Company
as a result of the exercise of Cash Tender Rights will be converted
automatically into G.P. Units in the Operating Partnership.
The Company will have to pay for such Common L.P. Units solely
out of the proceeds of a registered offering of newly issued shares of Common
Stock. The price payable for a Common L.P. Unit tendered will be equal to the
average of the daily market prices for the Common Stock for the 10 consecutive
trading days immediately preceding the date of receipt by the Company of a
notice of cash tender (each Common L.P. Unit being equivalent to one share of
Common Stock, subject to adjustment as described above), except that the
purchase price for such Common L.P. Units will be reduced by any decrease in
the price of the Common Stock that occurs between the exercise date and the
pricing of the Common Stock being sold pursuant to the registered offering and
underwriting discounts and commissions. The Irvine Company will thus bear the
risk of any such reduction, subject to certain withdrawal rights. Any
proceeds in excess of the purchase price will be for the sole benefit of the
Company. The Company shall be required to promptly file with the Commission a
registration statement with respect to any registered offering.
After an exercise of Cash Tender Rights, The Irvine Company may
not exercise its Cash Tender Rights until 90 days after the completion of the
registered offering of shares of Common Stock if applicable.
Funding of Investments
The Partnership Agreement provides that if the Operating
Partnership requires additional funds to pursue its investment objectives, the
Company may fund such investments by raising additional equity capital and
making a capital contribution to the Operating Partnership or by borrowing
such funds and lending the net proceeds thereof to the Operating Partnership.
If the Company funds an investment as a contribution to capital and purchase
of G.P. Units or lends funds to the Operating Partnership, the holders of
Common L.P. Units (subject to certain minor exceptions) will have the right to
participate in such funding or loan on a pro rata basis. In the event that
such holders do not participate in such funding, the Company's interest in the
Operating Partnership will be increased based upon the amount of such
additional capital contributions and the value of the Operating Partnership at
the time of such contributions. See "Policies With Respect to Certain
Activities--Financing Policies." The amount of any such loan may be limited
by the requirement that the Company derive at least 75% of its gross income
from certain investments related to real property. See "Certain Federal
Income Tax Considerations."
Tax Accounting
The Operating Partnership has a taxable year ending on December
31, pursuant to a Code provision that requires a partnership to adopt the same
tax year as its majority in interests partner.
Term
The Operating Partnership will continue in full force and
effect until December 31, 2092 or until sooner dissolved pursuant to the terms
of the Partnership Agreement.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax
considerations regarding an investment in Preferred Securities is based on
current law and is for general information only. See "Recent Legislation
Applicable to REITs," below, for a discussion of changes to the Code made by
the Taxpayer Relief Act of 1997. Such changes generally do not apply to the
Trust until its taxable year beginning January 1, 1998. This discussion
addresses initial holders only, and does not purport to deal with all aspects
of taxation that may be relevant to particular investors in light of their
personal investment or tax circumstances, or, except to the extent discussed
under the headings "Taxation of Tax-Exempt Holders" and "Taxation of Foreign
Holders" below, to certain types of investors (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) that are subject to special treatment under the federal income tax
laws.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE,
OWNERSHIP AND SALE OF PREFERRED SECURITIES AND OF THE TRUST'S ELECTION TO BE
TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE
AND ELECTION.
Taxation of the Trust
General. It is the opinion of Davis Polk & Wardwell that under
current law the Trust, and not the holders of the Preferred Securities, will
be treated as the owner of the Preferred L.P. Units for federal income tax
purposes.
The REIT provisions of the Code are highly technical and
complex. The following sets forth the material aspects of the provisions of
the Code that govern the federal income tax treatment of a REIT and its
beneficial owners. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all of which are subject
to change which may apply retroactively.
The Trust will elect to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1997, and the Trust
intends to operate so as to qualify as a REIT. In the opinion of Davis Polk &
Wardwell, commencing with the Trust's taxable year ending December 31, 1997,
the Trust will be treated as being organized in conformity with the
requirements for qualification as a REIT, and its proposed method of operation
will enable it to meet the requirements for qualification and taxation as a
REIT under the Code. It must be emphasized that this opinion is based and
conditioned upon certain assumptions and representations made by the Trust and
the Company as to factual matters concerning the business and properties as
set forth in this Prospectus. The opinion is expressed as of its date and
Davis Polk & Wardwell has no obligation to advise holders of Preferred
Securities of any subsequent change in the matters stated, represented or
assumed or any subsequent change in the applicable law. Moreover,
qualification and taxation as a REIT depends upon the Trust's ability to meet,
through actual annual operating results, distribution levels, diversity of
ownership and various other qualification tests imposed under the Code (as
discussed below), the results of which will not be reviewed by Davis Polk &
Wardwell. Accordingly, no assurance can be given that the actual results of
the Trust's operation for any one taxable year will satisfy such requirements.
See "--Failure to Qualify." An opinion of counsel is not binding on the
Internal Revenue Service (the "IRS"), and no assurance can be given that the
Service will not challenge the Trust's eligibility for taxation as a REIT.
If the Trust qualifies for taxation as a REIT, it generally
will not be subject to federal corporate income tax on its net income that is
currently distributed to holders of Trust Securities. This treatment
substantially eliminates the "double taxation" (at the corporate and
stockholder levels) that generally results from investment in an entity that
is taxable as a corporation. However, the Trust will be subject to federal
income tax as follows: First, the Trust will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains, if any. Second, under certain circumstances, the Trust may be
subject to the "alternative minimum tax" on its items of tax preference.
Third, if the Trust has net income from prohibited transactions (which are, in
general, certain sales or other dispositions of property held primarily for
sale to customers in the ordinary course of business other than foreclosure
property), such income will be subject to a 100% tax. Fourth, if the Trust
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), but has nonetheless maintained its qualification as a
REIT because certain other requirements have been met, it will be subject to a
100% tax on an amount equal to (a) the gross income attributable to the
greater of the amount by which the Trust fails the 75% or 95% test multiplied
by (b) a fraction intended to reflect the Trust's profitability. Fifth, if
the Trust should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, the Trust would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed. In addition, the Trust could also be subject to tax in certain
situations and on certain transactions not presently contemplated.
Requirements for Qualification. The Code defines a REIT as a
corporation, trust or association (1) that is managed by one or more trustees
or Directors; (2) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for the special Code
provisions applicable to REITs; (4) that is neither a financial institution
nor an insurance company subject to certain provisions of the Code; (5) the
beneficial ownership of which is held by 100 or more persons; (6) in which,
during the last half of each taxable year, not more than 50% in value of the
outstanding stock is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities); and (7)
which meets certain other tests described below (including with respect to the
nature of its income and assets). The Code provides that conditions (1) to
(4), inclusive, must be met during the entire taxable year, and that condition
(5) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. The
Declaration provides for restrictions regarding the transfer of Preferred
Securities, which provisions are intended to assist the Trust in continuing to
satisfy the ownership requirements described in conditions (5) and (6) above.
Such transfer restrictions are described in "Description of the Series A
Preferred Securities -- Restrictions on Ownership and Transfer of Series A
Preferred Securities."
To monitor the Trust's compliance with the ownership
requirements, the Trust is required to maintain records regarding the actual
ownership of the Trust Securities. To do so, the Trust must demand written
statements each year from the record holders of certain percentages of Trust
Securities in which the record holders are to disclose the actual owners of
the securities (i.e., the persons required to include in gross income the REIT
dividends). A list of those persons failing or refusing to comply with this
demand must be maintained as part of the Trust's records. A holder of Trust
Securities who fails or refuses to comply with the demand must submit a
statement with its tax return disclosing the actual ownership of the
securities and certain other information.
In addition, a corporation or trust may not elect to become a
REIT unless its taxable year is the calendar year. The Trust satisfies this
requirement.
Ownership of Partnership Interests. In the case of a REIT that
is a partner in a partnership, regulations provide that the REIT will be
deemed to own its proportionate share of the partnership's assets and to earn
its proportionate share of the partnership's income. In addition, the assets
and gross income of the partnership retain the same character in the hands of
the REIT for purposes of the gross income and asset tests applicable to REITs
as described below. Thus, the Trust's proportionate share of the assets,
liabilities and items of income of the Operating Partnership will be treated
as assets, liabilities and items of income of the Trust for purposes of
applying the REIT requirements described below. A summary of the rules
governing the federal income taxation of partnerships and their partners is
provided below in "--Tax Aspects of the Trust's Investments in the Operating
Partnership."
Income Tests. In order to maintain qualification as a REIT,
the Trust annually must satisfy three gross income requirements. First, at
least 75% of the Trust's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments in real property or mortgages
on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments.
Second, at least 95% of the Trust's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, and from other dividends, interest and gain from the
sale or disposition of stock or securities (or from any combination of the
foregoing).
Rents received by the Trust through the Operating Partnership
will qualify as "rents from real property" in satisfying the gross income
requirements described above only if several conditions are met, including the
following. 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." Moreover, for rents
received to qualify as "rents from real property," the 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 which the
REIT derives no revenue. However, the Trust or its affiliates are permitted
to, and do 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 to the occupant of the property.
If the Trust fails to satisfy one or both of the 75% or 95%
gross income tests (though not the 30% gross income test) for any taxable
year, it may nevertheless qualify as a REIT for such year if it is entitled to
relief under certain provisions of the Code. These relief provisions will be
generally available if the Trust's failure to meet such tests was due to
reasonable cause and not due to willful neglect, the Trust attaches a schedule
of the sources of its income to its 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 the Trust would be
entitled to the benefit of these relief provisions. If these relief
provisions are inapplicable to a particular set of circumstances involving the
Trust, the Trust will not qualify as a REIT. As discussed above in
"--General," even where these relief provisions apply, a tax is imposed with
respect to the excess net income.
Asset Tests. The Trust, at the close of each quarter of its
taxable year, must also satisfy two tests relating to the nature of its
assets. First, at least 75% of the value of the Trust's total assets must be
represented by real estate assets (including its allocable share of real
estate assets held by the Operating Partnership), stock or debt instruments
held for not more than one year purchased with the proceeds of an offering of
beneficial interests of the Trust, cash, cash items and government securities.
Second, the remaining 25% of the Trust's total assets may be invested in
securities, subject to the following restrictions: (i) the value of any one
issuer's securities owned by the Trust may not exceed 5% of the value of the
Trust's total assets, and (ii) the Trust may not own more than 10% of any one
issuer's outstanding voting securities. The Trust does not intend to invest
in securities other than Preferred L.P. Units and certain interest bearing
obligations.
Annual Distribution Requirements. The Trust, in order to
qualify as a REIT, is required to distribute dividends (other than capital
gain dividends) to its beneficial owners in an amount at least equal to (A)
the sum of (i) 95% of the Trust's "REIT taxable income" (computed without
regard to the dividends paid deduction and the Trust's net capital gain)
and (ii) 95% of the net income (after tax), if any, from foreclosure
property, minus (B) the sum of certain items of noncash income. Such
distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before the Trust timely files its
tax return for such year and if paid with or before the first regular
dividend payment after such declaration. To the extent that the Trust does
not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at the capital gains or ordinary corporate tax
rates, as the case may be. Furthermore, if the Trust should fail to
distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain
income for such year, and (iii) any undistributed taxable income from prior
periods, the Trust would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed. The
Trust intends to make timely distributions sufficient to satisfy this
annual distribution requirement.
Under certain circumstances, the Trust may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to holders of Trust Securities in a later year, which may be
included in the Trust's deduction for dividends paid for the earlier year.
Thus, the Trust may be able to avoid being taxed on amounts distributed as
deficiency dividends; however, the Trust will be required to pay interest
based on the amount of any deduction taken for deficiency dividends.
Failure to Qualify. If the Trust fails to qualify for taxation
as a REIT in any taxable year, and the relief provisions do not apply, the
Trust will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
beneficial owners in any year in which the Trust fails to qualify will not be
deductible by the Trust nor will they be required to be made. In such event,
to the extent of current and accumulated earnings and profits, all
distributions to beneficial owners will be taxable as ordinary income, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief
under specific statutory provisions, the Trust will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Trust would be entitled to such statutory relief.
Tax Aspects of the Trust's Investment in the Operating Partnership
General. Substantially all of the Trust's investments are held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities that are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income,
gain, loss, deduction and credit of a partnership, and are potentially subject
to tax thereon, without regard to whether the partners receive a distribution
from the partnership. The Trust will include in its income its proportionate
share of partnership items for purposes of the various REIT income tests.
Moreover, for purposes of the REIT asset tests, the Trust will include its
proportionate share of assets held by the Operating Partnership. See
"--Taxation of the Trust--Ownership of Partnership Interests."
Sale of the Properties. The Trust's share of any gain realized
by the Operating Partnership on the sale of any property held as inventory or
primarily for sale to customers in the ordinary course of business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "--Taxation of the Trust--Requirements for Qualification"
and "--Taxation of the Trust--Income Tests." Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a partnership's 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 intends to hold the Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning, and operating the Properties (and other
apartment properties) and to make such occasional sales of the Properties,
including peripheral land, as are consistent with the Trust's investment
objectives.
Taxation of Taxable Domestic Holders
General. As long as the Trust qualifies as a REIT,
distributions made to the Trust's taxable domestic holders 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 corporations.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent that they do not exceed the Trust's
actual net capital gain for the taxable year) without regard to the period for
which the holder has held its Preferred Security. It is expected that all
distributions from the Trust will be designated as ordinary income.
Gain from the sale of Preferred Securities will be included in
income as capital gain assuming the securities are a capital asset in the
hands of the holder. Capital gains of individuals derived in respect of
capital assets held for more than one year are eligible for reduced rates of
taxation depending upon the holding period of such assets. In addition, any
dividend declared by the Trust in October, November or December of any year
and payable to a holder of record on a specified date in any such month shall
be treated as both paid by the Trust and received by the holder on December 31
of such year, provided that the dividend is actually paid by the Trust during
January of the following calendar year.
In general, any loss upon a sale or exchange of shares by a
holder who has held such shares for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss to the
extent of distributions from the Trust required to be treated by such holder
as long-term capital gain.
Recent Legislation Applicable to REITs
The Taxpayer Relief Act of 1997 enacted on August 5, 1997 (the
"Act") made various changes to the Code, including to the provisions that
govern the federal income tax treatment of REITs. These changes to the REIT
provisions are generally effective for taxable years beginning after the date
of the enactment of the Act. For most REITs, including the Trust, these
changes to the REIT provisions are therefore not effective until taxable years
beginning on January 1, 1998.
Changes to the REIT provisions under the Act include the
following. First, a REIT will be able to provide certain services directly
without disqualifying all of the rent from the property where the services
are provided if the amount treated as received for those services does not
exceed 1% of the gross income from the property. Second, a REIT's wholly-
owned subsidiary will be treated as a "qualified REIT subsidiary" even
where the REIT had not always owned that subsidiary. Third, the Act
repeals the requirement that a REIT must derive less than 30% of its gross
income from the sale of stock or securities held for less than one year,
real property held less than four years, and property sold or disposed of
in a "prohibited transaction." Finally, a REIT will be able to elect to
retain and pay income tax on net long-term capital gains. In that event,
REIT shareholders would include in income their share of the long-term
capital gains retained by the REIT and would receive a credit for their
share of the taxes paid by the REIT.
Taxation of Tax-Exempt Holders
Based upon a published IRS ruling, distributions by the Trust
to a holder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisitions of its shares with "acquisition indebtedness" within
the meaning of the Code and the Preferred Securities are not otherwise used in
an unrelated trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of
the dividends paid by the Trust may be treated as UBTI to certain domestic
private pension trusts if the Trust is treated as a "pension-held REIT." The
Trust does not expect to become a "pension-held REIT." If the Trust were to
become a pension-held REIT, these rules generally would only apply to certain
pension trusts that hold more than 10% of the Trust's stock.
Taxation of Foreign Holders
The following is a discussion of certain anticipated U.S.
federal income and estate tax consequences of the ownership and disposition of
the Preferred Securities applicable to Non-U.S. Holders of such securities. A
"Non-U.S. Holder" is any holder other than (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized in the
United States or under the laws of the United States or of any state thereof,
(iii) an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source, or (iv) a trust whose income is
includible in gross income for U.S. federal income tax purposes regardless of
its source or, a trust if a United States court 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. The discussion is based on current law and is for general information
only. The discussion addresses only certain and not all aspects of U.S.
federal income and estate taxation.
Recently issued United States Treasury Regulations (the "New
Withholding Tax Regulations") will be effective with respect to dividends paid
after December 31, 1999, subject to certain transition rules. The discussion
below is not intended to be a complete discussion of the New Withholding Tax
Regulations, and prospective investors are urged to consult their tax advisors
with respect to the effect the New Withholding Tax Regulations would have if
adopted.
Distributions From the Trust.
1. Ordinary Dividends. The portion of dividends received by
Non-U.S. Holders payable out of the Trust's current and accumulated earnings
and profits that is not attributable to capital gains of the Trust and that is
not effectively connected with a U.S. trade or business of the Non-U.S. Holder
will be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-U.S. Holders will not be considered engaged in a
U.S. trade or business solely as a result of their ownership of Preferred
Securities. In cases where the dividend income from a Non-U.S. Holder's
investment in Preferred Securities is (or is treated as) effectively connected
with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S.
Holder generally will be subject to U.S. tax at graduated rates, in the same
manner as a U.S. Holders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder
that is a foreign corporation).
