<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 26, 1998
REGISTRATION NO. 333-42629
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
CHASTAIN CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Governing Instruments)
CHASTAIN CAPITAL CORPORATION
C/O ERE YARMOUTH, INC.
3424 PEACHTREE ROAD, N.E., SUITE 800
ATLANTA, GEORGIA 30326
(404) 848-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
KURT L. WRIGHT
C/O ERE YARMOUTH, INC.
3424 PEACHTREE ROAD, N.E., SUITE 800
ATLANTA, GEORGIA 30326
(404) 848-8600
(Name, address, including zip code, and telephone number, including area code of
agent for service)
Copies to:
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GEORGE C. HOWELL, III
JOHN J. KELLEY III RANDALL S. PARKS
KING & SPALDING HUNTON & WILLIAMS
191 PEACHTREE STREET 951 EAST BYRD STREET
ATLANTA, GEORGIA 30303 RICHMOND, VIRGINIA 23219
(404) 572-4600 (804) 788-8200
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---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of the Registration Statement.
---------------------
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. [ ]
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH STATE.
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED FEBRUARY 26, 1998
9,800,000 SHARES
[CHASTAIN CAPITAL LOGO]
COMMON STOCK
---------------------
Chastain Capital Corporation ("Chastain" and, together with its
subsidiaries, the "Company") is a real estate company organized in December 1997
that will invest in commercial and multifamily mortgage and real estate related
assets. The Company will elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"). ERE
Yarmouth, Inc. ("ERE Yarmouth" or the "Manager"), a wholly-owned indirect
subsidiary of Lend Lease Corporation Limited ("Lend Lease"), will manage the
day-to-day operations of the Company, subject to the supervision of the
Company's Board of Directors. The Company has no ownership interest in the
Manager.
---------------------
SEE "RISK FACTORS" ON PAGE 15 HEREOF FOR MATERIAL RISKS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK INCLUDING, AMONG OTHERS:
- The Company was organized in December 1997, has no operating history and
currently has nominal assets consisting of $1,000 in cash;
- The Company will be subject to conflicts of interest involving the Manager
and its affiliates (such as the existence of common officers and directors,
negotiation of agreements between the Company and the Manager and
allocation of investment opportunities among the Manager's clients,
including the Company), and the Company's officers and directors may not
have adequate time to devote to the Company;
- The incentive management fee payable under the Management Agreement may
create an incentive for the Manager to recommend riskier or more
speculative investments;
- The Manager will be entitled to a substantial termination fee in the event
of termination or non-renewal of the Management Agreement without cause;
- The Company will rely entirely on the Manager for its operations and
investments and Lend Lease, the indirect parent of the Manager, may be able
to influence the affairs of the Company;
- The Manager has only limited experience in operating a REIT and management
of the Company has no experience in operating a REIT;
- The Company has not entered into any borrowing arrangements and has no
commitments with lenders for working capital;
- The yield on the Company's investments in mortgage loans and
mortgage-backed securities ("MBS") and the value of the Common Stock of the
Company may be affected adversely by changes in prevailing interest rates,
rates of prepayment and credit losses;
- The Company intends to leverage its investments in an amount that is not
expressly limited and that will be determined by the Manager and,
ultimately, the Company's Board of Directors, which could lead to reduced
or negative cash flow and reduced liquidity;
- The Company has not identified any of the assets that it will purchase
following consummation of this offering and the Company will face
significant competition in acquiring such assets, which may adversely
affect the Company's ability to achieve its investment objectives;
(Continued on next page)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $ $ $
- ---------------------------------------------------------------------------------------------------------------
Total(3)(4)...................... $ $ $
===============================================================================================================
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(See footnotes on next page)
---------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
---------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC. EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
(Continued from previous page)
- The Company may invest in distressed real estate, which may not generate
sufficient revenues to meet operating expenses and debt service obligations
and may expose the Company to liability substantially in excess of the
Company's investment therein;
- The Company may acquire construction loans and, in some cases, mezzanine
investments, which typically involve a higher degree of risk than term
mortgage loans secured by income-producing real property;
- The Company may invest in agricultural loans, which are subject to special
risks related to changing weather conditions, economic downturns and
changing consumer attitudes toward food products;
- The Company may invest in real property, or mortgage loans secured by real
property, located outside the United States, which may expose the Company
to currency conversion risks, foreign tax laws and the uncertainty of
foreign laws;
- Failure to maintain REIT status would subject the Company to corporate tax
and would reduce net earnings and cash available for distribution to
shareholders;
- To qualify as a REIT, the Company must satisfy certain requirements
relating to its assets and income, which may restrict the Company's
investment opportunities, and the Company must distribute at least 95% of
its "REIT taxable income" each year, which could result in the Company
being compelled to sell assets or borrow money in order to satisfy this
requirement;
- The Company's proposed investments could result in the Company recognizing
interest income (including, but not limited to, original issue discount)
for tax purposes without any corresponding cash receipts, which could
result in the Company being compelled to sell assets, borrow money or raise
capital in order to have the cash required to distribute all of its taxable
income and thereby avoid corporate income tax on its retained earnings and
a nondeductible excise tax;
- The Company may make distributions to its shareholders that include a
return of capital;
- The Company's investment and operating policies and strategies may be
changed at any time without the consent of its shareholders; and
- The Company may offer Common Stock or securities convertible into its
Common Stock or Preferred Stock in the future, which may dilute the book
value or earnings per share of the outstanding Common Stock.
All of the 9,800,000 shares of Common Stock offered pursuant to this
Prospectus are being offered by the Company. In addition, (i) 1,166,567 shares
of Common Stock will be sold by the Company to ERE Yarmouth Holdings, Inc., a
wholly-owned indirect subsidiary of Lend Lease, in a private placement to close
upon the consummation of this offering, at the initial public offering price
less underwriting discount, and (ii) 700,000 shares of Common Stock will be sold
by the Company to FBR Asset Investment Corporation, an affiliate of Friedman,
Billings, Ramsey & Co., Inc. ("FBR"), one of the representatives of the
Underwriters, in a private placement to close upon the consummation of this
offering, at the initial public offering price less underwriting discount
(collectively, the "Private Placement"). The per share proceeds to the Company
from the Private Placement will be the same as the per share proceeds to the
Company from this offering, except that the Company will not pay an underwriting
discount to the Underwriters with respect to up to 7.0% of the shares of Common
Stock that are sold to certain clients of the Manager in this offering. Upon
consummation of this offering and the Private Placement, Lend Lease will
beneficially own approximately 10.0% of the outstanding Common Stock of the
Company and FBR Asset Investment Corporation will beneficially own approximately
6.0% of the outstanding Common Stock of the Company, assuming that the
Underwriters do not exercise their over-allotment option.
The initial public offering price of the Common Stock currently is expected
to be $15.00 per share. Prior to this offering, there has been no market for the
shares of Common Stock of the Company. The public offering price has been
determined by negotiation between the Company and the Underwriters. See
"Underwriting." The Company's Common Stock has been approved for listing on the
Nasdaq National Market under the symbol "CHAS."
Certain terms used herein are defined in the Glossary of Terms beginning on
page 107.
------------------------
(Footnotes continued from previous page)
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses in connection with the offering, estimated at
$750,000, which will be payable by the Company. Upon consummation of this
offering and the Private Placement, the Company will pay an aggregate of
approximately $115,000 of this amount to the Manager to reimburse it for
expenses paid on behalf of the Company.
(3) The Company has granted the several Underwriters a 30-day option to purchase
up to 1,470,000 additional shares of Common Stock to cover overallotments.
If all such shares of Common Stock are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company, before expenses of this
offering, will be $ , $ and $ , respectively. See
"Underwriting."
(4) The total Price to Public and the total Proceeds to Company reflect the
Private Placement.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZATION, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
ii
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY......................... 1
ORGANIZATION AND RELATIONSHIPS............. 13
RISK FACTORS............................... 15
The Company is Newly Formed and Has No
Operating History; Reliance on Manager... 15
Uncertainty as to the Company's Ability
Successfully to Implement its Operating
Policies and Strategies Resulting From
its Lack of Operating History.......... 15
The Company's Success will Depend on the
Services of External Management........ 15
The Company May Become Obligated to Pay
the Manager a Substantial Termination
Fee.................................... 15
Appropriate Investments May Not Be
Available and Full Investment of Net
Proceeds May Be Delayed................ 15
Conflicts of Interest in the Business of
the Company May Result in Decisions of
the Company that Do Not Fully Reflect the
Interests of the Shareholders of the
Company.................................. 16
Benefits to Insiders, Common Officers and
Directors.............................. 16
Manager May Advise Others................ 16
Independent Directors Will Not
Participate in Day-to-Day Operations... 17
Purchase of Assets from Lend Lease and
its Affiliates and Clients............. 17
Subordinated CMBS May Subject the Company
to Greater Credit Risks and Yields That
are Sensitive to Interest Rate Changes... 17
Subordinated CMBS are Subject to Greater
Credit Risks than More Senior
Classes................................ 17
Yields on Subordinated CMBS May be
Adversely Affected by Interest Rate
Changes................................ 18
The Company's Mortgage Loans Will Have
Special Risks Related to the Value of the
Underlying Properties, Third-Party
Servicers and the Timing and Availability
of Securitizations....................... 18
Multifamily and Commercial Loans
Involve a Greater Risk of Loss than
Single Family Loans.................. 18
Volatility of Values of Mortgaged
Properties May Affect Adversely the
Company's Mortgage Loans............. 18
Delinquency and Loss Ratios May Be
Affected by Performance of
Servicers............................ 19
Limited Recourse Loans May Limit the
Company's Recovery to the Value of
the Mortgaged Property............... 19
Possible Losses on Mortgage Loans
During Warehousing Period............ 19
Lack of Access to Securitizations Would
Adversely Affect the Company......... 20
Construction and Mezzanine Investments
Involve Greater Risks of Loss than
Loans Secured by Income Producing
Properties........................... 20
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Distressed Mortgage Loans May Have
Greater Default Risks than Performing
Loans................................ 20
Agricultural Lending is Subject to
Special Risks........................ 21
One Action Rules May Limit The
Company's Rights Following
Defaults............................. 21
Investments in Real Property are Subject to
Risks Arising From Conditions Beyond its
Control, the Availability of Insurance,
Property Taxes, Environmental Problems
and Foreign Laws......................... 21
Conditions Beyond Company's Control May
Affect Adversely the Value of Real
Property............................. 21
The Company's Insurance Will Not Cover
All Losses........................... 21
Property Taxes Decrease Returns on Real
Estate............................... 22
Compliance With Americans With
Disabilities Act and Other Changes in
Governmental Rules and Regulations
May be Costly........................ 22
Properties With Hidden Environmental
Problems May Increase Costs and
Create Liabilities for the Company... 22
Foreign Real Properties are Subject to
Currency Conversion Risks, Foreign
Tax Laws and Uncertainty of Foreign
Laws................................. 23
The Company Will be Subject to Economic and
Business Risks........................... 23
Interest Rate Changes May Affect
Adversely the Value of the Company's
Investments.......................... 23
The Company's Performance May be
Affected Adversely if its Hedging
Strategy Is Not Successful........... 23
Leverage Can Reduce Income Available
for Distribution and Cause Losses.... 24
Maturity Mismatch Between Asset
Maturities and Borrowing Maturities
May Affect Adversely the Company's
Net Income........................... 24
Interest Rate Mismatch Between Asset
Yields And Borrowing Rates May Affect
Adversely the Company's Net Income... 25
The Company May Not be Able To Borrow
Money on Favorable Terms............. 25
Adverse Changes in General Economic
Conditions Can Affect Adversely the
Company's Business................... 25
Significant Competition May Affect
Adversely the Company's Ability to
Acquire Assets at Favorable Spreads
Relative to Borrowing Costs.......... 25
Investments May Be Illiquid and Their
Value May Decrease................... 26
The Company Will Be Subject to Legal and
Tax Risks................................ 26
Adverse Consequences of Failure to
Maintain REIT Status May Include the
Company Being Subject to Taxation as
a Regular Corporation................ 26
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iii
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Certain Investments May Generate
Phantom Income....................... 27
Investment in the Common Stock of the
Company by Certain Plans May Give
Rise to a Prohibited Transaction
Under ERISA and the Code............. 28
Ownership Limitation May Restrict
Business Combination Opportunities... 28
Lend Lease Not Currently Subject to
Ownership Limitation................. 28
Preferred Stock May Prevent Change in
Control.............................. 28
Georgia Anti-Takeover Statutes May Re-
strict Business Combination
Opportunities........................ 29
Board of Directors May Change Certain
Policies Without Shareholder
Consent.............................. 29
Loss of Investment Company Act Exemp-
tion Would Affect the Company
Adversely............................ 29
The Company's Responsibility to
Indemnify The Manager and Officers
and Directors of the Company May
Result in Liability for the Actions
of the Manager and Officers and
Directors of the Company............. 29
The Company Will Be Subject to Other
Risks.................................... 30
Yield on IOs May be Adversely Affected
by Interest Rate Changes............. 30
The Failure to Develop a Market for
Common Stock May Result in a Decrease
in its Market Price.................. 30
Increases in Interest Rates May Affect
Adversely the Yield of the Common
Stock................................ 30
Possible Adverse Effects on Share Price
Arising From Shares of Common Stock
Eligible for Future Sale............. 30
Future Offerings of Capital Stock May
Result in Dilution of the Book Value
or Earnings Per Share of the
Outstanding Common Stock............. 31
OPERATING POLICIES AND OBJECTIVES.......... 31
Relationship with ERE Yarmouth and Lend
Lease.................................... 33
General................................ 33
Whole Loan Originations................ 33
Opportunistic Investing................ 33
CMBS Investment and Management......... 34
Mortgage Servicing..................... 34
The Company's Guidelines................... 34
General................................ 34
Purchase From the Manager and Its
Affiliates........................... 34
Investment Activities...................... 35
Subordinated Interests................. 35
Commercial Mortgage-Backed
Securities........................... 38
Opportunistic Real Properties.......... 38
Mezzanine Investments.................. 39
Other Real Estate Related Assets....... 40
Construction Loans................... 40
Agricultural Loans................... 40
Foreign Real Properties.............. 40
Other MBS............................ 40
Real Estate Companies................ 41
Risk Management............................ 41
Leverage and Borrowing................. 41
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CMOs and Warehouse Lines of Credit..... 42
Reverse Repurchase Agreements.......... 42
Bank Credit Facilities................. 42
Mortgage Loans on Real Estate Owned by
the Company.......................... 42
Interest Rate Management Techniques.... 42
Hedging................................ 42
Asset Management........................... 43
Other Policies............................. 44
Competition................................ 44
Mortgage Loans......................... 45
Subordinated Interests................. 45
Opportunistic Real Properties.......... 45
Mezzanine Investments.................. 45
PRIOR PERFORMANCE.......................... 45
ERE Yarmouth............................... 46
ERE Hyperion............................... 47
CERTAIN RELATIONSHIPS; CONFLICTS OF
INTEREST................................. 48
Benefits to Insiders................... 48
Officers and Directors................. 49
Management Agreement................... 49
Manager Advises Other Entities......... 49
Transactions with Affiliates of the
Manager.............................. 50
Business Relationships of Manager...... 50
Interest of Manager in Assets.......... 50
Purchase of Assets From the Manager.... 50
Role of Independent Directors.......... 51
THE PRIVATE PLACEMENT...................... 51
USE OF PROCEEDS............................ 52
CAPITALIZATION............................. 53
MANAGEMENT OF OPERATIONS................... 54
Lend Lease................................. 54
The Manager................................ 54
The Management Agreement................... 56
Portfolio Management................... 56
Equity Acquisition and Loan
Origination.......................... 58
Equity Asset Management................ 58
Interim Servicing...................... 58
Special Servicing...................... 58
Monitoring Servicing................... 59
Management Fees............................ 59
Stock Options.............................. 61
Eligibility and Awards................. 61
Exercise Price and Exercisability...... 61
Termination of Employment.............. 62
Amendment and Termination.............. 62
Limits of Responsibility................... 62
Year 2000 Issues........................... 63
THE COMPANY................................ 64
Directors and Executive Officers........... 64
Directors of the Company................... 64
Executive Officers Who Are Not Directors... 64
Directors Stock Incentive Plan............. 67
DISTRIBUTION POLICY........................ 67
YIELD CONSIDERATIONS RELATED TO THE
COMPANY'S INVESTMENTS.................... 68
Subordinated Interests..................... 68
Opportunistic Real Properties.............. 69
Mezzanine Investments...................... 69
Other Real Estate Related Assets........... 70
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iv
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Construction Loans..................... 70
Agricultural Loans..................... 70
IOs and Inverse IOs.................... 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
LIQUIDITY AND CAPITAL RESOURCES.......... 72
DESCRIPTION OF CAPITAL STOCK............... 72
General.................................... 72
Common Stock............................... 72
Preferred Stock............................ 73
Restrictions on Ownership and Transfer..... 73
Registration Rights........................ 74
Dividend Reinvestment Plan................. 75
Reports to Shareholders.................... 75
Transfer Agent and Registrar............... 75
Listing of the Common Stock................ 75
CERTAIN PROVISIONS OF GEORGIA LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS............................... 75
Board of Directors......................... 75
Amendment.................................. 76
Georgia Anti-Takeover Statutes............. 76
Operations................................. 77
Advance Notice of Director Nominations and
New Business............................. 77
COMMON STOCK AVAILABLE FOR FUTURE SALE..... 77
OPERATING PARTNERSHIP AGREEMENT............ 78
General.................................... 78
General Partner Not to Withdraw............ 78
Capital Contribution....................... 78
Redemption Rights.......................... 79
Operations................................. 79
Distributions.............................. 79
Allocations................................ 79
Term....................................... 79
Tax Matters................................ 79
FEDERAL INCOME TAX CONSEQUENCES............ 79
Taxation of the Company.................... 80
Requirements for Qualification............. 81
Income Tests........................... 83
Asset Tests............................ 86
Distribution Requirements.............. 86
Recordkeeping Requirements............. 87
Failure to Qualify......................... 87
Effect of Proposed Changes in Tax Laws..... 88
Taxation of Taxable U.S. Shareholders...... 88
Taxation of Shareholders on the Disposition
of the Common Stock...................... 90
Capital Gains and Losses................... 90
Information Reporting Requirements and
Backup Withholding....................... 90
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Taxation of Tax-exempt Shareholders........ 91
Taxation of Non-U.S. Shareholders.......... 91
State and Local Taxes...................... 93
Sale of the Company's Property............. 93
ERISA CONSIDERATIONS....................... 93
Employee Benefit Plans, Tax-Qualified
Retirement Plans and IRAs................ 94
Status of the Company under ERISA.......... 95
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
REAL PROPERTY INVESTMENTS................ 96
General.................................... 96
Types of Mortgage Instruments.............. 96
Leases and Rents........................... 97
Condemnation and Insurance................. 97
Foreclosure................................ 97
General................................ 97
Judicial Foreclosure................... 97
Non-Judicial Foreclosure/Power of
Sale................................. 98
Equitable Limitations on Enforceability
of Certain Provisions................ 98
Post-Sale Redemption................... 98
Anti-Deficiency Legislation............ 99
Cooperatives........................... 99
Bankruptcy Laws............................ 99
Default Interest and Limitations on
Prepayments.............................. 101
Forfeitures in Drug and RICO Proceedings... 101
Environmental Risks........................ 101
General................................ 101
CERCLA................................. 101
Certain Other Federal and State Laws... 102
Superlien Laws......................... 102
Additional Considerations.............. 102
Environmental Site Assessments......... 102
Applicability of Usury Laws................ 102
Americans With Disabilities Act............ 102
UNDERWRITING............................... 104
LEGAL MATTERS.............................. 106
EXPERTS.................................... 106
ADDITIONAL INFORMATION..................... 106
The Company................................ 106
Lend Lease................................. 106
GLOSSARY OF TERMS.......................... 107
FINANCIAL STATEMENTS....................... F-1
PRIOR PERFORMANCE TABLES................... A-1
ERE HYPERION PRIOR PERFORMANCE TABLES...... B-1
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v
<PAGE> 7
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless the context otherwise
requires, all references in this Prospectus to (i) the "Company" shall mean
Chastain Capital Corporation ("Chastain") and its wholly-owned subsidiaries,
including (a) Chastain GP Holdings, Inc. (the "General Partner"), (b) Chastain
LP Holdings, Inc. (the "Initial Limited Partner") and (c) Chastain Investments,
L.P. (the "Operating Partnership"); (ii) "Common Stock" shall mean the Company's
shares of common stock, par value $.01 per share; and (iii) "Private Placement"
shall mean the offering by the Company in separate transactions of 1,166,567
shares of Common Stock to ERE Yarmouth Holdings, Inc., a wholly-owned indirect
subsidiary of Lend Lease, and 700,000 shares of Common Stock to FBR Asset
Investment Corporation, an affiliate of FBR, at the public offering price less
underwriting discount. Unless otherwise indicated, the information contained in
this Prospectus assumes that (i) the Underwriters' over allotment option is not
exercised; (ii) all of the shares offered in the Private Placement will be sold;
and (iii) the offering price (the "Offering Price") of the Common Stock is
$15.00 per share. Capitalized terms used but not defined herein shall have the
meanings set forth in the Glossary of Terms beginning on page 104. References to
"dollars" and "$" are to United States dollars.
THE COMPANY
Chastain Capital Corporation (the "Company") is a Georgia corporation that
was organized on December 16, 1997 by ERE Yarmouth, Inc. ("ERE Yarmouth" or the
"Manager"), a wholly-owned indirect subsidiary of Lend Lease Corporation Limited
("Lend Lease"). The Company will elect to be taxed as a real estate investment
trust ("REIT") under the Code and will be managed and advised by ERE Yarmouth.
See "Management of Operations."
The Company will invest in commercial and multifamily mortgage and real
estate related assets identified, managed and actively serviced through the
offices of ERE Yarmouth located in major metropolitan markets throughout the
United States. The Company intends to emphasize, in particular, origination of
commercial mortgage loans for the purpose of securitizing and retaining the
subordinated interests in those loans. The Company's board of directors (the
"Board of Directors") will initially consist of five members, three of whom will
be unaffiliated with the Company, Lend Lease and the Manager (the "Independent
Directors").
The Company believes that it will have a competitive advantage as a result
of (i) its access to investment opportunities through ERE Yarmouth's twelve
offices located in major metropolitan markets throughout the United States and
over 1,100 professional employees, (ii) the experience of ERE Yarmouth in
originating and servicing whole commercial and multifamily mortgage loans
("Mortgage Loans"), (iii) the experience of ERE Yarmouth in acquiring and
managing commercial, multifamily and agricultural mortgage-backed securities
("CMBS") and in acquiring, managing and resolving opportunistic real property,
(iv) the experience of ERE Yarmouth in obtaining competitive financing on behalf
of its clients, (v) ERE Yarmouth's substantial investment in the computer
systems, research, property-specific and lease database technology and other
resources that the Company believes are necessary to conduct its business and
(vi) strategic relationships and contacts that ERE Yarmouth has developed in
conducting its real estate related businesses.
INVESTMENT ACTIVITIES
The Company's investments will include several categories of commercial
mortgage and real estate related assets that will be identified, managed and
actively serviced through ERE Yarmouth's twelve offices located in major
metropolitan markets throughout the United States. The Company intends to invest
throughout the real estate cycle, focusing on opportunities with respect to
which it perceives high relative value. Initially, the Company will emphasize
the creation of a mortgage portfolio collateralized by institutional quality
assets for the purpose of securitizing and retaining non-investment grade
subordinated interests in such loans. The Company's operating income is expected
to result primarily from the excess of (i) the sum of the Company's cash flows
on its assets, reinvestment income thereon and related income over (ii) the sum
of the
<PAGE> 8
Company's borrowing costs and operating expenses. There can be no assurance,
however, that the Company's investment strategy will be successful.
The Company intends to invest in the categories of assets described below.
The Company cannot anticipate with any certainty the percentage of the proceeds
of this offering and the Private Placement that will be invested in any
particular category of real estate assets, except that the Company intends to
invest at least 75% of its assets in the first three categories of assets
described below.
SUBORDINATED INTERESTS. The Company's primary business will be the
origination of Mortgage Loans for the purpose of issuing collateralized mortgage
obligations ("CMOs") secured by its Mortgage Loans and retaining the Mortgage
Loans subject to the CMO debt. As a result of such transactions, the Company
will retain non-investment grade tranches of CMOs which will include a "first
loss" subordinated equity ownership interest in the Mortgage Loans that has
economic characteristics similar to those of subordinated interests in CMBS. A
first loss class is the most subordinated class of a multi-class issuance of
pass-through or debt securities and is the first to bear loss upon a default of
the underlying Mortgage Loans ("Subordinated Interests"). The Company may also
acquire Subordinated Interests in CMBS. In connection with its origination and
acquisition of Subordinated Interests, the Company will attempt, where
appropriate, to mitigate these risks by obtaining rights to service defaulted
mortgage loans, including oversight and management of the resolution of such
mortgage loans by modification, foreclosure, deed in lieu of foreclosure or
otherwise ("Special Servicing" rights) with respect to the underlying Mortgage
Loans. In addition, the Company expects that many of the Mortgage Loans will be
serviced by the Manager or its affiliates. See "Operating Policies and
Objectives -- Investment Activities -- Subordinated Interests."
OPPORTUNISTIC REAL PROPERTIES. The Company may invest in commercial and
multifamily real property ("Real Property"), including (i) performing Real
Property which may present opportunities for high risk-adjusted returns ("High
Yield Real Property"), (ii) properties acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure) ("REO Property") and other
underperforming or otherwise distressed real property, as described below
(together with REO Property, "Distressed Real Property") and (iii) Mortgage
Loans that are in default ("Nonperforming Mortgage Loans"), or with respect to
which default is likely or imminent or with respect to which the borrower is
currently making monthly payments in accordance with a forbearance plan
("Subperforming Mortgage Loans" and, together with Nonperforming Mortgage Loans,
"Distressed Mortgage Loans", and together with Distressed Real Property and High
Yield Real Property, "Opportunistic Real Properties"). Underperforming real
property may include properties that are at a low point in their particular
property cycle and require capital and/or professional management to improve
their condition, appeal and marketability, but still exhibit good locational
characteristics. Typically, these properties lack market focus due to
unsophisticated management or ownership, or have owners who, for a variety of
reasons, are not financially capable or interested in maintaining the asset to
competitive standards. Distressed real properties include properties that are
subject to conflicts among owners, which may lead to lost leasing opportunities
due to delays in decision making, capital programs that lack focus, on-site
property management that is uncertain as to how to market the asset, or the
inability of one or more of the owners to fund its share of the costs of
ownership. The Company's general goal with respect to each High Yield Real
Property or Distressed Real Property will be to enjoy the increased cash flow
and long term appreciation of the asset by purchasing it at a favorably low
price, repositioning it by either creating a different market impression in the
mind of the tenant or consumer or eliminating a negative market impression for
the property, or converting the use of the property, if required, to improve its
cash flow by proper management or refinancing. See "Operating Policies and
Objectives -- Investment Activities -- Opportunistic Real Properties."
If the Company sells or otherwise disposes of Opportunistic Real Properties
held as inventory or held primarily for sale to customers in the ordinary course
of the Company's trade or business, any gain recognized by the Company in such a
transaction would be subject to a 100% "prohibited transactions" tax, unless the
Company was eligible to make, and did make, a "Foreclosure Property" election
with respect to the property, in which case the gain would be subject to tax at
the maximum corporate rate. For a discussion of the "prohibited transactions"
tax and "Foreclosure Property," see "Federal Income Tax
Consequences -- Requirements for Qualification -- Income Tests" and "Federal
Income Tax Consequences -- Sale of the Company's Property." The Company,
however, does not presently intend to acquire or
2
<PAGE> 9
hold properties that constitute inventory or other property held primarily for
sale to customers in the ordinary course of the Company's trade or business.
MEZZANINE INVESTMENTS. The Company may originate or acquire investments
that are subordinated to first lien mortgage loans on commercial and multifamily
real estate ("Mezzanine Investments"). Mezzanine Investments generally will
provide the Company the right to receive a stated interest rate on the loan
balance and may also include a percentage of gross revenues from the property,
payable to the Company on an ongoing basis, and/or a percentage of any increase
in value of the property, payable upon maturity or refinancing of the loan, or
otherwise would allow the Company to charge an interest rate that would provide
an attractive risk-adjusted return. Mezzanine Investments may also take the form
of preferred equity, which will have a claim against both the operating cash
flow and liquidation proceeds from the specific real estate assets. See
"Operating Policies and Objectives -- Investment Activities -- Mezzanine
Investments."
OTHER REAL ESTATE RELATED ASSETS. To enhance the Company's flexibility and
to respond quickly to market opportunities throughout the real estate cycle, the
Company may also invest in other real estate related assets, including (i) loans
secured by agricultural properties ("Agricultural Loans"), (ii) loans used to
finance the cost of construction or rehabilitation of Real Property
("Construction Loans"), (iii) Real Property or Mortgage Loans secured by Real
Property that is located outside the United States, (iv) various classes of
investment grade CMBS and investment grade single-family residential
mortgage-backed securities ("MBS") and (v) companies primarily engaged in the
business of real estate ownership, real estate services or other real estate
intensive operating businesses. The assets described in this section are
hereinafter referred to as "Other Real Estate Related Assets." The Company
intends to limit its investment in Other Real Estate Related Assets to no more
than 25% of the Company's portfolio. See "Operating Policies and Objectives --
Investment Activities -- Other Real Estate Related Assets."
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should consider carefully the matters discussed under "Risk Factors"
beginning on page 15 prior to an investment in the Company. Such risks include,
among others, the following:
THE COMPANY IS NEWLY FORMED; RELIANCE ON MANAGER
- UNCERTAINTY AS TO THE COMPANY'S ABILITY SUCCESSFULLY TO IMPLEMENT ITS
OPERATING POLICIES AND STRATEGIES RESULTING FROM ITS LACK OF OPERATING
HISTORY. The Company has no operating history and currently has nominal
assets consisting of $1,000 in cash. Until appropriate commercial and
multifamily mortgage and real estate related acquisitions are made, the
net proceeds of this offering may be invested in readily marketable
securities, consistent with maintaining the Company's REIT qualification,
or in interest-bearing deposit accounts. It may take considerable time for
the Company to find appropriate investments, during which time the
Company's assets will be invested in relatively low yield instruments.
- THE MANAGER WILL DIRECT THE BUSINESS AFFAIRS OF THE COMPANY. The Company
and the Manager will enter into an agreement (the "Management Agreement")
whereby the Manager will advise the Board of Directors and direct the
day-to-day business affairs of the Company. In addition, the Company does
not expect to employ full-time personnel and expects to rely on the
facilities, personnel and resources of the Manager to conduct its
operations. Thus, the Company's success will depend largely on the skill
and experience of the Manager's employees. In particular, the Independent
Directors will rely on information provided by the Manager to review any
proposed transactions of the Company with the Manager or Lend Lease and
their affiliates. The Manager has only limited experience in operating a
REIT and management of the Company has no experience in operating a REIT.
3
<PAGE> 10
CONFLICTS OF INTEREST
- COMMON OFFICERS AND DIRECTORS MAY PRESENT CONFLICTS OF INTEREST. The
Company and the Manager have common officers and directors, which may
present conflicts of interest in the Company's dealings with the Manager
and its affiliates that may result in the Company making decisions that do
not fully reflect the interests of the Company's shareholders. In
addition, certain directors and officers of the Company will have demands
on their time other than those of the Company.
- THE COMPANY MAY BECOME OBLIGATED TO PAY THE MANAGER A SUBSTANTIAL
TERMINATION FEE. In the event of termination or non-renewal of the
Management Agreement other than for cause, the Manager will be entitled to
a termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned during the immediately preceding
four quarters. The termination fee may be substantial.
- THE MANAGER MAY ADVISE OTHERS. The Company intends to rely extensively
on the Manager as its principal source of investments. The Manager advises
other entities that invest in the types of assets in which the Company
will invest. If the Manager is unable to provide the Company with adequate
investment opportunities, the Company's growth and results of operations
may be adversely affected.
- THE COMPANY MAY PURCHASE ASSETS FROM AFFILIATES. The Company may
(although it does not currently intend to) purchase assets from the
Manager and its affiliates, including Lend Lease.