Under the New Withholding Tax Regulations, to obtain a reduced
rate of withholding under a treaty, a Non-U.S. Holder will generally be
required to provide an Internal Revenue Service Form W-8 certifying such
Non-U.S. Holder's entitlement to benefits under the treaty. The New
Withholding Tax Regulations will also provide special rules to determine
whether, for purposes of determining the applicability of a tax treaty,
dividends paid to a Non-U.S. Holder that is an entity should be treated as
paid to the entity or those holding an interest in that entity.
2. Capital Gain Dividends. Although the Operating
Partnership intends to allocate only ordinary income to the Trust, the IRS
could take the position, in the event the Operating Partnership sells
property at a gain, that a portion of the gain should be allocated to the
Trust. Under the Foreign Investment in Real Property Act of 1980
("FIRPTA"), a distribution made by the Trust to a Non-U.S. Holder, to the
extent attributable to gains from dispositions of United States Real
Property Interests ("USRPIs") such as the Properties ("USRPI Capital
Gains"), will be considered effectively connected with a U.S. trade or
business of the Non-U.S. holder and subject to U.S. income tax at the rate
applicable to U.S. individuals and corporations, without regard to whether
the distribution is designated by the Trust as a capital gain dividend. In
addition, the Trust will be required to withhold tax equal to 35% of the
amount of dividends to the extent the dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate holder that is not entitled
to treaty exemption.
Disposition of Stock of the Trust. Unless the Trust's stock
constitutes a USRPI, a sale of such stock by a Non-U.S. Holder generally will
not be subject to U.S. taxation under FIRPTA. The stock will not constitute a
USRPI if the Trust is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Holders.
If the Trust does not constitute a domestically controlled
REIT, a Non-U.S. Holder's sale of Preferred Securities generally will still
not be subject to tax under FIRPTA as a sale of a USRPI provided that (i) the
stock is "regularly traded" (as defined by applicable Treasury regulations) on
an established securities market (e.g., the NYSE, on which the Preferred
Securities will be listed) and (ii) the selling Non-U.S. Holder held 5% or
less of the Trust's outstanding stock at all times during a specified testing
period.
If gain on the sale of Preferred Securities were subject to
taxation under FIRPTA, the Non-U.S. Holder would be subject to taxation in
accordance with Section 897 of the Code, and the purchaser of the Preferred
Securities could be required to withhold 10% of the purchase price and remit
such amount to the IRS.
Capital gains on the sale of Preferred Securities that are not
subject to FIRPTA will nonetheless be taxable in the United States to a
Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's investment in
Preferred Securities is effectively connected with a U.S. trade or business
conducted by the Non-U.S. Holder, the Non-U.S. Holder will generally be
subject to the same treatment as a U.S. Holder with respect to such gain; and
(ii) if the Non-U.S. Holder is a nonresident alien who was present in the
United States for 183 days or more during the taxable year and has a "tax
home" in the United States, the nonresident alien individual will be subject
to a 30% tax on the individual's capital gain.
Estate Tax. Preferred Securities 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
includible 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
includible in the estate for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding. The Trust must
report annually to the Service and to each Non-U.S. Holder the amount of
dividends (including any capital gain dividends) paid to, and the tax withheld
with respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these returns may also be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
Under current law, U.S. backup withholding (which generally is
imposed at the rate of 31% on certain payments to persons that fail to furnish
the information required under the U.S. information reporting requirements)
and information reporting will generally not apply to dividends (including any
capital gain dividends) paid on Preferred Securities to a Non-U.S. Holder at
an address outside the United States.
The New Withholding Tax Regulations will alter the foregoing
rules in certain respects. Among other things, the New Withholding Tax
Regulations will provide certain presumptions under which a Non-U.S. Holder
would be subject to backup withholding and information reporting unless the
Trust receives certification from the holder of its non-U.S. status.
The payment of the proceeds from the disposition of Preferred
Securities to or through a U.S. office of a broker will be subject to
information reporting and backup withholding unless the owner, under penalties
of perjury, certifies, among other things, its status as a Non-U.S. Holder, or
otherwise establishes an exemption. The payment of the proceeds from the
disposition of stock to or through a non-U.S. office of a non-U.S. broker
generally will not be subject to backup withholding and information reporting.
Other Tax Consequences
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective holders of Preferred Securities should recognize
that the present federal income tax treatment of an investment in the Trust
may be modified by legislative, judicial or administrative action at any time,
and that any such action may affect investments and commitments previously
made. Revisions in federal tax laws and interpretations thereof could
adversely affect the tax consequences of an investment in the Trust.
State and Local Taxes. The Trust and its holders may be
subject to state or local taxation in various state or local jurisdictions,
including those in which it, the Operating Partnership or they transact
business or reside. The state and local tax treatment of the Trust and its
holders may not conform to the federal income tax consequences discussed
above. Consequently, prospective holders of Preferred Securities should
consult their tax advisors regarding the effect of state and local tax laws on
an investment in the Trust.
UNDERWRITING
Subject to the terms and conditions set forth in an
underwriting agreement (the "Underwriting Agreement"), the Trust has agreed to
sell to each of the Underwriters named below, and each of the Underwriters,
for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"),
Goldman, Sachs & Co., J.P. Morgan Securities Inc. and Smith Barney Inc. are
acting as representatives (collectively, the "Representatives"), has severally
agreed to purchase from the Trust, the number of Series A Preferred Securities
set forth opposite its name below. The Underwriting Agreement provides that
the obligations of the Underwriters are subject to certain conditions
precedent, and that the Underwriters will be obligated to purchase all of the
Series A Preferred Securities if any are purchased. Under certain
circumstances, the commitments of the non-defaulting Underwriters may be
increased.
<TABLE>
<CAPTION>
Number of
Preferred
Underwriter Securities
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................
Goldman, Sachs & Co................................
J.P. Morgan Securities Inc.........................
Smith Barney Inc...................................
Total..................................... 4,000,000
</TABLE>
The Representatives have advised the Trust that the
Underwriters propose to offer the Series A Preferred Securities in part
directly to the public at the initial public offering price set forth on
the cover page of this Prospectus, and in part to certain securities
dealers at such price less a concession not in excess of $ per Series A
Preferred Security. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per Series A Preferred Security to
certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Trust has granted an option to the Underwriters,
exercisable for a period of 30 days after the date of this Prospectus, to
purchase up to 600,000 additional Series A Preferred Securities solely to
cover overallotments, if any, at the price to public, less the underwriting
discount set forth on the cover page of this Prospectus. If the Underwriters
exercise this option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof
which the number of Series A Preferred Securities to be purchased by it in the
foregoing table bears to the 4,000,000 Series A Preferred Securities initially
offered hereby.
The Trust, the Operating Partnership, and the partners of the
Operating Partnership have agreed that they will not, directly or indirectly,
for a period of 90 days after the date of the Underwriting Agreement, except
with the prior written consent of Merrill Lynch, offer, sell, or enter into
any agreement to sell, or otherwise dispose of (a) any securities of the Trust
(other than the Series A Preferred Securities offered hereby and the Common
Securities) and (b) any Preferred L.P. Units (other than the Series A
Preferred L.P. Units to be sold to the Trust as described in this Prospectus)
or any other security of the Operating Partnership that is substantially
similar to the Series A Preferred L.P. Units.
Application will be made to list the Series A Preferred
Securities on the NYSE under the symbol " ". If approved for listing,
trading of the Series A Preferred Securities on the NYSE is expected to
commence within 30 days after initial delivery of the Series A Preferred
Securities. Prior to this Offering, there has been no public market for the
Series A Preferred Securities. In order to meet one of the requirements for
listing the Series A Preferred Securities on the NYSE, the Underwriters will
undertake to sell lots of 100 or more Series A Preferred Securities to a
minimum of 400 beneficial holders.
The Operating Partnership has agreed to indemnify the
Underwriters against, or contribute to payments that the Underwriters may be
required to make in respect of, certain liabilities, including liabilities
under the Securities Act of 1933, as amended.
The Underwriters have informed the Trust that the Underwriters
do not intend to confirm sales accounts over which they exercise discretionary
authority in excess of 5%.
Until the distribution of the Series A Preferred Securities is
completed, rules of the Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Series A
Preferred Securities. As an exception to these rules, the Representatives are
permitted to engage in certain transactions that stabilize the price of the
Series A Preferred Securities. Such transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Series A
Preferred Securities.
If the Underwriters create a short position in the Series A
Preferred Securities in connection with the Offering, i.e., if they sell more
shares of Series A Preferred Securities than are set forth on the cover page
of this Prospectus, the Representatives may reduce that short position by
purchasing Series A Preferred Securities in the open market. The
Representatives may also elect to reduce any short position by exercising all
or part of the over-allotment options described above.
The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the
Representatives purchase shares of Series A Preferred Securities in the open
market to reduce the Underwriters' short position or to stabilize the price of
the Series A Preferred Securities, they may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those
shares as part of the Offering.
In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of a
security to the extent that it were discourage resales of the security.
Neither the Trust nor any of the Underwriters makes any
representation or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of the Series A
Preferred Securities. In addition, neither the Trust nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Each of the Underwriters engages in transactions with, and
from time to time has performed services for, the Company and the Operating
Partnership in the ordinary course of business. J.P. Morgan Securities
Inc., one of the Underwriters, is syndication agent, and Morgan Guaranty
Trust Company of New York, an affiliate of J.P. Morgan Securities Inc., is
a lender, under the Credit Facility. Approximately $10.2 million of the
net proceeds from the Offering will be used to repay Morgan Guaranty Trust
Company of New York for a portion of the outstanding borrowings of the
Operating Partnership under the Credit Facility. See "Use of Proceeds."
Since the amount to be repaid to Morgan Guaranty Trust Company of New York
exceeds 10% of the net proceeds from the sale of the Series A Preferred
Securities, the offering of the Series A Preferred Securities is being made
pursuant to the provisions of Rule 2710(c)(8) of the Conduct Rules of the
National Association of Securities Dealers, Inc. In addition, a member of
the Board of Directors of the Company is Chairman, President and Chief
Executive Officer of First Bank System, Inc., an affiliate of a lender
under the Credit Facility. See "Certain Relationships and Related
Transactions--Other Transactions."
EXPERTS
The balance sheet of IAC Capital Trust at October 31, 1997 and
the consolidated financial statements of Irvine Apartment Communities, L.P. at
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included herein in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the Series A Preferred Securities offered
hereby will be passed upon for the Trust by Skadden, Arps, Slate, Meagher &
Flom LLP, Wilmington, Delaware. The validity of the Series A Preferred L.P.
Units will be passed upon for the Operating Partnership by Davis Polk &
Wardwell, New York, New York. Davis Polk & Wardwell and Skadden, Arps,
Slate, Meagher & Flom LLP will rely as to matters of Maryland law on Piper &
Marbury L.L.P., Baltimore, Maryland. Certain legal matters relating to the
offering of the Series A Preferred Securities will be passed upon for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles,
California.
ADDITIONAL INFORMATION
The Trust has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement (of which this Prospectus forms a
part) on Form S-11 under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all the information set
forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Trust and the Series A Preferred Securities offered hereby,
reference is hereby made to the Registration Statement and such exhibits and
schedules.
The Operating Partnership and the Company are each subject
to, and following this offering, the Trust will be subject to, the
informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith file or will file
reports and other information with the Commission. Reports, proxy
statements and other information filed by the Company, the Operating
Partnership or the Trust with the Commission can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 or at its Regional Offices
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New
York, New York 10048, and copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
listed on the New York Stock Exchange, Inc. (the "New York Stock
Exchange") and the Pacific Stock Exchange, Inc. (the "Pacific Stock
Exchange"). In addition, reports, proxy statements and other information
concerning the Company can be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005 and at the
offices of the Pacific Stock Exchange, 301 Pine Street, San Francisco,
California 94104. Such material may also be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
Upon request, the Trust intends to furnish its securityholders
with annual reports containing consolidated financial statements of the Trust
and the Operating Partnership audited by their respective independent auditors
and with quarterly reports of the Trust and the Operating Partnership
containing unaudited condensed consolidated financial statements for each of
the three quarters of each fiscal year.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
IAC Capital Trust
Report of Independent Auditors................................................................... F-2
Balance Sheet as of October 31, 1997............................................................. F-3
Notes to Balance Sheet........................................................................... F-4
Irvine Apartment Communities, L.P.
Report of Independent Auditors................................................................... F-5
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995..................................... F-6
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994....... F-7
Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1996,
1995 and 1994.................................................................................. F-8
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994....... F-9
Notes to Consolidated Financial Statements....................................................... F-10
Schedule III - Consolidated Real Estate and Accumulated Depreciation ............................ F-22
Unaudited Condensed Consolidated Financial Information:
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996... F-26
Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30,
1997 and 1996.................................................................................. F-27
Unaudited Condensed Consolidated Statements of Changes in Partners' Capital for the nine months
ended September 30, 1997 and 1996.............................................................. F-28
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
1997 and 1996.................................................................................. F-29
Notes to Unaudited Condensed Consolidated Financial Statements................................... F-30
</TABLE>
REPORT OF INDEPENDENT AUDITORS
To the Trustees
IAC Capital Trust
We have audited the accompanying balance sheet of IAC Capital Trust, a
Delaware Business Trust, as of October 31, 1997. This balance sheet is the
responsibility of management. Our responsibility is to express an opinion on
the balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of IAC Capital Trust at October 31,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Newport Beach, California
November 1, 1997
IAC CAPITAL TRUST
Balance Sheet
October 31,
1997
-----------
Assets
Cash............................................... $ 10
------------
$ 10
============
Equity
Contributed Trust Estate .......................... $ 10
------------
$ 10
============
- ------------
See accompanying notes.
IAC CAPITAL TRUST
Notes to Balance Sheet
Note 1--Organization and Formation
IAC Capital Trust (the "Trust") is a business trust formed on October 31,
1997 under the Delaware Business Trust Act. Irvine Apartment Communities,
Inc. (the "Company") and certain members of management of the Company will
acquire all of the Common Securities of the Trust, representing common
undivided beneficial interests in all of the assets of the Trust, for an
aggregate consideration of $5,000. The Company has established a trust
estate as of October 31, 1997 through a cash contribution of $10. Upon
issuance by the Trust of Series A Preferred Securities as contemplated by
this Prospectus and Registration Statement (the "Offering"), the holders
thereof will own all of the issued and outstanding Series A Preferred
Securities of the Trust. From time to time the Trust may issue additional
series of Preferred Securities and invest the proceeds of any such
issuances in additional series of Preferred L.P. Units of Irvine Apartment
Communities, L.P. (the "Operating Partnership"). Each series of Preferred
Securities will represent a preferred undivided beneficial interest in the
assets of the Trust subject to its priority and payment terms.
The Trust exists for the purpose of (a) issuing its Common Securities as
described above, (b) issuing its Preferred Securities (c) investing the net
proceeds from the sale of each series of Preferred Securities in a
corresponding series of Preferred L.P. Units of the Operating Partnership
and (d) engaging in such other activities as are necessary, convenient or
incidental thereto. The proceeds from the sale of the Common Securities of
the Trust will be invested in an interest bearing account in, or a
certificate of deposit of, a bank. The rights of the holders of the
Preferred Securities and the Common Securities (collectively, the "Trust
Securities"), including economic rights, rights to information and voting
rights, are as set forth in the Trust's Declaration and related Business
Trust Act. The Trust's Declaration does not permit the incurrence by the
Trust of any indebtedness for borrowed money or the making of any
investment other than in the Preferred L.P. Units of the Operating
Partnership and as described above in connection with the investment of the
proceeds from the sale of Common Securities.
The Operating Partnership has agreed to reimburse all obligations
(other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including the fees and expenses of the Trustees and
any income taxes, duties and other governmental charges, and all costs and
expenses with respect thereto, to which the Trust may become subject,
except for withholding taxes.
Note 2--Income Taxes
After the Offering, the Trust intends to make an election to be taxed as a
real estate investment trust ("REIT") under the Internal Revenue Code (the
"Code"). As a REIT, the Trust generally will not be subject to federal
income tax if it distributes at least 95% of its REIT taxable income to its
shareholders. REITs are subject to a number of organizational and
operational requirements. If the Trust fails to qualify as a REIT in any
taxable year, the Trust will be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate tax rates. Even if the Trust qualifies for taxation as a REIT,
the Trust may be subject to state and local taxes on its income and
property and to federal income and excise taxes on its undistributed
income.
REPORT OF INDEPENDENT AUDITORS
To the Partners
Irvine Apartment Communities, L.P.
We have audited the accompanying consolidated balance sheets
of Irvine Apartment Communities, L.P., a Delaware limited partnership, as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, changes in partners' capital and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule beginning on page F-22. These
financial statements and schedule are the responsibility of management.
Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Irvine Apartment Communities, L.P. at December 31, 1996 and
1995, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Newport Beach, California
January 31, 1997
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land........................................................................... $176,070 $163,169
Buildings and improvements..................................................... 849,924 768,737
----------- -----------
1,025,994 931,906
Accumulated depreciation....................................................... (219,193) (192,106)
----------- -----------
806,801 739,800
Under development, including land.............................................. 58,241 73,727
----------- -----------
865,042 813,527
Cash and cash equivalents............................................................ 3,205 4,392
Restricted cash...................................................................... 1,376 1,181
Deferred financing costs, net of accumulated amortization
of $8,290 in 1996 and $5,663 in 1995................................................ 20,187 22,814
Other assets......................................................................... 11,188 11,316
=========== ===========
$900,998 $853,230
LIABILITIES
Mortgages and notes payable
Line of credit................................................................. $16,000 $22,000
Tax-exempt mortgage bond financings............................................ 329,248 332,602
Conventional mortgage financings............................................... 134,761 136,960
Mortgage notes payable to The Irvine Company................................... 51,227 52,011
Tax-exempt assessment district debt............................................ 21,828 19,713
----------- -----------
553,064 563,286
Accounts payable and accrued liabilities............................................. 21,496 20,254
Security deposits.................................................................... 6,094 5,124
----------- -----------
580,654 588,664
----------- -----------
PARTNERS' CAPITAL
40,848 partnership units outstanding at December 31, 1996 and 37,372 at
December 31, 1995
General partner, 18,556 partnership units at December 31, 1996 and 16,975 at
December 31, 1995................................................................... 180,017 155,433
Limited partner, 22,292 partnership units at December 31, 1996 and 20,397 at
December 31, 1995................................................................... 140,327 109,133
----------- -----------
320,344 264,566
----------- -----------
$900,998 $853,230
=========== ===========
<FN>
- ------------
See accompanying notes.
</FN>
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1996 1995 1994
-------- -------- --------
(in thousands, except per unit amounts)
<S> <C> <C> <C>
REVENUES
Rental income.................................................. $154,925 $133,678 $127,338
Other income................................................... 3,162 2,079 1,585
Interest income................................................ 611 411 1,313
---------- ---------- ----------
158,698 136,168 130,236
---------- ---------- ----------
EXPENSES
Property expenses.............................................. 33,859 31,761 33,105
Real estate taxes.............................................. 13,496 12,002 11,786
Property management fees....................................... 4,502 3,893 3,800
Interest expense, net.......................................... 29,506 25,894 26,827
Amortization of deferred financing costs....................... 2,627 8,510 15,942
Depreciation and amortization.................................. 27,239 23,143 21,055
General and administrative..................................... 6,277 5,909 5,442
---------- ---------- ----------
117,506 111,112 117,957
---------- ---------- ----------
Income before extraordinary item............................... 41,192 25,056 12,279
Extraordinary item - charge related to debt extinguishment..... - (23,427) -
---------- ---------- ----------
NET INCOME..................................................... $41,192 $1,629 $12,279
========== ========== ==========
ALLOCATION OF NET INCOME (LOSS):
General partner................................................ $18,746 $ 8,465 $ 7,273
Limited partner................................................ $22,446 $(6,836) $ 5,006
PARTNERSHIP UNIT DATA:
Weighted average partnership units outstanding................. 38,953 33,191 30,247
Income before extraordinary item per unit...................... $1.06 $0.75 $0.41
Net income per unit............................................ $1.06 $0.05 $0.41
<FN>
- ------------
See accompanying notes.
</FN>
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF CHANGES
IN PARTNERS' CAPITAL
Irvine
Apartment
Communities, The Irvine
Inc. Company Total
------------- ------------- ---------
(in thousands)
PARTNERS' CAPITAL
Balance, January 1, 1994..... $87,578 $124,766 $212,344
Net income.............. 7,273 5,006 12,279
Distributions........... (13,098) (20,476) (33,574)
--------- --------- ---------
Balance, December 31, 1994... 81,753 109,296 191,049
Net income.............. 8,465 (6,836) 1,629
Contributions........... 83,454 33,200 116,654
Distributions........... (18,239) (26,527) (44,766)
--------- --------- ---------
Balance, December 31, 1995... 155,433 109,133 264,566
Net income.............. 18,746 22,446 41,192
Contributions........... 31,385 39,327 70,712
Distributions........... (25,547) (30,579) (56,126)
--------- --------- ---------
Balance, December 31, 1996... $180,017 $140,327 $320,344
========= ========= =========
PARTNERSHIP UNITS OUTSTANDING
Balance, January 1, 1994..... 11,800 18,447 30,247
Additional units issued. - - -
--------- --------- ---------
Balance, December 31, 1994... 11,800 18,447 30,247
Additional units issued. 5,175 1,950 7,125
--------- --------- ---------
Balance, December 31, 1995... 16,975 20,397 37,372
Additional units issued. 1,581 1,895 3,476
--------- --------- ---------
Balance, December 31, 1996... 18,556 22,292 40,848
========= ========= =========
- ------------
See accompanying notes.
IRVINE APARTMENT COMMUNITIES, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income................................................................. $41,192 $1,629 $12,279
Adjustments to reconcile net income to net cash provided by operating
activities:
Extraordinary item -- charge related to debt extinguishment............. - 23,427 -
Amortization of deferred financing costs................................ 2,627 8,510 15,942
Depreciation and amortization........................................... 27,239 23,143 21,055
Increase (decrease) in cash attributable to changes in assets and
liabilities:
Restricted cash..................................................... (195) (150) 16
Other assets........................................................ (104) (4,882) (975)
Accounts payable and accrued liabilities............................ 1,308 3,147 895
Security deposits................................................... 970 579 574
-------- -------- --------
Net Cash Provided by Operating Activities.................................. 73,037 55,403 49,786
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets....................... (4,766) (4,520) (5,555)
Investment in real estate assets, net of construction payables............. (61,850) (123,698) (45,363)
-------- -------- --------
Net Cash Used in Investing Activities...................................... (66,616) (128,218) (50,918)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit........................................... 78,900 143,344 6,256
Payments on lines of credit................................................ (84,900) (127,600) -
Proceeds from tax-exempt mortgage bond financings and notes
payable................................................................... - 334,190 9,833
Payments on tax-exempt mortgage bond financings............................ - (325,845) -
Principal payments......................................................... (7,101) (5,676) (4,999)
Additions to deferred financing costs...................................... - (9,237) (832)
Contributions from partners................................................ 61,619 109,329 -
Distributions to partners.................................................. (56,126) (44,766) (33,574)
-------- -------- --------
Net Cash (Used in) Provided by Financing Activities........................ (7,608) 73,739 (23,316)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,187) 924 (24,448)
Cash and Cash Equivalents at Beginning of Year............................. 4,392 3,468 27,916
CASH AND CASH EQUIVALENTS AT END OF YEAR................................... $3,205 $4,392 $3,468
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of amounts capitalized............................. $29,644 $25,165 $25,860
Tax-exempt assessment district debt assumed........................... $2,771 $4,184 $15,656
<FN>
- ------------
See accompanying notes.
</FN>
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per unit amounts)
NOTE 1-- ORGANIZATION AND BASIS OF PRESENTATION
Irvine Apartment Communities, L.P., a Delaware limited
partnership (the "Operating Partnership"), was formed on November 15, 1993.
In connection with an initial public offering of common shares on December
8, 1993, Irvine Apartment Communities, Inc. (the "Company") obtained a
general partnership interest in and became the sole managing general
partner of the Partnership. The Irvine Company (the "Limited Partner")
transferred 42 apartment communities and a 99% interest in a limited
partnership which owns one apartment community to the Operating
Partnership. The Operating Partnership's management and operating
decisions are under the unilateral control of the Company. All management
powers over the business and affairs of the Operating Partnership are
vested exclusively in the Company. No limited partner of the Operating
Partnership has any right to exercise control or management power over the
business and affairs of the Operating Partnership. As of December 31,
1996, the Company had a 45.4% general partnership interest and The Irvine
Company had a 54.6% limited partnership interest in the Operating
Partnership.
The Operating Partnership owns, operates and develops
apartment communities in Orange County, California. The Operating
Partnership utilizes independent third-party property management and
construction management firms. As of December 31, 1996 the Operating
Partnership owned and operated 52 properties containing 13,656 operating
apartment units and 864 units under construction (collectively, the
"Properties"). Until July 31, 2020, the Operating Partnership has the
exclusive right, but not the obligation, to acquire land from The Irvine
Company for development of additional apartment communities on the Irvine
Ranch (see Note 7 to the consolidated financial statements).
Profits and losses are generally allocated to the Company
and to the Limited Partner based upon their respective ownership interests
in the Operating Partnership. The partnership agreement provides for the
allocation of certain costs to The Irvine Company. As of December 31,
1995, all such allocations had been completed.
The accompanying financial statements include the
consolidated accounts of the Operating Partnership and its financially
controlled subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
Under the terms of the partnership agreement, all costs
incurred by the Company relating to the ownership of interests in and
operation of the Operating Partnership, including the compensation of its
officers and employees, stock incentive plans, director fees and the costs
and expenses of being a public company, are reimbursed by the Operating
Partnership. In addition, the Limited Partner has the right, but not the
obligation, to match on the same terms and conditions any capital
contributions made by the Company based on the pro rata ownership interest
at the time of such contribution.
The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 1996 and 1995, and the revenues and expenses
for the three years ended December 31, 1996. Actual results could differ
from those estimates.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Real Estate Assets and Depreciation: Real estate assets,
which are held as long-term investments, are stated at cost less
accumulated depreciation. Impairment losses on long-lived assets used in
operations are recorded when events and circumstances indicate that the
assets are impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts. Land and
infrastructure costs are allocated to properties based on relative fair
value. Costs related to the development and construction of properties are
capitalized as incurred. Interest and property taxes are capitalized to
apartment communities which are under active development. When a building
within a community under construction is completed and held available for
occupancy, the related costs are expensed.
Repair and maintenance expenditures are expensed as
incurred. Major replacements and betterments are capitalized and
depreciated over their useful lives. Depreciation is computed on a
straight-line basis over the useful lives of the properties (principally
forty years for buildings; twenty years for siding, roofs and balconies;
fifteen years for plumbing and air conditioning equipment; ten years for
pools, tennis courts, parking lots and driveways; and five to ten years for
furniture and fixtures).
Cash and Cash Equivalents: The Operating Partnership
considers all highly liquid investments with a maturity when purchased of
three months or less to be cash equivalents.
Restricted Cash: Restricted cash is comprised of reserve
accounts for capital replacements, property taxes and insurance. These
restricted funds are subject to supervision and approval by a lender or a
government agency. The terms of the contract with the government agency
contain certain restrictions concerning operating policies, rental charges,
operating expenditures, distributions to owners and other matters.
Deferred Financing Costs: Costs incurred in obtaining long-
term financing or costs to buy down or hedge interest costs are deferred
and amortized over the term of the related debt agreements using the
effective interest method.
Revenue Recognition: The Operating Partnership leases
apartment units to a diverse resident base for terms of one year or less.
Credit investigations are performed for all prospective residents and
security deposits are also obtained. Resident receivables are evaluated
for collectibility. Rental revenue is recognized on an accrual basis as it
is earned over the life of the lease. Interest income is recorded as
earned.
Interest Expense: Interest rates are substantially fixed
for specified periods through interest rate swaps and buy-down agreements
for certain debt instruments. These financial instruments are entered into
as a hedge against the interest exposure from variable rate debt. The
differences paid or received on swaps and related agreements are included
in interest expense as yield adjustments.
Income Taxes: The Operating Partnership's taxable income is
reportable by its partners. Accordingly, no provision has been made for
federal income taxes in the accompanying statements of operations.
Per Unit Data: The computation of net income per
partnership unit is based on the weighted average number of partnership
units outstanding and excludes the effect of the Company's stock options
and performance awards since their dilutive effect is minimal.
Reclassifications: Certain amounts in the 1995 and 1994
financial statements have been reclassified to conform with financial
statement presentations in 1996.
NOTE 3 -- MORTGAGES AND NOTES PAYABLE
Line Of Credit: In November 1995, the Operating Partnership
obtained a $175 million unsecured revolving credit facility. The line of
credit facility has a term of two years and at the Operating Partnership's
option may be converted to a two-year term loan at maturity. This
revolving credit facility is available to finance the Operating
Partnership's ongoing rental property development program and for general
working capital needs. Borrowings under the line of credit bear interest
at the Operating Partnership's option at variable rates based on the
Eurodollar rate plus a spread of 1.5% or the Prime rate. The Operating
Partnership is also obligated to pay a fee on the average daily amount of
the unused portion of the commitment, and quarterly agent fees on the
commitment amount. The Company and the Operating Partnership must comply
with certain affirmative and negative covenants, including limitations on
distributions to its partners, limitations on payment of distributions, and
the maintenance of certain net worth, cash flow and financial ratios. At
December 31, 1996 the Company and the Operating Partnership were in
compliance with all of these covenants. As of December 31, 1996, $16
million was outstanding and $159 million was available under the line of
credit. In February 1997, the Operating Partnership's line of credit was
increased to $250 million.
Tax-Exempt Mortgage Bond Financings: On May 25, 1995, the
Operating Partnership refinanced all $324,816 of its outstanding tax-exempt
mortgage debt. As a result of a new 30-year refunding agreement, which is
backed by credit and liquidity support from the Federal National Mortgage
Association ("Fannie Mae"), the Operating Partnership obtained tax-exempt
mortgage bond financings of $334,190 maturing in June 2025. Standard &
Poor's Rating Group assigned ratings of AAA/A-1+ to the bonds based on the
collateral agreement with Fannie Mae. In connection with the refinancing
transaction, the Operating Partnership recorded an extraordinary charge of
$23,427 to write off deferred financing costs related to the debt that was
refinanced.
The tax-exempt financings represent loans payable that are
collateralized by twenty-three properties with a net book value of $281,211
as of December 31, 1996. Monthly principal and interest payments are made
to a trustee, which in turn pays the bondholders when interest is due. The
bonds are remarketed periodically and bear interest at short-term floating
rates. The floating rates have been fixed through interest rate swap
agreements. (See Interest Rate Swap Agreements.) Principal payments are
amortized over a 30-year period and are held in a principal payment fund.
The tax-exempt mortgage bond financings, before giving effect to the swap
agreements, had an average floating interest rate inclusive of fees of
4.76% in December 1996.
Conventional Mortgage Financings: Conventional mortgages
are collateralized by apartment communities with a net book value of
$148,493 as of December 31, 1996. The mortgages are generally due in
monthly installments and mature at various dates through 2018. Prior to
the Offering, interest rates were fixed at rates which ranged from 7.75% to
9.63%, with a weighted average rate of 8.69%. In connection with the
Offering, the interest rates were adjusted to market rates for specified
periods of time and currently range from 5.82% to 7.75%. As of December
31, 1996 the weighted average interest rate was 6.45%. Including the
amortization of deferred financing costs the all-in interest rate was
8.16%. The interest reduction periods expire prior to or at the loan
maturity dates and range from 1997 to 2008.
Mortgage Notes Payable to The Irvine Company: Two of the
Operating Partnership's apartment communities are financed by mortgage
notes payable to The Irvine Company. These mortgage notes totaled $51,227
and $52,011 at December 31, 1996 and 1995, respectively. The mortgage
notes are collateralized by all-inclusive trust deeds on each of the
apartment communities financed. They bore fixed interest rates of 5.75% at
December 31, 1996, are fully amortizing and mature in 2015 and 2024.
Interest incurred on the mortgage notes payable to The Irvine Company
totaled $2,966, $3,010 and $3,055 for the years ended December 31, 1996,
1995 and 1994, respectively. The mortgage notes payable to The Irvine
Company "wrap around" secured first trust deed notes payable to third-party
financial institutions. The secured first trust deed notes totaled $51,363
and $52,030 as of December 31, 1996 and 1995, respectively.
Tax-Exempt Assessment District Debt: In conjunction with
the purchase of land, the Operating Partnership assumed $2,771 in 1996 and
$4,184 in 1995 in tax-exempt assessment district debt which represents debt
issued by municipal government authorities to finance the construction of
infrastructure and improvements. The debt obligations are repaid by the
Operating Partnership through assessments.
Interest Rate Swap Agreements: The Operating Partnership
uses interest rate swap agreements to effectively convert its floating rate
tax-exempt mortgage bond financings to a fixed-rate basis, thus reducing
the impact on future income of fluctuations in interest rates. At December
31, 1996, the Operating Partnership had interest rate swap agreements on
notional amounts totaling $329,248 which pay fixed rates of interest and
receive floating rates of interest based on a municipal bond index that is
remarketed weekly. The swap agreement periods mature from 2002 to 2007.
The swap counterparties are primarily financial institutions rated AAA by
Standard & Poor's. The differences to be paid or received are accrued and
included in interest expense as a yield adjustment and the related amount
payable or receivable from counterparties is included in other assets or
accrued liabilities. Additionally, the Operating Partnership restructured
several interest rate swaps related to the retired tax-exempt bonds in May
1995. These transactions reduce the interest expense on tax-exempt
mortgage bond financings by approximately 30 basis points per year through
2001. At December 31, 1996, the average fixed interest rate paid to the
counterparties was 5.10% and the average variable interest rate received
was 3.64%. This resulted in a net interest payable of $381 which was
settled in the first week of January 1997. Based on prevailing interest
rates at December 31, 1996, the interest rate swap agreements have a fair
value of negative $4 million.
Capitalized Interest: The Operating Partnership capitalizes
interest on projects actively under development using qualifying asset
balances and applicable weighted average interest rates. The average
qualifying asset balance for projects under development was approximately
$40 million for the year ended December 31, 1996. Interest capitalized was
$3,151, $6,779 and $1,261 in 1996, 1995 and 1994, respectively. Interest
incurred totaled $32,657, $32,673 and $27,617 for the years ended December
31, 1996, 1995 and 1994, respectively.