THE COMPANY'S PROPOSED INVESTMENTS WILL SUBJECT IT TO CERTAIN RISKS
- MULTIFAMILY AND COMMERCIAL MORTGAGE LOANS INVOLVE A GREATER RISK OF LOSS
THAN SINGLE FAMILY LOANS. Investing in multifamily and commercial
Mortgage Loans generally is riskier than investing in single family
residential Mortgage Loans, due to dependency on successful operation of
the underlying properties for repayment, generally larger loan balances
and balloon payments at stated maturity.
- YIELD ON SUBORDINATED CMBS MAY BE ADVERSELY AFFECTED BY INTEREST RATE
CHANGES. The Company's investments and income will be sensitive to
changes in interest rates and prepayment rates. In periods of declining
interest rates, prepayments on Mortgage Loans and CMBS generally increase,
and the Company likely will have to reinvest such funds in lower-yielding
investments. Conversely, in periods of rising interest rates, prepayments
on Mortgage Loans and CMBS generally decrease, and the value of the
Company's fixed-rate investments generally will decline.
- DELINQUENCY AND LOSS RATIOS MAY BE AFFECTED BY PERFORMANCE OF
SERVICERS. Delinquency and loss ratios on the Company's Mortgage Loans
may be affected by the performance of servicers.
- SUBORDINATED CMBS ARE SUBJECT TO GREATER CREDIT RISKS THAN MORE SENIOR
CLASSES. The Company intends to acquire or retain significant amounts of
non-investment grade classes of CMBS. These investments are subject to a
greater risk of loss of principal and non-payment of interest than
investments in whole Mortgage Loans or senior, investment grade
securities.
- MEZZANINE INVESTMENTS INVOLVE GREATER RISK OF LOSS THAN LOANS SECURED BY
INCOME-PRODUCING PROPERTY. Investing in Mezzanine Investments generally
is riskier than investing in more senior equities or mortgage loans
because a foreclosure by a senior lienholder may result in the Mezzanine
Investments becoming unsecured or otherwise impaired, and the Company may
not recover the full amount, or indeed any, of its investment in such
Mezzanine Investments.
- OPPORTUNISTIC REAL PROPERTIES MAY NOT GENERATE SUFFICIENT REVENUES. The
Company's Opportunistic Real Properties (which may have significant
amounts of unleased space) may not generate sufficient revenues to provide
a return on investment after meeting operating expenses and debt service
obligations. In addition, declining real estate values may result in
losses on the Company's Real Properties.
4
<PAGE> 11
- AGRICULTURAL LENDING IS SUBJECT TO SPECIAL RISKS. The Company may invest
in Agricultural Loans, which are subject to special risks related to
changing weather conditions, economic downturns and changing consumer
attitudes towards food products.
- FOREIGN REAL PROPERTIES ARE SUBJECT TO SPECIAL RISKS. The Company may
invest in Real Property, or Mortgage Loans secured by Real Property,
located outside the United States, which may expose the Company to
currency conversion risks, foreign tax laws and the uncertainty of foreign
laws.
- THE COMPANY'S OTHER REAL ESTATE RELATED ASSETS ARE SUBJECT TO SPECIAL
RISKS. Certain of the Company's Other Real Estate Related Assets may
require significant management resources, may be illiquid and may decrease
in value because of changes in economic conditions.
- THE COMPANY MAY BEAR LOSSES ON MORTGAGE LOANS IN CONNECTION WITH THE
ISSUANCE OF CMOS. The Company intends to issue CMOs collateralized by its
Mortgage Loans, retaining the Mortgage Loans subject to the CMO debt. Any
losses on such Mortgage Loans would be borne by the Company to the extent
of the Company's remaining investment in such loans.
- THE COMPANY MAY NOT BE ABLE TO BORROW MONEY ON FAVORABLE TERMS. The
Company's borrowings are likely to include reverse repurchase agreements
with respect to its MBS. A decline in the market value of those MBS could
limit the Company's ability to borrow or result in lenders initiating
margin calls, requiring the Company to sell assets under adverse market
conditions in order to maintain liquidity. If such sales are made at
prices lower than the carrying value of the assets, the Company will
experience losses.
- YIELDS ON IOS MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES. The
yield on the Company's MBS that are entitled only to payments of interest
and no (or only nominal) distribution of principal ("IO") with
characteristics of a Subordinated Interest ("Sub IO") will be affected
adversely by faster than anticipated prepayment rates and particularly
high rates of prepayment could result in a failure of the Company to
recover its initial investment in Sub IOs.
- THE COMPANY MAY EXPERIENCE LOSSES ON ITS INVESTMENTS. Borrower default,
casualty losses and state or foreign law enforceability issues, as well as
other events and circumstances, may result in losses on the Company's
investments.
- SIGNIFICANT COMPETITION MAY ADVERSELY AFFECT THE COMPANY'S ABILITY TO
ACQUIRE ASSETS. The Company has not identified any assets to acquire and
will face significant competition in acquiring assets, which may adversely
affect the Company's ability to achieve its investment objectives.
HEDGING; LEVERAGE
- THE COMPANY'S PERFORMANCE MAY BE ADVERSELY AFFECTED IF ITS HEDGING
STRATEGY IS NOT SUCCESSFUL. The Company's performance may be affected
adversely if the Company does not hedge effectively against interest rate
and other risks. No hedging strategy will insulate the Company completely
from interest rate risk. There can be no assurance that a liquid secondary
market will exist for hedging instruments purchased or sold, and the
Company may be required to maintain a position until exercise or
expiration, which could result in losses.
- LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION AND CAUSE
LOSSES. The Company's Articles of Incorporation (the "Charter"), bylaws
(the "Bylaws") and guidelines that set forth general parameters for the
Company's investments, borrowings and operations (the "Guidelines") do not
expressly limit the amount of indebtedness the Company can incur. The
Company intends to leverage its investments in an amount to be determined
by the Manager and, ultimately, the Board of Directors. If borrowing costs
increase, or if the cash flow generated by the Company's assets decrease,
the Company's use of leverage will increase the likelihood that the
Company will experience reduced or negative cash flow and reduced
liquidity.
5
<PAGE> 12
TAX AND LEGAL RISKS
- ADVERSE CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE THE
COMPANY BEING SUBJECT TO TAXATION AS A REGULAR CORPORATION. Failure to
maintain REIT status would subject the Company to corporate income tax and
would reduce net earnings and cash available for distribution to
shareholders.
- TO MAINTAIN ITS STATUS AS A REIT, THE COMPANY'S ABILITY TO INVEST IN
CERTAIN TYPES OF ASSETS MAY BE RESTRICTED. To qualify as a REIT, the
Company must satisfy certain requirements concerning the nature of its
assets and income, which may restrict the Company's ability to invest in
various types of assets.
- TO AVOID CORPORATE INCOME TAX AND AN EXCISE TAX, THE COMPANY MUST
DISTRIBUTE ITS TAXABLE INCOME. To avoid corporate income taxation on its
earnings, the Company must distribute annually at least 95% of its "REIT
taxable income," with certain adjustments. The Company will be taxed at
regular corporate income tax rates on any undistributed taxable income,
including undistributed net capital gain. Under certain circumstances, an
additional 4% excise tax will be imposed on the Company if it fails to
distribute sufficient amounts. See "Federal Income Tax
Consequences -- Requirements for Qualification -- Distribution
Requirements."
- CERTAIN INVESTMENTS MAY GENERATE PHANTOM INCOME. The Company's proposed
investment in Subordinated Interests, Mezzanine Investments and Distressed
Mortgage Loans could result in the Company's recognizing interest income
(including, but not limited to, original issue discount ("OID")) for
federal income tax purposes in advance of the corresponding cash receipts
("Phantom Income"), which could result in the Company needing to sell
assets, borrow money or raise capital in order to have the cash needed to
distribute all of its taxable income and thereby avoid corporate income
tax on its retained earnings.
- OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION
OPPORTUNITIES. Ownership of Common Stock by each shareholder is limited
to 9.8% of the outstanding Common Stock (except for Lend Lease and its
affiliates so long as Lend Lease is publicly held), which may deter third
parties from seeking to control or acquire the Company.
- LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD AFFECT THE COMPANY
ADVERSELY. To maintain its exemption from regulation under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), the
Company, among other things, must maintain certain percentages of its
investments in assets that qualify for exemption from such regulation,
which requirement may restrict the Company's ability to invest in various
types of assets.
THE MANAGER
The business and investment affairs of the Company will be managed by ERE
Yarmouth, subject to the supervision of the Company's Board of Directors. ERE
Yarmouth, a Delaware corporation indirectly wholly-owned by Lend Lease, is a
full-service real estate investment advisor with experience in investing and
managing commercial real estate assets for institutional lenders and owners.
According to Pension & Investments, an investment management industry journal,
as of June 30, 1997, ERE Yarmouth managed the largest portfolio in the United
States of real estate assets owned by pension plans and other tax exempt
investors. ERE Yarmouth has substantial experience in the origination and
servicing of whole loans, the acquisition of CMBS, the acquisition and
resolution of troubled loans and the management of diverse real estate related
assets.
Through special service subsidiaries and affiliates, ERE Yarmouth provides
additional services to its clients and other third parties. In addition, ERE
Yarmouth and Hyperion Capital Management, Inc. ("Hyperion"), a fixed income
manager, formed Equitable Real Estate Hyperion Capital Advisors, LLC ("ERE
Hyperion"), a joint venture that advises institutional clients on investing in
CMBS. The Manager intends to execute an agreement with ERE Hyperion whereby ERE
Hyperion will perform certain functions relating to the Company's CMBS on behalf
of the Manager. As of December 31, 1997, Hyperion managed
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<PAGE> 13
over $5.3 billion of fixed-income securities with a specialization in MBS. For a
description of the operations and prior performance of ERE Hyperion, see
Appendix B.
In June 1997, Lend Lease, a corporation incorporated in the state of New
South Wales, Australia, acquired Equitable Real Estate Investment Management,
Inc. ("ERE") from The Equitable Companies Incorporated ("Equitable Companies")
(the "ERE Acquisition"). ERE is currently operated under the name "ERE
Yarmouth." Lend Lease, a large Australian public real estate and financial
services company with substantial global interests, operates in the United
States, Australia and New Zealand, Asia, South America and Europe. Established
in 1958, Lend Lease has over 6,700 employees, 34,300 shareholders and a market
capitalization exceeding $4.9 billion as of December 31, 1997. Lend Lease has
maintained an "AA" rating from Standard & Poor's since 1992. With its
acquisition of ERE, Lend Lease's global real estate investment management
business has approximately $29.9 billion in real estate assets under management
on five continents.
The Manager has only limited experience in operating a REIT and management
of the Company has no experience in operating a REIT. Furthermore, the Manager
has relatively limited experience in investing in Mezzanine Investments.
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager,
pursuant to which the Manager, subject to the supervision of the Company's Board
of Directors, will, among other things: (i) recommend and implement operating
strategies for the Company; (ii) conduct due diligence on potential investments
for the Company; (iii) arrange for the acquisition of assets and the origination
of Mortgage Loans by the Company; (iv) arrange for various types of financing
for the Company, including reverse repurchase agreements, warehouse lines of
credit, mortgage loans and the issuance of CMOs; (v) monitor the performance of
the Company's assets; (vi) provide certain administrative and managerial
services in connection with the operations of the Company; (vii) provide asset
management of equity real estate and (viii) provide access to the Manager's
proprietary database of property and leasing information. See "Management of
Operations -- The Management Agreement." The Management Agreement has been
approved by all of the Company's Independent Directors. The Management Agreement
does not specify a minimum standard of time and attention that the Manager is
required to devote to the Company.
The following table presents all compensation, fees and other benefits
(including reimbursement of certain out-of-pocket expenses) that the Manager may
earn or receive under the terms of the Management Agreement. There are no caps
on any category of such compensation, fees or benefits payable under the
Management Agreement.
<TABLE>
<CAPTION>
FEE RECIPIENT PAYOR
- --- ------------ --------
<S> <C> <C> <C>
Quarterly base management fee(1) equal to the following:
For the first four fiscal
quarters............... 1.00% per annum of the Average
Invested Assets(2) of the
Company
During each fiscal
quarter thereafter..... 0.85% per annum of the Average
Invested Assets up to $1
billion
0.75% per annum of the Average
Invested Assets from $1
billion to $1.25 billion
0.50% per annum of the Average
Invested Assets in excess of
$1.25 billion................. Manager(3) Company
</TABLE>
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<PAGE> 14
<TABLE>
<CAPTION>
FEE RECIPIENT PAYOR
- --- ------------ --------
<S> <C> <C> <C>
Quarterly non-cumulative incentive management fee based on the
amount, if any, by which the Company's Funds From
Operations(4) and certain net gains exceed a hurdle rate(5)... Manager Company
Termination fee equal to the sum of the base management fee
and incentive management fee, if any, earned during the
immediately preceding four fiscal quarters.................. Manager Company
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties(6)............................................ Manager Company
Potential fees to affiliates of the Manager(7)................ Affiliates Company
</TABLE>
- ---------------
(1) Intended to cover the Manager's costs in providing management services to
the Company. Because this amount is based on the invested assets of the
Company, it is not currently determinable. In connection with renewal and
renegotiation of the Management Agreement, the Board of Directors of the
Company may adjust the base management fee in the future to align it more
closely with the Manager's actual costs of providing such services. The
Manager will pay a portion of this fee to ERE Hyperion for submanagement
services performed on behalf of the Company.
(2) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves
less (i) uninvested cash balances and (ii) the book value of the Company's
CMO liabilities, computed by dividing (a) the sum of such values for each of
the three months during such quarter (based on the book value of such assets
as of the last day of each month) by (b) three.
(3) The Manager is a wholly-owned indirect subsidiary of Lend Lease.
(4) The term "Funds From Operations" as defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT") means net income (computed in
accordance with generally accepted accounting principles ("GAAP")) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and similar adjustments for
unconsolidated partnerships and joint ventures. Funds From Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
(5) The quarterly incentive management fee is equal to the product of (A) 25% of
the dollar amount by which (1) (a) Funds From Operations (before the
incentive fee) of the Company for the applicable quarter per weighted
average number of shares of Common Stock outstanding plus (b) gains (or
minus losses) from debt restructuring or sales of assets not included in
Funds From Operations of the Company for such quarter per weighted average
number of shares of Common Stock outstanding, exceed (2) an amount equal to
(a) the weighted average of the price per share at initial offering and the
prices per share at any secondary offerings by the Company multiplied by (b)
25% of the sum of the Ten-Year U.S. Treasury Rate plus four percent, and (B)
the weighted average number of shares of Common Stock outstanding. Because
this amount is based on the income of the Company, it is not currently
determinable. The quarterly incentive fee is non-cumulative. As used in
calculating the Manager's compensation, the term "Ten-Year U.S. Treasury
Rate" means the arithmetic average of the weekly average yield to maturity
for actively traded current coupon U.S. Treasury fixed interest rate
securities (adjusted to constant maturities of ten years) published by the
Federal Reserve Board during a quarter, or, if such rate is not published by
the Federal Reserve Board, any Federal Reserve Bank or agency or department
of the federal government selected by the Company. If the Company determines
in good faith that the Ten-Year U.S. Treasury Rate cannot be calculated as
provided above, then the rate shall be the arithmetic average of the per
annum average yields to maturities, based upon closing asked prices on each
business day during a quarter, for each actively traded marketable U.S.
Treasury fixed interest rate security with a final maturity date not less
than eight nor more than twelve years from the date of the
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<PAGE> 15
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.
(6) There is no cap on the reimbursement of out-of-pocket expenses.
(7) The Manager intends to solicit competitive bids in connection with certain
services to be performed on behalf of the Company, including servicing,
development and property management. Subject to approval of the Independent
Directors, the Company may award such contracts to the Manager and/or
affiliates of the Manager that make competitive bids. For example, Compass
Management and Leasing, Inc. ("COMPASS") a wholly-owned indirect subsidiary
of Lend Lease, may be retained to perform property management services for
the Company. However, the Manager is unable to predict with certainty which
of its affiliates will perform services for the Company or the extent of
such services.
BENEFITS TO INSIDERS
The Manager will be entitled to certain management fees, as discussed under
the heading "The Management Agreement" and, in the event of termination or
non-renewal of the Management Agreement without cause, may be entitled to
certain substantial termination fees.
ERE Yarmouth Holdings, Inc., a wholly-owned indirect subsidiary of Lend
Lease, will purchase 1,166,567 shares of Common Stock upon consummation of this
offering and the Private Placement at the initial public offering price, less
underwriting discount, after which Lend Lease will beneficially own
approximately 10.0% of the outstanding Common Stock of the Company (assuming
that the Underwriters do not exercise their over-allotment option).
To provide an incentive for the Manager to enhance the value of the Common
Stock, the Company will grant the Manager options to purchase ("Options")
1,166,667 shares of Common Stock (1,313,667 shares if the Underwriters exercise
their over-allotment option in full) or, if necessary to prevent Lend Lease from
exceeding the restriction on ownership (or deemed ownership by virtue of the
attribution provisions in the Code) of more than 9.8% of the total number of
outstanding shares of any class of capital stock of the Company by any
shareholder (if at such time Lend Lease is not publicly held) (the "Ownership
Limitation") set forth in the Charter, units of limited partnership of the
Operating Partnership ("Units") at a price per share equal to the initial public
offering price of the Common Stock. The Manager may redeem any Units so
purchased for cash or, at the election of the General Partner, shares of Common
Stock on a one-for-one basis. See "Operating Partnership Agreement -- Redemption
Rights." One quarter of the Manager's options will become exercisable on each of
the four anniversaries of the consummation of this offering. Unexercised options
will terminate on the tenth anniversary of the consummation of this offering.
See "Management of Operations -- Stock Options." In addition, 80% of the Options
remaining in the Company's stock option plan (the "Option Plan") following the
initial grant of Options to the Manager will be set aside for future Option
grants to the Manager. Such reserve does not guarantee that the Manager will be
granted such Options.
Additionally, upon consummation of this offering and the Private Placement,
the Company expects to grant Options to purchase shares of Common Stock to
executive officers of the Company (all of whom are employees of the Manager) and
to other employees of the Manager. Subject to certain limitations, the number of
Options initially granted to the officers of the Company and the Manager will be
equal to the number of shares of Common Stock that such individuals purchase in
this offering. See "Underwriting." One-fifth of these Options will become
exercisable on the date of grant and the remaining Options will become
exercisable in four equal installments commencing on the first anniversary of
the date of grant. Unexercised Options will terminate on the tenth anniversary
of the consummation of this offering.
CONFLICTS OF INTEREST
The Company will be subject to conflicts of interest involving the Manager.
First, although a majority of the Company's Board of Directors will be
Independent Directors, the remaining directors and each of the executive
officers of the Company also serve as directors or officers of the Manager.
Second, the Manager will
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receive a management fee and, the Management Agreement may be terminated without
cause only if the Manager is paid a substantial termination fee, which may
adversely affect the Company's ability to terminate the Manager without cause.
The Independent Directors will determine the Company's position as to whether
there is cause to terminate the Management Agreement. Furthermore, the incentive
management fee, which is based on the Company's income, may create an incentive
for the Manager to recommend investments that have greater income potential but
are generally more speculative than if the management fee did not include a
performance component. Third, the Manager advises other entities that invest in
the types of assets in which the Company will invest and the Management
Agreement will not prohibit the Manager or its affiliates from acting as
advisors for other entities (including subsidiaries) or performing investment,
corporate management or other services for any other entity (including
subsidiaries) that makes such investments. Fourth, the Manager may engage in
transactions on behalf of the Company with affiliates of the Manager. Fifth, the
Manager and its affiliates have long-term relationships with a significant
number of developers, institutions and corporations and their senior managers
that the Manager may consider in its management of the Company. Sixth, the
Management Agreement will not prohibit the Manager or any of its affiliates from
conducting any other business venture, making investments for its own account or
the accounts of any other entity, including, for example, owning any interest in
any other business venture of any nature in the vicinity of any of the Company's
properties or any other location. Seventh, the Company may purchase assets from
the Manager and its affiliates. See "Certain Relationships; Conflicts of
Interest."
To minimize the risks related to these potential conflicts, a majority of
the Board of Directors will be Independent Directors. The Independent Directors
have approved the Management Agreement and the Guidelines. Although the Manager
will perform the day-to-day operations of the Company, the Independent Directors
will review transactions engaged in by the Company in the quarter following
completion to ensure compliance with the Guidelines. In addition, the
Independent Directors will review all transactions between the Company, on the
one hand, and the Manager or its affiliates, on the other hand, prior to
completion to ensure compliance with the Guidelines. In such review, the
Independent Directors are expected to rely primarily on information provided by
the Manager. See "Operating Policies and Objectives -- The Company's
Guidelines." Additionally, the Company believes that Lend Lease's investment in
the Company and the Options granted to the Manager will more closely align the
goals of the Manager with those of the Company.
ERE Yarmouth utilizes an internal pipeline allocation and investment
committee approval process for every real estate investment, which is intended
to ensure that all clients, including the Company, will have fair access to new
opportunities without preference being accorded to any particular client. Each
client is assigned a portfolio manager who develops an annual plan detailing the
client's desired investment volume, deal structure and, by property type, the
desired physical characteristics, pricing, leasing risk and target markets. When
ERE Yarmouth has investment opportunities, the opportunity is prioritized among
its respective clients. If an investment opportunity is equally suited for more
than one client, such opportunity will be allocated based upon a rotation
system. Factors considered in prioritizing investment opportunities include, but
are not limited to: (i) the client's investment parameters, including size of
transaction, geographic location, property type and timing; (ii) discretionary
or non-discretionary requirements of the seller or borrower; (iii) the ability
of the client to meet the transaction's timing sensitivity; (iv) whether the
transaction is complementary with the client's existing portfolio and (v) in the
event the rotation system is required, the aggregate dollar amount invested and
number of transactions previously closed on behalf of the client. The ultimate
allocation decision is approved by an allocation committee (the "Allocation
Committee") in accordance with a process that is intended to be fair and
impartial, taking into account the investment criteria of each client (the
"Allocation Process"). See "Risk Factors -- Conflicts of Interest in the
Business of the Company May Result in Decisions of the Company that Do Not Fully
Reflect the Interest of the Shareholders of the Company" and "Certain
Relationships; Conflicts of Interest."
RISK MANAGEMENT
To create yields commensurate with its investment objectives, the Company
intends to leverage its assets primarily through the issuance of CMOs, reverse
repurchase agreements, warehouse lines of credit and other borrowing
arrangements, pledging its assets as collateral security for its repayment
obligations. The Company
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intends to use the proceeds from securitizations and other borrowings to invest
in additional Mortgage Loans, CMBS and other assets and, in turn, to borrow
against such assets and to repeat this process of borrowing and investing until
it has significantly leveraged its portfolio of assets. A portion of the
Company's borrowings may be in the form of reverse repurchase agreements that
are based on the market value of the CMBS pledged to secure the specific
borrowings. A decline in the market value of those CMBS could limit the
Company's ability to borrow or result in lenders initiating margin calls,
requiring the Company to sell assets under adverse market conditions in order to
maintain liquidity. If these sales were made at prices lower than the carrying
value of the assets, the Company would experience losses. A substantial portion
of the Company's net income is expected to consist of the difference between (i)
the income generated by its investments and (ii) the interest expense incurred
with respect to its borrowings, and hedging and other costs.
The Company may hedge all or a portion of the interest rate risk associated
with its borrowings through the use of interest rate caps, swaps and other
derivative financial products. However, the use of these instruments to hedge a
portfolio carries certain risks, including the risk that losses on a hedge
position will reduce the Company's earnings and funds available for distribution
to shareholders and, indeed, that such losses may exceed the amount invested in
such instruments. There is no perfect hedge for any investment and a hedge may
not perform its intended purpose of offsetting losses on an investment.
Furthermore, the Company may enter into over-the-counter hedging transactions in
which the protections afforded to participants in an organized exchange and in a
regulated environment may not be available, which would expose the Company to
counterparty risk. To the extent consistent with maintaining the Company's
status as a REIT, the Company also may engage in a variety of interest rate risk
management techniques for the purpose of managing the effective maturity or
interest rate of its assets or borrowings. These techniques also may be used to
attempt to protect against declines in the market value of the Company's assets
resulting from general economic and market trends or to change the duration of
or interest rate risk associated with the Company's borrowings. There can be no
assurance that the Company's investment and leverage strategy can be implemented
or will be successful and no hedging strategy will insulate the Company
completely from interest rate risk. See "Risk Factors -- The Company Will be
Subject to Economic and Business Risks -- The Company's Performance May be
Affected Adversely if its Hedging Strategy Is Not Successful" and "-- Leverage
Can Reduce Income Available for Distribution."
THE OFFERING
Shares offered to the public(1)......... 9,800,000 shares
Shares to be outstanding after the
offering(1)(2).......................... 11,666,667 shares
Proposed Nasdaq National Market
Symbol.................................. CHAS
- ---------------
(1) Assumes the Underwriters' over-allotment option is not exercised.
(2) Includes 1,166,567 shares to be sold to a wholly-owned indirect subsidiary
of Lend Lease and 700,000 shares to be sold to FBR Asset Investment
Corporation in the Private Placement. Does not include 2,500,000 shares
reserved for issuance pursuant to the Company's Option Plan, of which
Options to purchase 1,166,667 shares of Common Stock (1,313,667 shares if
the Underwriters' over-allotment option is exercised in full) are expected
to be granted to the Manager and certain Options are expected to be granted
to certain employees of the Manager upon consummation of this offering and
the Private Placement. See "Management of Operations -- Stock Options,"
"Capitalization," "Description of Capital Stock" and "Underwriting."
USE OF PROCEEDS
The Company intends temporarily to invest net proceeds of this offering and
the Private Placement in readily marketable, interest-bearing securities
consistent with the Company's qualification as a REIT until the Company finds
appropriate investments consistent with its investment policies. See "Operating
Policies and Objectives." Upon consummation of the offering and the Private
Placement, the Company will pay an
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aggregate of approximately $115,000 of the net proceeds to the Manager to
reimburse it for expenses paid on behalf of the Company.
DISTRIBUTION POLICY
The Company intends to make distributions to its shareholders of all or
substantially all of its net taxable income each year (subject to certain
adjustments) so as to qualify for the tax benefits accorded to REITs under the
Code. The Company intends to make four regular quarterly distributions per year.
To the extent necessary to maintain its REIT qualification or to avoid a
corporate income or excise tax in any particular year, the Company will declare
a fifth, special distribution. It is anticipated that the first distribution to
shareholders will be made promptly after the first full calendar quarter
following the consummation of this offering. The Company intends, to the extent
practicable, to invest or reinvest substantially all of the principal from
repayments, sales and refinancings of the Company's assets in Subordinated
Interests and other classes of CMBS, Mortgage Loans (including Distressed
Mortgage Loans), Opportunistic Real Properties, Mezzanine Investments and other
real estate related assets ("Real Estate Related Assets"). However, certain
distributions may include a return of capital. Such distributions, if any, will
be made at the discretion of the Company's Board of Directors. See "Distribution
Policy."
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under
sections 856 through 860 of the Code, commencing with its first REIT taxable
year ending on December 31, 1998. If the Company qualifies for taxation as a
REIT, the Company generally will not be subject to federal corporate income tax
on its taxable income that is distributed to its shareholders. A REIT is subject
to a number of organizational and operational requirements, including a
requirement that it currently distribute at least 95% of its annual "REIT
taxable income."
In the opinion of King & Spalding, counsel to the Company, assuming that
the elections and other procedural steps described in "Federal Income Tax
Consequences" below are completed by the Company in a timely fashion, the
Company will qualify to be taxed as a REIT pursuant to sections 856 through 860
of the Code commencing with the Company's first REIT taxable year ending on
December 31, 1998, and the Company's organization and proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the Internal Revenue Service (the
"Service") or any court. It must be emphasized that King & Spalding's opinion is
based on various assumptions and is conditioned upon certain representations
made by the Company as to factual matters, including representations regarding
the nature of the Company's properties and the future conduct and method of
operation of its business. None of the factual assumptions or representations
upon which King & Spalding's opinion is based, including such assumptions and
representations regarding the actual and proposed method of operation of the
Company's business, differs from the statements made in this Prospectus, nor is
King & Spalding aware of any facts or circumstances that are inconsistent with
such assumptions and representations.
It also must be emphasized that the Company's qualification and taxation as
a REIT depends upon its ability to meet, on a continuing basis through actual
annual operating results, distribution levels and stock ownership, the various
qualification tests imposed under the Code that are described below in "Federal
Income Tax Consequences -- Requirements for Qualification." King & Spalding will
not review the Company's compliance with those tests on a continuing basis.
Accordingly, there can be no assurance that the actual results of the Company's
operations for any particular taxable year will satisfy such requirements.
Failure to qualify as a REIT would subject the Company to federal income
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, and distributions to the Company's shareholders would
not be deductible. Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain federal, state, local and foreign taxes on its
income and property. See "Risk Factors -- The Company Will be Subject to Legal
and Tax Risks" and "Federal Income Tax Consequences -- Taxation of the Company."
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ORGANIZATION AND RELATIONSHIPS
The Company intends to invest primarily in Real Estate Related Assets. The
Manager will manage the day-to-day operations of the Company, subject to the
supervision of the Company's Board of Directors. The relationship among the
Company, its affiliates and the Manager is depicted in the picture shown below.
CHART
(1) Following consummation of this offering and the Private Placement, the
Company's Common Stock will be held as follows: 84% by public investors
(including up to 2% to be held by directors of the Company and officers,
employees and directors of Lend Lease and its subsidiaries), 10% by ERE Yarmouth
Holdings, Inc., a wholly-owned indirect subsidiary of Lend Lease and 6% by FBR
Asset Investment Corporation.
(2) The Company has incorporated and capitalized two wholly owned
subsidiaries, Chastain GP Holdings, Inc. ("General Partner") and Chastain LP
Holdings, Inc. ("Initial Limited Partner").
(3) The Initial Limited Partner and the General Partner will organize and
capitalize Chastain Investments, L.P. (the "Operating Partnership"), with the
Initial Limited Partner initially to hold a 99% interest as a limited partner in
the Operating Partnership, and the General Partner initially to hold a 1%
interest as a general partner in the Operating Partnership. See "Operating
Partnership Agreement."
(4) The Operating Partnership will provide potential sellers of assets the
opportunity to transfer those assets to the Operating Partnership in a
tax-deferred exchange. Such sellers would receive units of limited partnership
interest ("Units") in the Operating Partnership that would be redeemable (in a
taxable transaction) for cash or, at the election of the General Partner, shares
of Common Stock on a one-for-one basis.
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(5) ERE Yarmouth will enter into a Management Agreement with the Company,
pursuant to which ERE Yarmouth will manage the day-to-day operations of the
Company, subject to the supervision of the Company's Board of Directors.
(6) The Manager intends to subcontract with ERE Hyperion to perform certain
functions relating to the Company's CMBS on behalf of the Manager. The Manager
will pay any submanagement fees out of the management fee it receives from the
Company.
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RISK FACTORS
An investment in the Common Stock involves various risks. Before purchasing
shares of Common Stock offered hereby, prospective investors should give special
consideration to the information set forth below, in addition to the information
set forth elsewhere in this Prospectus.
THE COMPANY IS NEWLY FORMED AND HAS NO OPERATING HISTORY; RELIANCE ON MANAGER
UNCERTAINTY AS TO THE COMPANY'S ABILITY SUCCESSFULLY TO IMPLEMENT ITS
OPERATING POLICIES AND STRATEGIES RESULTING FROM ITS LACK OF OPERATING
HISTORY. The Company was organized on December 16, 1997. The Company has no
operating history and has not yet implemented its operating policies and
strategies. The Company is externally managed and will be dependent upon the
experience and expertise of the Manager in advising the Company and
administering its day-to-day operations. The Manager has only limited experience
in operating a REIT and management of the Company has no experience in operating
a REIT.