Other Matters: Mortgages and notes payable totaling
$183,829 at December 31, 1996 are subject to prepayment penalties.
<TABLE>
<CAPTION>
Mortgages and Notes Payable
(at December 31, 1996)
-------------------------------------------------------------------------------------
Expiration of
Outstanding Interest Rate
Principal Effective Reduction Interest Rate Maturity
Type of Debt Balance Interest Rate Period After Step-Up Date
- ------------ ------------ -------------- ------------ -------------- ------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Tax-exempt mortgage bond financings $329,248 5.82% n/a n/a 6/25
Conventional mortgage financings: -------- -----
Bayport......................... 4,862 6.91% 7/08 9.25% 7/18
Bayview......................... 3,510 6.91% 7/08 9.25% 7/18
Baywood......................... 20,972 6.91% 7/08 9.25% 7/18
Deerfield Phase I............... 7,462 6.57% 7/02 8.90% 7/08
Mariner Square.................. 5,637 6.32% 9/00 8.50% 8/08
The Parklands................... 6,512 6.15% n/a n/a 4/04
Parkwood........................ 12,642 6.31% 8/00 8.50% 7/08
Promontory Point................ 36,303 5.82% 9/97 8.30% 8/00
Rancho Mariposa................. 12,839 7.75% n/a 7.75% 6/03
San Paulo....................... 1,458 4.00% n/a n/a 1/13
San Paulo....................... 700 3.00% n/a n/a 1/08
Turtle Rock Vista............... 13,405 6.31% 8/00 8.50% 7/08
Woodbridge Pines................ 8,459 6.91% 9/08 9.25% 8/18
-------- -----
134,761 6.45% 8.42% 6/07
-------- -----
Mortgage notes payable to The Irvine
Company:
Park West....................... 33,993 5.75% n/a n/a 7/24
Rancho San Joaquin.............. 17,234 5.75% n/a n/a 1/15
-------- -----
51,227 5.75% 3/20
-------- -----
Tax-exempt assessment district debt:
Fixed rate...................... 5,554 6.27% n/a n/a 1/16
Variable rate................... 16,274 3.95% n/a n/a 2/17
-------- -----
21,828 4.54% 10/16
-------- -----
Line of credit....................... 16,000 7.50% n/a n/a 12/97
-------- -----
Total/weighted average............... $553,064 5.97% 7/18
======== =====
</TABLE>
<TABLE>
<CAPTION>
Scheduled Principal Amortization: Mortgages and Notes Payable
(at December 31, 1996)
-------------------------------------------------------------------------------------------------------
Mortgage
Tax-Exempt Notes
Mortgage Conventional Payable to Tax-Exempt
Line of Bond Mortgage The Irvine Assessment Percentage of
Year of Maturity Credit Financings Financings Company District Debt Totals Total Debt
- ---------------- -------- ---------- ------------ ---------- ------------- --------- ---------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
1997............ $ 16,000 $ 3,604 $ 2,504 $ 830 $ 284 $ 23,222 4.2%
1998............ 3,876 2,717 879 303 7,775 1.4%
1999............ 4,165 2,958 931 326 8,380 1.5%
2000............ 4,478 36,754 986 522 42,740 7.7%
2001............ 4,813 2,773 1,044 583 9,213 1.7%
Thereafter...... 308,312 87,055 46,557 19,810 461,734 83.5%
------- -------- -------- ------- ------- -------- ------
Total........... $16,000 $329,248 $134,761 $51,227 $21,828 $553,064 100.0%
------- -------- -------- ------- ------- -------- ------
Number of loans. 1 25 11 2 6 45
======= ======== ======== ======= ======= ========
</TABLE>
NOTE 4 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for
financial instruments approximate their fair value except as discussed
below. The fair values of mortgage notes payable to The Irvine Company are
estimated using discounted cash flow analyses and the Operating
Partnership's current estimated borrowing rates for similar types of
borrowing arrangements. The interest rate used in the fair value
calculation was 7.72% based on the terms of the loans. As of December 31,
1996, the fair value of the mortgage notes payable to The Irvine Company
was $42,590. See Note 3 to the consolidated financial statements for a
discussion of the fair value of the interest rate swap agreements.
NOTE 5 -- PARTNERS' CAPITAL
On May 8, 1995, the Company filed a shelf registration
statement with the Securities and Exchange Commission providing for the
issuance from time to time of up to $250 million of common stock, preferred
stock, debt securities, and warrants to purchase common stock, preferred
stock and debt securities. The Operating Partnership plans to use the
proceeds raised from any securities issued under the shelf registration and
any matching issuance of partnership units to the Limited Partner for
general corporate purposes, including the development of new apartment
communities, acquisitions and the repayment of existing debt.
On August 9, 1995, the Company sold, pursuant to its shelf
registration statement, 5.175 million shares of common stock at $17.25 per
share. Concurrently, the Limited Partner, pursuant to its rights under the
partnership agreement, purchased 1.5 million partnership units at $17.25
per unit. Such units are exchangeable for common stock on a one-for-one
basis, subject to adjustment and certain limitations. The net proceeds
from the two transactions totaled $109,329. Proceeds of $80,100 were used
to repay amounts outstanding under construction and revolving lines of
credit. The balance of $29,229 was used to fund new construction.
Pursuant to its shelf registration statement, on July 3,
1996, the Company completed the sale of 1.49 million shares of common stock
at $20.125 per share. The proceeds from this offering of $30 million
together with proceeds from the sale of newly issued partnership units to
the Limited Partner (see Note 6 to the consolidated financial statements),
totaled $60 million. Proceeds were used to repay $43 million of debt
outstanding under the revolving line of credit. The remaining proceeds
were used to fund ongoing development programs and for general corporate
purposes. Availability under the Company's shelf registration statement
was $130.7 million at December 31, 1996.
On February 20, 1997, the Company sold, pursuant to its
shelf registration statement, 1.15 million shares of common stock at $27.50
per share. Concurrently, the Limited Partner purchased 1.39 million
additional partnership units at $26.06 per unit (which is equal to the
public offering price of the common stock less an amount equivalent to the
underwriting discount) which are exchangeable for common stock on a
one-for-one basis, subject to adjustment and certain limitations. The
proceeds from the two transactions totaled $66 million and were used to
repay all indebtedness outstanding under the revolving line of credit, and
will be used for general corporate purposes, including ongoing development
activities on and off the Irvine Ranch. After the above transaction,
availability under the Company's shelf registration statement is
approximately $99 million.
<TABLE>
<CAPTION>
Reconciliation of Partnership Units Outstanding
-------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 Year Ended December 31, 1995 Year Ended December 31, 1994
------------------------------ ---------------------------------- -------------------------------
Irvine Irvine Irvine
Apartment Apartment Apartment
Communities, The Irvine Communities, The Irvine Communities, The Irvine
Inc. Company Total Inc. Company Total Inc. Company Total
------------ ---------- ------- ------------ ----------- ------- ------------ ---------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning
of period............ 16,975 20,397 37,372 11,800 18,447 30,247 11,800 18,447 30,247
Stock awards issued
and options
exercised............ 77 - 77 - - - - - -
Dividend reinvestment
plan................. 13 16 29 - - - - - -
Common stock
offerings and
related cash
contributions from
The Irvine
Company.............. 1,491 1,491 2, 982 5,175 1,500 6,675 - - -
Contributions of
property by The
Irvine Company........ - 388 388 - 450 450 - - -
Balance at end of ------ ------ ------- ----- ------ ------ ------ ------ ------
period................ 18,556 22,292 40, 848 975 20,397 37,372 11,800 18,447 30,247
------ ------ ------- ----- ------ ------ ------ ------ ------
Ownership interest at
end of period......... 45.4% 54.6% 100% 5.4% 54.6% 100% 39.0% 61.0% 100%
====== ====== ======= ===== ======= ====== ====== ====== ======
<CAPTION>
Net Income (Loss) Allocation
----------------------------------------
Years Ended December 31,
----------------------------------------
1996 1995 1994
-------- ---------- ---------
(in thousands)
<S> <C> <C> <C>
The Irvine Company:
Specific allocations to The Irvine Company................................. $ - $(17,741) $(6,370)
Income allocated to The Irvine Company based on its ownership interest..... 22,446 10,905 11,376
-------- --------- --------
22,446 (6,836) 5,006
-------- --------- --------
Irvine Apartment Communities, Inc.:
Income allocated to Irvine Apartment Communities, Inc. based on its
ownership interest........................................................ 18,746 8,465 7,273
-------- --------- --------
Net Income................................................................. $41,192 $ 1,629 $12,279
======== ========= ========
</TABLE>
Prior to December 31, 1995, the Operating Partnership
incurred debt extinguishment costs and swap amortization costs that were
allocated 100% to The Irvine Company in accordance with the partnership
agreement. As of December 31, 1995, all such allocations had been
completed.
NOTE 6 -- CERTAIN TRANSACTIONS WITH RELATED PARTIES
Substantially all costs incurred by the Company are borne by
the Operating Partnership. Included in general and administrative expenses
are charges from The Irvine Company pursuant to an administrative service
agreement covering services for risk management, income taxes and other
services of $108 for the year ended December 31, 1996. The amounts for the
corresponding periods in 1995 and 1994 were $106 and $160, respectively.
The Irvine Company and the Operating Partnership jointly purchase employee
health care insurance and property and casualty insurance. In addition,
the Operating Partnership incurred rent totaling $349, $270 and $203 for
the years ended December 31, 1996, 1995 and 1994, respectively, related to
leases with The Irvine Company that expire in 1997 and 1998. For the year
ended December 31, 1996, The Irvine Company contributed $354, or the
maximum allowable in connection with stock issuances under the dividend
reinvestment and additional cash investment plan.
In the third quarter of 1994, the Operating Partnership
acquired four sites for development of 1,695 units for $19,703 from The
Irvine Company. As partial financing for these four sites, the Operating
Partnership elected to assume $15,656 in tax-exempt assessment district
debt and paid $4,047 in cash.
In March 1995, the Operating Partnership acquired a 512-unit
development site known as Newport Ridge for $9,542 from The Irvine Company.
As partial financing for the acquisition of the site, the Operating
Partnership elected to assume $4,184 of tax-exempt assessment district
debt. The balance of $5,358 was paid through the issuance of 336,432
additional partnership units in the Operating Partnership to The Irvine
Company. In November 1995, the Operating Partnership acquired a 300-unit
development site known as Baypointe from The Irvine Company for $4,190, of
which $1,967 was paid through the issuance of 113,372 additional
partnership units in the Operating Partnership to The Irvine Company. The
partnership units are exchangeable for common stock of the Company on a
one-for-one basis, subject to adjustment and certain limitations.
In March 1996, the Operating Partnership acquired a land
site for $3.3 million from The Irvine Company for the development of 227
rental units, pursuant to the Land Rights Agreement between the Operating
Partnership and The Irvine Company. The Company's board committee of
independent directors approved the purchase in accordance with the Land
Rights Agreement. As partial financing for the site acquisition, the
Operating Partnership assumed $2.8 million in tax-exempt assessment
district debt. The balance of the purchase price was paid through the
issuance of 28,358 additional partnership units in the Operating
Partnership to The Irvine Company.
Concurrent with the Company's common stock offering on July
3, 1996 (see Note 5 to the consolidated financial statements), The Irvine
Company, pursuant to its rights under the partnership agreement, purchased
1.49 million partnership units at a price equal to the public offering
price of $20.125 per common share of stock, or a total of $30 million.
These units are exchangeable for common stock on a one-for-one basis,
subject to adjustment and certain limitations.
On July 29, 1996, the Operating Partnership acquired a land
site for $3.5 million from The Irvine Company for the development of 245
rental units pursuant to the Land Rights Agreement between the Operating
Partnership and The Irvine Company. The Company's board committee of
independent directors approved the purchase in accordance with the Land
Rights Agreement. Of the total purchase price, $2.4 million was paid
through the issuance of 115,544 additional partnership units in the
Operating Partnership to The Irvine Company.
On December 23, 1996, the Operating Partnership acquired a
land site for $6.0 million from The Irvine Company for the development of
207 rental units pursuant to the Land Rights Agreement between the
Operating Partnership and The Irvine Company. The Company's board
committee of independent directors approved the purchase in accordance with
the Land Rights Agreement. The purchase price was paid through the
issuance of 244,857 additional partnership units in the Operating
Partnership to The Irvine Company.
One of the Company's directors is chairman of a bank which
participates in the Operating Partnership's line of credit. Based on the
bank's percentage participation in the credit facility, the Operating
Partnership estimates that the amount of interest and fees paid to the bank
totaled $245, $388 and $96 in 1996, 1995 and 1994, respectively.
NOTE 7 -- LAND RIGHTS AGREEMENT WITH THE IRVINE COMPANY
The Operating Partnership and The Irvine Company are parties
to an exclusive land rights and non-competition agreement (the "Land Rights
Agreement"). This agreement, which extends through July 31, 2020, provides
the Operating Partnership with the exclusive right, but not the obligation,
to acquire additional land sites which have been entitled for residential
use and designated by The Irvine Company as ready for apartment development
in accordance with the Master Plan. The determination to exercise an
option with respect to a site is made solely by a majority of a committee
of independent directors of the Company (the "Independent Directors
Committee"), whose members are unaffiliated with The Irvine Company. In
addition, The Irvine Company and its chairman, Donald Bren, have agreed to
conduct their apartment community development and ownership activities on
the Irvine Ranch solely through the Operating Partnership.
Under terms of the Land Rights Agreement, through July 31,
2000, the purchase price for any apartment community sites acquired may be
paid with either cash, common stock or limited partnership units at the
option of the Company. After July 31, 2000, the choice of consideration
will revert to The Irvine Company. In addition, the purchase price for
future apartment sites encompassing the next 505 apartment units the
Operating Partnership develops will be set at an amount such that each
project's budgeted pro forma unleveraged return on costs for the first
twelve months following stabilized occupancy will be between 10.0% and
10.5%. However, in no event shall the purchase price for each such site
exceed 95% of the value of such site as determined by independent
appraisals.
NOTE 8 -- STOCK PLANS
Under the terms of the partnership agreement, payments under
the Company's stock incentive plans are reimbursed by the Operating
Partnership.
Employee Stock Option Plan: The Company has adopted long-
term stock incentive plans that provide for awards of non-qualified or
incentive stock options, stock appreciation rights, performance awards,
restricted stock, restricted stock units and stock unit awards. The plans
limit the number of shares of common stock, and matching partnership units,
to be issued with respect to these awards to 5% of the total partnership
units and common stock outstanding at the end of each year. The non-
qualified stock options in the table below vest in equal installments over
a three-year period and expire ten years from the grant dates.
<TABLE>
<CAPTION>
Non-Qualified Stock Option Transactions
-----------------------------------------------
Number of Options Exercise Price Per Share
----------------- ------------------------
<S> <C> <C>
Granted in 1993........................................ 149,000 $17.50
Outstanding at December 31, 1993....................... 149,000 $17.50
Granted................................................ 55,000 $17.50
Canceled............................................... (15,000) $17.50
------- ---------------
Outstanding at December 31, 1994....................... 189,000 $17.50
Granted................................................ 384,000 $15.88 to $16.13
Canceled............................................... (74,000) $16.13 to $17.50
------- ---------------
Outstanding at December 31, 1995....................... 499,000 $15.88 to $17.50
Granted................................................ 10,000 $20.00
Exercised.............................................. (66,667) $16.13 to $17.50
Canceled............................................... (33,333) $16.13
------- ---------------
Outstanding at December 31, 1996....................... 409,000 $15.88 to $20.00
======= ===============
Vested and exercisable at December 31, 1996............ 170,667 $15.88 to $17.50
======= ===============
</TABLE>
In addition, restricted stock performance awards issued to
certain officers of the Company vest over a five-year period provided that the
Company meets certain financial targets.
Number
Performance Award Transactions of Awards
- ------------------------------ ---------
Granted in 1993.................................. 200,000
Granted in 1995.................................. 235,000
Canceled in 1995................................. (110,000)
---------
Outstanding at December 31, 1995................. 325,000
---------
Granted in 1996.................................. 10,000
Awarded in 1996.................................. (20,000)
Canceled in 1996................................. (82,049)
---------
Outstanding at December 31, 1996................. 232,951
=========
Vested at December 31, 1996...................... 62,951
=========
The total number of shares, and matching partnership units,
available to be granted at December 31, 1996 under these plans was 1,323,770.
Directors' Stock Option Plan: The 1993 Stock Option Plan for
Directors was established with 100,000 shares of common stock that may be
granted to independent directors. Grants of fully vested options to purchase
5,000 shares of common stock, and matching partnership units, at the market
price on the grant date were made to each independent director immediately
following the Offering. Additionally, grants of fully vested options to
purchase 1,000 shares of common stock, and matching partnership units, at the
market price on the grant date were made to each independent director
immediately following each annual shareholders' meeting beginning in 1995.
These options are fully vested when granted and are exercisable for ten years
from the grant dates.