THE COMPANY'S SUCCESS WILL DEPEND ON THE SERVICES OF EXTERNAL
MANAGEMENT. The Company will contract with the Manager to advise the Board of
Directors and direct the day-to-day business affairs of the Company and will
rely on the Manager as its principal source of investment opportunities. In
addition, the Company does not expect to employ full-time personnel and expects
to rely on the facilities, personnel and resources of the Manager to conduct its
operations. Thus, the Company's success will depend on the services of the
Manager and its officers and employees. Certain officers, directors and
employees of the Company and the Manager and its affiliates have experience in
creating, evaluating, acquiring and managing Mortgage Loans, Subordinated
Interests, CMBS and Opportunistic Real Property. However, such officers,
directors and employees have only limited experience in operating a REIT. The
Manager will subcontract with ERE Hyperion and may contract with other third
parties to provide services to the Company. These parties may provide similar
services to other mortgage REITs and other competitors of the Company. There can
be no assurance that the Company and the Manager will be able to implement
successfully the strategies that the Company intends to pursue. Subject to the
Guidelines, the Manager is expected to have significant latitude as to the types
of assets it may determine to be proper investments for the Company. There can
be no assurance that the Manager's decisions in this regard will result in a
profit for the Company. The Company's success will depend in part on the
continuing ability of the Manager and its affiliates to hire and retain
knowledgeable personnel and the Manager's ability to cause such personnel to
focus their attention on the affairs of the Company rather than the affairs of
its other affiliates. The ability of the Manager and its affiliates to attract
and retain such personnel may be affected, in turn, by Lend Lease's and the
Manager's continued financial strength. Finally, the Company is subject to the
risk that the Manager will terminate the Management Agreement and that no
suitable replacement will be found to manage the Company.
THE COMPANY MAY BECOME OBLIGATED TO PAY THE MANAGER A SUBSTANTIAL
TERMINATION FEE. In the event of termination or non-renewal of the Management
Agreement without cause, the Manager will be entitled to a termination fee equal
to the sum of the base management fee and incentive management fee, if any,
earned during the immediately preceding four quarters. The termination fee may
be substantial.
APPROPRIATE INVESTMENTS MAY NOT BE AVAILABLE AND FULL INVESTMENT OF NET
PROCEEDS MAY BE DELAYED. None of the net proceeds of this offering or the
Private Placement are committed to purchase specific assets. The Company intends
to invest the net proceeds of this offering in readily marketable,
interest-bearing securities on a temporary basis until the Company finds
appropriate Real Estate Related Assets in which to invest. There can be no
assurance, however, that the Company will identify Real Estate Related Assets
that meet its investment criteria or that any such assets will produce a return
on the Company's investments. In addition, there is increased uncertainty and
risk to investors since they will be unable to evaluate the manner in which the
net proceeds are to be invested or the economic merit of the particular assets
to be acquired prior to an investment in the Common Stock offered hereby. There
may be a substantial period of time before the proceeds of this offering and the
Private Placement are fully invested and therefore investors may experience a
delay in receiving a return on their investment. Moreover, the Company and the
Manager have broad discretion in determining how to invest the net proceeds of
this offering and may change the current investment and operating policies of
the Company without a vote of the shareholders. Such deviations from
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<PAGE> 22
current policies might expose the Company to increased risks of loss or
liability, which could affect adversely the Company or the market price of the
Common Stock.
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY MAY RESULT IN DECISIONS OF
THE COMPANY THAT DO NOT FULLY REFLECT THE INTERESTS OF THE SHAREHOLDERS OF THE
COMPANY
BENEFITS TO INSIDERS, COMMON OFFICERS AND DIRECTORS. The Company is
subject to various potential conflicts of interests arising from its
relationship with the Manager and its affiliates. First, after the consummation
of this offering and the Private Placement, Lend Lease, the Manager's ultimate
parent company, will beneficially own 1,166,667 shares, representing 10.0% of
the outstanding Common Stock, of which 1,166,567 shares will be purchased for
cash at the initial public offering price, less underwriting discount. Second,
the Manager will render management services to the Company for a management fee,
which benefits Lend Lease. Additionally, the incentive management fee, which is
based on the Company's income, may create an incentive for the Manager to
recommend investments that have greater income potential but are generally more
speculative than if the management fee did not include a performance component.
Furthermore, the Manager, and/or affiliates of the Manager, may be retained to
provide servicing, development and property management on behalf of the Company.
The Management Agreement has been approved by a majority of the Independent
Directors. Moreover, the renewal of the Management Agreement after the initial
two-year term will require the affirmative vote of a majority of the Independent
Directors. The Company may terminate, or decline to extend the term of, the
Management Agreement without cause at any time after the initial term upon 60
days written notice by a majority vote of the Independent Directors; provided
that upon termination or non-renewal of the Management Agreement the Company
shall pay the Manager a termination fee equal to the sum of the base management
fee and incentive management fee, if any, earned during the twelve months
preceding such termination. This requirement may adversely affect the Company's
ability to terminate the Manager without cause. In addition, the Company has the
right to terminate the Management Agreement upon the occurrence of certain
specified events, including a material breach by the Manager of any provision
contained in the Management Agreement, without the payment of any termination
fee. See "Management of Operations -- The Management Agreement." Furthermore,
the Company will agree to indemnify the Manager and its officers and directors
with respect to their liability for expenses, losses, damages, liabilities and
claims arising from acts of the Manager not constituting bad faith, willful
misconduct, gross negligence or reckless disregard of duties performed pursuant
to the Management Agreement.
Two of the Company's directors and all of its executive officers serve as
directors or officers of the Manager. Specifically, Matthew Banks, Chairman of
the Board of the Company, is also Chief Executive Officer of ERE Yarmouth, and
Kurt L. Wright, Chief Executive Officer of the Company, is also Executive Vice
President of ERE Yarmouth. Both will continue to serve in such capacities in the
future. As such, they are expected to provide services not only to the Company
but also to Lend Lease and its affiliates. Although the Company expects that
Messrs. Banks and Wright will devote adequate time to the Company's operations,
if the operations of Lend Lease or its affiliates need immediate attention,
there can be no assurance that they will have adequate time for the Company.
MANAGER MAY ADVISE OTHERS. The Manager advises other entities that invest
in the types of assets in which the Company will invest and the Management
Agreement does not limit or restrict the right of the Manager or any of its
officers, directors, employees or affiliates from engaging in any business or
rendering services of any kind to any other person, including the purchase of or
rendering advice to others purchasing real estate assets that meet the Company's
policies and criteria. The Manager has implemented an Allocation Process, which
is intended to ensure that all clients, including the Company, will have fair
access to new business opportunities without preference being accorded to any
particular client. Pursuant to the terms of the Management Agreement, the
Manager must allocate all investment opportunities among its clients, including
the Company, in accordance with a process that is intended to be fair and
impartial, taking into account each client's individual investment goals and
criteria. There can be no assurance that the Company will be offered each
opportunity that may meet its investment Guidelines. The Management Agreement
requires the Manager to use commercially reasonable efforts in performing its
duties. However, the Manager may modify
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or terminate the Allocation Process at any time without the Company's consent.
See "Certain Relationships; Conflicts of Interest."
INDEPENDENT DIRECTORS WILL NOT PARTICIPATE IN DAY-TO-DAY
OPERATIONS. Although the Management Agreement has been approved by the
Independent Directors, daily operations between the Company and the Manager and
its affiliates will not be required to be approved by a majority of the
Independent Directors. Instead, the Manager will conduct the day-to-day
operations of the Company in accordance with the Guidelines that will be
approved by a majority of the Independent Directors. The Independent Directors
will review transactions engaged in by the Company in the quarter following
completion to monitor compliance with the Guidelines. Moreover, the Independent
Directors will review the Guidelines at least annually. Investors should be
aware that, in conducting this review, the Independent Directors are expected to
rely primarily on information provided to them by the Manager.
PURCHASE OF ASSETS FROM LEND LEASE AND ITS AFFILIATES AND CLIENTS. The
Company is subject to conflicts of interest with the Manager because the Company
may (although it does not currently intend to) purchase assets from the Manager
and its affiliates, including Lend Lease. The Independent Directors will review
any such transactions prior to completion to ensure that they are consistent
with the Guidelines. However, the Independent Directors are expected to rely
primarily on the advice of and information provided by the Manager in deciding
whether to approve such transactions, and there can be no assurance that the
price and other terms of such transactions will be fair to the Company.
SUBORDINATED CMBS MAY SUBJECT THE COMPANY TO GREATER CREDIT RISKS AND YIELDS
THAT ARE SENSITIVE TO INTEREST RATE CHANGES
SUBORDINATED CMBS ARE SUBJECT TO GREATER CREDIT RISKS THAN MORE SENIOR
CLASSES. The Company intends to originate and acquire a significant amount of
various classes of CMBS, including "first loss" classes of subordinated CMBS. A
first loss class is the most subordinated class of a multi-class issuance of
pass-through or debt securities and is the first to bear the loss upon a default
on the mortgage loans securing or backing a series of MBS ("Mortgage
Collateral"). Subordinated CMBS are subject to special risks, including a
substantially greater risk of loss of principal and non-payment of interest than
more senior classes. The market values of subordinated classes of CMBS tend to
be more sensitive to changes in economic conditions than more senior classes. As
a result of these and other factors, subordinated CMBS generally are not
actively traded and may not provide holders thereof with liquidity of
investment.
The Yield to Maturity on subordinated CMBS of the type the Company intends
to acquire will be extremely sensitive to the default and loss experience of the
underlying Mortgage Collateral and the timing of any such defaults or losses.
Because the subordinated classes of the type the Company intends to acquire
generally have no credit support, to the extent there are realized losses on the
Mortgage Collateral, the Company may not recover the full amount, or indeed any,
of its investment in such subordinated CMBS.
When the Company acquires a subordinated CMBS interest, it typically will
be unable to obtain the right to service the underlying performing Mortgage
Collateral. In an attempt to control and minimize its losses, the Company will
seek to obtain the right to service any underlying Mortgage Collateral that is
in default (the servicing of defaulted Mortgage Loans is referred to as "Special
Servicing"), although in many cases it is not likely to obtain Special Servicing
rights on acceptable terms. If the Company does acquire Special Servicing
rights, then it will contract with a Special Servicer (that may be the Manager)
to perform the Special Servicing functions, and thus the performance of the
Company's investments will depend, at least in part, on such Special Servicer's
handling of defaulted loans. To the extent the Company does not obtain Special
Servicing rights with respect to the Mortgage Collateral underlying its CMBS,
the servicer of the Mortgage Collateral generally would be responsible to
holders of the senior classes of CMBS, whose interests may not be the same as
those of the holders of the subordinated classes. Accordingly, the Mortgage
Collateral may not be serviced in a manner that is most advantageous to the
Company as the holder of a subordinated class.
The subordination of CMBS to more senior classes may affect the yield on
the subordinated CMBS adversely even if realized losses ultimately are not
allocated to such classes. On any payment date, interest and principal generally
would be paid on the more senior classes before interest and principal would be
paid with
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respect to the subordinated classes. Typically, interest deferred on
subordinated classes would be payable on subsequent payment dates to the extent
funds become available, but such deferral itself may not bear interest. Such
deferral of interest generally will affect adversely the yield on the
subordinated classes.
In connection with the securitization and sale of self-originated loans,
the Company must also make certain representations and warranties to "conduit"
purchasers. These representations and warranties cover such matters as title to
the mortgaged property, lien priority, environmental reviews and certain other
matters. The Company's representations and warranties rely in part on similar
representations and warranties made by the borrower or others. The Company would
have a claim against the borrower or another party in the event of a breach of
any of these representations or warranties; however, the Company's ability to
recover on any such claim would be dependent upon the financial condition of the
party against which such claim is asserted. There can be no assurance that the
Company will not experience a material loss as a result of representation and
warranties that it makes.
YIELDS ON SUBORDINATED CMBS MAY BE ADVERSELY AFFECTED BY INTEREST RATE
CHANGES. The yield on subordinated classes generally will be affected by the
rate and timing of payments of principal on the Mortgage Collateral underlying a
series of CMBS. The rate of principal payments may vary significantly over time
depending on a variety of factors such as the level of prevailing mortgage loan
interest rates and economic, demographic, tax, legal and other factors.
Prepayments on the Mortgage Collateral underlying a series of CMBS generally are
allocated to the more senior classes of CMBS until those classes are paid in
full. As a result, the weighted-average lives of the subordinated classes may be
longer than would be the case if, for example, prepayments were allocated pro
rata to all classes of CMBS. To the extent that the holder of a subordinated
class is not paid compensating interest on interest shortfalls due to
prepayments, liquidations or otherwise, the yield on the subordinated class may
be adversely affected.
THE COMPANY'S MORTGAGE LOANS WILL HAVE SPECIAL RISKS RELATED TO THE VALUE OF THE
UNDERLYING PROPERTIES, THIRD-PARTY SERVICERS AND THE TIMING AND AVAILABILITY OF
SECURITIZATIONS.
MULTIFAMILY AND COMMERCIAL LOANS INVOLVE A GREATER RISK OF LOSS THAN SINGLE
FAMILY LOANS. The Mortgage Loans that the Company expects to originate and
acquire generally will be secured by existing multifamily or commercial real
estate, including apartments, shopping centers, office buildings, hotels,
industrial properties, hospitals and nursing homes. Property pledged as security
for Mortgage Loans is referred to as "Mortgaged Property." Multifamily and
commercial real estate lending is considered to involve a higher degree of risk
than single family residential lending because of a variety of factors,
including generally larger loan balances, dependency on successful operation of
the Mortgaged Property and tenants operating businesses therein for repayment,
and loan terms that often require little or no amortization and, instead,
provide for balloon payments at stated maturity. In addition, the value of
multifamily and commercial real estate can be affected significantly by the
supply and demand in the market for that type of property. Market values may
vary as a result of economic events, governmental regulations or other factors
outside the control of the borrower or the Company, such as rent control laws in
the case of multifamily Mortgage Loans, which may impact the future cash flow of
the underlying Mortgaged Property.
The successful operation of a multifamily or commercial real estate project
is generally dependent on the performance and viability of the property manager
of that project. The property manager would be responsible for responding to
changes in the local market, planning and implementing the rental structure,
including establishing appropriate rental rates, and advising the owner so that
maintenance and capital improvements can be carried out in a timely fashion and
at an appropriate cost. There can be no assurance regarding the performance of
any operators and/or managers or persons who may become operators and/or
managers upon the expiration or termination of leases or management agreements
or following any default or foreclosure under a Mortgage Loan.
VOLATILITY OF VALUES OF MORTGAGED PROPERTIES MAY AFFECT ADVERSELY THE
COMPANY'S MORTGAGE LOANS. Commercial and multifamily property values and net
operating income derived therefrom are subject to volatility and may be
adversely affected by a number of factors, including, but not limited to,
national, regional and local economic conditions (which may be adversely
affected by plant closings, industry slowdowns and
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other factors); local real estate conditions (such as an oversupply of housing,
retail, industrial, office or other commercial space); changes or continued
weakness in specific industry segments; perceptions by prospective tenants and,
in the case of retail properties, retailers and shoppers, of the safety,
convenience, services and attractiveness of the property; the willingness and
ability of the property's owner to provide capable management and adequate
maintenance; construction quality, age and design; demographic factors;
retroactive changes to building or similar codes; and increases in operating
expenses (such as energy costs). The historical operating results of the
Mortgaged Properties may not be comparable to future operating results. In
addition, other factors may affect adversely the Mortgaged Properties' value
without affecting the net operating income, including changes in governmental
regulations, zoning or tax laws, potential environmental or other legal
liabilities, the availability of refinancing, and changes in interest rate
levels.
DELINQUENCY AND LOSS RATIOS MAY BE AFFECTED BY PERFORMANCE OF
SERVICERS. The Manager intends to become a rated Special Servicer. However,
there can be no assurance that it will receive a rating in a timely fashion. In
the interim, the Company intends to contract for the servicing of its Mortgage
Loans with servicers and will be subject to risks associated with potentially
inadequate servicing. Many borrowers require notices and reminders to keep
Mortgage Loans current and to prevent delinquencies and foreclosures. A
substantial increase in the delinquency or foreclosure rate resulting from
inadequate servicing could affect adversely the Company's performance and
ability to access profitably the capital markets for its financing needs,
including future securitizations.
The Company's servicing agreements with its servicers often will provide
that if the Company terminates the servicing agreement without cause (as defined
in the agreement), the Company may be required to pay the third-party servicer a
termination fee. Depending upon the size of the particular Mortgage Loan
portfolio then being serviced, the termination fee that the Company would be
obligated to pay upon termination of a servicing agreement without cause could
be substantial and could deter a termination without cause that otherwise would
be advantageous to the Company.
LIMITED RECOURSE LOANS MAY LIMIT THE COMPANY'S RECOVERY TO THE VALUE OF THE
MORTGAGED PROPERTY. The Company anticipates that a substantial portion of the
Mortgage Loans that it will originate or acquire and of the Mortgage Collateral
that it will originate or acquire may contain limitations on the mortgagee's
recourse against the borrower. In other cases, the mortgagee's recourse against
the borrower may be limited by applicable provisions of the laws of the
jurisdictions in which the Mortgaged Properties are located or by the
mortgagee's selection of remedies and the impact of those laws on that
selection. In those cases, in the event of a borrower default, recourse may be
limited to only the specific Mortgaged Property and other assets, if any,
pledged to secure the relevant Mortgage Loan. As to those Mortgage Loans that
provide for recourse against the borrower and its assets generally, there can be
no assurance that such recourse will provide a recovery in respect of a
defaulted Mortgage Loan greater than the liquidation value of the Mortgaged
Property securing that Mortgage Loan.
POSSIBLE LOSSES ON MORTGAGE LOANS DURING WAREHOUSING PERIOD. The Company
intends to acquire and accumulate Mortgage Loans for securitization as part of
its investment strategy. The Manager, in its discretion, will determine the
quantity of Mortgage Loans sufficient for securitization after discussions with
potential underwriters and rating agencies and an evaluation of the costs of
securitization. During the accumulation period, the Company will be subject to
risks of borrower defaults, bankruptcies, fraud losses and special hazard losses
that are not covered by standard hazard insurance. However, prior to
securitization, the Company generally does not intend to obtain credit
enhancements such as mortgage pool or hazard insurance. Typically, third parties
insure against these types of losses, and the Company would be dependent on the
creditworthiness of the insurer and timeliness of the reimbursement in the event
of a default on the underlying obligations. Further, the insurance coverage for
various type of losses is limited in amount, and losses in excess of the
limitation would be the responsibility of the Company. In the event of any
default under Mortgage Loans held by the Company, the Company will bear the risk
of loss of principal to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the Mortgage Loan. Also, during
the accumulation or warehousing period, the cost of financing and hedging the
Mortgage Loans could exceed the interest income on the Mortgage Loans. There can
be no assurance that any mortgage, fraud or hazard insurance will adequately
cover a loss suffered by the Company. It may not be possible or economical for
the
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Company to securitize all of the Mortgage Loans which it acquires, in which case
the Company will continue to hold the Mortgage Loans and bear the risks of
borrower defaults, bankruptcies, fraud losses and special hazard losses.
Furthermore, if the Company retains a Subordinated Interest in the
securitizations, it will retain many of these risks. See "Operating Policies and
Objectives -- Investment Activities."
The Company expects that when it acquires Mortgage Loans, the seller of the
Mortgage Loans (the "Mortgage Seller") generally will represent and warrant to
the Company that there has been no fraud or misrepresentation during the
origination of the Mortgage Loans and will agree to repurchase any loan with
respect to which there is fraud or misrepresentation. Although the Company will
have recourse to the Mortgage Seller based on the Mortgage Seller's
representations and warranties to the Company, the Company will be at risk for
loss to the extent the Mortgage Seller does not or cannot perform its repurchase
obligations. The Company intends to acquire third party insurance, to the extent
that it is available at a reasonable price, for such risks. If the Company is
unable or fails to acquire such insurance, the Company would be relying solely
on the value of the collateral underlying the Mortgage Loans.
In addition, substantial delays could be encountered in connection with the
foreclosure of defaulted Mortgage Loans, with corresponding delays in the
receipt of related proceeds by the Company. State and local statutes and rules
may delay or prevent the Company's foreclosure on or sale of the mortgaged
property and may prevent the Company from receiving new proceeds sufficient to
repay all amounts due on the related Mortgage Loan. Moreover, the Company's
servicing agent may be entitled to receive all expenses reasonably incurred in
attempting to recover amounts due and not yet repaid on liquidated Mortgage
Loans, thereby reducing amounts available to the Company.
LACK OF ACCESS TO SECURITIZATIONS WOULD ADVERSELY AFFECT THE COMPANY. The
Company intends to rely upon securitizations of Mortgage Loans to generate cash
proceeds for the purchase of additional Mortgage Loans. Several factors will
affect the Company's ability to complete securitizations, including conditions
in the securities markets generally, conditions in the mortgage-backed
securities market specifically, the credit quality of the Company's portfolio of
Mortgage Loans and the Company's ability to obtain credit enhancement. If the
Company were unable to successfully securitize a sufficient amount of Mortgage
Loans, then the Company would have to rely on other, more expensive short-term
methods of financing, or curtail or reduce its acquisition of Mortgage Loans.
There can be no assurance that the Company will be able to successfully
securitize any Mortgage Loans which it acquires or, if it is not successful,
that the Company will obtain financing alternatives to securitization or that if
such financing is available, that it will be available on favorable terms.
CONSTRUCTION AND MEZZANINE INVESTMENTS INVOLVE GREATER RISKS OF LOSS THAN
LOANS SECURED BY INCOME PRODUCING PROPERTIES. The Company may acquire
Construction Loans and, in some cases, Mezzanine Investments. Construction Loans
and Mezzanine Investments are considered to involve a higher degree of risk than
term mortgage lending secured by income-producing Real Property due to a variety
of factors, including, in the case of Construction Loans, dependency on
successful completion and operation of the project for repayment, difficulties
in estimating construction or rehabilitation costs and loan terms that often
require little or no amortization, providing instead for additional advances to
be made and for a balloon payment at a stated maturity date. In the case of
Mezzanine Investments, such factors would include, among other things, that a
foreclosure by the holder of the senior loan could result in a Mezzanine
Investment becoming unsecured. Accordingly, the Company may not recover the full
amount, or indeed any, of its investment in Mezzanine Investments. In addition,
Construction Loans and Mezzanine Investments may have higher loan to value
ratios than conventional term loans because of shared appreciation provisions.
Although the borrower may have an initial equity investment of 10% to 15% of
total project costs, such initial equity may not be sufficient to protect the
Company's investment in Construction Loans and Mezzanine Investments.
DISTRESSED MORTGAGE LOANS MAY HAVE GREATER DEFAULT RISKS THAN PERFORMING
LOANS. The Company may acquire Nonperforming and Subperforming Mortgage Loans,
as well as Mortgage Loans that have had a history of delinquencies. These
Mortgage Loans presently may be in default or may have a greater than normal
risk of future defaults and delinquencies, as compared to newly originated, high
quality loans. Returns on an investment of this type depend on the borrower's
ability to make required payments (or, with respect to
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Subperforming Mortgage Loans, the modified monthly payments required under the
applicable forbearance plan) or, in the event of default, the ability of the
loan's servicer to foreclose and liquidate the Mortgaged Property underlying the
Mortgage Loan. There can be no assurance that the servicer can liquidate a
defaulted Mortgage Loan successfully or in a timely fashion. See "Certain Legal
Aspects of Mortgage Loans and Real Property Investments."
AGRICULTURAL LENDING IS SUBJECT TO SPECIAL RISKS. The Company may
originate or acquire Agricultural Loans. In addition, the Company may acquire
underperforming agricultural real estate assets. The agriculture industry is
subject to special risks because the production of food and other agricultural
products are affected by weather conditions. Performance of the Company's
mortgage portfolio may be affected by an overall or localized economic downturn
due to changing governmental policies, changing market conditions, acts of God
and adverse changes in zoning laws. Changing consumer attitudes towards food
products due to health, price and environmental concerns may decrease demand for
certain commodities or commodities grown in certain localities. In addition, the
secondary market for agricultural mortgage investments is an emerging market
which may be illiquid.
ONE ACTION RULES MAY LIMIT THE COMPANY'S RIGHTS FOLLOWING
DEFAULTS. Several states have laws that prohibit more than one "judicial
action" to enforce a mortgage obligation, and some courts have construed the
term "judicial action" broadly. The servicer of the mortgage obligation may be
required to foreclose first on properties located in states where such "one
action" rules apply (and when non-judicial foreclosure is permitted) before
foreclosing on properties located in states where judicial foreclosure is the
only permitted method of foreclosure. See "Certain Legal Aspects of Mortgage
Loans and Real Property Investments -- Foreclosure."
INVESTMENTS IN REAL PROPERTY ARE SUBJECT TO RISKS ARISING FROM CONDITIONS BEYOND
ITS CONTROL, THE AVAILABILITY OF INSURANCE, PROPERTY TAXES, ENVIRONMENTAL
PROBLEMS AND FOREIGN LAWS
CONDITIONS BEYOND COMPANY'S CONTROL MAY AFFECT ADVERSELY THE VALUE OF REAL
PROPERTY. Real Properties are subject to varying degrees of risk as described
under "-- The Company's Mortgage Loans Will Have Special Risks Related to the
Value of the Underlying Properties, Third-Party Servicers and the Timing and
Availability of Securitizations -- Volatility of Values of Mortgaged Properties
May Affect Adversely the Company's Mortgage Loans." In addition, Opportunistic
Real Properties may have significant amounts of unleased space and thus may not
generate revenues sufficient to pay operating expenses and meet debt service
obligations. The value of the Company's investments in Real Property and the
Company's income and ability to make distributions to its shareholders will be
dependent upon the ability of the Manager to hire and supervise capable property
managers to operate the Real Property in a manner that maintains or increases
revenues in excess of operating expenses and debt service or, in the case of
Real Property leased to a single lessee, the ability of the lessee to make rent
payments. Revenues from Real Property may be affected adversely by changes in
national or local economic conditions, competition from other properties
offering the same or similar attributes, changes in interest rates and in the
availability, cost and terms of mortgage funds, the impact of present or future
environmental legislation and compliance with environmental laws, the ongoing
need for capital improvements (particularly in older structures), changes in
real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of God, including
earthquakes, hurricanes and other natural disasters (which may result in
uninsured or underinsured losses), acts of war, adverse changes in zoning laws
and other factors which will be beyond the control of the Company.
THE COMPANY'S INSURANCE WILL NOT COVER ALL LOSSES. The Company intends to
maintain comprehensive casualty insurance on its Real Property, including
liability and fire and extended coverage, in amounts sufficient to permit
replacement in the event of a total loss, subject to applicable deductibles. The
Company will endeavor to obtain coverage of the type and in the amount
customarily obtained by owners of properties similar to its Real Property. There
are certain types of losses, however, generally of a catastrophic nature, such
as earthquakes, floods and hurricanes, that may be uninsurable or not
economically insurable. Inflation, changes in building codes and ordinances,
environmental considerations, provisions in loan documents encumbering
properties that have been pledged as collateral security for loans, and other
factors also might
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make it economically impractical to use insurance proceeds to replace a property
if it is damaged or destroyed. Under such circumstances, the insurance proceeds
received by the Company, if any, might not be adequate to restore the Company's
investment with respect to the affected property.
PROPERTY TAXES DECREASE RETURNS ON REAL ESTATE. All Real Property owned by
the Company will be subject to real property taxes and, in some instances,
personal property taxes. Such real and personal property taxes may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. An increase in property taxes on the Company's
Real Property could affect adversely the Company's income and ability to make
distributions to its shareholders and could decrease the value of that Real
Property.
COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND OTHER CHANGES IN
GOVERNMENTAL RULES AND REGULATIONS MAY BE COSTLY. Under the Americans with
Disabilities Act of 1990, as amended (the "ADA"), all public properties are
required to meet certain federal requirements related to access and use by
disabled persons. Certain Real Property that the Company acquires may not be in
compliance with the ADA. If such Real Property is not in compliance, the Company
may be required to make modifications to bring it into compliance or face the
possibility of an imposition of fines or an award of damages to private
litigants. In addition, changes in governmental rules and regulations or
enforcement policies affecting the use and operation of the Company's Real
Property, including changes to building codes and fire and life-safety codes,
may occur. If the Company is required to make substantial modifications at its
Real Property to comply with the ADA or other changes in governmental rules and
regulations, the Company's income and ability to make distributions to its
shareholders could be affected adversely.
The Company may obtain engineering reports on Real Properties prior to
their acquisition. The purpose of engineering reports is, among other things, to
identify existing and potential violations of the ADA. However, the Company will
exercise judgment on this issue and may choose not to obtain engineering reports
on certain Real Property prior to its acquisition and to purchase Mortgage Loans
without engineering reports on the underlying Mortgaged Property if it deems
that to do so is prudent. Further, even if an engineering report is obtained,
there can be no assurance it will reveal all existing and potential
environmental risks and liabilities, and there can be no assurance that there
will be no unknown or material environmental obligations or liabilities.
PROPERTIES WITH HIDDEN ENVIRONMENTAL PROBLEMS MAY INCREASE COSTS AND CREATE
LIABILITIES FOR THE COMPANY. The operating costs and values of Real Property
owned by the Company may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of complying with future legislation. Under various federal, state
and local environmental laws, ordinances and regulations, a current or previous
owner or operator of Real Property may be liable for the costs of removal or
remediation of hazardous or toxic substances in, on, under or in the vicinity of
such Real Property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The Company's income and ability to make distributions to its
shareholders could be affected adversely by the existence of an environmental
liability with respect to its properties.
The Company may obtain Phase I environmental assessments on Real Properties
prior to their acquisition. The purpose of Phase I environmental assessments is
to identify existing and potential environmental contamination that is made
apparent from historical reviews of the properties, reviews of certain public
records, preliminary investigations of the sites and surrounding properties, and
screening for the presence of hazardous substances, toxic substances and
underground storage tanks. However, the Company will exercise judgment on this
issue and may choose not to obtain Phase I environmental assessments on certain
Real Property prior to its acquisition and to purchase Mortgage Loans without
Phase I environmental assessments on the underlying Mortgaged Property if it
deems that to do so is prudent. Further, even if a Phase I environmental
assessment is obtained, there can be no assurance it will reveal all existing
and potential environmental risks and liabilities, and there can be no assurance
that there will be no unknown or material environmental obligations or
liabilities.
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FOREIGN REAL PROPERTIES ARE SUBJECT TO CURRENCY CONVERSION RISKS, FOREIGN
TAX LAWS AND UNCERTAINTY OF FOREIGN LAWS. The Company may invest in Real
Property, or Mortgage Loans secured by Real Property, located outside the United
States. Investing in Real Property located in foreign countries creates risks
associated with the uncertainty of foreign laws and markets. Moreover,
investments in foreign assets may be subject to currency conversion risks. In
addition, income from investment in foreign Real Property and, in some
instances, foreign Mortgage Loans may be subject to tax by foreign
jurisdictions, which would reduce the economic benefit of such investments. The
Manager has only limited experience in investing in foreign Real Property.
THE COMPANY WILL BE SUBJECT TO ECONOMIC AND BUSINESS RISKS
INTEREST RATE CHANGES MAY AFFECT ADVERSELY THE VALUE OF THE COMPANY'S
INVESTMENTS. The value of the Company's Mortgage Loans will be affected by the
prepayment rates on such Mortgage Loans, although multifamily and commercial
Mortgage Loans, which will be the Company's primary investment focus, generally
provide for lock-out periods and prepayment penalties that reduce this risk.
There can be no assurance, however, that prepayment penalties will deter
prepayments. Similarly, the value of the Company's MBS will be affected by the
prepayment rates on the mortgage loans comprising the Mortgage Collateral for
such securities. Prepayment rates on Mortgage Loans and MBS are influenced by
changes in current interest rates and a variety of economic, geographic and
other factors beyond the control of the Company and cannot be predicted with
certainty. In periods of declining mortgage interest rates, prepayments on
Mortgage Loans and MBS generally increase. If general interest rates also
decline, the funds available for reinvestment by the Company during such periods
are likely to be reinvested at lower interest rates than the Company was earning
on the Mortgage Loans and MBS that were prepaid. Mortgage Loans and MBS may
decrease in value as a result of increases in interest rates and may benefit
less than other fixed-income securities from declining interest rates because of
the risk of prepayment. In general, changes in both interest rates and
prepayment rates will affect the total return on the Company's Mortgage Loans
and MBS, which in turn will affect the amount available for distribution to the
Company's shareholders. This volatility may be greater with certain MBS, such as
IOs, Sub IOs and MBS that is entitled to no (or only nominal) distributions of
principal, but is entitled to interest at a floating rate that varies inversely
with a specified index ("Inverse IOs"), that the Company may acquire. The value
of adjustable rate Mortgage Loans and MBS paying fixed coupon rates, which the
Company may acquire, generally will vary inversely with changes in prevailing
interest rates. Under certain interest rate and prepayment rate scenarios, the
Company may not recover fully its investment in such assets.
The Company's strategy is to leverage its investments significantly by
borrowing against them, investing the net proceeds of those borrowings in
additional Real Estate Related Assets, borrowing against those additional
assets, and repeating the process of borrowing and investing until it has a
significantly leveraged portfolio. See "Operating Policies and
Objectives -- Portfolio Management -- Leverage and Borrowing." The Company will
be required to bear interest costs, transaction costs and other fees, costs and
expenses related to its anticipated borrowings that it will use in seeking to
implement its strategy of achieving a significantly leveraged portfolio. The
Company's operating results depend in part on the difference between the income
earned on the Company's income-generating assets and the interest expense
incurred in connection with its borrowings. See "-- Leverage Can Reduce Income
Available for Distribution and Cause Losses." As the positive spread between the
two increases, the Company's net income should increase. Accordingly, changes in
the general level of interest rates can affect the Company's income by affecting
the spread between the Company's income-earning assets and interest-bearing
liabilities, as well as, among other things, the value and the average life of
the Company's interest-earning assets and its ability to realize gains from the
sale of its assets. Interest rates are highly sensitive to many factors,
including governmental monetary, fiscal and tax policies, domestic and
international economic and political considerations, and other factors beyond
the control or anticipation of the Company.
THE COMPANY'S PERFORMANCE MAY BE AFFECTED ADVERSELY IF ITS HEDGING STRATEGY
IS NOT SUCCESSFUL. The Company's performance may be affected adversely if the
Company fails to limit the effects of changes in interest rates on its
operations by employing an effective hedging strategy, including engaging in
interest rate
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swaps, caps, floors and other interest rate exchange contracts, and buying and
selling interest rate futures and options on such futures. The use of these
instruments to hedge a portfolio carries certain risks, including the risk that
losses on a hedge position will reduce the Company's earnings and funds
available for distribution to shareholders and, indeed, that such losses may
exceed the amount invested in such instruments. There is no perfect hedge for
any investment and a hedge may not perform its intended purpose of offsetting
losses on an investment. For example, the Company will attempt to match the
interest rate indexes and repricing terms of its Mortgage Loans with those of
its borrowings, but it may not be able to achieve a perfect match. During
periods of volatile interest rates, such interest rate mismatches could affect
adversely the Company's ability to hedge effectively its interest rate risk. The
Company may enter into over-the-counter hedging transactions in which the
protections afforded to participants in an organized exchange and in a regulated
environment may not be available, which would expose the Company to counterparty
risk. Although the Company intends to enter into such contracts only with
counterparties the Company believes to be financially sound and to monitor the
financial soundness of such parties on a periodic basis, the Company may be
exposed to the risk that the counterparties with which the Company trades may
become financially unsound or insolvent. If a counterparty ceases making markets
and quoting prices in such instruments, which may render the Company unable to
enter into an offsetting transaction with respect to an open position, the
Company may be forced to unwind its position, which may result in a loss on the
hedge position and could cause the Company to suffer the adverse consequence
against which the hedging transaction was designed to protect.
Certain of the hedging instruments acquired by the Company are traded on
exchanges, which may subject the Company to the risk of trading halts,
suspensions, exchange or clearing house equipment failure, insolvency of a
brokerage firm or other disruptions of normal trading activities. Hedging
instruments that are not traded on regulated exchanges, guaranteed by an
exchange or its clearing house, or regulated by any U.S. or foreign governmental
authorities have no requirements with respect to record keeping, financial
responsibility or segregation of customer funds and positions. The business
failure of a counterparty with which the Company has entered into a hedging
transaction will most likely result in a default. Default by a party with which
the Company has entered into a hedging transaction may result in the loss of
unrealized profits and force the Company to cover its resale commitments, if
any, at the then current market price. Although generally the Company will seek
to reserve for itself the right to terminate its hedging positions, it may not
always be possible to dispose of or close out a hedging position without the
consent of the counterparty, and the Company may not be able to enter into an
offsetting contract in order to cover its risk. There can be no assurance that a
liquid secondary market will exist for hedging instruments purchased or sold,
and the Company may be required to maintain a position until exercise or
expiration, which could result in losses.
LEVERAGE CAN REDUCE INCOME AVAILABLE FOR DISTRIBUTION AND CAUSE
LOSSES. The Charter and Bylaws do not limit the amount of indebtedness the
Company can incur. The Company intends to leverage its assets through
securitizations and other borrowings, generally through the issuance of CMOs and
the use of warehouse lines of credit, reverse repurchase agreements, bank credit
facilities and other borrowings. The Company will leverage its assets only when
it expects that such leverage will enhance returns, although there can be no
assurance that the Company's use of leverage will prove to be beneficial. The
extent to which the Company uses leverage will be determined by the Manager
pursuant to the Guidelines and ultimately, by the Board of Directors, who may
act at any time without the approval of or notice to the shareholders. The
Guidelines currently require that the Company maintain a ratio of collateralized
debt to equity of no more than 12:1. The percentage of leverage used will vary
depending on, among other things, the Company's estimate of the cash flow that
its assets will generate, and the stability of that cash flow. Leverage can
reduce the cash flow available for distributions to shareholders. Moreover,
there can be no assurance that the Company will be able to meet its debt service
obligations resulting from leverage and, to the extent that it cannot, the
Company risks the loss of some or all of its assets.
MATURITY MISMATCH BETWEEN ASSET MATURITIES AND BORROWING MATURITIES MAY
AFFECT ADVERSELY THE COMPANY'S NET INCOME. The Company's use of short-term
floating rate borrowings to acquire long term assets, including Mortgage Loans
and CMBS, some of which will bear a fixed rate of interest, may expose the
Company to a maturity mismatch. As a consequence, the Company's borrowing costs
could exceed the income earned on the Company's assets acquired with the
borrowed funds, thereby reducing the Company's
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income and ability to make distributions to its shareholders. Further, CMBS
subject to reverse repurchase agreements periodically are marked to market by
the repurchase lender, and a decline in the value of CMBS pledged to secure
reverse repurchase agreements may result in margin calls. In addition, if
renewals of or substitutes for maturing or called short term borrowings are
unavailable to the Company for any reason, the Company may be required to sell
assets quickly to repay those borrowings. Certain of the Company's CMBS may be
illiquid and a sale associated with a short marketing period generally would
result in the Company receiving a lower price than otherwise would be available.
There can be no assurance that the Company will not incur losses associated with
forced sales of illiquid collateral to repay borrowings. Furthermore, the use of
leverage will magnify the Company's exposure to losses.
INTEREST RATE MISMATCH BETWEEN ASSET YIELDS AND BORROWING RATES MAY AFFECT
ADVERSELY THE COMPANY'S NET INCOME. The Company's borrowings may be at interest
rates based on indexes and repricing terms similar to, but of somewhat shorter
maturities than, the interest rate indexes and repricing terms of various of the
Company's variable rate assets. While the historical spread between relevant
short-term interest rate indexes has been relatively stable, there have been
periods, such as the 1979 through 1982 high interest rate environment, when the
spread between those indexes was volatile. Further, certain of the Company's
assets will bear fixed rates of interest and have long term maturities. There
can be no assurance that such fixed rates of interest will exceed the variable
rates of interest on related borrowings. Interest rate mismatches could impact
the Company's financial condition in a material way, and could affect adversely
the Company's income and ability to make distributions to its shareholders,
dividend yield and the market price of the Common Stock. See "-- Leverage Can
Reduce Income Available for Distribution and Cause Losses" and "-- The Company
May Not be Able to Borrow Money on Favorable Terms."
THE COMPANY MAY NOT BE ABLE TO BORROW MONEY ON FAVORABLE TERMS. The
ability of the Company to achieve its investment objectives through leverage
will depend on the Company's ability to borrow money on favorable terms. The
Company has not entered into any borrowing arrangements at the present time, and
there can be no assurance that the Company will be able to enter into
arrangements enabling it to borrow money on favorable terms. Furthermore, there
can be no assurance that the Company will be able to obtain financing at
borrowing rates below the asset yields of its mortgage assets. The Company will
face competition for financing sources which may limit the availability of, and
adversely affect the cost of funds to, the Company.
ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN AFFECT ADVERSELY THE
COMPANY'S BUSINESS. The Company's success is dependent upon the general
economic conditions in the geographic areas in which a substantial number of its
investments are located. Adverse changes in national economic conditions or in
the economic conditions of the regions in which the Company conducts substantial
business likely would have an adverse effect on real estate values, interest
rates and, accordingly, the Company's business, income and ability to make
distributions to its shareholders. The general economic conditions in the
geographic areas in which the Company's investments are located will be beyond
the control of the Company.
SIGNIFICANT COMPETITION MAY AFFECT ADVERSELY THE COMPANY'S ABILITY TO
ACQUIRE ASSETS AT FAVORABLE SPREADS RELATIVE TO BORROWING COSTS. The Company
will engage in a business that may become increasingly competitive in the future
as more people enter the market, which may adversely affect the Company's
ability to achieve its investment objectives. In acquiring Real Estate Related
Assets, the Company will compete with CRIIMI MAE, Inc., Ocwen Asset Investment
Corporation, Goldman Sachs' Whitehall Street Real Estate Limited Partnership
Funds and Capital Trust, as well as other REITs, investment banking firms,
savings and loan associations, banks, mortgage bankers, insurance companies,
mutual funds, other lenders, Fannie Mae and other entities purchasing similar
assets, many of which have established operating histories and procedures, may
have access to greater capital and other resources and may have other advantages
over the Company in conducting certain businesses and providing certain
services. There are several REITs similar to the Company and others may be
organized in the future. The effect of the existence of additional REITs may be
to increase competition for the available supply of Real Estate Related Assets
contemplated to be acquired by the Company.
With respect to Mortgage Loans, the Company will face competition from
conduit originators, insurance company lenders, mortgage bankers, similar REITs,
savings and loan associations and other loan originators.
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In purchasing Subordinated Interests in CMBS, the Company will compete with
mortgage REITs, other mortgage-related companies, high yield funds, fixed income
managers and mutual funds. The Company will primarily compete for Opportunistic
Real Properties with real estate funds advised by pension fund advisors and
investment banks and with selective REITs focused on this asset class.
Competition for Mezzanine Investments will come primarily from whole loan
originators who offer Mezzanine Investments in conjunction with their first
mortgages or from high yield funds that typically have the capacity to engage in
larger transactions. The Company's net income will depend, in large part, on the
Company's ability to originate and acquire Mortgage Loans and CMBS having yields
that produce favorable spreads over the Company's borrowing costs. Increased
competition for the acquisition of Mortgage Loans and CMBS or a reduction in the
available supply could result in higher prices and thus lower yields on such
Mortgage Loans and CMBS, which could narrow (or make negative) the yield spread
relative to the Company's borrowing costs. In addition, the Company's
competitors may seek to establish relationships with the financial institutions
and other firms from whom the Company intends to acquire such assets. There can
be no assurance that the Company will be able to acquire sufficient Real Estate
Related Assets at favorable spreads relative to the Company's borrowing costs to
achieve the Company's objectives. In addition, there can be no assurance that a
supply of Real Estate Related Assets suitable for acquisition by the Company
will continue to be available, or that changes in market conditions or
applicable laws will not affect the availability of suitable Real Estate Related
Assets.
INVESTMENTS MAY BE ILLIQUID AND THEIR VALUE MAY DECREASE. Many of the
Company's assets are and will be relatively illiquid. In addition, certain of
the CMBS that the Company will acquire will include interests that have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
or other applicable securities laws, resulting in a prohibition against
transfer, sale, pledge or other disposition of those CMBS except in a
transaction that is exempt from the registration requirements of, or is
otherwise in accordance with, those laws. The ability of the Company to vary its
portfolio in response to changes in economic and other conditions will be
relatively limited. There can be no assurance that the fair market value of any
of the Company's assets will not decrease in the future.
THE COMPANY WILL BE SUBJECT TO LEGAL AND TAX RISKS
ADVERSE CONSEQUENCES OF FAILURE TO MAINTAIN REIT STATUS MAY INCLUDE THE
COMPANY BEING SUBJECT TO TAXATION AS A REGULAR CORPORATION. The Company intends
to operate in a manner so as to qualify as a REIT for federal income tax
purposes. In the opinion of King & Spalding, counsel to the Company in
connection with this offering and the Company's election to be taxed as a REIT,
assuming that the elections and other procedural steps described in "Federal
Income Tax Consequences" below are completed by the Company in a timely fashion,
the Company will qualify to be taxed as a REIT pursuant to sections 856 through
860 of the Code commencing with the Company's first REIT taxable year ending on
December 31, 1998, and the Company's organization and proposed method of
operation will enable it to continue to meet the requirements for qualification
and taxation as a REIT under the Code. Investors should be aware, however, that
opinions of counsel are not binding upon the Service or any court. It must be
emphasized that King & Spalding's opinion is based on various assumptions and is
conditioned upon certain representations made by the Company as to factual
matters, including representations regarding the nature of the Company's
properties and the future conduct and method of operation of its business. None
of the factual assumptions or representations upon which King & Spalding's
opinion is based, including such assumptions and representations regarding the
actual and proposed method of operation of the Company's business, differs from
the statements made in this Prospectus, nor is King & Spalding aware of any
facts or circumstances that are inconsistent with such assumptions and
representations.
It also must be emphasized that the Company's qualification and taxation as
a REIT depends upon its ability to meet, on a continuing basis through actual
annual operating results, distribution levels and stock ownership, the various
qualification tests imposed under the Code. King & Spalding will not review the
Company's compliance with those tests on a continuing basis. Accordingly, there
can be no assurance that the actual results of the Company's operations for any
particular taxable year will satisfy such requirements.
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If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates, and
distributions to shareholders would not be deductible by the Company in
computing its taxable income. Any such corporate tax liability could be
substantial and would reduce the amount of cash available for distribution to
shareholders, which in turn could have an adverse impact on the value of, and
trading prices for, the Common Stock. Unless entitled to relief under certain
Code provisions, the Company also would be disqualified from taxation as a REIT
for the four taxable years following the year during which the Company ceased to
qualify as a REIT.
To avoid corporate income taxation on its earnings, the Company must
distribute to its shareholders, with respect to each taxable year, dividends in
an aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT
taxable income" (determined before the deduction for dividends paid and
excluding any net capital gain) and (B) 95% of the net income (after tax), if
any, from Foreclosure Property, minus (ii) the sum of certain items of noncash
income. The Company will be taxed at regular corporate income tax rates on any
undistributed taxable income, including undistributed net capital gain. In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its net capital gain for that year and (iii) 100% of its
undistributed taxable income from prior years. See "Federal Income Tax
Consequences."
The Company intends to make distributions to its shareholders to comply
with the foregoing distribution requirement and to avoid the nondeductible
excise tax. Differences in timing between the recognition of taxable income and
the actual receipt of cash, however, may require the Company to borrow funds,
issue capital stock or sell assets on a short-term basis to meet the
distribution requirement and to avoid the nondeductible excise tax. In addition,
the requirement to distribute a substantial portion of the Company's taxable
income could cause the Company (i) to sell assets in adverse market conditions,
(ii) to distribute amounts that represent a return of capital under generally
accepted accounting principles or (iii) to distribute amounts that would
otherwise be spent on future acquisitions, unanticipated capital expenditures or
repayment of debt.
To qualify as a REIT, the Company also must satisfy certain requirements
concerning the nature of its assets and income, which may restrict the Company's
ability to invest in various types of assets. See "Federal Income Tax
Consequences -- Requirements for Qualification -- Asset Tests." Without limiting
the generality of the foregoing, the Company will not be able to acquire
securities (other than securities which are treated as an interest in real
property, interests in entities that are treated as partnerships for federal
income tax purposes, and the stock of wholly owned corporate subsidiaries) of
any single issuer which would represent either more than 5% of the total value
of the Company's assets or more than 10% of the voting securities of such
issuer. In addition, to satisfy the income requirements of a REIT, the Company
generally will be restricted to acquiring assets which generate qualifying
income for purposes of certain income tests. See "Federal Income Tax
Consequences -- Requirements for Qualification -- Income Tests." These
restrictions could affect adversely the Company's ability to optimize its
portfolio of assets.
CERTAIN INVESTMENTS MAY GENERATE PHANTOM INCOME. Subordinated Interests
and Mortgage Loans subject to CMO debt typically generate Phantom Income. For
example, Subordinated Interests often are issued with OID, which generally is
equal to the difference between an obligation's issue price and its redemption
price. The Company's Mezzanine Investments also may be deemed to have OID for
federal income tax purposes. OID generally will be accrued using a constant
yield methodology that does not allow credit losses to be reflected until they
are actually incurred. The Company will be required to recognize as income each
year the portion of the OID that accrues during that year, which will increase
the amount that the Company must distribute for that year in order to avoid a
corporate-level income tax, notwithstanding the fact that there may be no
corresponding contemporaneous receipt of cash by the Company. The Company also
may be required to accrue interest income from Mortgage Loans even though the
borrowers fail to pay the full amounts due, and may recognize "Excess Inclusion"
as defined in Section 860E(c) of the Code, or other Phantom Income from
interests in MBS, including those that may be designated as the residual
interest (a "REMIC Residual Interest") in one or more real estate mortgage
investment conduits (a "REMIC"). See
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"Federal Income Tax Consequences." In addition, the Company may recognize
taxable market discount income upon the receipt of proceeds from the disposition
of, or principal payments on, Mortgage Loans and Subordinated Interests that are
"market discount bonds" (i.e., obligations with a stated redemption price at
maturity that is greater than the Company's tax basis in such obligations),
although such proceeds often will be used to make non-deductible principal
payments on related borrowings. Finally, the Company may recognize taxable
income without receiving a corresponding cash distribution if it forecloses on
or makes a "significant modification" (as defined in Treasury Regulations
section 1.1001-3(c)) to a Mortgage Loan, to the extent that the fair market
value of the underlying property or the principal amount of the modified loan,
as applicable, exceeds the Company's basis in the original loan. Consequently,
the Company's investments could have the effect of requiring the Company to
incur borrowings or to liquidate a portion of its portfolio at rates or times
that the Company regards as unfavorable in order to distribute all of its
taxable income and thereby avoid corporate-level income tax.
INVESTMENT IN THE COMMON STOCK OF THE COMPANY BY CERTAIN PLANS MAY GIVE
RISE TO A PROHIBITED TRANSACTION UNDER ERISA AND THE CODE. The Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and section 4975
of the Code prohibit certain transactions that involve (i) certain pension,
profit-sharing or other employee benefit plans subject to Title I of ERISA (each
a "Plan") and (ii) the assets of a Plan. A "party in interest" or "disqualified
person" with respect to a Plan will be subject to (x) an initial 15% excise tax
on the amount involved in any prohibited transaction involving the assets of the
Plan for each year or part thereof during which the transaction is not corrected
and (y) an excise tax equal to 100% of the amount involved if any prohibited
transaction is not corrected. Consequently, the fiduciary of a Plan
contemplating an investment in the Common Stock should consider whether the
Company, any other person associated with the issuance of the Common Stock, or
any affiliate of the foregoing is or might become a "party in interest" or
"disqualified person" with respect to the Plan. In such a case, the acquisition
or holding of Common Stock by or on behalf of the Plan could be considered to
give rise to a prohibited transaction under ERISA and the Code. See "ERISA
Considerations -- Employee Benefit Plans, Tax Qualified Retirement Plans and
IRAs."
OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES. In
order for the Company to maintain its qualification as a REIT, not more than 50%
in value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the taxable year (other
than its first taxable year as a REIT). For the purpose of preserving its REIT
qualification, the Charter's Ownership Limitation generally prohibits direct or
indirect ownership of more than 9.8% of the number of outstanding shares of
Common Stock or of any class or series of preferred stock, except by Lend Lease
so long as it is publicly held. The Ownership Limitation could have the effect
of discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their shares
of Common Stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interests. See "Description of
Capital Stock -- Restrictions on Ownership and Transfer" and "Federal Income Tax
Consequences -- Requirements for Qualification."
LEND LEASE NOT CURRENTLY SUBJECT TO OWNERSHIP LIMITATION. Lend Lease and
its affiliates are not subject to the Ownership Limitation so long as Lend Lease
is "publicly held." The Charter provides that Lend Lease will be considered to
be "publicly held" so long as no more than 20% of its outstanding capital stock
is owned, directly or indirectly, by any one individual. Upon consummation of
this offering and the Private Placement, Lend Lease will beneficially own 10.0%
of the outstanding Common Stock of the Company. Furthermore, Lend Lease is not
precluded from purchasing additional shares of Common Stock of the Company in
the future. See "Description of Capital Stock -- Restrictions on Ownership and
Transfer."
PREFERRED STOCK MAY PREVENT CHANGE IN CONTROL. The Charter authorizes the
Board of Directors to classify and reclassify unissued capital stock into shares
of preferred stock of one or more series and to establish the preferences and
rights of any shares of preferred stock issued. Although the Company has no
current intention to issue any series of preferred stock in the foreseeable
future, the issuance of any series of preferred stock could have the effect of
delaying or preventing a change in control of the Company even if a
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majority of the holders of the Company's Common Stock (the "Common
Shareholders") believed such change of control was in their best interest. See
"Description of Capital Stock -- Preferred Stock."
GEORGIA ANTI-TAKEOVER STATUTES MAY RESTRICT BUSINESS COMBINATION
OPPORTUNITIES. As a Georgia corporation, the Company is subject to various
provisions of Georgia law, which impose certain restrictions and require certain
procedures with respect to certain stock purchases and business combinations.
See "Certain Provisions of Georgia Law and of the Company's Articles of
Incorporation and Bylaws -- Georgia Anti-Takeover Statutes."
BOARD OF DIRECTORS MAY CHANGE CERTAIN POLICIES WITHOUT SHAREHOLDER
CONSENT. The major policies of the Company, relating to the origination of
loans, purchase and sale of assets, financing, operations, debt and
distributions, including the Guidelines, are determined by its Board of
Directors. The Board of Directors, and in certain cases, the Independent
Directors, may amend or revise the Guidelines and other policies, or approve
transactions that deviate from these policies, from time to time without a vote
of the shareholders. The effect of any such changes may be positive or negative.
The Company cannot change its policy of seeking to maintain its qualification as
a REIT without the affirmative vote of two-thirds of all of the votes ordinarily
entitled to be cast in the election of directors, voting together as a single
class and the affirmative vote of 80% of the members of the Board of Directors.
See "Operating Policies and Objectives" and "Certain Provisions of Georgia Law
and of the Company's Articles of Incorporation and Bylaws."
LOSS OF INVESTMENT COMPANY ACT EXEMPTION WOULD AFFECT THE COMPANY
ADVERSELY. Although the Securities and Exchange Commission (the "Commission")
has not granted an exemption to the Company, the Company believes that it will
not be, and intends to conduct its operations so as not to become, regulated as
an investment company under the Investment Company Act. The Investment Company
Act exempts entities from regulation that, directly or through majority-owned
subsidiaries, are "primarily engaged in the business of purchasing or otherwise
acquiring mortgages and other liens on and interests in real estate"
("Qualifying Interests"). Under current interpretations by the staff of the
Commission, in order to qualify for this exemption, the Company, among other
things, must maintain at least 55% of its assets in Qualifying Interests and
also may be required to maintain an additional 25% in Qualifying Interests or
other assets related to real estate. The assets that the Company may acquire
therefore may be limited by the provisions of the Investment Company Act. In
connection with its acquisition of CMBS, the Company will seek, where
appropriate, to obtain foreclosure rights by obtaining the Special Servicing
rights with respect to the underlying Mortgage Loans, although there can be no
assurance that it will be able to do so on acceptable terms. If the Company does
not obtain such rights, the related CMBS generally will not constitute
Qualifying Interests (but the Company believes they would constitute other
assets related to real estate) for the purpose of the Investment Company Act. If
the Company obtains such rights, the Company believes that the related CMBS
generally will constitute Qualifying Interests for the purpose of the Investment
Company Act. The Company does not intend, however, to seek an exemptive order,
no-action letter or other form of interpretive guidance from the Commission or
its Staff on this position. If the Commission or its staff were to take a
different position with respect to whether such CMBS constitute Qualifying
Interests, the Company, among other things, could be required either (a) to
change the manner in which it conducts its operations to avoid being required to
register as an investment company under the Investment Company Act or (b) to
register as an investment company, either of which could have an adverse effect
on the Company and the market price for the Common Stock.
THE COMPANY'S RESPONSIBILITY TO INDEMNIFY THE MANAGER AND OFFICERS AND
DIRECTORS OF THE COMPANY MAY RESULT IN LIABILITY FOR THE ACTIONS OF THE MANAGER
AND OFFICERS AND DIRECTORS OF THE COMPANY. Georgia law permits a Georgia
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its shareholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services or (b) active and deliberate dishonesty
established by a final judgment as being material to the cause of action. The
Charter contains such a provision which eliminates such liability to the maximum
extent permitted by Georgia law. See "The Company -- Directors and Executive
Officers."
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The Company will indemnify the Manager and its officers and directors from
any action or claim brought or asserted by any party by reason of any allegation
that the Manager or one or more of its officers or directors is otherwise
accountable or liable for the debts or obligations of the Company or its
affiliates. In addition, the Manager and its officers and directors will not be
liable to the Company, and the Company will indemnify the Manager and its
officers and directors, for acts performed in good faith pursuant to the
Management Agreement, except for claims arising from acts constituting bad
faith, willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement. See "Management of Operations -- Limits
of Responsibility." In addition, the Company will indemnify, hold harmless and
pay reasonable expenses in advance of final disposition of a proceeding to
present or former directors and officers and certain other parties to the
fullest extent permitted from time to time by Georgia Law. See "The Company."
THE COMPANY WILL BE SUBJECT TO OTHER RISKS
YIELD ON IOS MAY BE ADVERSELY AFFECTED BY INTEREST RATE CHANGES. The
Company may create or acquire IOs, which are classes of MBS that are entitled to
no (or only nominal) payments of principal, but only to payments of interest.
IOs present a heightened risk of total loss of investment. The yield to maturity
of IOs is very sensitive to changes in the weighted average life of such
securities, which in turn is dictated by the rate of prepayments on the
underlying mortgage collateral. In periods of declining interest rates, rates of
prepayments on mortgage loans generally increase, and if the rate of prepayments
is faster than anticipated, then the yield on IOs will be affected adversely.
Inverse IOs are a class of MBS that bear interest at a floating rate that varies
inversely with (and often at a multiple of) changes in a specified index. The
Company may invest in Inverse IOs for the purpose of, among other things,
hedging its portfolio of IOs. The yield to maturity of an Inverse IO generally
is extremely sensitive to changes in the related index. The Company also may
invest in Sub IOs, a class for which interest generally is withheld and used to
make principal payments on more senior classes or to fund a reserve account for
the protection of senior classes until overcollateralization or until the
balance in the reserve account reaches a specified level. Interest on a Sub IO
generally will be paid only after the overcollateralization or the balance in
the reserve account reaches the specified level. Sub IOs provide credit support
to the senior classes, and thus bear substantial credit risk. Moreover, because
all IO classes only receive interest payments, their yields are extremely
sensitive not only to default losses but also to changes in the weighted average
life of the relevant classes, which in turn will be dictated by the rate of
prepayments on the underlying Mortgage Collateral. In addition, Sub IOs often
generate taxable income in excess of cash received, which may affect the
Company's ability to meet the distribution requirements applicable to REITs. See
"-- The Company Will Be Subject to Legal and Tax Risks -- Adverse Consequences
of Failure to Maintain REIT Status May Include the Company Being Subject to
Taxation as a Regular Corporation."
THE FAILURE TO DEVELOP A MARKET FOR COMMON STOCK MAY RESULT IN A DECREASE
IN ITS MARKET PRICE. Prior to this offering, there has not been a public market
for the shares of Common Stock offered hereby. The initial public offering price
will be determined by the Company and representatives of the Underwriters. There
can be no assurance that the price at which the shares of Common Stock will sell
in the public market after the offering will not be lower than the price at
which they are sold by the Underwriters. The Company's Common Stock has been
approved for listing on the Nasdaq National Market. Quotation through the Nasdaq
National Market does not insure, however, that an active market will develop for
the Common Stock.
INCREASES IN INTEREST RATES MAY AFFECT ADVERSELY THE YIELD OF THE COMMON
STOCK. The Company's earnings will be derived primarily from the expected
positive spread between the yield on the Company's Real Estate Related Assets
and the costs to the Company of its borrowings. This expected positive spread
will not necessarily be larger in high interest rate environments than in low
interest rate environments. In periods of high interest rates, however, the net
income of the Company, and therefore the dividend yield on the Common Stock, may
be less attractive compared to alternative investments of equal or lower risk,
which could impact adversely the market price of the Common Stock.
POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES OF COMMON STOCK
ELIGIBLE FOR FUTURE SALE. A substantial number of shares of Common Stock
currently outstanding, or issuable upon exercise of stock options, will become
eligible for future sale in the public market at prescribed times pursuant to
applicable regulations and registration rights granted to certain
securityholders. No prediction can be made as to the
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effect, if any, of future sales of shares of Common Stock, or the availability
of shares for future sales, on the market price of the Common Stock.
A wholly-owned indirect subsidiary of Lend Lease, ERE Yarmouth Holdings,
Inc., has agreed to purchase 1,166,567 shares of Common Stock in the Private
Placement so that it will own 10% of the outstanding Common Stock of the Company
upon the consummation of this offering and the Private Placement. Pursuant to
the stock purchase agreement between ERE Yarmouth Holdings, Inc. and the
Company, Lend Lease must retain its shares of Common Stock of the Company until
the earlier of (i) two years from the consummation of the offering and (ii) the
date, if any, that ERE Yarmouth is terminated as the Manager. The Company has
agreed to enter into a registration rights agreement with Lend Lease upon
consummation of this offering and the Private Placement. From and after the
second anniversary of the consummation of this offering, Lend Lease will have
unlimited "piggyback" registration rights, subject to certain conditions. In
addition, if ERE Yarmouth ceases to act as manager of the Company, Lend Lease
may require that the Company file a shelf registration statement on Form S-3
relating to the Common Stock. The Company may defer filing the shelf
registration statement under certain circumstances. See "Description of Capital
Stock -- Registration Rights."
FBR Asset Investment Corporation has agreed to purchase 700,000 shares of
Common Stock of the Company in the Private Placement, or 6.0% of the outstanding
Common Stock of the Company upon consummation of this offering and the Private
Placement. The Company has agreed to enter into a registration rights agreement
with FBR Asset Investment Corporation upon consummation of this offering and the
Private Placement. From and after the one year anniversary of the consummation
of this offering, FBR Asset Investment Corporation will have unlimited
"piggyback" registration rights, subject to certain conditions, and may require
the Company to file a shelf registration statement on Form S-3 relating to the
Common Stock. The Company may prohibit offers and sales of securities pursuant
to the shelf registration statement under certain circumstances. See
"Description of Capital Stock -- Registration Rights."
In addition, the Company has granted the Manager options to purchase
1,166,667 shares of Common Stock (1,313,667 shares if the Underwriters exercise
their over-allotment option in full) or, if necessary to prevent Lend Lease from
exceeding the Ownership Limitation set forth in the Charter at such time as it
is not publicly held, Units in the Operating Partnership at a price per share
equal to the initial public offering price of the Common Stock. One quarter of
these options will become exercisable on each of the four anniversaries of the
consummation of this offering. In addition, the Company expects to grant options
to purchase shares of Common Stock to officers of the Company and the Manager
upon consummation of this offering. The number of Options initially granted to
the officers of the Company and the Manager will be equal to the number of
shares of Common Stock that such individuals purchase in this offering. See
"Underwriting." One-fifth of these Options will become exercisable on the date
of grant and the remaining Options will become exercisable in four equal
installments commencing on the first anniversary of the date of grant.
Significant sales of shares of Common Stock in the public market following the
offering could adversely affect prevailing market prices. See "Common Stock
Available for Future Sale."