Number of Exercise Price Per
Directors' Option Transactions Options Share
- ------------------------------ --------- ------------------
Granted in 1993 25,000 $17.44
Granted in 1995 5,000 $15.63
------ ----------------
Outstanding at December 31, 1995 30,000 $15.63 to $17.44
Granted in 1996 5,000 $20.06
------ ----------------
Outstanding at December 31, 1996 35,000 $15.63 to $20.06
====== ================
Available for future grant 65,000
======
Equity Compensation Plans: The Operating Partnership applies
APB Opinion 25 and related interpretations in accounting for its equity
compensation plans as described above. Accordingly, no compensation cost has
been recognized for its stock option plans. Compensation cost for the
Company's other stock-based compensation plans has been determined utilizing
the fair value of the award over the service period. Had the Operating
Partnership applied FAS Statement 123 for stock-based compensation, it would
result in net income and earnings per unit amounts that approximate the
amounts reported. Under FAS Statement 123, the fair value for options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 7.15% and 6.46%; dividend yields of 8.49% and
7.09%; volatility factors of the expected market price of the Company's common
stock of 0.242 and 0.204; and a weighted average expected life of the options
of seven years.
NOTE 9 -- SAVINGS PLAN
Effective January 1, 1994, the Company implemented a defined
contribution 401(k) benefit plan covering substantially all employees who have
satisfied minimum age and service requirements. The Company matches employee
contributions up to 50%, within certain limits, which is accrued as incurred.
The Company also makes contributions to this plan for each participant,
generally equal to 3% of the participant's base salary. The aggregate cost of
these contributions was $122, $95 and $82 in 1996, 1995 and 1994, respectively.
NOTE 10 -- AGREEMENTS, COMMITMENTS AND CONTINGENCIES
Management Agreements: The Operating Partnership has management
agreements with unaffiliated property management companies to maintain and
manage the operations of the properties. Management fees range from 2.5% to
3.25% of revenues depending on the size of the property (resulting in a
weighted average rate of approximately 2.8% of revenues). These agreements are
renewable annually and are generally cancelable on 30 days' notice. Included in
operating expenses are costs incurred by the management companies on behalf of
the Operating Partnership.
Litigation: The Operating Partnership is party to various
legal actions which are incidental to its business. Management believes that
these actions will not have a material adverse effect on the Operating
Partnership's consolidated financial position.
Assessment Districts: In some of the local jurisdictions
within Orange County where the Predecessor developed property, assessment
districts were formed by local governments to finance major infrastructure
improvements. At December 31, 1996, the Operating Partnership had $39.0
million of assessment district debt, of which $21.9 million was reflected in
the balance sheet.
Exchange Rights: The Irvine Company has the right to exchange
up to one-third of the total partnership units it owns for shares of common
stock of the Company in each twelve-month period commencing on December 1 of
each year at an exchange ratio of one-to-one, subject to adjustment in certain
events. These exchanges are subject to certain restrictions including
percentage ownership limits.
Company's Obligation to Purchase Tendered Partnership Units:
The Limited Partner has the right to sell to the Company for cash generally up
to one-third of its partnership units in each twelve-month period commencing on
December 1 of each year. These sales are subject to certain restrictions. The
Company is to purchase the tendered interests at a purchase price equal to the
average of the daily market prices for the common stock of the Company for the
ten consecutive trading days immediately preceding the date of receipt by the
Company of a notice of cash tender. The Company is to pay for these interests
solely with the net proceeds of an offering of the Company's common stock. The
Company would bear the costs of sale (other than underwriting discounts and
commissions). The Limited Partner would bear all market risk if the market
price at closing was less than the purchase price as determined on the date of
tender. Any proceeds of the offering in excess of the purchase price would be
for the sole benefit of the Company.
Rent Restrictions: As of December 31, 1996, 21% of the
apartment units within the Operating Partnership's portfolio were required to
be set aside for residents within certain income levels and had limitations on
the rent that could be charged to such tenants. The rental revenue from five
of these projects includes governmental rent subsidy payments of $3,977,
$4,023 and $3,932 for the years ended December 31, 1996, 1995 and 1994,
respectively.
NOTE 11 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands, except per unit amounts)
1996 Quarters Ended March 31 June 30 September 30 December 31
- ------------------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues..................................... $37,089 $38,967 $40,680 $41,962
Expenses..................................... 28,401 29,811 29,619 29,675
Net income................................... 8,688 9,156 11,061 12,287
Net income per unit.......................... $ 0.23 $ 0.24 $ 0.27 $ 0.30
1995 Quarters Ended March 31 June 30 September 30 December 31
- ------------------- -------- ------- ------------ -----------
Revenues..................................... $32,584 $33,170 $34,328 $36,086
Expenses..................................... 28,777 27,912 27,068 27,355
Net income................................... 3,807 (18,169) 7,260 8,731
Net income per unit.......................... $ 0.13 $ (0.59) $ 0.21 $ 0.23
</TABLE>
Schedule III - Consolidated Real Estate and Accumulated Depreciation
December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at Which Carried at
December 31, 1996 (a) (b)
---------------------------------
City, State Number Buildings and Accumulated Date of Depreciable
Apartment Community Name of Units Encumbrances(c) Land (d) Improvements Total Depreciation Completion Life (e)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stabilized More Than Two Years
Irvine, California
Amherst Court.......... 162 $1,430 $11,247 $12,677 $2,255 1991 5-40 yrs.
Berkeley Court......... 152 $7,808 858 8,257 9,115 2,821 1986 5-40 yrs.
Cedar Creek............ 176 8,586 519 8,614 9,133 3,021 1985 5-40 yrs.
Columbia Court......... 58 2,601 321 2,683 3,004 881 1984 5-40 yrs.
Cornell Court.......... 109 5,202 785 5,044 5,829 1,597 1984 5-40 yrs.
Cross Creek............ 136 6,754 561 7,287 7,848 2,568 1985 5-40 yrs.
Dartmouth Court........ 294 17,303 2,674 17,230 19,904 5,513 1986 5-40 yrs.
Deerfield.............. 288 10,812 3,810 11,495 15,305 4,383 1975/83 5-40 yrs.
Harvard Court.......... 112 5,158 1,034 5,864 6,898 1,952 1986 5-40 yrs.
Northwood Park......... 168 7,759 1,246 8,459 9,705 3,058 1985 5-40 yrs.
Northwood Place........ 604 30,143 4,613 34,096 38,709 11,191 1986 5-40 yrs.
Orchard Park........... 60 1,138 2,099 3,237 837 1982 5-40 yrs.
Park West.............. 880 33,992 18,768 53,522 72,290 25,328 1970/71/72 5-40 yrs.
Parkwood............... 296 12,642 7,667 12,698 20,365 4,850 1974 5-40 yrs.
Rancho San Joaquin..... 368 17,234 7,910 28,325 36,235 12,972 1976 5-40 yrs.
San Carlo.............. 354 2,715 25,720 28,435 5,907 1989 5-40 yrs.
San Leon............... 248 12,380 1,726 14,507 16,233 4,449 1987 5-40 yrs.
San Marco.............. 426 24,327 2,873 24,355 27,228 6,199 1988 5-40 yrs.
San Marino............. 200 9,849 1,376 11,567 12,943 3,756 1986 5-40 yrs.
San Mateo.............. 283 1,444 18,621 20,065 3,696 1990 5-40 yrs.
San Paulo.............. 382 26,591 1,906 26,785 28,691 2,487 1993 5-40 yrs.
San Remo............... 248 13,832 1,765 14,287 16,052 4,457 1986/88 5-40 yrs.
Stanford Court......... 320 13,877 2,202 14,226 16,428 5,202 1985 5-40 yrs.
The Parklands.......... 121 6,512 68 7,068 7,136 2,216 1983 5-40 yrs.
Turtle Rock Canyon..... 217 18,791 1,889 19,969 21,858 3,703 1991 5-40 yrs.
Turtle Rock Vista...... 252 13,405 6,327 13,340 19,667 5,120 1976/77 5-40 yrs.
Windwood Glen.......... 196 9,852 1,266 9,668 10,934 3,124 1985 5-40 yrs.
Windwood Knoll......... 248 1,111 11,575 12,686 3,724 1983 5-40 yrs.
Woodbridge Oaks........ 120 832 6,718 7,550 2,217 1983 5-40 yrs.
Woodbridge Pines....... 220 8,459 5,755 10,484 16,239 3,985 1976 5-40 yrs.
Woodbridge Villas...... 258 4,353 9,105 13,458 3,729 1982 5-40 yrs.
Woodbridge Willows..... 200 9,655 1,421 11,468 12,889 4,888 1984 5-40 yrs.
------ ------- ------- ------- ------- -------
8,156 333,524 92,363 466,383 558,746 152,086
------ ------- ------- ------- ------- -------
Newport Beach, California
Bayport................ 104 4,862 3,146 4,226 7,372 1,678 1971 5-40 yrs.
Bayview................ 64 3,510 2,353 2,925 5,278 1,193 1971 5-40 yrs.
Baywood................ 388 20,972 10,809 20,362 31,171 7,450 1973/84 5-40 yrs.
Mariner Square......... 114 5,637 392 5,030 5,422 3,106 1969 5-40 yrs.
Newport North.......... 570 37,970 8,849 31,314 40,163 9,963 1986 5-40 yrs.
Promontory Point....... 520 36,303 18,775 41,153 59,928 16,083 1974 5-40 yrs.
------ ------- ------- ------- ------- -------
1,760 109,254 44,324 105,010 149,334 39,473
------ ------- ------- ------- ------- -------
Tustin, California
Rancho Alisal.......... 356 20,625 3,558 19,894 23,452 5,884 1988/91 5-40 yrs.
Rancho Maderas......... 266 19,372 1,144 16,263 17,407 3,732 1989 5-40 yrs.
Rancho Mariposa........ 238 12,839 683 16,241 16,924 2,535 1992 5-40 yrs.
Rancho Tierra.......... 252 19,622 1,215 16,470 17,685 3,918 1989 5-40 yrs.
Sierra Vista........... 306 2,318 22,667 24,985 3,405 1992 5-40 yrs.
------ -------- -------- -------- -------- --------
1,418 72,458 8,918 91,535 100,453 19,474
Total Stabilized More Than ------ -------- -------- -------- -------- --------
Ttwo Years................... 11,334 $515,236 $145,605 $662,928 $808,533 $211,033
======= ======== ======== ======== ======== ========
Stabilized Less Than Two Years
Irvine, California
Villa Coronado......... 513 $5,842 $ 37,985 $43,827 $2,058 1995/96 5-40 yrs.
Santa Rosa............. 368 3,169 27,615 30,784 1,410 1995/96 5-40 yrs.
Santa Clara............ 378 3,624 31,126 34,750 1,468 1995/96 5-40 yrs.
------ ------- -------- -------- -------
1,259 12,635 96,726 109,361 4,936
------ ------- -------- -------- -------
Tustin, California
Rancho Monterey........ 436 6,823 33,970 40,793 1,385 1995/96 5-40 yrs.
------ ------- -------- -------- -------
436 6,823 33,970 40,793 1,385
------ ------- --------- -------- -------
Newport Coast, California
Newport Ridge.......... 512 9,357 45,265 54,622 1,813 1995/96 5-40 yrs.
------ ------- --------- -------- -------
512 9,357 45,265 54,622 1,813
------ ------- --------- -------- -------
Total Stabilized Less Than
TwoYears................... 2,207 $28,815 $175,961 $204,776 $8,134
====== ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Gross Amount at Which Carried at
December 31, 1996 (a) (b)
Number Encumbrances Buildings and Accumulated Date of Depreciable
Apartment Community Name (City) of Units (c) Land (d) Improvements Total Depreciation Completion Life (e)
- ------------------------------- -------- ------------ -------- ------------- ----- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Delivered Units In Projects
Under Construction
Baypointe (Newport
Beach)...................... 68 $ 953 $ 6,609 $ 7,562 $ 13 1996 5-40 yrs.
Santa Maria (Irvine)........ 47 697 4,426 5,123 13 1996 5-40 yrs.
------ -------- -------- -------- ---------- --------
Total Delivered Units.......... 115 $ 1,650 $ 11,035 $ 12,685 $ 26
------ -------- -------- -------- ---------- --------
Total Stabilized and Delivered. 13,656 $515,236 $176,070 $849,924 $1,025,994 $219,193
------ -------- -------- ------- --------- --------
Units Under Construction
Baypointe (Newport Beach)...... 232 $ 3,237 $ 18,602 $ 21,839
Santa Maria (Irvine)........... 180 2,646 11,638 14,284
The Colony (Newport
Beach)........................ 245 3,545 9,772 13,317
Santa Rosa II (Irvine)......... 207 5,999 1,323 7,322
Other.......................... 1,479 1,479
------ -------- -------- ----------
Total Units Under
Construction 864 $ 15,427 $ 42,814 $ 58,241
------ -------- -------- -------- ---------- --------
Total.......................... 14,520 $515,236 $191,497 $892,738 $1,084,235 $219,193
====== ======== ======== ======== ========== ========
- ----------
Notes:
(a) The aggregate cost of land and buildings for federal income tax purposes
is approximately $654,007 (unaudited).
(b) The gross amount at which buildings and improvements are carried represent
historical cost amounts incurred in the development of the projects and
capital improvements incurred subsequent to the completion of
construction. Prior to the General Partner's December 1993 initial
public offering, the gross land, buildings and improvements amounts
represent The Irvine Company's historical cost basis.
(c) Encumbrances represent debt secured by deeds of trust.
(d) Land acquired from The Irvine Company is recorded at cost based on the
purchase price.
(e) Estimated useful lives are five to seven years for furniture and fixtures,
five to twenty years for improvements and forty years for buildings.
</TABLE>
A summary of activity of real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
Real Estate
----------------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................................... $1,005,633 $ 869,756 $792,510
Additions:
Through cash expenditures........................................ 66,857 124,368 61,590
Through assumption of tax-exempt assessment district debt........ 2,771 4,184 15,656
Through issuance of partnership units............................ 8,973 7,325
--------- --------- -------
Balance at end of year............................................ $1,084,234 $1,005,633 $869,756
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated Depreciation
----------------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 192,106 $ 169,039 $148,052
Charges to depreciation expense................................... 27,087 23,067 20,987
--------- --------- -------
Balance at end of year............................................ $ 219,193 $ 192,106 $169,039
========= ========= =======
See report of independent auditors and accompanying notes.
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
Unaudited Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
1997 1996
------------- ------------
(in thousands)
<S> <C> <C>
ASSETS
Real estate assets, at cost
Land........................................................................ $ 205,595 $ 176,070
Buildings and improvements.................................................. 994,117 849,924
--------- ---------
1,199,712 1,025,994
Accumulated depreciation.................................................... (240,718) (219,193)
--------- ---------
958,994 806,801
Under development, including land........................................... 105,265 58,241
--------- ---------
1,064,259 865,042
Cash and cash equivalents........................................................ 2,373 3,205
Restricted cash.................................................................. 1,434 1,376
Deferred financing costs, net.................................................... 18,722 20,187
Other assets..................................................................... 15,038 11,188
--------- ---------
$1,101,826 $ 900,998
========= =========
LIABILITIES
Mortgages and notes payable
Line of credit.............................................................. $ 135,000 $ 16,000
Tax-exempt mortgage bond financings......................................... 326,569 329,248
Conventional mortgage financings............................................ 132,902 134,761
Mortgage notes payable to The Irvine Company................................ 50,608 51,227
Tax-exempt assessment district debt......................................... 21,747 21,828
--------- ---------
666,826 553,064
Accounts payable and accrued liabilities......................................... 31,762 21,496
Security deposits................................................................ 7,485 6,094
--------- ---------
706,073 580,654
--------- ---------
PARTNERS' CAPITAL
General partner, 19,879 partnership units at September 30, 1997 and 18,556
at December 31, 1996............................................................ 210,685 180,017
Limited partners, 24,094 partnership units at September 30, 1997 and 22,292
at December 31, 1996............................................................ 185,068 140,327
--------- ---------
395,753 320,344
--------- ---------
$1,101,826 $ 900,998
========= =========
- ----------
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
Unaudited Condensed Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1997 1996
-------- --------
(in thousands, except per unit
amounts)
<S> <C> <C>
REVENUES
Rental income................................................. $133,114 $114,000
Other income.................................................. 3,093 2,317
Interest income............................................... 659 419
------- -------
136,866 116,736
------- -------
EXPENSES
Property expenses............................................. 28,790 24,903
Real estate taxes............................................. 10,959 10,023
Property management fees...................................... 3,809 3,316
Interest expense, net......................................... 21,949 22,378
Amortization of deferred financing costs...................... 1,882 1,975
Depreciation and amortization................................. 21,700 20,346
General and administrative.................................... 4,822 4,890
------- -------
93,911 87,831
------- -------
NET INCOME.................................................... $ 42,955 $ 28,905
======= =======
ALLOCATION OF NET INCOME:
General partner............................................... $ 19,399 $ 13,148
Limited partner............................................... $ 23,556 $ 15,757
PARTNERSHIP UNIT DATA:
Weighted average partnership units outstanding................ 43,350 38,410
Net income per unit........................................... $0.99 $0.75
Cash distributions declared and paid per unit................. $ 1.105 $ 1.075
- ----------
See accompanying notes.
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
Unaudited Condensed Consolidated Statements of Changes in Partners' Capital
<TABLE>
<CAPTION>
Irvine Apartment Limited
Communities, Inc. Partners Total
----------------- -------- -----
(in thousands)
<S> <C> <C> <C>
PARTNERS' CAPITAL
Balance at January 1, 1996...................... $155,433 $109,133 $264,566
Net income................................. 13,148 15,757 28,905
Contributions.................................. 30,151 33,185 63,336
Distributions.............................. (18,800) (22,534) (41,334)
------- ------- -------
Balance at September 30, 1996................... $179,932 $135,541 $315,473
======= ======= =======
Balance at January 1, 1997...................... $180,017 $140,327 $320,344
Net income................................. 19,399 23,556 42,955
Contributions.............................. 32,698 47,286 79,984
Distributions.............................. (21,429) (26,101) (47,530)
------- ------- -------
Balance at September 30, 1997................... $210,685 $185,068 $395,753
======= ======= =======
PARTNERSHIP UNITS OUTSTANDING
Balance at January 1, 1996...................... 16,975 20,397 37,372
Additional partnership units issued........ 1,509 1,644 3,153
------- ------- -------
Balance at September 30, 1996................... 18,484 22,041 40,525
======= ======= =======
Balance at January 1, 1997...................... 18,556 22,292 40,848
Additional partnership units issued........ 1,323 1,802 3,125
------- ------- -------
Balance at September 30, 1997................... 19,879 24,094 43,973
======= ======= =======
- ----------
See accompanying notes.
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
Unaudited Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1997 1996
---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income............................................................................... $ 42,955 $ 28,905
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs.............................................. 1,882 1,975
Depreciation and amortization......................................................... 21,700 20,346
Increase (decrease) in cash attributable to changes in assets and liabilities:
Restricted cash................................................................... (58) (169)
Other assets...................................................................... (4,050) (1,283)
Accounts payable and accrued liabilities.......................................... 5,612 5,050
Security deposits................................................................. 1,391 924
-------- --------
Net Cash Provided by Operating Activities................................................ 69,432 55,748
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital improvements to operating real estate assets..................................... (3,199) (2,914)
Investment in real estate assets, net of construction payables........................... (202,608) (41,306)
-------- --------
Net Cash Used in Investing Activities.................................................... (205,807) (44,220)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under lines of credit......................................................... 153,000 55,900
Payments on lines of credit.............................................................. (34,000) (77,900)
Payments on tax-exempt mortgage bond financings.......................................... (2,679) (2,493)
Principal payments....................................................................... (2,559) (2,916)
Deferred financing costs................................................................. (417)
Contributions from partners.............................................................. 69,728 60,387
Distributions to partners................................................................ (47,530) (41,334)
-------- --------
Net Cash Provided by (Used in) Financing Activities...................................... 135,543 (8,356)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... (832) 3,172
Cash and Cash Equivalents at Beginning of Period......................................... 3,205 4,392
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 2,373 $ 7,564
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid, net of amounts capitalized........................................... $ 21,348 $ 22,605
Tax-exempt assessment district debt assumed......................................... $ -- $ 2,771
- ----------
See accompanying notes.
</TABLE>
IRVINE APARTMENT COMMUNITIES, L.P.
Notes to Unaudited Condensed Financial Statements
Note 1 - Organization
Irvine Apartment Communities, Inc. (the "Company"),
operates as a real estate investment trust ("REIT") under the Internal
Revenue Code of 1986, as amended. In connection with the Company's initial
public offering of common stock (the "Offering"), the Company obtained a
general partnership interest in and became the sole managing general
partner of Irvine Apartment Communities, L.P., a Delaware limited
partnership (the "Operating Partnership"). The Operating Partnership was
formed on November 15, 1993 and began operations as of December 8, 1993,
the date of the Offering. In connection with the Offering, The Irvine
Company transferred 42 apartment communities and a 99% interest in a
limited partnership which owns one apartment community to the Operating
Partnership. At September 30, 1997 the Company had a 45.2% general
partnership interest in and was the sole managing general partner of the
Operating Partnership. At September 30, 1997, The Irvine Company had a
54.6% limited partnership interest in the Operating Partnership. On
February 4, 1997, the Operating Partnership acquired the assets of Thompson
Residential Company, Inc. (see Note 5). The purchase price was paid by
the issuance of 74,523 limited partnership units in the Operating
Partnership. At September 30, 1997, Thompson Residential Company, Inc. had
a 0.2% limited partnership interest in the Operating Partnership. The
Operating Partnership's management and operating decisions are under the
unilateral control of the Company. The Company was incorporated in
Delaware on September 10, 1993. On May 2, 1996, the Company changed its
state of incorporation from Delaware to Maryland.
The Company is a self-administered equity REIT engaged in the
operation and development (through the Operating Partnership) of apartment
communities in Orange County, California and, beginning in 1997, other
locations in California. The Operating Partnership utilizes independent third
party property management and construction management firms. As of September
30, 1997 the Operating Partnership owned 55 apartment communities representing
14,991 apartment units and 1,110 units under construction (collectively,
the "Properties"). The Operating Partnership broke ground on its first
"off-Ranch" apartment community, located in Northern California's Silicon
Valley, in May 1997. On June 30, 1997, the Operating Partnership acquired
a 923-unit apartment community in the La Jolla region of north San Diego
County (see Note 6). Until July 31, 2020, the Operating Partnership has
the exclusive right, but not the obligation, to acquire land from The
Irvine Company for development of additional apartment communities on the
Irvine Ranch.
Note 2 - Basis of Presentation
The accompanying financial statements include the consolidated
accounts of the Operating Partnership and its financially controlled
subsidiary. All intercompany accounts and transactions have been eliminated
in consolidation.
Profits and losses are generally allocated to the Company and
to the limited partners based upon their respective ownership interests in the
Operating Partnership. Under the terms of the partnership agreement, all
costs incurred by the Company relating to the ownership of its interest in and
operation of the Operating Partnership, including the compensation of its
officers and employees, stock incentive plans, director fees and the costs and
expenses of being a public company, are paid by the Operating Partnership. In
addition, The Irvine Company generally has the right, but not the obligation,
to match on the same terms and conditions any capital contributions made by
the Company and the Operating Partnership based on the pro rata ownership
interest at the time of such contribution.
The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of September 30, 1997 and December 31, 1996 and the revenues
and expenses for the three months and nine months ended September 30, 1997
and 1996. Actual results could differ from those estimates.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included. All such adjustments are of a normal, recurring nature.
Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997. These unaudited condensed financial statements
should be read in conjunction with the Consolidated Financial Statements
and notes thereto of the Operating Partnership included in this Prospectus
and Registration Statement.
Note 3 - Mortgages and Notes Payable
Line of Credit: In June 1997, the Operating Partnership
renewed its $250 million unsecured revolving credit facility. The
credit facility has a term of three years and currently bears interest at
LIBOR plus 0.70% or prime. The credit facility provides for the borrowing
interest rates to be adjusted up or down reflecting credit ratings on the
Operating Partnership's senior unsecured long-term indebtedness. Under the
credit facility, the Operating Partnership is able to borrow funds from the
participating banks through a competitive bid process to obtain a lower
interest rate. At September 30, 1997, outstanding borrowings under the
credit facility priced on a competitive bid basis were $70 million at an
average interest spread of 0.46% over LIBOR. This revolving credit
facility, which is guaranteed by the Company, is available to finance the
Operating Partnership's ongoing rental property development program and for
general working capital needs. The Company and the Operating Partnership
must comply with certain affirmative and negative covenants, including
limitations on distributions, and the maintenance of certain net worth,
cash flow and financial ratios. At September 30, 1997 the Company and the
Operating Partnership were in compliance with all of these covenants. As
of September 30, 1997, $135 million was outstanding and $115 million was
available under the line of credit.
Shelf Registration Statements: On May 14, 1997 the Company
filed a shelf registration statement with the Securities and Exchange
Commission providing for the issuance from time to time of up to $350 million
of common stock, preferred stock, debt securities, and warrants to purchase
common stock, preferred stock and debt securities. This registration
statement replaced the Company's previous registration statement. The Company
plans to use the proceeds raised from any securities issued under its shelf
registration statement for general corporate purposes, including the
development of new apartment communities, acquisitions and the repayment of
existing debt. Availability under the Company's shelf registration statement
was $350 million at September 30, 1997. Concurrently, the Operating
Partnership filed a shelf registration statement with the Securities and
Exchange Commission providing for the issuance from time to time of up to $350
million of debt securities. The Operating Partnership plans to use the
proceeds raised from any securities issued under its shelf registration
statement for general corporate purposes, including the development of new
apartment communities, acquisitions and the repayment of existing debt.
Availability under the Operating Partnership's shelf registration statement
was $350 million at September 30, 1997.
Subsequent Event: On October 1, 1997 the Operating Partnership
issued $100 million aggregate principal amount of 7% senior unsecured notes
(the "Notes") pursuant to its shelf registration statement. The Notes are due
on October 1, 2007 and were priced at 99.21% to yield 7.10%, or 99 basis
points over the rate on U.S. Treasury securities with comparable maturity on
the date such rate was set. Net proceeds from the offering of $98.3 million
were used to repay indebtedness under the Operating Partnership's revolving
credit facility, which was used to finance The Villas of Renaissance
acquisition (see Note 6).
Note 4 - Partners' Capital
On February 20, 1997 the Company sold, in a public offering,
1.15 million shares of common stock at $27.50 per share. Concurrently, The
Irvine Company (see Note 7), pursuant to its rights under the partnership
agreement, purchased 1.39 million additional limited partnership units at
$26.06 per unit (which is equal to the public offering price of the common
stock less an amount equivalent to the underwriting discount) which are
exchangeable for common stock on a one for one basis, subject to adjustment
and certain limitations. The proceeds from the two transactions totaled $66
million and were used to repay all indebtedness then outstanding under the
revolving line of credit, and for general corporate purposes, including
ongoing development activities on and off the Irvine Ranch.
The Operating Partnership paid cash distributions of $0.365 per
partnership unit on February 28 and May 30, 1997 and $0.375 per partnership
unit on August 29, 1997. On October 23, 1997 the Operating Partnership
declared a cash dividend of $0.375 per partnership unit that is payable on
November 26, 1997. During the first and second quarters of 1996, the
Operating Partnership paid a cash dividend of $0.355 per partnership unit and
$0.365 per partnership unit during the third quarter of 1996.
As of September 30, 1997 the Company had $350 million of
availability under its shelf registration statement, which provides for the
issuance from time to time of common stock, preferred stock, debt securities,
and warrants to purchase common stock, preferred stock and debt securities
(see Note 3).
The computation of primary earnings per partnership unit for
the Operating Partnership is based on a weighted average of 43,920,321 and
43,349,958 units of partnership interest outstanding during the three and nine
months ended September 30, 1997, respectively.
Reconciliation of Partnership Units Outstanding
<TABLE>
<CAPTION>
(in thousands) Nine Months Ended September 30, 1997
----------------------------------------------------
The Irvine
Company Company Other Total
------- ---------- ----- -----
<S> <C> <C> <C> <C>
Balance at beginning of period.............. 18,556 22,292 40,848
Stock awards issued and options exercised... 156 156
Dividend reinvestment plan.................. 17 20 37
Common stock offering and related cash
contribution from The Irvine Company....... 1,150 1,394 2,544
Acquisition of Thompson Residential assets.. 75 75
Contributions of property by The Irvine
Company.................................... 313 313
------ ------ --- ------
Balance at end of period.................... 19,879 24,019 75 43,973
====== ====== === ======
Ownership interest at end of period......... 45.2% 54.6% 0.2% 100%
====== ====== === ======
<CAPTION>
Nine Months Ended September 30, 1996
----------------------------------------------------
The Irvine
Company Company Total
------- ---------- -------
<S> <C> <C> <C>
Balance at beginning of period.............. 16,975 20,397 37,372
Stock awards issued and options exercised... 10 10
Dividend reinvestment plan.................. 9 9 18
Common stock offering and related cash
contribution from The Irvine Company....... 1,490 1,491 2,981
Acquisition of Thompson Residential assets..
Contributions of property by The Irvine
Company.................................... 144 144
------ ------ ------
Balance at end of period.................... 18,484 22,041 40,525
------ ------ ------
Ownership interest at end of period......... 45.6% 54.4% 100%
====== ====== ======
</TABLE>
Note 5 - Acquisition of Thompson Residential Assets
On February 4, 1997, the Operating Partnership acquired for $2
million the assets of Thompson Residential Company, Inc. ("TRC"), a privately
held, Northern California-based multifamily development company. Included
in the purchase were options to purchase three development sites located in
Northern California's Silicon Valley. The purchase price was paid by the
issuance of 74,523 limited partnership units in the Operating Partnership,
exchangeable for common stock of the Company, with the price per unit of
$26.838 which was based on the average closing price of the Company's common
stock for the 10 trading days preceding the acquisition's closing date. In
addition, TRC may be paid up to an additional $2 million in cash or limited
partnership units if the apartment community (The Hamptons) achieves certain
performance targets. The three senior real estate executives at TRC have also
joined the Company with primary responsibility for the Company's operations
outside of the Irvine Ranch.
Note 6 - Acquisition of The Villas of Renaissance
On June 30, 1997 the Operating Partnership acquired a 923-unit
apartment community located in the La Jolla region of north San Diego County
from an unrelated third party for $127.0 million. $118.0 million of the
purchase price was funded by borrowings under the Operating Partnership's $250
million unsecured line of credit (see Note 3) and $9.0 million was funded from
cash on hand. A more detailed description of the transaction is described in
the Company's and the Operating Partnership's Current Report on Form 8-K filed
with the Securities Exchange Commission on July 15, 1997, as amended on July
23, 1997.
Note 7 - Certain Transactions With Related Parties
Substantially all costs incurred by the Company are borne by
the Operating Partnership. Included in general and administrative expenses
are charges from The Irvine Company pursuant to an administrative services
agreement covering services for risk management, income taxes and other
services of $95,000 and $80,000 for the nine months ended September 30, 1997
and 1996, respectively. The Irvine Company and the Operating Partnership
jointly purchase employee health care insurance and property and casualty
insurance. In addition, the Operating Partnership incurred rent totaling
$264,000 and $233,000 for the nine months ended September 30, 1997 and
1996, respectively, related to leases with The Irvine Company that expire
at the end of 1997 and 1998. For the nine months ended September 30, 1997
The Irvine Company contributed $568,000 in connection with partnership unit
and stock issuances under the dividend reinvestment and additional cash
investment plan.
On February 10, 1997, the Operating Partnership acquired a land
site for $8.4 million from The Irvine Company for the development of 316
rental units pursuant to the Land Rights Agreement between the Operating
Partnership and The Irvine Company. The Company's board committee of
independent directors approved the purchase in accordance with the Land Rights
Agreement. The purchase price was paid through the issuance of 313,439
additional limited partnership units in the Operating Partnership to The
Irvine Company. Pursuant to the terms of the acquisition, a portion of the
limited partnership units in the Operating Partnership are subject to refund
if the apartment community developed on the site does not achieve a 10%
unleveraged return on costs for the first twelve months following stabilized
occupancy.
On October 21, 1997, the Operating Partnership acquired a land
site for $5.7 million from The Irvine Company for the development of 196
rental units pursuant to the Land Rights Agreement. The Company's board
committee of independent directors approved the purchase in accordance with
the Land Rights Agreement. The purchase price was paid through the issuance
of 179,433 additional limited partnership units in the Operating Partnership
to The Irvine Company. Pursuant to the terms of the acquisition, a portion of
the limited partnership units in the Operating Partnership are subject to
refund if the apartment community developed on the site does not achieve a 10%
unleveraged return on costs for the first twelve months following stabilized
occupancy.
Concurrent with the Company's common stock offering on February
20, 1997 (see Note 4), The Irvine Company, pursuant to its rights under the
partnership agreement, purchased 1.39 million limited partnership units at a
price equal to the public offering price of $26.06 per unit (which is equal to
the public offering price of the common stock less an amount equivalent to the
underwriting discount) which are exchangeable for common stock on a one for
one basis, subject to adjustment and certain limitations.
One of the Company's directors is chairman of a bank which
participates in the Company's line of credit. Based on the bank's percentage
participation in the credit facility, the Operating Partnership estimates that
the amount of interest and fees paid to the bank totaled $271,000 and $196,000
in the first nine months of 1997 and the three months ended September 30,
1997, respectively. Interest and fees for the corresponding periods in 1996
were $231,000 and $61,000, respectively.
==============================================================================
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Trust or the Underwriters. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstance create an implication that there has been no change in the
affairs of the Operating Partnership or the Trust since the date hereof.
This Prospectus does not constitute an offer or solicitation by anyone in
any state 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 anyone to whom it is unlawful to make such offer or solicitation.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary...........................................................4
Risk Factors................................................................17
IAC Capital Trust...........................................................24
Recent Developments.........................................................27
Use of Proceeds.............................................................28
Operating Partnership Consolidated Ratios of Earnings to Fixed Charges
and Preferred L.P. Unit Distributions......................................28
Calitalization of IAC Capital Trust.........................................29
Capitalization of Irvine Apartment Communities, L.P.........................29
Selected Consolidated Financial Information.................................30
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Operating Partnership....................................33
Business and Properties of the Operating Partnership........................42
Policies with Respect to Certain Activities.................................56
Management..................................................................60
Principal Securityholders...................................................68
Certain Relationships and Related Transactions..............................71
Description of the Series A Preferred Securities............................75
Description of the Series A Preferred L.P. Units............................88
Relationship Between the Preferred Securities and the Preferred L.P.