FUTURE OFFERINGS OF CAPITAL STOCK MAY RESULT IN DILUTION OF THE BOOK VALUE
OR EARNINGS PER SHARE OF THE OUTSTANDING COMMON STOCK. The Company may increase
its capital resources in the future by making additional offerings of its Common
Stock, securities convertible into its Common Stock or Preferred Stock. The
actual or perceived effect of such offerings may be the dilution of the book
value or earnings per share of the Common Stock outstanding, which may result in
the reduction of the market price of the Common Stock.
OPERATING POLICIES AND OBJECTIVES
The Company's investments will include several categories of commercial
mortgage and real estate related assets that will be identified, managed and
actively serviced by ERE Yarmouth's twelve offices located in major metropolitan
markets throughout the United States. The Company intends to invest throughout
the real estate cycle, focusing on opportunities with respect to which it
perceives high relative value. Initially, the Company will emphasize creating a
mortgage portfolio collateralized by institutional quality assets for the
purpose of securitizing and retaining the subordinated interests in such loans.
The Company will seek to
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generate cash flow primarily (i) by originating and acquiring whole loans in
order to create pools of Mortgage Loans for securitization and retain the
Subordinated Interests in those pools subject to the CMO debt and (ii) from
investments in (A) Subordinated Interests in CMBS; (B) Mezzanine Investments in
commercial and multifamily residential properties and (C) Opportunistic Real
Properties, including REO Properties. There can be no assurance that the Company
will be able to acquire such assets, that the terms or results of such
acquisitions will be beneficial to the Company, or that the Company will achieve
its objectives. See "Risk Factors."
Although the Company expects that its primary emphasis will be on the
origination and acquisition of Subordinated Interests, the Company's investment
decisions will depend on changing market factors and will include the
origination and acquisition of Mezzanine Investments, Opportunistic Real
Properties and Other Real Estate Related Assets, including Agricultural Loans,
Construction Loans, foreign real estate and Environmentally Distressed Real
Properties. The Company may decide in the future to pursue other available
acquisition opportunities it deems suitable for the Company's portfolio. Thus
the Company cannot anticipate with any certainty the percentage of the proceeds
of this offering that will be invested to any particular category of Real Estate
Related Assets, except that the Company does not expect to invest more than 25%
of its assets in Other Real Estate Related Assets. Subject to the Guidelines
described below, the Company has a great deal of discretion in the manner in
which to invest the proceeds of this offering and the Private Placement. The
Company will seek to maximize yield by managing credit risk through credit
underwriting, although there can be no assurance that the Company's efforts will
be successful.
The Company will have no predetermined limitations or targets for
concentration of property type or geographic location. Instead, the Company
plans to make acquisition decisions through asset and collateral analysis,
evaluating investment risks and potential rewards on a case-by-case basis. To
the extent that the Company's assets become concentrated in a few states or a
particular region, the return on an investment in the Common Stock will become
more dependent on the economy of such states or region.
To create yields commensurate with its investment objectives, the Company
intends to borrow funds through the issuance of CMOs in non-REMIC debt
securitizations or other borrowing arrangements, pledging its assets (including
Mortgage Loans and interests in MBS) as collateral security for its repayment
obligations. The Company also, in certain limited cases, may securitize Mortgage
Loans by transferring them to a special purpose trust or corporation that elects
to be treated as a REMIC. The special purpose entity would issue CMBS known as
"Pass-Through Certificates." The Company intends to purchase certain non-
investment grade and IO classes from the special purpose entity. Pass-Through
Certificates evidence interests in trusts, the primary assets of which are
mortgage loans. The Company intends to use the proceeds from securitizations and
borrowings to invest in additional Mortgage Loans, CMBS and other assets and, in
turn, to borrow against those newly acquired assets, primarily through CMOs. The
Company's strategy is to repeat this process to the extent opportunities to use
leverage are available and the Manager determines and advises that using
leverage is prudent and consistent with maintaining an acceptable level of risk
until the Company has significantly leveraged its portfolio of Mortgage Loans
and CMBS. See "Operating Policies and Objectives." There can be no assurance
that the Company will be able to acquire appropriate assets, that the terms or
results of the Company's acquisitions will be beneficial to it, or that the
Company will achieve its objectives. See "Risk Factors."
If the Company decides to acquire assets from a prospective seller or other
transferor that would realize significant gain on the sale or other disposition
of those assets, the Company will, in an attempt to make a transfer of those
assets to the Company a more attractive disposition alternative to the
prospective transferor, offer to acquire those assets in exchange for Units in
the Operating Partnership. The Units will be redeemable for cash or, at the
option of the General Partner, shares of Common Stock of the Company on a "one
for one" basis. The number of Units to be issued to the prospective transferor
would be determined by the Manager in substantially the same manner as if the
Company were considering a purchase of those assets for cash. See "Operating
Partnership Agreement."
The Company may change its policies in connection with any of the foregoing
without the approval of the shareholders.
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RELATIONSHIP WITH ERE YARMOUTH AND LEND LEASE
The Company will rely extensively on the experience of the Manager in
developing and managing its portfolio. ERE Yarmouth has substantial experience
in the origination and servicing of whole loans and CMBS, the acquisition and
resolution of troubled loans and the acquisition and management of diverse real
estate related assets. This experience, together with ERE Yarmouth's personnel,
office network, systems, research capabilities and operating policies, will be
made available to the Company through the Management Agreement. The Company
believes that the availability of ERE Yarmouth's resources will allow the
Company effectively to manage its Real Estate Related Assets.
GENERAL. ERE Yarmouth and Lend Lease collectively provide investment
management, property management, leasing and development services on five
continents. According to Pensions & Investments, an investment management
journal, as of June 30, 1997, ERE Yarmouth managed the largest portfolio in the
United States of real estate assets owned by pension plans and other tax exempt
investors. As of December 31, 1997, ERE Yarmouth had over $29.1 billion of
assets under management on behalf of a wide variety of corporate, public and
union pension funds, international investors, insurance companies and other
financial institutions, including $22.1 billion of equity investments and $7.0
billion of mortgages. As of December 31, 1997, ERE Yarmouth held 615 investments
in its portfolios representing 83 million square feet of retail space, 132
million square feet of office space, 57 million square feet of industrial space,
and 13,316 hotel rooms. ERE Yarmouth represents 22 commingled client portfolios
and 368 institutional clients and has 1,100 professional employees. ERE Yarmouth
is headquartered in Atlanta, Georgia and has twelve offices that work in
conjunction with 141 COMPASS offices, located throughout the United States.
COMPASS is a wholly-owned indirect subsidiary of Lend Lease. The firm's regional
operations include full-service offices with valuation professionals, asset
managers and origination, acquisition and disposition specialists. ERE
Yarmouth's regional operations are designed to allow it to monitor new
investment opportunities closely and act quickly on opportunities. See "Prior
Performance."
To support its investment activities, ERE Yarmouth tracks more than 70 U.S.
markets using both macro economic/demographic data and information derived
directly from its portfolios of office buildings, warehouses, shopping centers,
hotels and apartments. Additionally, ERE Yarmouth's proprietary information
systems technology directly monitors property performance and customizes
portfolio reporting. ERE Yarmouth has invested in a computer infrastructure that
includes significant capacity for expansion and upgrade. Management of the
Company believes that ERE Yarmouth's systems and procedures have substantial
applicability to the Company's lines of business, and that the Company's access,
through the Management Agreement, to ERE Yarmouth's information technology will
be a key factor in the Company's ability to compete.
WHOLE LOAN ORIGINATIONS. Through its predecessors, ERE Yarmouth has been
investing in mortgages on behalf of Equitable Life for the past 130 years. Prior
to 1993, all of ERE's mortgage investing was handled through its regional office
network. From January 1993 through December 1997, ERE's regional office network
originated $1.7 billion of commercial whole loans on behalf of Equitable Life
and other pension fund clients and refinanced in excess of $1.0 billion of
mortgages. In 1993, in addition to ERE's regional office origination business,
ERE and Donaldson, Lufkin & Jenrette formed a joint venture mortgage origination
and securitization company known as Column Financial, Inc. ("Column Financial")
to take advantage of the growth in the CMBS origination and securitization
markets. From January 1993 through June 1997, Column Financial originated in
excess of $1.4 billion of commercial mortgage loans and securitized in excess of
$2 billion of loans. Although Column Financial was not included in the
acquisition of ERE by Lend Lease, the Company believes that ERE's experience
with Column Financial will enable the Manager to better originate, underwrite
and close Mortgage Loans for securitization for the Company.
OPPORTUNISTIC INVESTING. ERE Yarmouth, through its regional office
network, has invested significant capital on behalf of its institutional client
base. From January 1995 through December 1997, ERE Yarmouth has acquired $3.2
billion of equity real estate for clients, of which over $360 million was in
small equity real estate and distressed loans, which were diversified by
property type and location. The Company believes that
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this experience will enable the Manager to appropriately identify, underwrite
and close investments in Opportunistic Real Property on behalf of the Company.
CMBS INVESTMENT AND MANAGEMENT. ERE Yarmouth, along with ERE Hyperion, has
significant experience in the acquisition and management of CMBS, including, at
December 31, 1997 over $400 million of commercial mortgage backed securities of
which $211 million were subordinated securities. The Company expects this
experience to enable the Manager to appropriately identify, evaluate, price and
manage Subordinated Interests and other classes of CMBS for the Company. For a
description of the operations and prior performance data of ERE Hyperion, see
Appendix B.
MORTGAGE SERVICING. One of ERE's primary functions when it was established
in 1984 as an independent subsidiary of Equitable Life was to act as Equitable
Life's mortgage loan servicing unit. EQ Services, Inc. ("EQ Services") was
incorporated in March 1992 as a separate affiliate of ERE to provide servicing
for commercial mortgage backed securities and third party client portfolios in
addition to Equitable Life's own General Account. Within three years, EQ
Services grew into one of the largest servicers of CMBS. In late 1995, as
pricing and other market conditions changed, Equitable Life exited the
securitized servicing business. EQ Services was sold and the mortgage servicing
function for Equitable Life was transferred back to ERE. ERE itself, and through
EQ Services, has acted as master or Special Servicer on various loan pools. As
of December 31, 1997, ERE Yarmouth serviced a $4.8 billion commercial mortgage
portfolio and in excess of a $2 billion agricultural mortgage portfolio.
THE COMPANY'S GUIDELINES
GENERAL. The following is a summary of the Guidelines setting forth the
general parameters for the Company's investments, borrowings and operations. The
Guidelines have been approved by the Board of Directors (including a majority of
the Independent Directors) and may be changed by the Board of Directors without
a vote of the shareholders. The Manager is empowered to make the day-to-day
investment decisions of the Company based on the Guidelines. Such investment
decisions will include decisions to issue commitments on behalf of the Company
to invest in Subordinated Interests, Opportunistic Real Properties, Mezzanine
Investments and Other Real Estate Related Assets. The Independent Directors will
review transactions of the Company in the quarter following completion to ensure
compliance with the Guidelines.
The Company intends to invest primarily in Real Estate Related Assets.
Pending investment of its funds in longer term investments as provided for in
the Guidelines, the Company intends to invest those funds in readily marketable
securities or interest-bearing deposit accounts, consistent in each case with
maintaining the Company's status as a REIT. The Company is permitted to take an
opportunistic approach to its investments, and may acquire any of the types of
assets described in the Guidelines if the Company and the Manager determine that
such investments would be in the Company's best interests.
The Company, in consultation with the Manager, may establish underwriting
criteria for evaluating potential investments and, if such underwriting criteria
are established, the Company, in consultation with the Manager, may modify such
underwriting criteria at any time and from time to time. The Company's policy
generally is to offer a price for each asset that it contemplates acquiring that
is not greater than the price that the Manager estimates to be sufficient to
generate an acceptable risk-adjusted return to the Company from the acquisition
of that asset.
PURCHASE FROM THE MANAGER AND ITS AFFILIATES. The Company may (although it
does not intend to) purchase assets from the Manager and its affiliates,
including Lend Lease, from time to time. The price at which the Company will
purchase Mortgage Loans and other assets from third parties (including the
Manager and its affiliates) will be determined in accordance with the
Guidelines, as amended from time to time. The Manager will determine the
transfer price for the Company's acquisitions of assets from Lend Lease and its
affiliates based on pricing guidelines approved by the Independent Directors.
The Independent Directors will approve those transactions to ensure compliance
with the Company's pricing guidelines.
In deciding whether to approve an acquisition of any assets, including
acquisitions of Mortgage Loans and other assets from Lend Lease or its
affiliates, the Manager may consider such information as it deems
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appropriate to determine whether the acquisition is consistent with the
Guidelines, such as whether the price is fair and the investment otherwise is
suitable and in the best interests of the Company. In addition, the Manager may
consider, among other factors, whether the acquisition of that asset will
enhance the Company's ability to achieve or exceed the Company's risk adjusted
target rate of return, if any, established for the relevant time period by the
Board of Directors, whether the asset otherwise is well-suited for the Company
and whether the Company financially is able to take advantage of the investment
opportunity presented thereby. To determine whether the price of an investment
is fair, the Manager may consider a number of other factors, which may include
an appraisal by an appraiser who is certified or licensed in the state and whose
compensation is not dependent on the transaction. The Independent Directors are
likely to rely substantially on information and analysis provided by the Manager
to evaluate the Company's Guidelines, compliance therewith and other matters
relating to the Company's investments.
Where possible, the price that the Company will pay for Mortgage Loans,
CMBS and other assets acquired from the Manager or its affiliates will be
determined by reference to the prices most recently paid to the Manager or its
affiliates for similar assets, adjusted for differences in the terms of such
transactions and for changes in market conditions between the dates of the
relevant transactions. If no previous sales of similar assets have occurred, the
Company will attempt to determine a market price for the asset by an alternative
method, such as obtaining a broker's price opinion or an appraisal, if it can do
so at a reasonable cost. Investors should understand, however, that such
determinations are estimates and are not bona fide third party offers to buy or
sell.
It is the intention of the Company that the agreements and transactions,
including the sale of Mortgage Loans, CMBS and Real Property, taken as a whole,
between the Company on the one hand and Lend Lease and its affiliates on the
other hand are fair to both parties. However, there can be no assurance that
each of such agreements and transactions will be on terms at least as favorable
to the Company as it could have obtained from unaffiliated third parties.
INVESTMENT ACTIVITIES
The discussion below describes the principal categories of assets that the
Company intends to originate or acquire. The Manager may contractually commit
the Company to aggregate investments in any calendar quarter up to $250,000,000
without the approval of the Board of Directors. In addition, in any calendar
quarter the Manager may contractually commit the Company to purchase up to a
specified aggregate amount in each category of Real Estate Related Assets, as
set forth below. The Company intends to invest at least 75% of its assets in the
first three categories of assets described below. Commencing on the twelve month
anniversary following consummation of this offering, the Manager must have Board
of Director approval to invest more than 45% of the Company's aggregate assets
in any single region of the United States, or in any individual property type.
In addition, after such date the Manager will need Board of Directors approval
to invest in excess of 45% of the total assets of the Company in any single
category of assets described below.
SUBORDINATED INTERESTS. The Company will originate commercial whole loans
for the purpose of securitizing such pools of such loans and retaining
non-investment grade Subordinated Interests. MBS typically are divided into two
or more classes, sometimes called "tranches." The senior classes are higher
"rated" securities, which would be rated by independent agencies from low
investment grade "BBB" to higher investment grade "AA" or "AAA." The junior,
subordinated classes typically would include a lower rated, non-investment grade
"BB" and "B" class, and an unrated, higher-yielding, credit support class (the
"Subordinated Interest," which generally is required to absorb the first losses
on the underlying mortgage loans). The Manager may contractually commit the
Company to aggregate Mortgage Loans up to $150 million, or $30 million for any
individual transaction, in any calendar quarter. Any investments outside of
these guidelines must be approved in advance by the Board of Directors.
MBS generally are issued either as CMOs or Pass-Through Certificates. CMOs
are debt obligations of special purpose corporations, owner trusts or other
special purpose entities secured by commercial mortgage loans or MBS. CMOs and
Pass-Through Certificates may be issued or sponsored by private originators of,
or investors in, mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks,
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investment banks and other entities. MBS are not guaranteed by an entity having
the credit status of a governmental agency or instrumentality and generally are
structured with one or more of the types of credit enhancement described below.
In addition, MBS may be illiquid. See "Risk Factors -- The Company Will Be
Subject to Economic and Business Risks -- Investments May be Illiquid and Their
Value May Decrease."
In most mortgage loan securitizations, a series of MBS is issued in
multiple classes in order to obtain investment-grade ratings for the senior
classes and thus increase their marketability. Each class of MBS may be issued
with a specific fixed or variable coupon rate and has a stated maturity or final
scheduled distribution date. Principal prepayments on the mortgage loans
comprising the Mortgage Collateral may cause the MBS to be retired substantially
earlier than their stated maturities or final scheduled distribution dates
although, with respect to commercial mortgage loans, there generally are
penalties for or limitations on the ability of the borrower to prepay the loan.
Interest is paid or accrued on MBS on a periodic basis, typically monthly.
The credit quality of MBS depends on the credit quality of the underlying
Mortgage Collateral. Among the factors determining the credit quality of the
underlying mortgage loans will be the ratio of the mortgage loan balances to the
value of the properties securing the mortgage loans, the purpose of the mortgage
loans (e.g., refinancing or new purchase), the amount and terms of the mortgage
loans, the geographic diversification of the location of the properties and, in
the case of commercial mortgage loans, the credit-worthiness of tenants.
Moreover, the principal of and interest on the underlying mortgage loans
may be allocated among the several classes of a MBS in many ways, and the credit
quality of a particular class results primarily from the order and timing of the
receipt of cash flow generated from the underlying mortgage loans. Subordinated
Interests carry significant credit risks. Typically, in a "senior-subordinated"
structure, the Subordinated Interests provide credit protection to the senior
classes by absorbing losses from loan defaults or foreclosures before such
losses are allocated to senior classes. Moreover, typically, as long as the more
senior tranches of securities are outstanding, all prepayments on the mortgage
loans generally are paid to those senior tranches. In some instances,
particularly with respect to Subordinated Interests in commercial
securitizations, the holders of Subordinated Interests are not entitled to
receive scheduled payments of principal until the more senior tranches are paid
in full. Because of this structuring, Subordinated Interests in a typical
securitization are subject to a substantially greater risk of non-payment than
are those more senior tranches. Accordingly, the Subordinated Interests are
assigned lower credit ratings, or no ratings at all. Neither the Subordinated
Interests nor the underlying mortgage loans are guaranteed by agencies or
instrumentalities of the U.S. government or by other governmental entities and,
accordingly, are subject to credit risks. See "Risk Factors -- Subordinated CMBS
May Subject the Company to Greater Credit Risk and Yields that are Sensitive to
Interest Rate Changes -- Subordinated CMBS are Subject to Greater Credit Risks
than More Senior Classes."
As a result of the typical "senior-subordinated" structure, the
Subordinated Interest will be extremely sensitive to losses on the underlying
mortgage loans. For example, if the Company owns a $10 million Subordinated
Interest in an MBS consisting of $100 million of underlying mortgage loans, a 7%
loss on the underlying mortgage loans will result in a 70% loss on the
Subordinated Interest. Accordingly, the holder of the Subordinated Interest is
particularly interested in minimizing the loss frequency (the percentage of the
loan balances that default over the life of the Mortgage Collateral) and the
loss severity (the amount of loss on a defaulted mortgage loans, i.e., the
principal amount of the mortgage loan unrecovered after applying any recovery to
the expenses of foreclosure and accrued interest) on the underlying mortgage
loans.
The loss frequency on a pool of mortgage loans will depend upon a number of
factors, most of which will be beyond the control of the Company or the
applicable servicer. Among other things, the default frequency will reflect
broad conditions in the economy generally and real estate particularly, economic
conditions in the local area in which the underlying Mortgage Property is
located, the loan-to-value ratio of the mortgage loan, the purpose of the loan,
and the debt service coverage ratio. The loss severity will depend upon many of
the same factors described above, and will also be influenced by the servicer's
ability to foreclose on the defaulted mortgage loan and sell the underlying
Mortgaged Property. For a discussion of certain legal issues affecting the
servicer's ability to foreclose on a mortgage loan, and the legal impediments to
the sale of the underlying Mortgaged Property, see "Certain Legal Aspects of
Mortgage Loans and Real Property Investments." These
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legal issues may extend the time of foreclosure proceedings or may require the
expenditure of additional sums to sell the underlying Mortgaged Property, in
either case increasing the amount of loss with respect to the loan.
The underwriting standards that will be used by the Company in evaluating
Mortgage Loans will include a review of (i) the underlying collateral of each
Mortgage Loan, including property characteristics, location and
credit-worthiness of tenants, (ii) the borrower and manager's ability to manage
the property and make debt service payments, (iii) the relative principal
amounts of the loan, including the loan-to-value and debt service coverage
ratios and (iv) the Mortgage Loan's purpose and documentation. Such evaluation
will include engaging third party appraisal, environmental and engineering firms
to prepare independent reports. The Mortgage Loans will consist primarily of
assets backed by first liens on commercial and multifamily properties and will
generally have loan-to-value ratios of no more than 80% and debt service
coverage ratios of no less than 1.20x. Loan sizes will generally range from $1
million to $30 million per property.
The Manager is a primary servicer of originated loan pools and intends to
become a rated Special Servicer. The Company intends in many instances to
acquire Special Servicing rights with respect to the Mortgage Loans underlying
MBS in which the Company owns a Subordinated Interest. The Manager would service
such loans on behalf of the Company. Such Special Servicing rights will give the
Company, among other things, some control over the timing of foreclosures on
such mortgage loans and, thus, may enable the Company to reduce losses on such
mortgage loans. There can be no assurance, however, that the Manager will become
a rated Special Servicer, that the Company will be able to acquire such Special
Servicing rights or that losses on the mortgage loans will not exceed the
Company's expectations. Although the Company's strategy is to purchase
Subordinated Interests at a price designed to return the Company's investment
and generate a profit thereon, there can be no assurance that such goal will be
met or, indeed, that the Company's investment in a Subordinated Interest will be
returned in full or at all. See "Risk Factors -- Subordinated CMBS May Subject
the Company to Greater Credit Risk and Yields That are Sensitive to Interest
Rate Changes," "Risk Factors -- The Company Will Be Subject to Economic and
Business Risks," "-- Portfolio Management" and "-- Asset Management."
Moreover, many of the Subordinated Interests to be acquired by the Company
will not have been registered under the Securities Act, but instead will
initially have been sold in private placements. Because Subordinated Interests
acquired in private placements have not been registered under the Securities
Act, they will be subject to certain restrictions on resale and, accordingly,
will have more limited marketability and liquidity.
Although there are some exceptions, most issuers of multi-class MBS elect
to be treated, for federal income tax purposes, as REMICs. The Company may
acquire not only Subordinated Interests that are treated as regular interests in
REMICs, but also those that are designated as REMIC Residual Interests. Unlike
regular interests in REMICs, REMIC Residual Interests typically generate Excess
Inclusion or other forms of "Phantom Income" that bear no relationship to the
actual economic income that is generated by a REMIC. Consequently, if a
Subordinated Interest that is designated as a REMIC Residual Interest generates
a significant amount of phantom income in any taxable year, the Company could be
required to borrow funds or to liquidate assets in order to distribute all of
its taxable income and thereby avoid corporate income tax for such taxable year.
In securitizing the Mortgage Loans that it originates, the Company
generally will issue non-REMIC CMOs to avoid having to treat the securitization
as a sale of the Mortgage Loans for federal income tax purposes. Any gain from
such a sale of the Mortgage Loans potentially could be subject to a 100% penalty
tax.
Subordinated Interests (other than REMIC Residual Interests and Sub IOs)
generally are issued at a significant discount to their outstanding principal
balance, which gives rise to OID for federal income tax purposes. The Company
will be required to accrue the OID as taxable income over the life of the
related Subordinated Interest on a level-yield method in advance of the receipt
of the related cash flow. The OID income attributable to a Subordinated Interest
generally will increase the amount that the Company must distribute in order to
avoid corporate income tax in the early years of the Company's ownership of the
Subordinated Interest even though the Company may not receive the related cash
flow from the Subordinated Interest until a later taxable year. As a result, the
Company could be required to borrow funds or to liquidate
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assets in order to distribute all of its taxable income and thereby avoid
corporate income tax for any taxable year. See "Risk Factors -- The Company Will
Be Subject to Legal and Tax Risks." There can be no assurance that the Company's
strategy for investing in Subordinated Interests will be successful.
COMMERCIAL MORTGAGE-BACKED SECURITIES. It is expected that many of the
Subordinated Interests originated or acquired by the Company will be
Subordinated Interests in CMBS. If the Subordinated Interest is originated by
the Company, that interest will generally incorporate the characteristics of an
IO. The Mortgage Collateral supporting CMBS may be mortgage pass-through
securities (discussed below) or pools of whole loans. Generally, the Mortgage
Collateral supporting the CMBS pools will have geographic and property type
diversification and will consist of 50 to 300 Mortgage Loans or, in certain
cases, may be single asset transactions. Of the interests in CMBS that the
Company originates or acquires, most will be Subordinated Interests, but the
Company also may purchase more senior tranches or combined tranches of
first-loss and more senior CMBS. The Manager may contractually commit the
Company to aggregate CMBS up to $75 million, or $75 million for any individual
transaction, in any calendar quarter. Any investments outside of these
guidelines must be approved in advance by the Board of Directors.
CMBS are backed generally by a more limited number of commercial or
multifamily Mortgage Loans with larger principal balances than those of single
family residential Mortgage Loans. As a result, a loss on a single Mortgage Loan
underlying a CMBS will have a greater negative effect on the Yield of such CMBS,
especially the Subordinated Interests in such CMBS.
The Company believes that there will be opportunities to create and invest
in Subordinated Interests in CMBS. Increasingly, owners of commercial Mortgage
Loans are choosing to securitize their portfolios. However, there can be no
assurance that appropriate opportunities for investment in CMBS will continue to
be available.
Before acquiring Subordinated Interests, the Company intends to perform
certain credit underwriting and stress testing to attempt to evaluate future
performance of the Mortgage Collateral supporting the CMBS which will include
(i) a review of the underwriting criteria used in making Mortgage Loans
comprising the Mortgage Collateral for CMBS, (ii) a review of the relative
principal amounts of the loans, their loan-to-value and debt service coverage
ratios as well as the Mortgage Loans' purpose and documentation, (iii) where
available, a review of the historical performance of the loans originated by the
particular originator, (iv) in the case of CMBS, some level of re-underwriting
the underlying Mortgage Loans, as well as selected site visits and (v) a review
of independent third party appraisal, environmental and engineering reports.
ERE Yarmouth intends to utilize ERE Hyperion to locate certain of its CMBS
investments and conduct the due diligence and management of those assets. The
Manager will execute an agreement with ERE Hyperion, giving it the right to
manage the Company's CMBS investments. See "Operating Policies and
Objectives -- Relationship with ERE Yarmouth and Lend Lease -- CMBS Investment
and Management."
OPPORTUNISTIC REAL PROPERTIES. The Company believes that under appropriate
circumstances the acquisition of REO Properties and other Opportunistic Real
Properties offers significant opportunities to the Company. The Company's policy
will be to conduct an investigation and evaluation of the Opportunistic Real
Property before purchasing such property. Evaluations of potential properties
will be conducted primarily by the Manager's employees who specialize in the
analysis of underperforming or distressed assets, often with further
specialization based on geographic or collateral-specific factors. It is
expected that the Manager's employees will use third parties, such as brokers
who are familiar with the property's type and location, to assist them in
conducting an evaluation of the value of the property, and depending on the
circumstances, may use subcontractors, such as local counsel and engineering and
environmental experts, to assist in the evaluation and verification of
information and the gathering of other information not previously made available
by the potential seller. The amount offered by the Company generally will be the
price that the Manager estimates is sufficient to generate an acceptable
risk-adjusted return on the Company's investment, and prices paid by the Company
are expected to range from $2.5 million to $25 million. The Company's goal will
be to enjoy the increased cash flow and long term appreciation of the
Opportunistic Real Properties by purchasing it at a favorably low price,
repositioning it by either creating a different market impression in the mind of
the tenant or consumer or eliminating a negative market impression for the
property, or converting the use of the
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property, if required, to improve its cash flow by proper management and
refinancing. The Manager may contractually commit the Company to aggregate
Opportunistic Real Properties up to $75 million, or $25 million for any
individual transaction, in any calendar quarter. Any investments outside of
these guidelines must be approved in advance by the Board of Directors.
Although the Company believes that a permanent market for the acquisition
of Opportunistic Real Properties has emerged in recent years within the private
sector, there can be no assurance that the Company will be able to acquire the
desired amount and type of Opportunistic Real Property in future periods or that
there will not be significant inter-period variations in the amount of such
acquisitions. See "Risk Factors -- Investments in Real Property are Subject to
Risks Arising From Conditions Beyond its Control, the Availability of Insurance,
Property Taxes, Environmental Problems and Foreign Laws." Moreover, there can be
no assurance that the Company will be effective in making any asset acquired
more valuable than the price paid to acquire it.
If the Company sells or otherwise disposes of Opportunistic Real Properties
held as inventory or held primarily for sale to customers in the ordinary course
of the Company's trade or business, any gain recognized by the Company in such a
transaction would be subject to a 100% "prohibited transactions" tax, unless the
Company was eligible to make, and did make, a Foreclosure Property election with
respect to the property -- in which case the gain would be subject to tax at the
maximum corporate rate. For a discussion of the "prohibited transactions" tax
and of Foreclosure Property, see "Federal Income Tax Consequences --
Requirements for Qualification -- Income Tests" and "Federal Income Tax
Consequences -- Sale of the Company's Property." The Company, however, does not
presently intend to acquire or hold properties that constitute inventory or
other property held primarily for sale to customers in the ordinary course of
the Company's trade or business.
MEZZANINE INVESTMENTS. The Company may make investments that are
subordinated to first lien Mortgage Loans on commercial and multifamily real
estate. For example, on a commercial property subject to a first lien Mortgage
Loan with a principal balance equal to 70% of the value of the property, the
Company could lend the owner of the property (typically a partnership) an
additional 15% to 20% of the value of the property. Typically the loan would be
secured, either by the property subject to the first lien (giving the Company a
second lien position) or a partnership interest in the owner. If a partnership
interest is pledged, the Company would be in a position to take over the
operation of the property in the event of a default on the loan. These Mezzanine
Investments generally would provide the Company with the right to receive a
stated interest rate on the loan balance and may also include a percentage of
gross revenues from the property, payable to the Company on an ongoing basis,
and/or a percentage of any increase in value of the property, payable upon
maturity or refinancing of the loan, or otherwise would allow the Company to
charge an interest rate that would provide an attractive risk-adjusted return.
Mezzanine Investments may also take the form of preferred equity, which will
have a claim against both the operating cash flow and liquidation proceeds from
the specific real estate assets. The Manager may contractually commit the
Company to aggregate Mezzanine Investments up to $75 million, or $20 million for
any individual transaction, in any calendar quarter. Any investments outside of
these guidelines must be approved in advance by the Board of Directors.
Before originating Mezzanine Investments, the Company intends to perform
certain credit underwriting to attempt to evaluate future performance of the
collateral supporting such investment, which will include a review of (i) the
underlying collateral of each Mortgage Loan, including property characteristics,
location, credit-worthiness of tenants and economics; (ii) the relative
principal amounts of the loan, including the loan-to-value and debt service
coverage ratios, (iii) the borrower and manager's ability to manage the property
and make debt service payments, and (iv) the Mortgage Loan's purpose and
documentation. The Mezzanine Investments will be on commercial and multi-family
properties that generally will have loan-to-value ratios of no more than 90% and
debt service coverage ratios of no less than 1.05x. Investments will generally
range from $500,000 to $20 million per asset.
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OTHER REAL ESTATE RELATED ASSETS. The Manager may contractually commit the
Company to aggregate Other Real Estate Related Assets up to $50 million, or $20
million for any individual transaction, in any calendar quarter. Any investments
outside of these guidelines must be approved in advance by the Board of
Directors. The Company intends to limit its investment in such assets to no more
than 25% of the Company's portfolio. Investments in Other Real Estate Related
Assets will generally have loan-to-value ratios of no more than 85% and debt
service coverage ratios of no less than 1.10x. These investments will generally
range from $1 million to $20 million per investment.
The Company's policy will be to conduct an investigation and evaluation of
Other Real Estate Related Assets before purchasing such assets. Evaluation of
potential properties will be conducted primarily by the Manager's employees who
specialize in the analysis of such assets, often with further specialization
based on geographic or collateral-specific factors. The Company expects the
Manger to use third parties, such as brokers who are familiar with the
property's type and location, to assist it in conducting an evaluation of the
value of the property, and, depending on the circumstances, to use
subcontractors, such as local counsel and engineering and environmental experts,
to assist in the evaluation and verification of information and the gathering of
other information not previously made available by the potential seller. Other
Real Estate Related Assets may include the following:
CONSTRUCTION LOANS. The Company may take advantage of opportunities
to provide Construction Loans on commercial property, taking a first lien
mortgage to secure the debt.
AGRICULTURAL LOANS. The Company may originate or acquire Agricultural
Loans for use in securitization pools and may acquire agricultural
underperforming real estate assets. Agricultural Loans are secured by first
liens on a parcel or parcels of land, which may be improved by buildings,
fixtures, and equipment or other structures permanently affixed to the
parcel or parcels, that are used for the production of one or more
agricultural commodities or products. Loans are secured by a first lien
mortgage with principal amortization based upon the nature of depreciable
assets and commodity types. Lower percentage (longer duration)
amortizations are associated with productive agricultural real estate with
limited or no depreciable buildings or structures. Typically, as the value
of depreciable structures becomes a larger percentage of the security, the
amortization percentage is higher (shorter duration). Agricultural real
estate may also be improved with permanent plantings (orange groves,
vineyards, etc.) which produce crops for multiple years and the loan
amortizations are structured to reflect the economic life of the productive
assets. The loans are payable monthly, quarterly or semi-annually depending
upon the nature of the commodity produced.
FOREIGN REAL PROPERTIES. In addition to purchasing Opportunistic Real
Properties, the Company may originate or acquire Mortgage Loans secured by
real estate located outside the United States or purchase such real estate.
The Company has not imposed any limits with respect to the amounts that it
could invest in foreign real properties in the aggregate, any particular
type of foreign real property, or properties located in any particular
country. Investing in real estate located in foreign countries creates
risks associated with the uncertainty of foreign laws, markets and risks
related to currency conversion and possible taxation by foreign
jurisdictions. Although the Manager has no experience in investing in
foreign real estate, its ultimate parent company, Lend Lease, has 15
offices located outside the United States, primarily in Australia, Asia and
Europe. The Company believes that the Manager's experience in managing
distressed assets generally will be helpful to the management of such
assets. The Company may be subject to foreign income tax with respect to
its investments in foreign real estate. However, any foreign tax credit
that otherwise would be available to the Company for U.S. federal income
tax purposes will not flow through to the Company's shareholders due to the
Company's status as a REIT.
OTHER MBS. The Company may create or acquire IOs that have
characteristics of Subordinated Interests, known as Sub IOs. A Sub IO is
entitled to no payments of principal; moreover, interest on a Sub IO often
is withheld in a reserve fund or spread account and is used to fund
required payments of principal and interest on the more senior tranches.
Once the balance in the spread account reaches a certain level, interest on
the Sub IO is paid to the holders of the Sub IO. These Sub IOs provide
credit support to the senior classes, and thus bear substantial credit
risk. Moreover, because a Sub IO receives
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<PAGE> 47
only interest payments, its yield is extremely sensitive to changes in the
weighted average life of the class, which in turn is dictated by the rate
of prepayments (including as a result of defaults) on the underlying loans.
Some Sub IOs are designated as REMIC Residual Interests, which typically
generate Excess Inclusion or other forms of "Phantom Income." The Company
may invest not only in classes of Subordinated Interests but also in other
classes of MBS, such as IOs and Inverse IOs. Although the Manager has
limited experience in investing in these categories of MBS, ERE Hyperion
regularly invests in such assets. These investments will differ from the
Company's Subordinated Interests because they generally are not the "first
loss" position, have credit ratings of "AAA" through "BB" and are not
commercially oriented. See "Risk Factors -- Subordinated CMBS May Subject
the Company to Greater Risk and Yields That are Sensitive to Interest Rate
Changes."
REAL ESTATE COMPANIES. As public market ownership and consolidation
continues in the real estate industry, the Company expects to target
investments in real estate companies. Opportunities in this target area
include public and private companies, regardless of form, whether
corporate, partnership, limited liability company or otherwise. The Company
intends to invest in private placements of common stock or other securities
convertible into common stock. When the Company identifies strong
management teams and growth prospects, it may provide growth capital for
build-ups of companies with otherwise limited access to equity capital and
may recapitalize over-leveraged or other poorly capitalized companies. The
Company expects to take advantage of the arbitrage between private and
public market pricing of real estate with its investments in this area.
Conversely, when an entity can be acquired for less than the value of its
assets, the Company may acquire control of such entity, whether directly
(through the acquisition of a controlling equity interest) or indirectly
(through the acquisition of debt). The provisions of the Code regarding the
qualification of an entity as a REIT, however, may restrict the Company's
ability to invest in corporate stock. See "Federal Income Tax
Consequences -- Requirements for Qualification -- Asset Tests" and "Federal
Income Tax Consequences -- Effect of Proposed Changes in Tax Laws."
RISK MANAGEMENT
The following describes some of the investment management practices that
the Company may employ from time to time to earn income, facilitate portfolio
management (including managing the effect of maturity or interest rate
sensitivity) and mitigate risk (such as the risk of changes in interest rates).
There can be no assurance that the Company will not amend or deviate from these
policies or adopt other policies in the future.
LEVERAGE AND BORROWING. The Company intends to leverage its assets through
the issuance of CMOs, reverse repurchase agreements, warehouse lines of credit,
bank credit facilities, mortgage loans on real estate and other borrowings, when
there is an expectation that such leverage will benefit the Company. However,
the Company does not intend to borrow funds from the Manager or its affiliates.
If changes in market conditions cause the cost of such financing to increase
relative to the income that can be derived from securities purchased with the
proceeds thereof, the Company may reduce the amount of leverage it utilizes. The
Manager will not be permitted to materially change the terms of any line of
credit (except for decreasing the interest rate on such lines of credit),
including increasing the commitment under the lines of credit, without the
approval of the Board of Directors. The Manager may enter into financing for the
Company so long as it maintains a ratio of collateralized debt to equity of no
more than 12:1, without the approval of the Board of Directors. In addition, the
Manager will manage the Company's balance sheet so that the Company can
instantaneously respond to combined collateral/hedge margin calls of at least 2%
of the market value of the pledged assets. Any ratios less than 2% will require
the approval of the Board of Directors.
Leverage creates an opportunity for increased income but, at the same time,
creates special risks. For example, leverage magnifies changes in the net worth
of the Company and affects the amounts available for distribution to
shareholders. Although the amount owed will be fixed, the Company's assets may
change in value during the time the debt is outstanding. Leverage will create
interest expenses for the Company which can exceed the revenues from the assets
retained.
To the extent the revenues derived from assets acquired with borrowed funds
exceed the interest expense the Company will have to pay, the Company's net
income may be greater than if borrowing had not been used.
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<PAGE> 48
Conversely, if the revenues from the assets acquired with borrowed funds are not
sufficient to cover the cost of borrowing, the net income of the Company will be
less than if borrowing had not been used, and therefore the amount available for
distribution to shareholders will be reduced. See "Risk Factors -- The Company
Will Be Subject to Economic and Business Risks -- Leverage Can Reduce Income
Available for Distribution and Cause Losses."
Under certain circumstances, and notwithstanding adverse interest rate or
market conditions, the Company may use leverage to obtain sufficient cash to
make required distributions of dividends or to fund share repurchases and tender
offers when such leveraging is deemed to be in the best interests of
shareholders. Such situations may arise if the Company's status as a REIT or its
ability to maintain minimum liquidity levels is endangered.
CMOS AND WAREHOUSE LINES OF CREDIT. The Company intends to originate or
purchase Mortgage Loans and to issue CMOs collateralized by such loans. During
the period in which the Company is acquiring mortgage loans for securitization,
the Company is likely to borrow funds secured by such loans pursuant to
warehouse lines of credit. The Company has not yet established any such credit
lines. The collateral (whether whole mortgage loans or CMBS) will be transferred
into a wholly owned subsidiary, and that entity will issue CMOs. The transaction
will be structured as debt, with the issuer retaining an equity interest in the
collateral. In a debt transaction, the principal balance of the collateral
(whether whole loans or MBS) will exceed the principal balance of the CMOs.
Thus, once the CMOs are paid in full, the issuer will own the collateral free of
the lien of the CMO debt. Moreover, the Company may issue CMOs collateralized by
previously issued CMOs or CMBS in transactions known as "resecuritizations." The
Company will structure a resecuritization in the same manner as a
securitization.
The Company will issue CMOs through wholly owned subsidiaries, rather than
directly, to segregate the underlying collateral into separate pools. Under
section 856(i) of the Code, any wholly owned corporate subsidiary of a REIT is a
"qualified REIT subsidiary" and is disregarded as an entity separate from the
REIT for federal income tax purposes. See "Federal Income Tax
Consequences -- Requirements for Qualification."
REVERSE REPURCHASE AGREEMENTS. The Company intends to enter into reverse
repurchase agreements, which are agreements under which the Company would sell
assets to a third party with the commitment that the Company repurchase such
assets from the purchaser at a fixed price on an agreed date. Reverse repurchase
agreements may be characterized as loans to the Company from the other party
that are secured by the underlying assets. The repurchase price reflects the
purchase price plus an agreed market rate of interest.
BANK CREDIT FACILITIES. The Company intends to borrow money through
various bank credit facilities, which will have varying fixed or adjustable
interest rates and varying maturities. The Company has not yet established any
such bank credit facilities.
MORTGAGE LOANS ON REAL ESTATE OWNED BY THE COMPANY. The Company expects to
borrow funds secured by mortgages on the Company's real estate, including any
Opportunistic Real Properties owned by the Company.
INTEREST RATE MANAGEMENT TECHNIQUES. The Company may engage in a variety
of interest rate management techniques for the purpose of managing the effective
maturity or interest rate of its assets or liabilities. These techniques also
may be used to attempt to protect against declines in the market value of the
Company's assets resulting from general trends in debt markets or to change the
duration of or interest rate risk associated with the Company's borrowings. Any
such transaction is subject to risks, and may limit the potential earnings on
the Company's investment in real estate related assets. Such techniques may
include puts and calls on securities or indices of securities, Eurodollar
futures contracts and options on such contracts, interest rate swaps or other
such transactions. Applicable REIT qualification rules may limit the Company's
ability to use these techniques. See "Federal Income Tax
Consequences -- Requirements for Qualification -- Income Tests."
HEDGING. The Company has retained the services of third party interest
rate risk consultants to advise the Manager with respect to the Company's
hedging policy. The Guidelines permit the Company to enter into hedging
transactions in certain circumstances. The Company's Guidelines expressly state
that the Company's
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<PAGE> 49
policy is to use hedging techniques to mitigate potential risks, and not for
speculative purposes, e.g., with respect to indebtedness, to limit, fix or cap
the interest rate on variable interest rate indebtedness.
The Manager will implement the hedging directives of the Company consistent
with the Guidelines. The Company primarily will utilize the following derivative
financial instruments to avoid or reduce interest rate risk: interest rate
swaps, options on interest rate swaps, treasury-locks, options on treasuries and
interest rate caps or floors. The Company primarily will initiate hedge
transactions with counterparties that have a long term credit rating of not less
than "A1" by Moody's, "A+" by Standard & Poor's or "A+" by Duff & Phelps. All
derivative financial instruments will be reviewed and valued by the Manager on a
monthly basis. A monthly report as to the effectiveness of the instruments and
any recommended adjustments to the hedging strategy will be documented and
presented to the Board of Directors on a quarterly basis. Upon the expiration or
termination of a hedge transaction, an analysis will be performed by the Company
to report the efficiency of the hedge to the Board of Directors.
The Company primarily intends to undertake to manage the following interest
rate risks:
The value of fixed rate mortgage loans originated and held for
securitization. The Company plans to issue CMOs backed by securitized
pools of mortgage loans that it originates. Changes in interest rates
during the time the Company is holding Mortgage Loans for securitization
will impact the net proceeds and terms available from the issuance of CMOs.
The intent of the Company's hedging strategy will be to produce an
aggregate gain or loss which approximates the gain or loss in
securitization proceeds caused by changes in interest rates between the
time the Mortgage Loan is funded and the time the Company issues CMOs. All
hedge agreements related to a securitized pool of loans will be terminated
concurrently with the securitization.
The interest expense incurred by the Company. The Company intends to
borrow money through short term bank credit facilities and reverse
repurchase agreements which will have variable interest rates. Changes in
interest rates will impact the Company's cash flow. The intent of the
Company's hedging strategy will be to reduce the impact of rising interest
rates through the use of interest rate swaps and caps.
The provisions of the Code regarding the qualification of an entity as a
REIT may restrict the Company's ability to enter into hedging transactions. See
"Federal Income Tax Consequences -- Requirements for Qualification -- Asset
Tests" and "Federal Income Tax Consequences -- Requirements for Qualification --
Income Tests." If necessary to avoid these restrictions, the Company will
conduct some of its hedging activities through a corporate subsidiary that is
fully subject to federal corporate income tax. The Company's ability to invest
in a taxable corporate subsidiary, however, could be affected by certain
proposed tax legislation. See "Federal Income Tax Consequences -- Effect of
Proposed Changes in Tax Laws."
ASSET MANAGEMENT
The Company intends to acquire Special Servicing rights with respect to the
mortgage loans underlying Subordinated Interests it purchases. Acquiring these
rights will give the Company control of the underlying mortgage loans within
certain parameters.
The terms of Special Servicing agreements vary considerably and the Company
cannot predict with certainty the precise terms of the Special Servicing
agreements into which it will enter. In general, however, the Company will
attempt to negotiate Special Servicing agreements that will permit the Company
to service, or to direct the servicing of, Mortgage Loans that are more than
90-days delinquent. At that point, the Company would have the right (and the
obligation) to decide whether to begin foreclosure proceedings or to seek
alternatives to foreclosure, such as forbearance agreements, partial payment
forgiveness, repayment plans, loan modification plans, loan sales and loan
assumption plans. Thus, the Company would have within its control, subject to
obligations to the related senior classes, greater ability to minimize losses on
Mortgage Loans underlying Subordinated Interests owned by the Company.
The Manager currently intends to become a rated Special Servicer and the
Company intends to assign to the Manager all of its Special Servicing rights and
obligations (other than the right to direct foreclosure). It is
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<PAGE> 50
expected that all of the Special Servicing compensation will be paid to the
Manager and, as a result, the Company will benefit from the Special Servicing
rights primarily from enhanced value of the related Subordinated Interests due
to greater control of Special Servicing of the loans, and not from receipt of
Special Servicing fees.
The Manager has considerable experience in servicing distressed loans
through management of an existing $7.2 billion mortgage portfolio as well as
through its prior ownership with EQ Services, which was an "Above Average" rated
master and special servicer. The Manager provides both primary servicing and
Special Servicing capabilities. The primary servicing group manages the mortgage
payment process, is centrally coordinated and includes such functions as funding
the loans, processing payments, reporting delinquencies to Special Servicing,
maintaining escrows, accounting services and other various monitoring functions,
i.e. taxes, insurance and UCC filings. Special Servicing utilizes the Manager's
regional operations specialist to provide hands-on real estate analysis through
a mortgage reinspection program to identify early warning signs of problem
loans. The reinspection program provides ongoing physical inspections and
valuation of the collateral. Other asset management functions of Special
Servicing include accumulation of property financial information such as rent
rolls, budgets and income and expense statements, monitoring monthly delinquency
reports for any late payments, analyzing the financial and physical condition of
the security, handling any loan defaults, bankruptcy or transfer of title or
other property specific issues. Through the Manager's research area, the Special
Servicer asset manager is able to combine macro-level data with property
specific information to draw conclusions for managing the mortgage assets within
a pool. The Manager is currently in the process of seeking a rating as a Special
Servicer of commercial loans from certain rating agencies.
The legal aspects of the mortgage loans that underlie the Subordinated
Interests to be acquired by the Company will affect the value of those assets.
For a discussion of certain legal aspects of mortgage loans, see "Certain Legal
Aspects of Mortgage Loans and Real Property Investments."
The Manager also has experience in managing Opportunistic Real Properties
through a full asset management staff, which oversees all aspects of managing
equity real estate. Asset managers are responsible for focusing on a property's
investment potential and are responsible for annual budgets and asset management
plans, multi-year business plans, capital recommendations and hold/sell
recommendations. Because asset management and servicing is one of the Manager's
business focuses, it has an established network of real estate professionals
through the United States to assist its asset management activities. The Manager
maintains working relationships with approved engineers, environmental
consultants, appraisers and real estate brokers nationwide, and calls upon these
local advisors for assistance when appropriate.
OTHER POLICIES
The Company does not intend to make personal loans to its officers or
directors, or to any employees of the Manager. Furthermore, the Company does not
currently intend to issue securities that rank senior to the Common Stock, to
invest in the securities of other issuers for the purpose of exercising control
over such issuers, to underwrite securities of other issuers, or to repurchase
or otherwise reacquire its shares of Common Stock or other securities. However,
the Board of Directors of the Company may alter these policies at any time
without shareholder approval.
The Company may offer its securities in exchange for property. Furthermore,
the Company organized the Operating Partnership to provide potential sellers of
assets with the opportunity to transfer those assets to the Company in a
tax-deferred exchange. See "Operating Partnership Agreement."
Holders of Common Stock will receive annual reports containing audited
financial statements with a report thereon by the Company's independent
certified public accountants. See "Additional Information -- The Company."
COMPETITION
The Company will engage in a business that may become increasingly
competitive in the future as more companies enter the market, which may
adversely affect the Company's ability to achieve its investment
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objectives. In acquiring Real Estate Related Assets generally, the Company will
compete with CRIIMI MAE, Inc., Ocwen Asset Investment Corporation, Goldman
Sachs' Whitehall Street Real Estate Limited Partnership Funds and Capital Trust,
as well as other REITs, investment banking firms, savings and loan associations,
banks, mortgage bankers, insurance companies, mutual funds and other lenders and
other entities purchasing similar assets, many of which have established
operating histories and procedures, may have access to greater capital and other
resources and may have other advantages over the Company in conducting certain
businesses and providing certain services. There are several REITs similar to
the Company and others may be organized in the future. The effect of the
existence of additional REITs may be to increase competition for the available
supply of Real Estate Related Assets contemplated to be acquired by the Company.
MORTGAGE LOANS. With respect to Mortgage Loans, the Company will face
competition from conduit originators, insurance company lenders, mortgage
bankers, similar REITs, savings and loan associations and other loan
originators.
SUBORDINATED INTERESTS. In purchasing Subordinated Interests in CMBS, the
Company will compete with mortgage REITs, other mortgage-related companies, high
yield funds, fixed income managers and mutual funds.
OPPORTUNISTIC REAL PROPERTIES. The Company will compete with real estate
funds advised by pension fund advisors and investment banks and with selective
REITs focused on this asset class. The Company will seek smaller equity
investments ranging from $2.5 million to $25 million.
MEZZANINE INVESTMENTS. Competition for Mezzanine Investments will come
primarily from whole loan originators who offer Mezzanine Investments in
conjunction with their first mortgages or from high yield funds that typically
have the capacity to engage in larger transactions. The Company will focus on
smaller assets with an average investment of $500,000 to $20 million, which will
give the Company a larger market with less competition and a more diverse
investment base. However, smaller investments can be time-consuming to originate
and manage.
Although many of the Company's prospective competitors may have access to
greater capital and have other advantages, the Company believes that it has a
competitive advantage as a result of (i) ERE Yarmouth's twelve offices located
in major metropolitan markets throughout the United States and over 1,200
employees, (ii) the experience of ERE Yarmouth in originating and servicing
Mortgage Loans, (iii) the experience of ERE Yarmouth in acquiring and managing
CMBS and in acquiring, managing and resolving Opportunistic Real Property, (iv)
the experience of ERE Yarmouth in obtaining competitive financing on behalf of
its clients, (v) ERE Yarmouth's substantial investment in the computer systems,
research, property-specific and lease database technology and other resources
that the Company believes are necessary to conduct this business and (vi)
strategic relationships and contacts that ERE Yarmouth has developed in
conducting its real estate related businesses. However, the Manager has only
limited experience in operating a REIT and has relatively limited experience in
investing in Mezzanine Investments.
PRIOR PERFORMANCE
The information contained in this section of the Prospectus is included
solely to enable prospective investors to have information which can be used to
evaluate the discretionary experience of the Manager and its Affiliates in
investing in real estate and CMBS on behalf of its clients. Additional
information regarding the prior performance of clients of the Manager is
contained in Appendix A and B. Additional information concerning the acquisition
of properties and CMBS by certain clients of the Manager is contained in Table
VI, which appears in Part II of the Registration Statement of which this
Prospectus is a part. Upon request, the Company will furnish, without charge,
copies of Table VI and the most recent annual report on Form 10-K filed with the
Commission for any program listed below which is required to file such report.
Upon request and payment of copying and mailing costs, the Company will also
furnish copies of the Appendixes to any such report.
THE PRIOR PERFORMANCE INFORMATION INCLUDED IN THIS PROSPECTUS IS HISTORICAL
AND INVESTORS SHOULD NOT CONSTRUE THE INCLUSION OF SUCH
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INFORMATION AS IMPLYING OR INDICATING IN ANY MANNER THAT THE COMPANY WILL MAKE
INVESTMENTS WHICH ARE COMPARABLE TO THOSE MADE BY THE FUNDS DISCUSSED BELOW, OR
THAT THE RESULTS ACHIEVED BY THE COMPANY WILL IN ANY WAY RESEMBLE OR BE
COMPARABLE TO THOSE ACHIEVED BY SUCH OTHER FUNDS. INVESTORS IN THE COMPANY WILL
NOT BE ACQUIRING ANY INTEREST IN THE FUNDS DESCRIBED BELOW OR DESCRIBED IN THE
PRIOR PERFORMANCE TABLES LOCATED IN APPENDIX A AND B OF THIS PROSPECTUS. IN
ADDITION, THE REAL ESTATE MARKETS HAVE GENERALLY BEEN FAVORABLE DURING MUCH OF
THE PERIOD FOR WHICH DATA IS PROVIDED. THEREFORE, THE FOLLOWING INFORMATION MAY
NOT BE INDICATIVE OF THE RESULTS THAT WILL BE EXPERIENCED BY THE MANAGER IN
CONNECTION WITH ITS MANAGEMENT OF THE COMPANY'S ASSETS.
ERE YARMOUTH
As of December 31, 1997, ERE Yarmouth had over $29.1 billion of assets
under management on behalf of a wide variety of corporate, public and union
pension funds, international investors, insurance companies and other financial
institutions, including $22.1 billion of equity investments and $7.0 billion of
mortgages. Portfolios under management held 615 investments representing 83
million square feet of retail space, 132 million square feet of office space, 57
million square feet of industrial space and 13,316 hotel rooms. The Company does
not believe that the assets managed for ERE Yarmouth's clients have been
adversely affected by any major business developments or conditions that would
be material to investors in the Company's Common Stock. ERE Yarmouth primarily
manages non-discretionary separate accounts for individual clients (including
Equitable) tailored to meet specific risk guidelines and rate of return
objectives. Because ERE Yarmouth does not have discretionary authority with
respect to these accounts, the Company believes they would not be meaningful or
relevant to a prospective investor in the Company's Common Stock.
However, ERE Yarmouth does represent, and in some cases has co-invested in,
20 commingled, discretionary client funds, of which two invest primarily in
mortgages and 18 invest primarily in wholly owned properties and interests in
joint ventures. Of these 20 funds, one is public and 19 are non-public. Although
not all of these funds have investment objectives similar to the Company, the
Company believes that information regarding these commingled discretionary
client funds may be relevant in evaluating the performance of the Manager.
Of the 20 funds, nine have investment objectives similar to those of the
Company and 11 have dissimilar investment objectives. The 11 funds with
dissimilar investment objectives invest in "core" properties, which consist of
top quality, highly leased, stabilized institutional grade properties in
traditional product types, such as regional malls and central business district
office towers. Certain information relating to those 11 funds is set forth
below.
The nine funds with similar investment objectives invest in smaller
properties and underperforming or otherwise distressed real property. Although
the investment objectives of these funds are not identical to those of the
Company, they are similar, and the Company believes that prior performance
information about these funds may be material to a prospective investor. Certain
information relating to those nine funds is set forth below and is included in
the prior performance tables set forth at Appendix A.
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<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997(1)
-----------------------------------------------------------------
SIMILAR INV
TOTAL PUBLIC NON-PUBLIC OBJECTIVES(%)(2)
-------------- ------------ -------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total $ raised from investors....... $4,326,588,305 $108,514,500 $4,218,073,805 31%
Total # of investors................ 11,865 11,297 568 1
Number of properties purchased/
mortgages originated by region:
Northeast......................... 73 5 68 29
Southeast......................... 57 1 56 46
Midwest........................... 25 3 22 60
West.............................. 57 2 55 49
-------------- ------------ -------------- ---
Total..................... 212 11 201 42%
============== ============ ============== ===
Aggregate $ of properties purchased/
mortgages originated.............. $4,983,722,576 $104,671,096 $4,879,051,480 37%
Property type %'s
Office............................ 44% 38% 44% 61%
Retail............................ 35 35 35 9
Industrial........................ 7 22 7 3
Multi-family...................... 2 5 2 3
Hotel............................. 7 -- 7 18
Other............................. 4 -- 4 6
-------------- ------------ -------------- ---
Total..................... 100% 100% 100% 100%
============== ============ ============== ===
% of properties that were purchased:
New............................... 5% --% 6% 0%
Used.............................. 90 100 89 96
Pre or during development......... 5 -- 5 4
-------------- ------------ -------------- ---
Total..................... 100% 100% 100% 100%
============== ============ ============== ===
# of properties sold................ 158 4 154 15%
</TABLE>
- ---------------
(1) This table includes information about the Manager's 20 commingled,
discretionary client funds.
(2) Represents the percentage of the item relating to funds having investment
objectives similar to one or more of the Company's investment objectives.
The Company's investment objectives are to invest in Subordinated Interests,
Opportunistic Real Properties, Mezzanine Investments and other Real Estate
Related Assets.
ERE HYPERION
In May 1995, ERE and Hyperion established a joint venture, Equitable Real
Estate Hyperion Capital Advisors, LLC ("ERE Hyperion"), to raise third-party
funds for investment in CMBS. The intent of the joint venture is to leverage off
the real estate expertise of ERE Yarmouth and the fixed income expertise of
Hyperion to more effectively invest in and manage CMBS.
Since inception, ERE Hyperion has invested on behalf of seven clients, four
of which were non-discretionary accounts and three of which were discretionary
accounts. The term discretionary means that absolute authority is afforded the
investment manager to buy and sell securities on the client's behalf, within an
agreed upon framework. Currently, ERE Hyperion invests on behalf of three
non-discretionary clients and three discretionary clients. To date, ERE Hyperion
has not had any credit losses on the investments it manages. Certain information
regarding these discretionary clients is set forth below. Additional disclosure
relating to the operations and prior performance of ERE Hyperion's discretionary
clients is set forth at Appendix B.
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<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997(1)
--------------------
(UNAUDITED)
<S> <C>
Total CMBS $s raised from investors......................... $370,000,000
# of investors.............................................. 3
Total CMBS $s invested...................................... $352,000,000
Total # of CMBS transactions invested in.................... 85
Total $ of CMBS purchased................................... $463,666,281
Percentage of CMBS invested by credit rating:
AAA....................................................... 5%
AA........................................................ 3
A......................................................... 16
BBB....................................................... 34
BB........................................................ 40
B......................................................... 3
------------
100%
============
Total CMBS sale transactions................................ 25
Property type characteristics within CMBS pools(2):
Office.................................................... 18%
Retail.................................................... 29
Industrial................................................ 6
Multi-family.............................................. 30
Hotel..................................................... 10
Other..................................................... 7
------------
100%
============
</TABLE>
- ---------------
(1) This table includes information about ERE Hyperion's three discretionary
separate client accounts.
(2) Amounts represent the percentage of property types that provide underlying
collateral to the CMBS.
CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST
The Company will be subject to conflicts of interest involving the Manager.
In addition to the Management Agreement, the Company will enter into a number of
relationships with the Manager and its affiliates, some of which may give rise
to conflicts of interest. Transactions that may give rise to a conflict of
interest between the Company's shareholders and the Manager include, but are not
limited to, the renegotiation of the Management Agreement between the Company
and the Manager, the Company's origination of a Mortgage Loan for a client of
the Manager, the Company's entering into of a joint venture with a client of the
Manager, an affiliate of the Manager being hired to manage or develop a property
owned by the Company, and the Company's purchase of assets from the Manager or
its affiliates.
The market in which the Company expects to purchase assets is characterized
by rapid evolution of products and services and, as a result, there may in the
future be relationships between the Company, the Manager, and affiliates of the
Manager in addition to those described herein. The Company intends to implement
policies as necessary or appropriate to deal with such potential conflicts in
the future.
BENEFITS TO INSIDERS. The Manager will be entitled to certain management
fees, as discussed under the heading "Management Agreement" below and, in the
event of termination or non-renewal of the Management Agreement without cause,
may be entitled to certain substantial termination fees.
ERE Yarmouth Holdings, Inc., a wholly-owned indirect subsidiary of Lend
Lease, will purchase 1,166,567 shares of Common Stock upon consummation of this
offering and the Private Placement at the initial public offering price, less
underwriting discount, after which Lend Lease will beneficially own
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<PAGE> 55
approximately 10.0% of the outstanding Common Stock of the Company (assuming
that the Underwriters do not exercise their over-allotment option).
Lend Lease must retain its shares of the Company until the earlier of (i)
two years from the Company's initial public offering of shares of Common Stock
and (ii) the date, if any, that ERE Yarmouth is terminated as the Manager, but
may dispose of its shares any time thereafter in accordance with the provisions
of Rule 144 of the Securities Act. Rule 144 permits holders of restricted
securities as well as affiliates of an issuer of the securities, pursuant to
certain conditions and subject to certain restrictions, to sell their securities
publicly without registration under the Securities Act. Notwithstanding the
foregoing, if the Company terminates the Management Agreement, Lend Lease may
require the Company to register the Manager's shares of Common Stock with the
Commission (and under applicable state law).
To provide an incentive for the Manager to enhance the value of the Common
Stock, the Company will grant the Manager Options to purchase 1,166,667 shares
of Common Stock (1,313,667 shares if the Underwriters exercise their
over-allotment option in full) or, if necessary to prevent Lend Lease from
exceeding the Ownership Limitation set forth in the Charter, Units at a price
per share equal to the initial public offering price of the Common Stock. The
Manager may redeem any Units so purchased for cash or, at the election of the
General Partner, shares of Common Stock on a one-for-one basis. See "Operating
Partnership Agreement -- Redemption Rights." One quarter of the Manager's
options will become exercisable on each of the four anniversaries of the
consummation of this offering. Unexercised options will terminate on the tenth
anniversary of the consummation of this offering. See "Management of
Operations -- Stock Options." In addition, 80% of the Options remaining in the
Option Plan following the initial grant to the Manager will be set aside for
future Option grants to the Manager. Such reserve does not guarantee that the
Manager will be granted such Options.
Additionally, upon consummation of this offering and the Private Placement,
the Company expects to grant Options to purchase shares of Common Stock to
executive officers of the Company (all of whom are employees of the Manager) and
to other employees of the Manager. The number of Options initially granted to
the officers of the Company and the Manager will be based on the number of
shares of Common Stock that such individuals purchase in this offering. See
"Underwriting." One-fifth of these Options will become exercisable. Unexercised
options will terminate on the tenth anniversary of the consummation of this
offering.
OFFICERS AND DIRECTORS. The executive officers of the Company are officers
and employees of the Manager. A majority of the Company's directors have no
business affiliations with the Manager, but were initially selected by the
Manager. Matthew L. Banks, the Chairman of the Board, is Chief Executive Officer
of the Manager. Kurt L. Wright, the Chief Executive Officer and a Director of
the Company, is an Executive Vice President of the Manager.