Units......................................................................93
Operating Partnership Agreement.............................................94
Certain Federal Income Tax Considerations...................................97
Underwriting...............................................................104
Experts....................................................................106
Legal Matters..............................................................106
Additional Information.....................................................107
Index to Financial Statements..............................................F-1
Until __________, 1998 (__ days after the date of this Prospectus), all
dealers effecting transactions in the Series A Preferred Securities, whether
or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
==============================================================================
------------
Series A Preferred Securities
IAC Capital Trust
% Series A REIT Enhanced Trust Originated
Preferred Securities(SM) ("TOPrS(SM)")
[IAC Logo]
------------------
PROSPECTUS
------------------
Merrill Lynch & Co.
Goldman, Sachs & Co.
J.P. Morgan & Co.
Smith Barney Inc.
, 1997
==============================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 31. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission registration fee........ $34,849
NASD filing fee............................................ 12,000
Rating agency fees......................................... *
Trustee's fees............................................. *
Printing and engraving expenses............................ *
Legal fees and expenses.................................... *
Blue sky filing and legal fees and expenses................ *
Accounting fees and expenses............................... *
Miscellaneous.............................................. *
-------
Total.................................................... $ *
=======
__________
*To be filed by amendment
All amounts estimated except for Securities and Exchange
Commission registration fee.
Item 32. Sales to Special Parties.
See Item 33.
Item 33. Recent Sales of Unregistered Securities.
Irvine Apartment Communities, L.P.: Incorporated by reference
to (i) Item 10 of the Registration Statement on Form 10 of the Operating
Partnership, filed on May 15, 1997; (ii) Item 2 of the Quarterly Report on
Form 10-Q of the Operating Partnership for the quarter ended March 31, 1997;
(iii) Item 2 of the Quarterly Report on Form 10-Q of the Operating Partnership
for the quarter ended June 30, 1997, as amended; and (iv) Item 2 of the
Quarterly Report on Form 10-Q of the Operating Partnership for the quarter
ended September 30, 1997.
IAC Capital Trust: Not applicable.
Item 34. Indemnification of Directors and Officers.
The Amended and Restated Declaration of Trust (the
"Declaration") of the Trust will provide that no Trustee, affiliate of any
Trustee or any officers, directors, shareholders, members, partners, employees,
representatives or agents of any Trustee or any employee or agent of the Trust
or its affiliates (each, an "Indemnified Person") shall be liable, responsible
or accountable in damages or otherwise to any employee or agent of the Trust
or its affiliates, or any officers, directors, shareholders, employees,
representatives or agents of the Operating Partnership or the Company or their
affiliates or to any holders of Preferred Securities of the Trust for any
loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Indemnified Person in good faith on behalf of the Trust and in
a manner such Indemnified Person reasonably believed to be within the scope of
the authority conferred on such Indemnified Person by the Declaration or by
law, except that an Indemnified Person shall be liable for any such loss,
damage or claim incurred by reason of such Indemnified Person's gross
negligence (or, in the case of the Property Trustee of the Trust, negligence)
or willful misconduct with respect to such acts or omissions. The Declaration
also provides that, to the fullest extent permitted by applicable law, the
Operating Partnership and the Company shall indemnify and hold harmless each
Indemnified Person from and against any loss, damage or claim incurred by such
Indemnified Person by reason of any act or omission performed or omitted by
such Indemnified Person in good faith on behalf of the Trust and in a manner
such Indemnified Person reasonably believed to be within the scope of authority
conferred on such Indemnified Person by the Declaration, except that no
Indemnified Person shall be entitled to be indemnified in respect of any loss,
damage or claim incurred by such Indemnified Person by reason of gross
negligence (or, in the case of the Property Trustee of the Trust, negligence)
or willful misconduct with respect to such acts or omissions. The Declaration
further provides that to the fullest extent permitted by applicable law,
expenses (including legal fees) incurred by an Indemnified Person in defending
any claim, demand, action, suit or the final disposition of such claim,
demand, action, suit or proceeding shall, from time to time, be advanced by
the Operating Partnership or the Company prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Company and
the Operating Partnership of an undertaking by or on behalf of the Indemnified
Person to repay such amount if it shall be determined that the Indemnified
Person is not entitled to be indemnified pursuant to the Declaration.
The Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement") of the Operating Partnership dated as of December 1,
1993, as amended, contains provisions indemnifying the Company and the
Company's officers and directors against certain liabilities. The Partnership
Agreement provides for indemnification of the Company and the Company's
officers and directors to the fullest extent permitted by law; provided that no
indemnification shall be provided (i) for willful misconduct or a knowing
violation of the law or (ii) for any transaction for which a party seeking
indemnification received an improper personal benefit in violation or breach
of any provision of the Partnership Agreement. Such indemnification includes
the advance of expenses. Any indemnification pursuant to the Partnership
Agreement shall be made only out of the assets of the Operating Partnership,
and neither the Company nor any limited partner of the Operating Partnership
shall have any obligation to contribute to the capital of the Operating
Partnership or otherwise provide funds to enable the Operating Partnership to
fund its indemnification obligations. The indemnification provided by the
Partnership Agreement shall be in addition to any other rights to which a
person may be entitled. Any amendment, modification or repeal of the
indemnification provisions of the Partnership Agreement shall be prospective
only, and shall not apply to or have any effect on any right to
indemnification provided thereunder with respect to acts or omissions
occurring prior to such amendment, modification or repeal.
In addition, the Company's officers and directors are
indemnified under Maryland law and the Company's Articles of Incorporation.
Section 2-418 of the Maryland General Corporation Law permits the
indemnification of directors, officers, employees and agents of Maryland
corporations. ARTICLE EIGHTH of the Company's Articles of Amendment and
Restatement (the "Articles") authorizes the indemnification of directors and
officers to the full extent required or permitted by the General Laws of the
State of Maryland, now or hereafter in force, whether such persons are serving
the Company or, at its request, any other entity, which indemnification shall
include the advance of expenses under the procedures and to the full extent
permitted by law. ARTICLE EIGHTH of the Articles further provides that the
foregoing rights of indemnification shall not be exclusive of any other rights
to which those seeking indemnification may be entitled and that no amendment
or repeal of ARTICLE EIGHTH shall apply to or have any effect on any right to
indemnification provided thereunder with respect to acts or omissions
occurring prior to such amendment or repeal. In addition, the Company's
officers and directors are covered by certain directors' and officers'
liability insurance policies maintained by the Company. Reference is made to
Section 2-418 of the Maryland General Corporation Law and ARTICLE EIGHTH of
the Articles which are incorporated herein by reference.
Item 35. Treatment of Proceeds from Stock Being Registered.
The proceeds from the Securities being registered herein
will be credited to Redeemable Preferred Securities in the amount of $25
per share which will be presented outside of shareholders' equity in IAC
Capital Trust's balance sheet.
Item 36. Financial Statements and Exhibits.
(a) Financial Statements (all included in Prospectus)
IAC Capital Trust
Report of Independent Auditors
Balance Sheet as of October 31, 1997
Notes to Balance Sheet
Irvine Apartment Communities, L.P.
Report of Independent Auditors
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Changes in Partners' Capital for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Schedule III -- Consolidated Real Estate and Accumulated Depreciation
Unaudited Condensed Consolidated Financial Information
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996
Unaudited Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1997 and 1996
Unaudited Condensed Consolidated Statements of Changes in Partners'
Capital for the nine months ended September 30, 1997 and 1996
Unaudited Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996
Notes to Unaudited Condensed Consolidated Financial Statements
(b) Exhibits
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Purchase and Sale Agreement and Joint Escrow Instructions dated
April 18, 1997 by and between Aoki Construction (CA) Co.,
Ltd. and the Operating Partnership (incorporated by reference
to Exhibit 2.1 of the Current Report on Form 8-K of the
Company and the Operating Partnership filed on August 6,
1997).
3.1 Agreement of Limited Partnership of the Operating Partnership (the
"Operating Partnership Agreement") (incorporated by
reference to Exhibit 10.1 of the Annual Report on Form 10-K
of the Company for the year ended December 31, 1993, File No.
1-12478 (the "Company's 1993 Form 10-K")).
3.1.1 Amendment No. 1 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.1 of the Quarterly
Report on Form 10-Q of the Company for the quarter ended June
30, 1995, File No. 1-12478 (the "Company's 1995 Second
Quarter Form 10-Q")).
3.1.2 Amendment No. 2 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.2 of the Company's
1995 Second Quarter Form 10-Q).
3.1.3 Amendment No. 3 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.3 of the Company's
1995 Second Quarter Form 10-Q).
3.1.4 Amendment No. 4 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.4 of the Company's
Registration Statement on Form 8-B, filed with the Securities
and Exchange Commission on April 30, 1996 (the "Company's
Form 8-B")).
3.1.5 Amendment No. 5 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.5 of the Company's
Form 8-B).
3.1.6 Amendment No. 6 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 24 of Amendment No. 6
to the Schedule 13D filed on March 4, 1997 by The Irvine
Company, TIC Investment Company A, TIC Investment Company C
and Donald L. Bren ("Amendment No. 6 to the Schedule 13D")).
3.1.7 Amendment No. 7 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 25 of Amendment No. 6
to the Schedule 13D).
3.1.8 Amendment No. 8 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 3.1.8 of the Quarterly
Report on Form 10-Q of the Company and the Operating
Partnership for the quarter ended September 30, 1997 (the
"1997 Third Quarter Form 10-Q")
3.1.9 Amendment No. 9 to the Operating Partnership Agreement.*
4.1 Indenture dated as of October 1, 1997 between the Operating
Partnership and First Trust of California, National
Association, as Trustee (the "Trustee") (incorporated by
reference to Exhibit 4.1 of the Current Report on Form 8-K of
the Company and the Operating Partnership filed on October 1,
1997).
4.2 Supplemental Indenture No. 1 dated as of October 1, 1997, relating
to the Operating Partnership's 7% Notes due 2007, between the
Operating Partnership and the Trustee (incorporated by
reference to Exhibit 4.2 of the Current Report on Form 8-K of
the Company and the Operating Partnership filed on October 1,
1997).
4.3 Form of Trust Preferred Security (included in Exhibit 4.5).
4.4 Declaration of Trust of IAC Capital Trust (with attached
Certificate of Trust).
4.5 Form of Amended and Restated Declaration of Trust of IAC Capital
Trust.*
5.1 Opinion of Davis Polk & Wardwell.*
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the
validity of the Series A Trust Preferred Securities of IAC
Capital Trust.*
8.1 Opinion of Davis Polk & Wardwell re: tax matters.*
10.1 Purchase and Sale Agreement and Joint Escrow Instructions dated
April 18, 1997 by and between Aoki Construction (CA) Co.,
Ltd. and the Operating Partnership (see Exhibit 2.1).
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the
Company's 1993 Form 10-K).
10.4 Miscellaneous Rights Agreement among the Company and the persons
named therein (incorporated by reference to Exhibit 10.4 of
the Company's Form 8-B).
10.4.1 Amendment No. 1 to the Miscellaneous Rights Agreement
(incorporated by reference to Exhibit 10.4.1 of the 1997
Third Quarter Form 10-Q).
10.5 Administrative Services Agreement (incorporated by reference to
Exhibit 10.5 of the Company's 1993 Form 10-K).
10.5.1 Amendment and Extension to the Administrative Services Agreement
(incorporated by reference to Exhibit 10.5.1 of the Annual
Report on Form 10-K of the Company for the year ended
December 31, 1994).
10.6 Exclusive Land Rights and Non-Competition Agreement (incorporated
by reference to Exhibit 10.6 of the Company's 1993 Form 10-K).
10.6.1 Amendment No. 1 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.1 of the
Company's 1995 Second Quarter Form 10-Q).
10.6.2 Amendment No. 2 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.2 of the
Company's 1995 Second Quarter Form 10-Q).
10.6.3 Amendment No. 3 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.3 of the
Company's Form 8-B).
10.6.4 Amendment No. 4 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.4 of the
1997 Third Quarter Form 10-Q).
10.7 Contribution Agreement and Escrow Instructions Agreement
(incorporated by reference to Exhibit 10.7 of the Company's
1993 Form 10-K).
10.8 Irvine Apartment Communities, Inc. 1993 Stock Option Plan for
Directors (incorporated by reference to Exhibit 10.8 of the
Company's 1993 Form 10-K).
10.9 Irvine Apartment Communities, Inc. 1993 Long-Term Stock Incentive
Plan (incorporated by reference to Exhibit 10.9 of the
Company's 1993 Form 10-K).
10.10 Irrevocable Trust Agreement (incorporated by reference to Exhibit
10.10 of the Company's 1993 Form 10-K).
10.11 Revolving Credit Agreement dated as of June 27, 1997 (incorporated
by reference to Exhibit 10.11 of the Quarterly Report on Form
10-Q of the Company and the Operating Partnership for the
quarter ended June 30, 1997 (the "1997 Second Quarter Form
10-Q")).
10.12 Indenture of Trust for Tax-Exempt Mortgage Bond Financing
(incorporated by reference to Exhibit 10.13 of the Company's
1995 Second Quarter Form 10-Q).
10.13 Employment Arrangement Letter with Chief Executive Officer
(incorporated by reference to Exhibit 10.13 of the 1997
Second Quarter Form 10-Q).
10.14 Irvine Apartment Communities, Inc. 1996 Long-Term Stock Incentive
Plan (incorporated by reference to Exhibit 10.14 of the
Company's Form 8-B).
10.15 Severance Agreement with the Company's former Chief Financial
Officer (incorporated by reference to Exhibit 10.15 of the
Company's 1996 Form 10-K).
10.16 Severance Agreement with the Company's former Chief Executive
Officer (incorporated by reference to Exhibit 10.16 of the
Company's 1996 Form 10-K).
12 Statement re: Computation of Consolidated Ratio of Earnings to
Fixed Charges of the Operating Partnership.
21.1 Subsidiaries of the Operating Partnership (incorporated by
reference to Exhibit 21 of the Registration Statement on Form
10 of the Operating Partnership filed on May 15, 1997).
21.2 Subsidiaries of IAC Capital Trust (not applicable--no
subsidiaries).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Davis Polk & Wardwell (included in Exhibits 5.1 and
8.1).
23.3 Consent of Skadden, Arps, Slate Meagher & Flom LLP (included in
Exhibit 5.2).
24 Powers of Attorney (included on the signature pages hereof).
- ------------
* To be filed by Amendment.
Item 37. Undertakings.
The undersigned registrant hereby undertake to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, trustees and
controlling persons of the registrant pursuant to the foregoing provisions or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a
director, officer, trustee or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, trustee or controlling person, in connection with the
securities being registered hereunder, 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 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby further undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
undersigned registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-11 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Newport Beach, California, on the
4th day of November, 1997.
IAC CAPITAL TRUST, a Delaware business trust
By: Irvine Apartment Communities, Inc.,
as sponsor
By: /s/ Shawn Howie
-------------------------------------
Shawn Howie
Vice President, Corporate Finance and
Controller
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints James E. Mead, Shawn Howie,
Jeffrey Small and James M. Lurie, and each of them, his true and lawful
attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, and in any and all capacities, to
sign any and all amendments (including post-effective amendments) to the
Registration Statement to which this power of attorney is attached, as well as
any registration statement (or amendment thereto) relating to one or more of
the offerings covered hereby filed pursuant to Rule 462(b) promulgated under
the Securities Act of 1933, as amended, and to file the same and all exhibits
to them and other documents to be filed in connection with them, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities as Directors and Officers of Irvine Apartment Communities, Inc.,
the sponsor of the registrant, and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------- ----------------------------- -----------------
<S> <C> <C>
/s/ Donald Bren
- ------------------------- Chairman of the Board of November 4, 1997
Donald Bren Directors
/s/ William H. McFarland
- ------------------------- President and Chief Executive November 4, 1997
William H. McFarland Officer and Director
(Principal Executive Officer)
/s/ Anthony M. Frank
- -------------------------
Anthony M. Frank Director November 4, 1997
/s/ John F. Grundhofer
- -------------------------
John F. Grundhofer Director November 4, 1997
/s/ Bowen H. McCoy
- -------------------------
Bowen H. McCoy Director November 4, 1997
/s/ Michael D. McKee
- -------------------------
Michael D. McKee Director November 4, 1997
/s/ Jack W. Peltason
- -------------------------
Jack W. Peltason Director November 4, 1997
/s/ John F. Seymour, Jr.
- -------------------------
John F. Seymour, Jr. Director November 4, 1997
/s/ Raymond L. Watson
- -------------------------
Raymond L. Watson Director November 4, 1997
/s/ James E. Mead
- ------------------------- Senior Vice President, Chief November 4, 1997
James E. Mead Financial Officer and Secretary
(Principal Financial Officer)
/s/ Shawn Howie
- ------------------------- Vice President, Corporate November 4, 1997
Shawn Howie Finance and Controller
(Principal Accounting Officer)
</TABLE>
File No: 333-_________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------
EXHIBITS
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------
IAC CAPITAL TRUST
==============================================================================
List of Exhibits
Exhibit
Number Description
- ------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Purchase and Sale Agreement and Joint Escrow Instructions dated
April 18, 1997 by and between Aoki Construction (CA) Co.,
Ltd. and the Operating Partnership (incorporated by reference
to Exhibit 2.1 of the Current Report on Form 8-K of the
Company and the Operating Partnership filed on August 6,
1997).