MANAGEMENT AGREEMENT. ERE Yarmouth will serve as Manager pursuant to the
terms of the Management Agreement and will have broad discretionary authority
with respect to the management and operations of the Company. The Management
Agreement will not prohibit the Manager or its affiliates from acting as
advisors for other entities (including subsidiaries) or performing investment,
corporate management or other services for any other entity (including
subsidiaries). The ability of the Manager and its employees to engage in other
business activities could reduce the time and effort spent on the management of
the Company. In addition, the incentive fee payable to the Manager by other
clients may be higher than the fee paid by the Company, creating additional
potential conflicts of interest.
The Manager will be receive an incentive management fee based on the
Company's income, which may create an incentive for the Manager to recommend
investments with greater income potential, which generally are riskier or more
speculative than would be the case if its fees did not include a performance
component. Such incentives may result in increased risk to the value of the
Company's investment portfolio. In addition, the Manager will be entitled to a
substantial termination fee in the event of termination or non-renewal of the
Management Agreement without cause.
MANAGER ADVISES OTHER ENTITIES. There may be circumstances where
investments are suitable for other funds or clients of the Manager and the
Company. ERE Yarmouth utilizes an Allocation Process for every
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<PAGE> 56
real estate investment, which is intended to ensure that all clients, including
the Company, will have fair access to new opportunities without preference being
accorded to any particular client. Each client is assigned a portfolio manager
who develops an annual plan detailing the client's desired investment volume,
deal structure and, by property type, the desired physical characteristics,
pricing, leasing risk and target markets. When ERE Yarmouth has investment
opportunities, the opportunity is prioritized among its respective clients. If
an investment opportunity is equally suited for more than one client, such
opportunity will be allocated based upon a rotation system. Factors considered
in prioritizing investment opportunities include, but are not limited to, (i)
the client's lending parameters, including size of transaction, geographic
location, property type and timing, (ii) discretionary or non-discretionary
requirements of the borrower, (iii) ability of the client to meet the
transaction's timing sensitivity and whether the transaction is complementary
with the client's existing portfolio and (iv) in the event the rotation system
is required, the aggregate dollar amount invested and number of transactions
previously closed on behalf of the client. Each portfolio manager will give the
reasoning for the acquisition of a deal on behalf of its client. The ultimate
allocation decision will be approved by an Allocation Committee of the Manager
in accordance with a fair and impartial process, taking into account the
investment criteria of each client. See "The Management of Operations -- The
Manager."
In addition, in providing services to its other clients, the Manager may
recommend activities that would compete with or otherwise adversely affect the
Company and one or more of its subsidiaries. Situations may arise in which the
investment activities of the other funds or clients of the Manager may
disadvantage the Company, such as the inability of the market to fully absorb
orders for the purchase or sale of particular securities placed by the Manager
for the Company and its other funds or clients at prices and in quantities that
would be obtained if the orders were being placed only for the Company. The
Manager may aggregate orders of the Company with orders for its other accounts.
Such aggregation of orders might not always be to the benefit of the Company
with regard to the price or quantity executed.
TRANSACTIONS WITH AFFILIATES OF THE MANAGER. The Manager may engage in
transactions on behalf of the Company with affiliates of the Manager. For
example, COMPASS, an affiliate of the Manager may provide management and leasing
services for certain of the Company's properties and subsidiaries.
BUSINESS RELATIONSHIPS OF MANAGER. The Manager and its affiliates have
long-term relationships with a significant number of developers, institutions
and corporations and their senior managers. In determining whether the Company
should invest in a particular transaction, the Manager will consider these
relationships in its management of the Company. There may be certain
transactions that will not be undertaken on behalf of the Company in view of
such relationships.
The Manager may retain one or more of its affiliates to provide services on
behalf of the Company or its subsidiaries, enter into other transactions on
behalf of the Company or its subsidiaries and enter into other transactions on
behalf of the Company or its subsidiaries with one or more of its affiliates.
The Management Agreement provides that any arrangement relating to the provision
of services to the Company or its subsidiaries by any ERE Yarmouth affiliate
must be on terms and conditions no less favorable to the Company than the terms
and conditions under which similarly qualified third parties perform similar
services. Any such arrangement would be approved by the Independent Directors.
INTEREST OF MANAGER IN ASSETS. In addition, the Management Agreement will
not prohibit the Manager or any of its affiliates from conducting any other
business venture, making investments for its own account or the accounts of any
other entity, including, for example, owning any interest in any other business
venture of any nature in the vicinity of any of the Company's properties or any
other location. The Manager may have interests, therefore, in properties which
compete with properties owned by the Company. The Manager also may have
conflicting interests with respect to property investment opportunities for the
Company.
PURCHASE OF ASSETS FROM THE MANAGER. The Company may (although it does not
intend to) purchase assets from the Manager and its affiliates. The Manager will
obtain fairness opinions from third parties concerning the price for
Subordinated Interests and appraisals for any Opportunistic Real Properties
purchased from the Manager or its affiliates in the future, but the Independent
Directors are likely to rely substantially on information and analysis provided
by the Manager to evaluate the Company's Guidelines, compliance therewith and
other matters relating to the Company's investments. The terms of a particular
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<PAGE> 57
transaction, however, will not be approved in advance by the Company's Board of
Directors. Moreover, fairness opinions from third parties and appraisals are not
always reliable indicators of the value of assets. In particular, fairness
opinions from third parties generally are obtained from the underwriter or
placement agent of the CMBS, who may have an incentive to overstate the value of
the CMBS. Moreover, the market for unregistered CMBS is illiquid, and therefore
accurate prices are difficult to estimate.
ROLE OF INDEPENDENT DIRECTORS. The relationships between the Company, on
the one hand, and the Manager and its affiliates, on the other, will be governed
by policy Guidelines that have been approved by a majority of the Independent
Directors. The Guidelines establish certain parameters for the operations of the
Company, including quantitative and qualitative limitations on the Company's
assets that may be acquired. The Guidelines are intended to assist and instruct
the Manager and to establish restrictions applicable to transactions with
affiliates of the Manager. Transactions with affiliates of the Manager must be
approved by a majority of the Independent Directors. The Independent Directors
will, however, review the Company's transactions on a quarterly basis to ensure
compliance with the Guidelines.
Although the Independent Directors will review the Guidelines periodically
and will monitor compliance with those Guidelines, investors should be aware
that, in conducting this review, the Independent Directors will rely primarily
on information provided to them by the Manager. The Independent Directors will
review any such transactions in the quarter following completion to ensure
compliance with the Guidelines, but in doing so, they, by necessity, will rely
primarily on information and analysis provided to them by the Manager. See "Risk
Factors."
If the Independent Directors determine in their periodic review of
transactions that a particular transaction does not comply with the Guidelines,
then the Independent Directors will consider what corrective action, if any, can
be taken. Moreover, if transactions are consummated that deviate from the
Guidelines, then the Independent Directors will have the option, under the terms
of the Management Agreement, to terminate the Manager. In such event, a
termination fee will be owed to the Manager unless the Manager's actions
demonstrate bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
THE PRIVATE PLACEMENT
The Company has previously offered ERE Yarmouth Holdings, Inc. and FBR
Asset Investment Corporation the opportunity to purchase 1,166,567 shares and
700,000 shares, respectively, of Common Stock in the Private Placement at the
initial public offering price, less underwriting discount. On December 17, 1997,
the Company executed binding stock purchase agreements with each such purchaser.
The closing of the sale of an aggregate of 1,866,567 shares of Common Stock
offered pursuant to the Private Placement will occur concurrently with the
closing of the sale of 9,800,000 shares of Common Stock offered pursuant to this
offering.
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USE OF PROCEEDS
The estimated net proceeds to the Company from this offering and the
Private Placement, and the proceeds as a percentage of total gross proceeds are
set forth in the following table:
<TABLE>
<CAPTION>
DOLLAR
AMOUNT PERCENT
------------ -------
<S> <C> <C>
Gross Private Placement proceeds(1)......................... $ 26,038,610 15.1%
Gross public offering proceeds.............................. 147,000,000 84.9
------------ -----
Gross proceeds.............................................. $178,038,610 100.0%
============ =====
Public offering expenses:
Underwriting discount..................................... 9,569,700(2) 5.5
Organizational expenses................................... 750,000 0.4
------------ -----
Net public offering proceeds................................ $136,680,300 79.0%
============ =====
Total amount available for investment....................... $162,718,910 94.0%
============ =====
</TABLE>
- ---------------
(1) Based on the sale of 1,166,567 shares of Common Stock to ERE Yarmouth
Holdings, Inc., a wholly-owned indirect subsidiary of Lend Lease, and
700,000 shares of Common Stock to FBR Asset Investment Corporation.
(2) The underwriting discount is not applicable to up to 7.0% of shares of
Common Stock offered hereby, which may be offered to certain specified
clients of ERE Yarmouth.
The net proceeds of this offering will be invested in short-term,
interest-bearing securities and held in trust by the Company until used to
originate or acquire Real Estate Related Assets as provided herein. See
"Operating Policies and Strategies."
The Company intends to supplement the proceeds of this offering through
bank borrowings, commercial paper borrowings and the issuance of debt securities
and additional equity securities.
See "Management's Discussion and Analysis of Liquidity and Capital
Resources."
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CAPITALIZATION
The capitalization of the Company, as of December 31, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby and in the
Private Placement(assuming an initial public offering price of $15.00 per
share), is as follows:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C>
Preferred Stock, par value $.01............................. $ 0 $ 0
Common Stock, par value $.01................................ 1 116,667
Authorized -- 200,000,000 shares
Issued and outstanding -- 100 shares, 11,666,667 shares,
as adjusted
Additional Paid-In Capital.................................. 999 162,603,243
-------- ------------
Total............................................. 1,000 162,719,910
======== ============
</TABLE>
- ---------------
(1) Includes 1,166,567 shares of Common Stock to be purchased in the Private
Placement by an affiliate of Lend Lease and 700,000 shares to be purchased
in the Private Placement by FBR Asset Investment Corporation, after
deducting expenses of this offering estimated to be $750,000 payable by the
Company. Excludes shares issuable upon the exercise of Options to be
outstanding upon consummation of this offering.
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<PAGE> 60
MANAGEMENT OF OPERATIONS
LEND LEASE
In June 1997, Lend Lease, a corporation incorporated in the state of New
South Wales, Australia acquired ERE from The Equitable Companies Incorporated
("Equitable Companies") (the "ERE Acquisition"). ERE currently operates under
the name "ERE Yarmouth".
Lend Lease, a large Australian public real estate and financial services
company, with substantial global interests, operates in the United States,
Australia and New Zealand, Asia, South America and Europe. Established in 1958,
Lend Lease has over 6,700 employees, 34,300 shareholders and a market
capitalization exceeding $4.9 billion as of December 31, 1997. Lend Lease has
maintained an "AA" rating from Standard & Poor's since 1992. With its
acquisition of ERE, Lend Lease's global real estate investment management
business has approximately $29.9 billion in real estate assets under management
on five continents.
Lend Lease's operations are diversified across a broad array of real estate
related activities, including property development and project management,
property and infrastructure funds management, and information and technology.
Lend Lease has been creating and managing real estate portfolios to facilitate
institutional and individual investment into real estate since 1971. Lend
Lease's experience in managing real estate funds includes public real estate
investment trusts, major commingled funds and separate account management for
pension fund clients.
Lend Lease has had a presence in the United States since the 1980s. In
1993, Lend Lease significantly increased its presence in the United States with
the purchase of The Yarmouth Group, Inc. ("Yarmouth"), a real estate investment
management operation headquartered in New York. Since the acquisition of
Yarmouth, Lend Lease has invested in commingled funds, underwritten portfolio
restructurings and directly purchased property interests. In addition, Lend
Lease is currently developing one of the largest shopping centers in Europe and
operates a property investment management business in Asia. Lend Lease recently
relocated its global real estate investment management headquarters to New York.
THE MANAGER
ERE Yarmouth is a wholly-owned indirect subsidiary of Lend Lease and, prior
to the consummation of the ERE Acquisition, ERE was a wholly-owned, indirect
subsidiary of The Equitable Life Assurance Society of the United States
("Equitable Life"), which is wholly-owned by The Equitable Companies. ERE
Yarmouth provides real estate investment advisory services to its clients.
Through special purpose subsidiaries or affiliates, including ERE Hyperion, ERE
Yarmouth provides additional services to its clients and to other third parties.
ERE Yarmouth is a full-service real estate investment advisor with
experience in investing and managing commercial real estate assets of
institutional lenders and owners. ERE Yarmouth manages in excess of $29 billion
in assets on behalf of a wide variety of corporate, public and union pension
funds, international investors, insurance companies and other financial
institutions.
ERE Yarmouth is based in Atlanta, Georgia and has twelve offices that work
in conjunction with 141 COMPASS offices throughout the United States. COMPASS is
a wholly-owned indirect subsidiary of Lend Lease. ERE's regional operations
include full-service offices with valuation professionals, asset managers,
origination acquisition and disposition specialists. ERE Yarmouth's regional
operations are designed to allow it to monitor new investment opportunities
closely and act quickly on such opportunities.
ERE Yarmouth has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the "Advisers Act") since 1986.
Prior to 1986, ERE operated under the registration of its parent company,
Equitable Life, in its capacity as investment advisor. ERE Yarmouth acts as a
fiduciary to both corporate and public pension plan assets.
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The following tables set forth certain information about the Board of
Directors of the Manager. The Manager began operating under the name ERE
Yarmouth in June 1997 and, prior thereto, operated as ERE.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
George R. Puskar.................. 54 Chairman of the Board
Douglas A. Tibbetts............... 52 Vice Chairman of the Board
Matthew Banks..................... 36 Chief Executive Officer
James Quille...................... 47 President and Chief Operating Officer
Amber Degnan...................... 49 Senior Executive Vice President and Chief Financial Officer
Samuel F. Hatcher................. 52 Senior Executive Vice President and General Counsel
</TABLE>
The principal occupation for the last five years of each member of the
Board of Directors and certain other information is set forth below.
George R. Puskar has been Chairman of ERE Yarmouth since June 1997. Prior
thereto he was Chairman of the Board and Chief Executive Officer of ERE since
1988. Mr. Puskar has been active in many real estate organizations serving on
the boards of the Urban Land Institute, the International Council of Shopping
Centers, National Council of Real Estate Investment Fiduciaries and the National
Realty Committee. Mr. Puskar has also served as chairman of the fundraising
drive to endow a real estate chair at Clark Atlanta University/Morehouse College
and is a board member of Georgia State University (advisory), the Wharton
School's Real Estate Center in Philadelphia (advisory), and the NYSE-listed Carr
Real Estate Investment Trust. Mr. Puskar has been with ERE since his graduation
from Duquesne University with a BEA in Economics and Political Science.
Douglas A. Tibbetts has been Vice Chairman of the Board of ERE Yarmouth
since January 1998. Prior thereto, he was President of ERE Yarmouth from June
1997 to January 1998, where he oversaw its institutional public/private debt and
equity business, marketing and client relationships. From 1989 to June 1997, Mr.
Tibbetts was President of ERE where he directed the formation of the COMPASS
subsidiaries in 1991, EQ Services in 1992, Column Financial in 1994, ERE
Hyperion in 1995, ERE/Rosen Real Estate Securities, LLC in 1997 and currently
heads ERE Yarmouth's Prime Property Fund Strategic Investment Committee. He
holds a BS from Stetson University.
Matthew Banks has been Chief Executive Officer of ERE Yarmouth since June
1997, responsible for its overall management as well as Lend Lease's worldwide
real estate investment management and advisory business. Since 1995, he has
served as Chief Executive Officer of Lend Lease Property Investment Services
Group in Australia. From 1992 to 1995, he served in various positions within
Lend Lease, including Senior Project Manager, Branch Manager, Development
Manager, and General Manager. Mr. Banks holds an Architectural Degree from the
University of Melbourne.
James Quille has been President of ERE Yarmouth since January 1998 and
Chief Operating Officer of ERE Yarmouth since June 1997, responsible for its
day-to-day operations. Mr. Quille has over 20 years experience in the property
sector, serving the past 13 years with Lend Lease in senior management roles and
board positions in the development, project, asset, and fund management
divisions. From 1994 to 1997, Mr. Quille was Director Asia where he was
responsible for the establishment of Lend Lease Funds Management Operations in
Asia and launching the Asia Pacific Investment Company. From 1992 to 1994, Mr.
Quille was Director New Business Development Lend Lease Property Investment
Services ("LLPISG") where he was responsible for originating new products and
planning strategy for expansion of LLPISG activities in new markets and sectors.
From 1989 to 1992, Mr. Quille was Director Asset Management LLPISG where he
oversaw the Asset Management activities of General Property Trust, the largest
public real estate investment trust listed on the Sydney Stock Exchange. He has
been active in the strategy creation of Lend Lease Global Property Funds
Management operations. Mr. Quille is a Fellow of the Faculty of Building &
Associate of the Australian Institute of Building.
Amber Degnan has been Senior Executive Vice President and Chief Financial
Officer of ERE Yarmouth since June 1997, and was formerly a Yarmouth principal
with overall responsibility for Investor Reporting Services, including
accounting, tax, financial and performance reporting and corporate governance.
Prior to
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joining Yarmouth in 1990, Ms. Degnan was a Partner with Deloitte & Touche,
serving as head of the Southeast Real Estate Group. Ms. Degnan holds a BSM from
Syracuse University.
Samuel F. Hatcher has been Senior Executive Vice President and General
Counsel for ERE Yarmouth since June 1997 and, prior thereto, was Executive Vice
President and General Counsel of ERE since 1989. Prior to joining ERE, he was a
partner in an Atlanta law firm. Mr. Hatcher is also a member of the American
College of Real Estate Lawyers. Mr. Hatcher has more than 26 years of legal
experience and holds an AB from Davidson College and a JD from Yale Law School.
Officers, directors and other personnel of the Manager have significant
experience in mortgage finance and the operation of commercial real estate,
including all of the asset types in which the Company intends to invest;
however, they have only limited experience in managing a REIT. See "Risk
Factors -- The Company is Newly Formed and Currently Holds No
Assets -- Uncertainty as to The Company's Ability Successfully to Implement its
Operating Policies and Strategies Resulting From its Lack of Operating History."
THE MANAGEMENT AGREEMENT
The Company will enter into the Management Agreement with the Manager for
an initial term expiring two years from the date of the agreement. Thereafter,
successive extensions, each for a period not to exceed twenty-four months, may
be made by agreement between the Company and the Manager, subject to the
affirmative vote of a majority of the Independent Directors. The Company may
terminate, or decline to extend the term of, the Management Agreement without
cause at any time after the initial term upon 60 days written notice by a
majority vote of the Independent Directors; provided that the Company shall pay
the Manager a termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned with respect to the immediately
preceding four fiscal quarters. This requirement may adversely affect the
Company's ability to terminate the Manager without cause. In addition,
Independent Directors of the Company may terminate the Management Agreement upon
the occurrence of certain specified events, including a material breach by the
Manager of any provision contained in the Management Agreement, without the
payment of any termination fee. If the Management Agreement is terminated for
any reason, Lend Lease will have certain registration rights with respect to its
Common Stock.
The Manager at all times will be subject to the supervision of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Company will rely on the Manager's expertise
in six principal areas, as described more fully below: (i) portfolio management;
(ii) equity acquisition and loan origination; (iii) equity asset management;
(iv) interim servicing; (v) Special Servicing; and (vi) monitoring servicing.
The Manager will be responsible for the day-to-day operations of the Company and
will perform (or cause to be performed) such services and activities relating to
the assets and operations of the Company as may be appropriate, including:
PORTFOLIO MANAGEMENT. The Manager will perform portfolio management
services on behalf of the Company and the Operating Partnership pursuant to the
Management Agreement with respect to the Company's investments. Such services
will include, but not be limited to, consulting with the Company on mortgage
originations, purchase, sale and leasing opportunities, collection of
information and submission of reports pertaining to the Company's assets,
interest rates, and general economic conditions, periodic review and evaluation
of the performance of the Company's portfolio of assets, acting as liaison
between the Company and banking, mortgage banking, investment banking and other
parties with respect to the purchase and disposition of assets, and other
customary functions related to portfolio management. The Manager may enter into
subcontracts with other parties, including its affiliates, to provide any such
services to the Company. In addition, the Manager will be responsible for:
(i) serving as the Company's consultant with respect to formulation of
investment criteria and preparation of policy Guidelines by the Board of
Directors;
(ii) advising the Company regarding, and arranging for, (A) the
issuance of CMOs collateralized by the Company's Mortgage Loans, (B)
reverse repurchase agreements on the Company's MBS and (C) other
borrowings, as appropriate;
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<PAGE> 63
(iii) representing the Company in connection with the purchase and
commitment to purchase assets, the sale and commitment to sell assets, and
the maintenance and administration of its portfolio of assets;
(iv) furnishing reports and statistical and economic research to the
Company regarding the Company's activities and the services performed for
the Company by the Manager;
(v) monitoring and providing to the Board of Directors on an ongoing
basis price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the Board
of Directors from time to time, and providing data and advice to the Board
of Directors in connection with the identification of such dealers;
(vi) providing executive and administrative personnel with office
space and office services required in rendering services to the Company;
(vii) administering the day-to-day operations of the Company and
performing and supervising the performance of such other administrative
functions necessary in the management of the Company as may be agreed upon
by the Manager and the Board of Directors, including the collection of
revenues and the payment of the Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions;
(viii) communicating on behalf of the Company with the holders of any
equity or debt securities of the Company as required to satisfy the
reporting and other requirements of any governmental bodies or agencies or
trading markets and to maintain effective relations with such holders;
(ix) preparing on behalf of the Company all reports that are required
to be filed with the Commission;
(x) to the extent not otherwise subject to an agreement executed by
the Company, designating a servicer for mortgage loans sold to the Company
and arranging for the monitoring and administering of such servicers;
(xi) counseling the Company in connection with policy decisions to be
made by the Board of Directors;
(xii) engaging in hedging activities on behalf of the Company,
consistent with the Company's status as a REIT and with the Guidelines;
(xiii) upon request by and in accordance with the directions of the
Board of Directors, investing or reinvesting any money of the Company;
(xiv) providing, arranging and reviewing legal, accounting and tax
services for the Company;
(xv) establishing, maintaining and administering a bank account or
accounts in the name of Company at banks to be selected by the Manager, on
which the officers of the Manager shall be authorized signatories and shall
be responsible for short-term cash management and investment of funds
generated by the Company's assets (including, without limitation, the Real
Estate Related Assets) on a short-term basis;
(xvi) (A) causing the timely preparation and filing of all federal,
state and local income tax, real estate tax and information returns for the
Company and payment of any taxes thereunder due on behalf of Company and,
to the extent the Manager deems to be appropriate, shall liaison with tax
consultants and legal counsel regarding all tax planning and structuring
matters for the Company and (B) performing all administrative work in
paying taxes owed, and, where appropriate, seeking refunds of taxes paid;
(xvii) preparing and maintaining books and records for each Real
Estate Related Asset and arranging for the financial statements of the
Company to be audited annually in accordance with GAAP by independent
public accountants of nationally recognized standing; and
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(xviii) counseling the Company regarding the maintenance of an
exemption from investment company status under the Investment Company Act
of 1940; and
(xix) counseling the Company regarding the maintenance of its status
as a REIT and monitoring compliance with the various REIT qualification
tests and other rules set out in the Code and income tax regulations
promulgated under the Code ("Treasury Regulations") thereunder.
EQUITY ACQUISITION AND LOAN ORIGINATION. The Manager will acquire
Opportunistic Real Properties, Subordinated Interests and Mezzanine Investments
on behalf of the Company and will act as the Company's agent to originate
commercial Mortgage Loans and Mezzanine Investments on behalf of the Company.
Such services will include developing and maintaining a transaction log and
pipeline report(s) for review of potential acquisitions and loans, preparing
investment submissions, negotiating and completing purchase and sale agreements,
loan applications/commitments, preparing and maintaining competitive pricing
information, conducting due diligence, preparing closing papers, and performing
all services necessary or appropriate in conjunction with the transaction
activities of the Company.
EQUITY ASSET MANAGEMENT. The Manager will perform the full range of asset
management services on behalf of the Company pursuant to the Management
Agreement with respect to the Company's portfolio of Opportunistic Real
Properties and Mezzanine Investments and REO Property with equity
characteristics. These responsibilities include but are not limited to
budgeting, oversight of capital improvement programs, selection of property
managers and leasing agents, oversight of property management and leasing
activities, liaison with key tenants and joint venture partners and reporting.
INTERIM SERVICING. The Manager will service and administer the Company's
portfolio of Mortgage Loans from origination to securitization. Such servicing
activities will be in accordance with the Management Agreement, the terms of the
Mortgage Loans, and to the extent consistent with such terms, the usual and
customary standards of practice of prudent commercial mortgage lenders and
servicers. Activities will include, but not be limited to, the following:
collection of Mortgage Loan payments; creation of accounts, including custodial
and escrow accounts; deposits into and withdrawals from custodial accounts;
deposits into and withdrawals from escrow accounts; approval of and disbursement
of funds from escrow accounts; payment of taxes and insurance due on any
Mortgage Loans; collection of repair deposits and periodic reserve payments; the
enforcement of any due on sale clauses or a negotiation of assumption
agreements; monitoring any non-performing loans; bookkeeping and accounting for
all Mortgage Loans and accounts; timely remittance of funds to the Company;
review of and recommendations as to fire losses, easement problems and
condemnation; delinquency and foreclosure procedures with regard to Mortgage
Loans; supervision of claims filed under any mortgage insurance policies;
enforcement of the obligation of any servicer to repurchase Mortgage Loans; and
collection of information and submission of reports pertaining to Mortgage Loans
and moneys remitted to the Company. The Manager may enter into subcontracts with
other parties, including its affiliates, to provide any such services for the
Manager.
SPECIAL SERVICING. For any Mortgage Loan for which the Manager is not
directly providing interim Servicing, the Manager will perform monitoring
services on behalf of the Company pursuant to the Management Agreement with
respect to the Company's portfolio of Special Servicing rights. Such monitoring
services will include, but not be limited to, the following activities:
negotiating Special Servicing agreements; serving as the Company's consultant
with respect to the Special Servicing of mortgage loans; collection of
information and submission of reports pertaining to the mortgage loans and to
moneys remitted to the Manager or the Company; acting as a liaison between the
servicers of the mortgage loans and the Company and working with servicers as
described below to the extent necessary to improve their servicing performance;
with respect to mortgage loans for which the Company is Special Servicer,
periodic review and evaluation of the performance of each servicer to determine
its compliance with the terms and conditions of the related servicing agreement;
review of and recommendations as to fire losses, easement problems and
condemnation, delinquency and foreclosure procedures with regard to mortgage
loans; review of servicers' delinquency, foreclosures and other reports on
mortgage loans; supervising claims filed under any mortgage insurance policies;
and enforcing the obligation of any servicer to repurchase mortgage loans. The
Manager may enter into subcontracts with other parties, including its
affiliates, to provide any such services for the Manager.
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<PAGE> 65
MONITORING SERVICING. For any Mortgage Loan for which the Manager is not
directly providing interim Servicing, the Manager will monitor and administer
the servicing of the Company's Mortgage Loans, other than loans pooled to back
MBS or pledged to secure MBS. Such monitoring and administrative services will
include, but not limited to, the following activities: serving as the Company's
consultant with respect to the servicing of loans; collection of information and
submission of reports pertaining to the Mortgage Loans and to moneys remitted to
the Manager or the Company by servicers; periodic review and evaluation of the
performance of each servicer to determine its compliance with the terms and
conditions of the servicing agreement and, if deemed appropriate, recommending
to the Company the termination of such servicing agreement; acting as a liaison
between servicers and the Company and working with servicers to the extent
necessary to improve their servicing performance; review of and recommendations
as to fire losses, easement problems and condemnation, delinquency and
foreclosure procedures with regard to the Mortgage Loans; review of servicers'
delinquency, foreclosing and other reports on Mortgage Loans; advising as to and
supervising claims filed under any mortgage insurance policies; and enforcing
the obligation of any servicer to repurchase Mortgage Loans from the Company.
MANAGEMENT FEES
The following table presents all compensation, fees and other benefits
(including reimbursement of certain out-of-pocket expenses) that the Manager may
earn or receive under the terms of the Management Agreement. There are no caps
on any category of such compensation, fees or benefits payable under the
Management Agreement.
<TABLE>
<CAPTION>
FEE RECIPIENT PAYOR
- --- ---------- -------
<S> <C> <C> <C>
Quarterly base management fee(1) equal to the following:
For the first four fiscal
quarters................ 1.00% per annum of the Average
Invested Assets(2) of the
Company
During each fiscal quarter
thereafter.............. 0.85% per annum of the Average
Invested Assets up to $1
billion
0.75% per annum of the Average
Invested Assets from $1 billion
to
$1.25 billion
0.50% per annum of the Average
Invested Assets in excess of
$1.25
billion........................ Manager(3) Company
Quarterly non-cumulative incentive management fee based on the
amount, if any, by which the Company's Funds From
Operations(4) and certain net gains exceed a hurdle rate(5)... Manager Company
Termination fee equal to the sum of the base management fee and
incentive management fee, if any, earned during the
immediately preceding four fiscal quarters.................... Manager Company
Reimbursement of out-of-pocket expenses of the Manager paid to
third parties(6).............................................. Manager Company
Potential fees to affiliates of the Manager(7).................. Affiliates Company
</TABLE>
- ---------------
(1) Intended to cover the Manager's costs in providing management services to
the Company. Because this amount is based on the invested assets of the
Company, it is not currently determinable. In connection with renewal and
renegotiation of the Management Agreement, the Board of Directors of the
Company may adjust the base management fee in the future to align it more
closely with the Manager's actual costs
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<PAGE> 66
of providing such services. The Manager will pay a portion of this fee to
ERE Hyperion for submanagement services performed on behalf of the Company.
(2) The term "Average Invested Assets" for any period means the average of the
aggregate book value of the assets of the Company, including a proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves
less (i) uninvested cash balances and (ii) the book value of the Company's
CMO liabilities, computed by dividing (a) the sum of such values for each of
the three months during such quarter (based on the book value of such assets
as of the last day of each month) by (b) three.
(3) The Manager is a wholly-owned indirect subsidiary of Lend Lease.
(4) The term "Funds From Operations" as defined by NAREIT means net income
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation and amortization on
real estate assets, and after deduction of preferred stock dividends, if
any, and similar adjustments for unconsolidated partnerships and joint
ventures. Funds From Operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as
an alternative to net income as an indication of the Company's performance
or to cash flows as a measure of liquidity or ability to make distributions.
(5) The quarterly incentive management fee is equal to the product of (A) 25% of
the dollar amount by which (1) (a) Funds From Operations (before the
incentive fee) of the Company for the applicable quarter per weighted
average number of shares of Common Stock outstanding plus (b) gains (or
minus losses) from debt restructuring or sales of assets not included in
Funds From Operations of the Company for such quarter per weighted average
number of shares of Common Stock outstanding, exceed (2) an amount equal to
(a) the weighted average of the price per share at the initial offering and
the prices per share at any secondary offerings by the Company multiplied by
(b) 25% of the sum of the Ten- Year U.S. Treasury Rate plus four percent,
and (B) the weighted average number of shares of Common Stock outstanding.
Because this amount is based on the income of the Company, it is not
currently determinable. The quarterly incentive fee is non-cumulative. As
used in calculating the Manager's compensation, the term "Ten-Year U.S.
Treasury Rate" means the arithmetic average of the weekly average yield to
maturity for actively traded current coupon U.S. Treasury fixed interest
rate securities (adjusted to constant maturities of ten years) published by
the Federal Reserve Board during a quarter, or, if such rate is not
published by the Federal Reserve Board, any Federal Reserve Bank or agency
or department of the federal government selected by the Company. If the
Company determines in good faith that the Ten-Year U.S. Treasury Rate cannot
be calculated as provided above, then the rate shall be the arithmetic
average of the per annum average yields to maturities, based upon closing
asked prices on each business day during a quarter, for each actively traded
marketable U.S. Treasury fixed interest rate security with a final maturity
date not less than eight nor more than twelve years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.
(6) There is no cap on the reimbursement of out-of-pocket expenses.
(7) The Manager intends to solicit competitive bids in connection with certain
services to be performed on behalf of the Company, including servicing,
development and property management. Subject to approval of the Independent
Directors, the Company may award such contracts to the Manager and/or
affiliates of the Manager that make competitive bids. For example, COMPASS
may be retained to perform property management services for the Company.
However, the Manager is unable to predict with certainty which of its
affiliates will perform services for the Company.