3.1 Agreement of Limited Partnership of the Operating Partnership (the
"Operating Partnership Agreement") (incorporated by
reference to Exhibit 10.1 of the Annual Report on Form 10-K
of the Company for the year ended December 31, 1993, File No.
1-12478 (the "Company's 1993 Form 10-K")).
3.1.1 Amendment No. 1 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.1 of the Quarterly
Report on Form 10-Q of the Company for the quarter ended June
30, 1995, File No. 1-12478 (the "Company's 1995 Second
Quarter Form 10-Q")).
3.1.2 Amendment No. 2 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.2 of the Company's
1995 Second Quarter Form 10-Q).
3.1.3 Amendment No. 3 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.3 of the Company's
1995 Second Quarter Form 10-Q).
3.1.4 Amendment No. 4 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.4 of the Company's
Registration Statement on Form 8-B, filed with the Securities
and Exchange Commission on April 30, 1996 (the "Company's
Form 8-B")).
3.1.5 Amendment No. 5 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 10.1.5 of the Company's
Form 8-B).
3.1.6 Amendment No. 6 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 24 of Amendment No. 6
to the Schedule 13D filed on March 4, 1997 by The Irvine
Company, TIC Investment Company A, TIC Investment Company C
and Donald L. Bren ("Amendment No. 6 to the Schedule 13D")).
3.1.7 Amendment No. 7 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 25 of Amendment No. 6
to the Schedule 13D).
3.1.8 Amendment No. 8 to the Operating Partnership Agreement
(incorporated by reference to Exhibit 3.1.8 of the Quarterly
Report on Form 10-Q of the Company and the Operating
Partnership for the quarter ended September 30, 1997 (the
"1997 Third Quarter Form 10-Q")
3.1.9 Amendment No. 9 to the Operating Partnership Agreement.*
4.1 Indenture dated as of October 1, 1997 between the Operating
Partnership and First Trust of California, National
Association, as Trustee (the "Trustee") (incorporated by
reference to Exhibit 4.1 of the Current Report on Form 8-K of
the Company and the Operating Partnership filed on October 1,
1997).
4.2 Supplemental Indenture No. 1 dated as of October 1, 1997, relating
to the Operating Partnership's 7% Notes due 2007, between the
Operating Partnership and the Trustee (incorporated by
reference to Exhibit 4.2 of the Current Report on Form 8-K of
the Company and the Operating Partnership filed on October 1,
1997).
4.3 Form of Trust Preferred Security (included in Exhibit 4.5).
4.4 Declaration of Trust of IAC Capital Trust (with attached
Certificate of Trust).
4.5 Form of Amended and Restated Declaration of Trust of IAC Capital
Trust.*
5.1 Opinion of Davis Polk & Wardwell.*
5.2 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding the
validity of the Series A Trust Preferred Securities of IAC
Capital Trust.*
8.1 Opinion of Davis Polk & Wardwell re: tax matters.*
10.1 Purchase and Sale Agreement and Joint Escrow Instructions dated
April 18, 1997 by and between Aoki Construction (CA) Co.,
Ltd. and the Operating Partnership (see Exhibit 2.1).
10.2 Lease Agreement (incorporated by reference to Exhibit 10.2 of the
Company's 1993 Form 10-K).
10.4 Miscellaneous Rights Agreement among the Company and the persons
named therein (incorporated by reference to Exhibit 10.4 of
the Company's Form 8-B).
10.4.1 Amendment No. 1 to the Miscellaneous Rights Agreement
(incorporated by reference to Exhibit 10.4.1 of the 1997
Third Quarter Form 10-Q).
10.5 Administrative Services Agreement (incorporated by reference to
Exhibit 10.5 of the Company's 1993 Form 10-K).
10.5.1 Amendment and Extension to the Administrative Services Agreement
(incorporated by reference to Exhibit 10.5.1 of the Annual
Report on Form 10-K of the Company for the year ended
December 31, 1994).
10.6 Exclusive Land Rights and Non-Competition Agreement (incorporated
by reference to Exhibit 10.6 of the Company's 1993 Form 10-K).
10.6.1 Amendment No. 1 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.1 of the
Company's 1995 Second Quarter Form 10-Q).
10.6.2 Amendment No. 2 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.2 of the
Company's 1995 Second Quarter Form 10-Q).
10.6.3 Amendment No. 3 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.3 of the
Company's Form 8-B).
10.6.4 Amendment No. 4 to the Exclusive Land Rights and Non-Competition
Agreement (incorporated by reference to Exhibit 10.6.4 of the
1997 Third Quarter Form 10-Q).
10.7 Contribution Agreement and Escrow Instructions Agreement
(incorporated by reference to Exhibit 10.7 of the Company's
1993 Form 10-K).
10.8 Irvine Apartment Communities, Inc. 1993 Stock Option Plan for
Directors (incorporated by reference to Exhibit 10.8 of the
Company's 1993 Form 10-K).
10.9 Irvine Apartment Communities, Inc. 1993 Long-Term Stock Incentive
Plan (incorporated by reference to Exhibit 10.9 of the
Company's 1993 Form 10-K).
10.10 Irrevocable Trust Agreement (incorporated by reference to Exhibit
10.10 of the Company's 1993 Form 10-K).
10.11 Revolving Credit Agreement dated as of June 27, 1997 (incorporated
by reference to Exhibit 10.11 of the Quarterly Report on Form
10-Q of the Company and the Operating Partnership for the
quarter ended June 30, 1997 (the "1997 Second Quarter Form
10-Q")).
10.12 Indenture of Trust for Tax-Exempt Mortgage Bond Financing
(incorporated by reference to Exhibit 10.13 of the Company's
1995 Second Quarter Form 10-Q).
10.13 Employment Arrangement Letter with Chief Executive Officer
(incorporated by reference to Exhibit 10.13 of the 1997
Second Quarter Form 10-Q).
10.14 Irvine Apartment Communities, Inc. 1996 Long-Term Stock Incentive
Plan (incorporated by reference to Exhibit 10.14 of the
Company's Form 8-B).
10.15 Severance Agreement with the Company's former Chief Financial
Officer (incorporated by reference to Exhibit 10.15 of the
Company's 1996 Form 10-K).
10.16 Severance Agreement with the Company's former Chief Executive
Officer (incorporated by reference to Exhibit 10.16 of the
Company's 1996 Form 10-K).
12 Statement re: Computation of Consolidated Ratio of Earnings to
Fixed Charges of the Operating Partnership.
21.1 Subsidiaries of the Operating Partnership (incorporated by
reference to Exhibit 21 of the Registration Statement on Form
10 of the Operating Partnership filed on May 15, 1997).
21.2 Subsidiaries of IAC Capital Trust (not applicable--no
subsidiaries).
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Davis Polk & Wardwell (included in Exhibits 5.1 and
8.1).
23.3 Consent of Skadden, Arps, Slate Meagher & Flom LLP (included in
Exhibit 5.2).
24 Powers of Attorney (included on the signature pages hereof).
- ------------
* To be filed by Amendment.
Exhibit 4.4
Declaration of Trust
CONFORMED COPY
DECLARATION OF TRUST, dated as of October 31, 1997, among
Irvine Apartment Communities, Inc., a Maryland corporation, as Sponsor, Irvine
Apartment Communities, L.P., a Delaware limited partnership (the
"Partnership), the sole general partner of which is the Sponsor, James E.
Mead, The Bank of New York, a New York banking corporation, and The Bank of
New York (Delaware), a Delaware banking corporation, not in their individual
capacities but solely as Trustees (collectively the "Trustees"). The Sponsor,
the Partnership and the Trustees hereby agree as follows:
1. The trust created hereby shall be known as "IAC Capital
Trust," in which name the Trustees, or the Sponsor to the extent provided
herein, may conduct the business of the Trust, make and execute contracts, and
sue and be sued.
2. The Sponsor hereby assigns, transfers, conveys and sets
over to the Trustees the sum of $10. The Trustees hereby acknowledge receipt
of such amount in trust from the Sponsor, which amount shall constitute the
initial trust estate. The Trustees hereby declare that they will hold the
trust estate in trust for the Sponsor. It is the intention of the parties
hereto that the Trust created hereby constitutes a business trust under
Chapter 38 of Title 12 of the Delaware Code, 12 Del. C. Section 3801 et seq.
(the "Business Trust Act"), and that this document constitutes the governing
instrument of the Trust. The Trustees are hereby authorized and directed to
execute and file a certificate of trust with the Delaware Secretary of State
in the form attached hereto.
3. The Sponsor, the Partnership and the Trustees will enter
into an Amended and Restated Declaration of Trust, satisfactory to each such
party and substantially in the form included as an exhibit to the 1933 Act
Registration Statement referred to below, to provide for the contemplated
operation of the Trust created hereby and the issuance of the Preferred
Securities and Common Securities referred to therein. Prior to the execution
and delivery of such Amended and Restated Declaration of Trust, the Trustees
shall not have any duty or obligation hereunder or with respect of the trust
estate, except as otherwise required by applicable law or as may be necessary
to obtain prior to such execution and delivery any licenses, consents or
approvals required by applicable law or otherwise.
4. The Sponsor, the Partnership and the Trustees hereby
authorize and direct the Sponsor, as the sponsor of the Trust, (i) to file
with the Securities and Exchange Commission (the "Commission") and execute, in
each case on behalf of the Trust, (a) a Registration Statement on Form S-11
(the "1933 Act Registration Statement"), including any pre-effective or
post-effective amendments to such Registration Statement, relating to the
registration under the Securities Act of 1933, as amended, of the Preferred
Securities of the Trust and (b) a Registration Statement on Form 8-A or
other appropriate form (the "1934 Act Registration Statement") (including
all pre-effective and post-effective amendments thereto) relating to the
registration of the Preferred Securities of the Trust under Section 12(b)
of the Securities Exchange Act of 1934, as amended; (ii) to file with the
New York Stock Exchange and execute on behalf of the Trust a listing
application and all other applications, statements, certificates,
agreements and other instruments as shall be necessary or desirable to
cause the Preferred Securities to be listed on the New York Stock Exchange;
(iii) to file and execute on behalf of the Trust such applications,
reports, surety bonds, irrevocable consents, appointments of attorney for
service of process and other papers and documents as shall be necessary or
desirable to register the Preferred Securities under the securities or
"Blue Sky" laws of such jurisdictions as the Sponsor, on behalf of the
Trust, may deem necessary or desirable; (iv) to prepare and execute
letters or documents to or instruments with, The Depository Trust Company
relating to the Preferred Securities; (v) to execute on behalf of the
Trust an underwriting agreement among the Trust, the Partnership and any
underwriter, dealer or agent relating to the Preferred Securities,
substantially in the form included as Exhibit 1.1 to the 1933 Act
Registration Statement and (vi) to incur (or cause the Partnership to
incur) expenses, execute documents and to take any other actions as shall
be necessary or desirable in offering the Preferred Securities. In the
event that any filing referred to in clauses (i)-(iii) above is required by
the rules and regulations of the Commission, the New York Stock Exchange or
state securities or Blue Sky laws, to be executed on behalf of the Trust by
the Trustees, James E. Mead, in his capacity as Trustee of the Trust, is
hereby authorized and directed to join in any such filing and to execute on
behalf of the Trust any and all of the foregoing, it being understood that
The Bank of New York and The Bank of New York (Delaware), in their
capacities as Trustees of the Trust, shall not be required to join in any
such filing or execute on behalf of the Trust any such document unless
required by the rules and regulations of the Commission, the New York Stock
Exchange or state securities or blue sky laws. In connection with all of
the foregoing, the Sponsor and each Trustee, solely in its capacity as
Trustee of the Trust, hereby constitutes and appoints James E. Mead, Shawn
Howie, Jeffrey Small and James M. Lurie, and each of them, as his, her or
its, as the case may be, true and lawful attorneys-in-fact, and agents,
with full power of substitution and resubstitution, for the Sponsor or such
Trustee or in the Sponsor's or such Trustee's name, place and stead, in any
and all capacities, to sign any and all amendments (including post-
effective amendments) to the 1933 Act Registration Statement, the 1934 Act
Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as the Sponsor
or such Trustee might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or
their or his or her substitute or substitutes, shall do or cause to be done
by virtue hereof.
5. This Declaration of Trust may be executed in one or more
counterparts.
6. The number of Trustees initially shall be three (3) and
thereafter the number of Trustees shall be such number as shall be fixed from
time to time by a written instrument signed by the Sponsor which may increase
or decrease the number of Trustees; provided, however, that the number of
Trustees shall in no event be less than three (3); and provided, further that
to the extent required by the Business Trust Act, one Trustee shall either be
a natural person who is a resident of the State of Delaware or, if not a
natural person, an entity which has its principal place of business in the
State of Delaware. Subject to the foregoing, the Sponsor is entitled to
appoint or remove without cause any Trustee at any time, upon written notice
delivered to the Trustee. The Trustees may resign upon thirty days prior
notice to the Sponsor.
7. This Declaration of Trust may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of which
together shall be deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Declaration of Trust to be duly executed as of the day and year first above
written.
Irvine Apartment Communities Inc.,
as Sponsor
By: /s/ James E. Mead
-------------------------
Name: James E. Mead
Title: Senior Vice President
Irvine Apartment Communities., L.P.
By: Irvine Apartment Communities, Inc. its sole general partner
By: /s/ James E. Mead
-------------------------
Name: James E. Mead
Title: Senior Vice President
The Bank of New York,
not in its individual capacity
but solely as Trustee
By: /s/ Van K. Brown
-------------------------
Name: Van K. Brown
Title: Assistant Vice President
The Bank of New York (Delaware),
not in its individual capacity
but solely as Trustee
By: /s/ Walter N. Gitlin
-------------------------
Name: Walter N. Gitlin
Title: Authorized Signatory
/s/ James E. Mead
- -----------------------------
James E. Mead,
not in his individual capacity
but solely as Trustee
CONFORMED COPY
CERTIFICATE OF TRUST OF IAC CAPITAL TRUST
This CERTIFICATE OF TRUST of IAC Capital Trust (the "Trust"),
dated as of October 31, 1997, is being duly executed and filed by the
undersigned, as trustees, to form a business trust under the Delaware Business
Trust Act (12 Del. Code Section 3801 et seq.).
1. Name. The name of the business trust being formed hereby
is IAC Capital Trust.
2. Delaware Trustee. The name and business address of the
trustee of the Trust with a principal place of business in the State of
Delaware is The Bank of New York (Delaware), a Delaware banking corporation,
White Clay Center, Route 273, Newark, Delaware 19711.
3. Effective Date. This Certificate of Trust shall be
effective as of its filing.
IN WITNESS WHEREOF, the undersigned, being the sole trustees of
the Trust, have executed this Certificate of Trust as of the date first above
written.
The Bank of New York (Delaware),
as Trustee
By: /s/ Walter N. Gitlin
---------------------------
Name: Walter N. Gitlin
Title: Authorized Signatory
The Bank of New York,
as Trustee
By: /s/ Van K. Brown
---------------------------
Name: Van K. Brown
Title: Assistant Vice President
/s/ James E. Mead
-------------------------------
James E. Mead,
as Trustee
Exhibit 12
Irvine Apartment Communities, L.P.
Computation of Consolidated Ratio of Earnings to Fixed Charges
(in thousands, except ratios)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------- ------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Earnings (Loss) Before
Extraordinary Item............... $42,955 $28,905 $41,192 $25,056 $12,279 $(387) $(1,600)
Add back:
Interest Expense.................. 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of Deferred
Financing Costs.................. 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Portion of Rent Expense Deemed
to Represent Interest............ 88 78 115 89 68
------ ------ ------ ------ ------ ------ ------
Earnings Available for Fixed
Charges.......................... 66,874 53,336 73,440 59,549 55,116 52,873 49,028
------ ------ ------ ------ ------ ------ ------
Fixed Charges
Interest Expense.................. 21,949 22,378 29,506 25,894 26,827 50,248 49,154
Amortization of Deferred
Financing Costs.................. 1,882 1,975 2,627 8,510 15,942 3,012 1,474
Capitalized Interest.............. 3,694 2,296 3,151 6,779 1,261 233 640
Portion of Rent Expense
Deemed to Represent Interest..... 88 78 115 89 68
------ ------ ------ ------ ------ ------ ------
Fixed Charges..................... $27,613 $26,727 $35,399 $41,272 $44,098 $53,493 $51,268
------ ------ ------ ------ ------ ------ ------
Ratio of Earnings to Fixed
Charges.......................... 2.42x 2.00x 2.07x 1.44x 1.25x 0.99x 0.96x
Excess of Fixed Charges Over
Earnings......................... $(620) $(2,240)
</TABLE>
- ----------
For the purpose of calculating the consolidated ratio of earnings to fixed
charges, earnings consist of earnings before income taxes, extraordinary
items, and fixed charges. Fixed charges consist of interest expense,
capitalized interest, amortization of deferred financing costs and that
portion of rental expense representative of the interest factor in leases.
Exhibit 23.1
We consent to the reference to our firm under the caption
"Experts" and to the use of our reports dated (a) January 31, 1997, on the
consolidated financial statements and schedule of Irvine Apartment
Communities, L.P., and (b) November 1, 1997, on the balance sheet of IAC
Capital Trust, in the Registration Statement (Form S-11) and related
Prospectus of IAC Capital Trust filed on November 4, 1997.
ERNST & YOUNG LLP
Newport Beach, California
November 3, 1997