The ability of the Company to generate Funds from Operations in excess of
the Ten-Year U.S. Treasury Rate, and of the Manager to earn the incentive
compensation described in the above table, is dependent upon the level and
volatility of interest rates, the Company's ability to react to changes in
interest rates and to utilize successfully the operating strategies described
herein, and other factors, many of which are not within the Company's control.
The management fees are payable in arrears. The Manager's base and
incentive fees will be calculated by the Manager within 45 days after the end of
each quarter, and such calculation will be promptly delivered to
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the Company. The Company is obligated to pay such fees and expenses within 60
days after the end of each fiscal quarter.
The Manager is expected to use the proceeds from its base management fee
and incentive compensation in part to pay compensation to its officers who,
although they also are officers of the Company, will receive no cash
compensation directly from the Company.
STOCK OPTIONS
The Company intends to adopt the Option Plan, under which the Compensation
Committee or, if none, the Board of Directors will be authorized to grant
Options to purchase shares of Common Stock (or, if necessary to prevent the
recipient from exceeding the Ownership Limitation set forth in the Charter,
Units in the Operating Partnership that may be redeemed for cash or, at the
election of the General Partner, shares of Common Stock on a one-for-one basis).
See "Operating Partnership Agreement -- Redemption Rights." The maximum
aggregate number of shares of Common Stock that may be issued pursuant to
options granted under the Option Plan will be 2,500,000. The purpose of the
Option Plan is to provide a means of performance-based compensation in order to
provide incentive for the Manager to enhance the value of the Company's stock.
To provide an incentive for the Manager to enhance the value of the Common
Stock, the Company will grant the Manager Options to purchase 1,166,667 shares
of Common Stock (1,313,667 shares if the Underwriters exercise their
over-allotment option) or, if necessary to prevent Lend Lease from exceeding the
Ownership Limitation set forth in the Charter at such time as it is not publicly
held, Units at a price per share equal to the initial public offering price of
the Common Stock. One quarter of these Options will become exercisable on each
of the four anniversaries of the consummation of this offering.
ELIGIBILITY AND AWARDS. All employees (including officers), directors and
others providing services to the Company, as well as the Manager and employees
(including officers) and directors of the Manager (collectively, the "Eligible
Recipients"), will be eligible to receive Options at the discretion of the
Compensation Committee. In addition, 80% of the Options remaining in the Option
Plan following the initial grant of Options to the Manager will be set aside for
future Option grants to the Manager. Such reserve does not guarantee that the
Manager will be granted such Options. The Compensation Committee will be
authorized to determine which Eligible Recipients shall receive Options, and the
terms and conditions on which Options shall be granted. The Compensation
Committee may grant Options to employees of the Manager, subject to certain
limits described in the Option Plan. Options granted pursuant to the Option Plan
will be nonqualified stock options. Options granted to individuals pursuant to
the Option Plan generally are not transferable except by will or by the
applicable laws of descent and distribution. The Manager may transfer its
Options to any other Eligible Recipient. Grants of Options under the Option Plan
to persons or entities other than employees and directors of the Company may
result in a charge against the Company's earnings for financial reporting
purposes under GAAP. Any such charge to earnings will be recognized over the
period during which such Options become exercisable.
Upon consummation of this offering and the Private Placement, the Company
expects to grant Options to executive officers of the Company (all of whom are
employees of the Manager) and to other employees of the Manager. Subject to
certain limitations, the number of Options initially granted to the officers of
the Company and the Manager will be equal to the number of shares of Common
Stock that such individuals purchase in this offering. See "Underwriting."
One-fifth of these options will become exercisable on the date of grant and the
remaining Options will become exercisable in four equal installments commencing
on the first anniversary of the date of grant. Unexercised options will
terminate on the tenth anniversary of the consummation of this offering.
EXERCISE PRICE AND EXERCISABILITY. The exercise price of all Options will
be not less than 100% of the fair market value of the Common Stock subject to
the Options on the date of grant. All Options will become exercisable as
determined by the Compensation Committee at the time of the award. Options
granted under the Plan generally will be exercisable in five equal installments
on the date of grant and each of the four anniversaries of the date of grant.
The exercise price of an Option may be paid by any one or more of the
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following: (i) cash or certified check, (ii) shares of Common Stock held more
than six months, (iii) cancellation of any indebtedness owed by the Company,
(iv) a full-recourse promissory note, if approved by the Committee or (v) a
"cashless" exercise pursuant to a sale through a broker of all or a portion of
the shares covered by the Option.
TERMINATION OF EMPLOYMENT. If an Eligible Recipient's affiliation with the
Company is terminated for cause or if such Eligible Recipient terminates his
affiliation voluntarily, all of such Eligible Recipient's unexercised Options
will terminate immediately upon such termination. Except as otherwise determined
by the Compensation Committee, if an Eligible Recipient has a termination of
affiliation because of death or total and permanent disability or for any other
reason (other than a voluntary termination or a termination for cause), all of
such Eligible Recipient's unexercised Options may be exercised by the Eligible
Recipient or his beneficiary or legal representative to the extent such Options
are or become exercisable in accordance with their terms during the shorter of
(i) the one-year period following the Eligible Recipient's death or total and
permanent disability or, if longer, a period to be determined by the Board
acting in its absolute discretion or (ii) the period of the remaining life of
the Option. If an Eligible Recipient has a termination of affiliation for any
reason other than death, total and permanent disability, a voluntary termination
or a termination for cause, all of such Eligible Recipient's unexercised Options
may be exercised by the Eligible Recipient on the date of such termination or
during the 90 day period immediately following such termination or, if less,
during the remaining life of the Option. Upon termination of the Manager, all
Options granted to employees of the Manager will become immediately exercisable
for a period of 90 days from such termination.
AMENDMENT AND TERMINATION. The Board of Directors generally may amend the
Option Plan at any time, except that approval by the Company's shareholders will
be required for any amendment that increases the aggregate number of shares of
Common Stock that may be issued pursuant to the Option Plan, that materially
changes the class of persons eligible to receive such Options, that extends the
maximum Option term or that decreases the exercise price of any Option to less
than the fair market value of the Common Stock on the date of grant. Shares of
Common Stock subject to Options that expire, are terminated or otherwise are
surrendered to the Company will be available for issuance in connection with
future awards under the Option Plan. No Option term may exceed ten years from
the date of grant, and no Option grant may be made under the Option Plan after
the tenth anniversary of the date the Option Plan was adopted by the Board of
Directors.
LIMITS OF RESPONSIBILITY
Pursuant to the Management Agreement, the Manager will not assume any
responsibility other than to render the services called for thereunder and will
not be responsible for any action of the Company's Board of Directors in
following or declining to follow its advice or recommendations. In addition, the
Manager does not owe any fiduciary duties to the Company and its shareholders.
The Manager, its directors and its officers will not be liable to the Company,
any subsidiary of the Company, the Independent Directors, the Company's
shareholders or any subsidiary's shareholders for acts performed in accordance
with and pursuant to the Management Agreement, except by reason of acts
constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement. The Company has agreed
to indemnify the Manager, its directors and its officers with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising from
acts of the Manager not constituting bad faith, willful misconduct, gross
negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the Management Agreement.
The Management Agreement does not limit or restrict the right of the
Manager or any of its officers, directors, employees or affiliates from engaging
in any business or rendering services of any kind to any other person, including
the purchase of, or rendering advice to others purchasing, assets that meet the
Company's policies and criteria. See "Risk Factors -- Conflicts of Interest in
the Business of the Company May Result in Decisions of the Company that Do Not
Fully Reflect the Interests of the Shareholders of the Company."
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YEAR 2000 ISSUES
The Manager has made Year 2000 compliance a high priority for replacement
applications and is in the process of updating and replacing other applications
that are not Year 2000 compliant. The Manager expects to complete the updating
of its critical systems no later than December 31, 1998, which will allow for
one year of systems testing to resolve any remaining Year 2000 compliance
issues. The Manager does not believe that the costs to remediate any Year 2000
issues will be material to its business, operations or financial condition, or
will have an adverse affect on its clients, including the Company.
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THE COMPANY
Chastain Capital Corporation was incorporated in the State of Georgia on
December 16, 1997 and will elect to be taxed as a REIT under the Code. The
principal executive offices of the Company are located at 3424 Peachtree Road,
N.E., Suite 800, Atlanta, Georgia 30326-1113. The Company's telephone number is
(404) 848-8600.
DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth certain information about the directors and
executive officers of the Company.
DIRECTORS OF THE COMPANY:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Matthew Banks........................................ 36 Chairman of the Board
Kurt L. Wright....................................... 38 Chief Executive Officer and Director
Harald R. Hansen(1).................................. 67 Director
Elizabeth Kennan(1).................................. 60 Director
W.J. Smith(1)........................................ 65 Director
</TABLE>
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
Rufus A. Chambers, Jr. .............................. 36 President
D. Michael Jett...................................... 48 Chief Operating Officer
Steven G. Grubenhoff................................. 34 Chief Financial Officer
Samuel F. Hatcher.................................... 52 Secretary
</TABLE>
- ---------------
(1) Independent Director.
The Board of Directors has appointed Harald R. Hansen and Elizabeth Kennan
to the Audit Committee of the Board of Directors (the "Audit Committee") and
W.J. Smith, Harald R. Hansen and Elizabeth Kennan to the Compensation Committee.
Mr. Hansen will serve as the initial chairman of the Audit Committee and Mr.
Smith will serve as the initial chairman of the Compensation Committee. The
Audit Committee will be responsible for recommending to the Board of Directors
the firm to be employed as independent auditors of the Company, reviewing with
the independent auditor the Company's financial statements and internal
accounting controls and the plans and results of the audit engagement, approving
the professional services provided by the independent auditor, reviewing the
independence of the independent auditor, considering the range of audit and
non-audit fees and reviewing the adequacy of the Company's internal accounting
controls. The Compensation Committee will be responsible for making
recommendations, at least annually, to the Board of Directors regarding the
policies of the Company relating to, and the amounts and terms of, all
compensation of executive officers of the Company and administering and
discharging in full the authority of the Board of Directors with respect to the
Option Plan.
The Company does not expect to employ full-time personnel. Instead, it
expects to rely on the facilities, personnel and resources of the Manager to
conduct its operations. The Company will not compensate the Manager separately
for the use of such facilities and personnel. However, to the extent that the
Manager's costs increase, it may attempt to renegotiate the base management fee
in proportion to such increase. For biographical information on Messrs. Banks
and Hatcher, who are also members of the Board of Directors of the Manager, see
"Management of Operations -- The Manager."
Kurt L. Wright has served as Chief Executive Officer of the Company since
its inception. Mr. Wright has been Executive Vice President of ERE Yarmouth
since April 1997 and currently heads ERE Yarmouth's Mortgage Debt and Public
Markets Group, which is responsible for all CMBS and REIT share management, loan
originations and securitization and high-yield investing. From 1995 to 1997, he
was Senior Vice President
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responsible for portfolio management for the Buckhead Strategic Fund series and
ERE Hyperion Capital Advisors. From 1993 to 1995, Mr. Wright was a Vice
President responsible for mortgage research, product development and marketing
activities within the Mortgage Investors Group. From 1990 to 1993, he performed
real estate market analyses and ad hoc review of client portfolios while a
member of ERE's Investment Research Department, Mr. Wright was the founder and
Co-Chief Investment Officer of ERE Hyperion, a CMBS manager with over $300
million of assets under management and is a member of the Investment Committee
of ERE Rosen, LLC, a REIT securities manager with $500 million of assets under
management. From 1988 to 1990, he was a Senior Analyst for the Prudential Realty
Group, from 1985 to 1987 he was Treasurer and Controller of Morgan Stanley Real
Estate Inc. and from 1981 to 1984 he was an accountant for Deloitte, Haskins &
Sells specializing in real estate. Mr. Wright is a Chartered Financial Analyst
and a Certified Public Accountant, and is a member of the Editorial Board of
Real Estate Capital Markets Report and the Research Committee of the National
Council of Real Estate Investment Fiduciaries. Mr. Wright has a BA from Colgate
University, an MS from New York University and an MBA from Columbia University.
Harald R. Hansen has served as a director of the Company since February
1998. He served as chairman of First Union National Bank of Georgia from January
1989 until his retirement in September 1996. From January 1989 to April 1996 he
also served as Chief Executive Officer of First Union National Bank of Georgia
and prior to that he was executive vice president in charge of the General
Banking Group of First Union National Bank of Georgia. Mr. Hansen serves as
chairman of the board of directors of the United Way, chairman of the advisory
board for the School of Business at Clark Atlanta University, Chairman of the
Midtown Alliance and the Chairman of the Atlanta Paralympics Organizing
Committee. In addition, he serves on the board of directors of the Atlanta
Symphony, the High Museum of Art in Atlanta, the Woodruff Arts Center, the
Southern Golf Association, the Georgia State University School of Business and
the Fuqua School of Business at Duke University. Mr. Hansen has received
numerous honors including the Distinguished Service Award from the Atlanta
Business League and the Minority Business Advocate of the Year from the Minority
Business Development Agency in Atlanta. Mr. Hansen earned a bachelor's degree
from Duke University and served in the U.S. Naval Reserve, the U.S. Marine Corps
and is a retired colonel in the U.S. Marine Corps Reserve.
Elizabeth T. Kennan has served as a director of the Company since February
1998. She has been President Emeritus of Mount Holyoke College since 1995. She
was President and Professor of History of Mount Holyoke College from 1978 until
1995. Dr. Kennan has received numerous academic distinctions and fellowships
including an Honorary Doctor of Humanities from the University of Hartford, a
Doctor of Letters from the University of Massachusetts at Amherst and a Doctor
of Laws from Smith College. She has served on various academic boards and
national committees including the Board of Directors of the Consortium on
Financing Higher Education, the Board of Trustees for the University of Notre
Dame and the Governor's Nominating Council. In addition, Dr. Kennan is a
director of Talbots Inc., the Putnam Funds, Northeast Utilities, Bell Atlantic
Corporation and the Kentucky Home Mutual Life Insurance Company. Dr. Kennan
received her undergraduate degree from Mount Holyoke College, a Master of Arts
from Oxford University in England and Ph.D. from the University of Washington.
W.J. Smith has served as a Director of the Company since February 1998 and
has been President of W.J.S. & Associates, a company that provides real estate
consultant services to public pension funds and real estate advisors to pension
funds, since December 1991. From 1964 to 1991 he was employed with the State of
California Public Employees Retirement System where he served as Principal
Mortgage and Real Estate Investment Officer and head of the Mortgage and Real
Estate Equity Departments. Mr. Smith currently serves on the Board of Directors
of Shurgard Storage Centers, Franchise Finance Corporation of America, and the
PGA Tour Properties Board. In addition, he served two terms on the National
Advisory Board of Directors of the Federal National Mortgage Association and
eight years on the Advisory Board for the University of California Center for
Real Estate and Urban Economics.
Rufus A. Chambers, Jr. has served as President of the Company since its
inception. Mr. Chambers has been Senior Vice President of ERE Yarmouth since
July 1996. Mr. Chambers has been responsible for new mortgage business for the
Atlanta region, was the portfolio manager of a large loan securitization program
and oversaw capital markets activities for ERE's pension fund clients. From 1992
to 1995 he was responsible for new mortgage business underwriting and was
portfolio manager for a major corporate pension account, from
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1989 to 1991 he worked in the Atlanta Regional Office, from 1987 to 1989 he was
a member of ERE's International Group, from 1986 to 1987 he was an appraiser in
the Dallas regional office and from 1984 to 1986 he was in the sales area at
ERE. Mr. Chambers is Chairman of the Income Property Group of the Mortgage
Bankers Association of Georgia and was formerly the President of the Real Estate
Group of Atlanta. Mr. Chambers has a BBA from the University of Georgia.
D. Michael Jett has served as Chief Operating Officer of the Company since
its inception. He has been Senior Vice President of ERE Yarmouth since 1992.
Since 1995, Mr. Jett has been responsible for coordinating new equity
acquisitions for three ERE Yarmouth division offices. Mr. Jett previously headed
asset management and value recovery functions, overseeing a team of 95 real
estate professionals at EQ Services, ERE's former mortgage servicing affiliate.
From 1990 to 1994, Mr. Jett coordinated the national valuation process for the
Equitable General Account and the Prime Property Fund. From 1986 to 1990, he was
regional manager of valuation services for the Federal Asset Disposition
Association, the predecessor to the Resolution Trust Corporation and from 1982
to 1986, he was a senior analyst at Metric Partners (formerly Fox & Carskadon),
responsible for sourcing and underwriting apartment acquisitions. Mr. Jett holds
the MAI and CRE designations and a BBA in real estate from Georgia State
University. He has previously been president of the Counselors of Real Estate,
Georgia chapter and a member of the Appraisal Institute's Admissions and Credit
Committee.
Steven G. Grubenhoff has served as Chief Financial Officer of the Company
since its inception. He has been a Vice President of ERE Yarmouth since 1995.
Mr. Grubenhoff has served as chief financial officer for two commingled
opportunistic real estate limited partnerships since 1995. Mr. Grubenhoff's
responsibilities have included all financial reporting requirements, developing
portfolio financial strategies, ensuring that optimum tax and legal structures
are being utilized; performing financial due diligence on new investments and
managing interest rate exposures. From 1989 to 1994, he was Vice President of
Finance, Controller and Tax Manager for Laing Properties, Inc., a full service
real estate company based in Atlanta, Georgia. From 1986 to 1988, he was an
Auditor and Tax Senior concentrating in real estate with KPMG Peat Marwick. Mr.
Grubenhoff is a Certified Public Accountant and has a BSBA from Ohio State
University.
All members of the Board of Directors (each, a "Director") will be elected
at each annual meeting of the Company's shareholders for a term of one year, and
hold office until their successors are elected and qualified. All officers serve
at the discretion of the Board of Directors. Although the Company may have
salaried employees, it currently does not have employees and does not expect to
employ anyone as long as the Management Agreement is in force. The Company will
pay an annual director's fee to each Independent Director equal to $30,000 per
annum, consisting of $15,000 in cash and $15,000 in shares of Common Stock. The
number of shares of Common Stock to be awarded to each Independent Director will
be determined annually by dividing $15,000 by the average closing price of the
Common Stock for the preceding ten business days. The shares of Common Stock
will be vested when issued. See "-- Directors Stock Plan." Each Independent
Director will be paid a fee of $1,000 for each meeting of the Board of Directors
over four attended in person by such Independent Director. All Directors will be
reimbursed for their costs and expenses in attending all meetings of the Board
of Directors. Affiliated directors will not be separately compensated by the
Company.
Directors and executive officers of the Company will be required to devote
only so much of their time to the Company's affairs as is necessary or required
for the effective conduct and operation of the Company's business. Because the
Management Agreement provides that the Manager will assume principal
responsibility for managing the affairs of the Company, the officers of the
Company, in their capacities as such, are not expected to devote substantial
portions of their time to the affairs of the Company. However, in their
capacities as officers or employees of the Manager, or its affiliates, they will
devote such portion of their time to the affairs of the Manager as is required
for the performance of the duties of the Manager under the Management Agreement.
The Charter provides that, except in the case of a vacancy, the majority of
the members of the Board of Directors will at all times after the issuance of
the shares offered hereby be Independent Directors. Vacancies
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occurring on the Board of Directors among the Independent Directors will be
filled by the vote of a majority of the remaining Directors, including a
majority of the remaining Independent Directors.
The Charter provides for the indemnification of the Directors and officers
of the Company to the fullest extent permitted by Georgia law. Georgia law
generally permits indemnification of directors and officers against certain
costs, liabilities and expenses that any such person may incur by reason of
serving in such positions as long as such person acts in good faith and in a
manner reasonably believed by him (i) to be in the best interests of the
Company, when acting in his official capacity and (ii) not opposed to the best
interests of the Company in all other cases. Moreover, in the case of any
criminal proceedings, such person must have had no reasonable cause to believe
the conduct was unlawful. Georgia law also generally permits a corporation to
limit or eliminate the damages that may be assessed against a director or
officer of a Georgia corporation in an action by, or in the right of, the
corporation or its shareholders. The Company has included provisions in its
Charter that eliminate the liabilities of Directors and officers in certain
actions brought by or on behalf of shareholders. See "Description of Certain
Provisions of Georgia Law and the Company's Articles of Incorporation and
Bylaws." Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to Directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
DIRECTORS STOCK INCENTIVE PLAN
The Company has adopted a directors stock incentive plan (the "Directors
Stock Plan") pursuant to which Common Stock will be issued to each Independent
Director as part of their annual director's fee. The purpose of the Directors
Stock Plan is to attract and retain Independent Directors, to provide an
additional incentive to each Independent Director to work to increase the value
of the Common Stock and to provide each Independent Director with a stake in the
future of the Company that corresponds to the stake of each of the Company's
shareholders. There are 25,000 shares of Common Stock reserved for issuance
under the Directors Stock Plan.
The Directors Stock Plan provides that each Independent Director will
receive, as of the consummation of this offering, the number of shares of Common
Stock determined by dividing $15,000 by the initial public offering price of a
share of Common Stock. Thereafter, each person serving as an Independent
Director on the date of the annual meeting of the Board of Directors shall
receive the number of shares of Common Stock determined by dividing $15,000 by
the "Fair Market Value" of a share of Common Stock as of such date. "Fair Market
Value" means the average of the closing price for a share of Common Stock for
the ten immediately preceding business days as reported by The Wall Street
Journal or, if The Wall Street Journal no longer reports such closing prices,
the average of such closing prices as reported by a newspaper or trade journal
selected by the Board of Directors. If no newspaper or trade journal reports
such closing prices, "Fair Market Value" means the price that the Board of
Directors acting in good faith determines that a share of Common Stock might
change hands between a willing buyer and a willing seller.
DISTRIBUTION POLICY
In order to avoid corporate income taxation of its earnings, the Company
must distribute to its shareholders an amount at least equal to (i) 95% of its
"REIT taxable income" (determined before the deduction for dividends paid and
excluding any net capital gain) plus (ii) 95% of the excess of its net income
from Foreclosure Property over the tax imposed on such income by the Code less
(iii) any excess noncash income (as determined under the Code). See "Federal
Income Tax Consequences." The actual amount and timing of distributions,
however, will be at the discretion of the Board of Directors and will depend
upon the financial condition of the Company in addition to the requirements of
the Code. It is anticipated that the first distribution will be made after the
first full fiscal quarter following the completion of this offering.
Subject to the distribution requirements referred to in the immediately
preceding paragraph, the Company intends, to the extent practicable, to invest
substantially all of the principal from repayments, sales and refinancings of
the Company's assets in Real Estate Related Assets. However, certain
distributions may
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include a return of capital. Such distributions, if any, will be made at the
discretion of the Company's Board of Directors.
It is anticipated that distributions generally will be taxable as ordinary
income to non-exempt shareholders of the Company, although a portion of such
distributions may be designated by the Company as capital gain dividends or may
constitute a return of capital. The Company will furnish annually to each of its
shareholders a statement setting forth distributions paid during the preceding
year and their federal income tax status. For a discussion of the federal income
tax treatment of distributions by the Company, see "Federal Income Tax
Consequences -- Taxation of the Company" and "Federal Income Tax Consequences --
Taxation of Taxable U.S. Shareholders."
YIELD CONSIDERATIONS RELATED TO THE COMPANY'S INVESTMENTS
Before purchasing any Real Estate Related Asset, the Company, with the
assistance of the Manager, will consider the expected yield of the asset and the
factors that may influence the yield actually obtained on such asset. "Yield" or
"Yield to Maturity" is the interest rate that will make the present value of the
future cash flow from an investment equal to its price. These considerations
will affect the Company's decision whether to purchase such asset and the price
offered for such asset. Despite the Manager's substantial experience in
evaluating potential yields on Real Estate Related Assets, there can be no
assurance that the Company can make an accurate assessment of the yield to be
produced by an asset. Many factors, most of which are beyond the control of the
Company, are likely to influence the yield on the Company's investments.
SUBORDINATED INTERESTS
The Yield to Maturity on any class of Subordinated Interests will depend
upon, among other things, the price at which such class is purchased, the
interest rate for such class and the timing and aggregate amount of
distributions on the securities of such class, which in turn will depend
primarily on (i) whether there are any losses on the underlying loans allocated
to such class and (ii) whether and when there are any prepayments of the related
Mortgage Loans (which include both voluntary prepayments by the obligors on the
Mortgage Loans and prepayments resulting from liquidations due to defaults and
foreclosures).
The Yield on the Subordinated Interests originated and acquired by the
Company will be extremely sensitive to defaults on the Mortgage Loans comprising
the Mortgage Collateral for such securities and the severity of losses resulting
from such defaults, as well as the timing of such defaults and actual losses.
The Company's right as a holder of Subordinated Interests to distributions of
principal and interest will be subordinated to all of the more senior classes of
securities. Actual losses on the Mortgage Collateral (after default, where the
proceeds from the foreclosure sale of the real estate securing the loan are less
than the unpaid balance of the mortgage loan plus interest thereon and
disposition costs) will be allocated first to the Subordinated Interests and
then to the more senior securities. The Subordinated Interests the Company
intends to originate and acquire with the proceeds from this offering are
subject to special risks, including a substantially greater risk of loss of
principal and non-payment of interest than the more senior securities of such
series.
If the Company originates and acquires Subordinated Interests with an
anticipated yield as of the acquisition date based on an assumed rate of default
and severity of loss on the Mortgage Loans comprising the Mortgage Collateral
that is lower than the actual default rate and severity of loss, its yield will
be lower than the Company initially anticipated. In the event of substantial
losses, the Company may not recover the full amount (or, indeed, any) of its
acquisition cost. The timing of actual losses also will affect the Company's
yield, even if the rate of default and severity of loss are consistent with the
Company's anticipation. In general, the earlier a loss occurs, the greater the
adverse effect on the Company's yield. Additionally, the yield on CMBS
collateralized by adjustable rate mortgage loans will vary depending on the
amount of and caps on the adjustments to the interest rates of such mortgage
loans. There can be no assurance as to the rate of delinquency, severity of loss
or the timing of any such losses on Mortgage Loans underlying Subordinated
Interests and thus as to the actual Yield received by the Company.
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The aggregate amount of distributions on the Company's Subordinated
Interests and their Yield also will be affected by the amount and timing of
principal prepayments on the Mortgage Loans comprising the Mortgage Collateral.
To the extent that more senior tranches of Subordinated Interests are
outstanding, all prepayments of principal on the underlying Mortgage Loans
typically will be paid to the holders of more senior classes. This subordination
of the Subordinated Interests to more senior classes may affect adversely the
Yield on the Subordinated Interests originated and acquired by the Company. Even
if there are no actual losses on the mortgage loans, interest and principal
payments are made on the more senior classes before interest and principal are
paid with respect to the Subordinated Interests. Typically, interest deferred on
Subordinated Interests is payable on subsequent payment dates to the extent
funds are available, but such deferral does not itself bear interest. Such
deferral of interest will reduce the actual Yield on the Company's Subordinated
Interests.
Because the Company will originate and acquire Subordinated Interests at a
significant discount from their outstanding principal balance, if the Company
estimates the yield on a security based on a faster rate of payment of principal
than actually occurs, the Company's yield on that security will be lower than
the Company anticipated. Whether and when there are any principal prepayments on
the Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, tax, legal and other
factors. Principal prepayments on Mortgage Loans secured by multifamily
residential and commercial properties are likely to be affected by prepayment
premium provisions applicable to each of the Mortgage Loans, and by the extent
to which the Servicer is able to enforce such prepayment premium provisions.
Moreover, the yield to maturity on such Subordinated Interests may also be
affected by any extension of the scheduled maturity dates of the Mortgage Loans
as a result of modifications of the Mortgage Loans by the Servicer, if
permitted.
The timing of any prepayments on the mortgage loans underlying CMBS owned
by the Company may significantly affect the Company's Yield to Maturity, even if
the average rate of principal payments is consistent with the Company's
expectation. In general, the earlier a prepayment of principal of the Mortgage
Loans, the greater the effect on an investor's Yield. The effect on the
Company's Yield of principal payments occurring at a rate higher (or lower) than
the rate anticipated by the Company during any particular period may not be
fully offset by a subsequent like decrease (or increase) in the rate of
principal payments.
Because the rate and timing of principal payments on the underlying
Mortgage Loans will depend on future events and on a variety of factors, there
can be no assurance as to such rate or the timing of principal payments on the
Subordinated Interests the Company owns or acquires.
OPPORTUNISTIC REAL PROPERTIES
The Yield on the Company's investments in Real Properties, including
Opportunistic Real Properties, will depend upon the price that the Company pays
for such investments, the costs of capital improvements and other costs of
managing the properties, the level of rents and other income generated by the
properties, the length of time between acquisition and disposition and the price
at which the Company ultimately disposes of such properties. Although the
Manager's skills in managing an Opportunistic Real Property may have a strong
impact on the Yield of such an investment, the yield of such an investment may
be adversely affected by factors beyond the Company's control, such as adverse
changes in economic conditions, neighborhood characteristics and competition
from other properties offering the same or similar services. See "Risk
Factors -- Risks Related to Investments in Real Property."
MEZZANINE INVESTMENTS
The Yield to Maturity on the Company's investment in Mezzanine Investments
will depend, among other things, upon (i) whether there are any losses on such
Mezzanine Investments, (ii) whether and when there are any prepayments of such
Mezzanine Investments, (iii) the interest rates on such Mezzanine Investments
and (iv) the purchase price of such Mezzanine Investments.
The Yield to Maturity on all Mezzanine Investments will be sensitive to
defaults by the borrower and the severity of the losses that might result from
such defaults because they generally have higher loan-to-value
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ratios than traditional Mortgage Loans. The borrower generally will have an
equity investment of 10% to 15% of total project costs, but if the borrower
defaults there can be no assurance that losses will not exceed such amount.
Because the borrower's equity may not be adequate to protect the Company's
investment, the Company's yield on such loans is particularly sensitive to
defaults.
If the Company acquires a Mezzanine Investment at a significant discount
from its outstanding principal balance and the Company estimates the yield on
the Mezzanine Investment based on a faster rate of payment of principal than
actually occurs, the Company's Yield on that Mezzanine Investment will be lower
than the Company anticipated. Conversely, if the Company acquires a Mezzanine
Investment at a significant premium to its outstanding principal balance,
estimating the Yield on such Mezzanine Investment based on a slower rate of
payment of principal than actually occurs, the Company's yield on that Mezzanine
Investment will be lower than anticipated.
Whether and when there are any principal prepayments on the Mezzanine
Investments will be affected by a variety of factors, including, without
limitation, the terms of the Mezzanine Investments, the level of prevailing
interest rates, the availability of mortgage credit, and economic, tax, legal
and other factors. Principal prepayments on Mezzanine Investments secured by
multifamily residential and commercial properties are likely to be affected by
prepayment premium provisions applicable to each of the Mezzanine Investments,
and by the extent to which the Servicer is able to enforce such prepayment
premium provisions. Moreover, the Yield to Maturity on Mezzanine Investments may
also be affected by any extension of the scheduled maturity dates of the
Mezzanine Investments as a result of modifications of the Mezzanine Investments
by the servicer, if permitted.
OTHER REAL ESTATE RELATED ASSETS
CONSTRUCTION LOANS. The yield on the Company's investments in Construction
Loans will depend, among other things, upon (i) whether there are any losses on
such Construction Loans, (ii) the ability of owners to lease the properties,
(iii) the interest rate on such Construction Loans and (iv) the ability of the
borrower to refinance the Construction Loans with permanent financing.
The Yield to Maturity on all Construction Loans will be sensitive to
defaults by the borrowers and the severity of the losses that might result from
such defaults because such loans generally have higher loan-to-value ratios than
traditional Mortgage Loans. The borrowers generally will have equity investments
of 10% to 15% of total project costs, but if the borrower defaults there can be
no assurance that losses will not exceed such amounts. Because the borrower's
equity may not be adequate to protect the Company's investment in a Construction
Loan, the Company's Yield on such loans is particularly sensitive to defaults.
Yield to Maturity on Construction Loans can be reduced by prepayments.
Whether and when there are any principal prepayments on the Construction Loans
will be affected by a variety of factors, including, without limitation, the
terms of the Construction Loans, the level of prevailing interest rates, the
availability of mortgage credit, and economic, tax, legal and other factors.
Principal prepayments on Construction Loans secured by multifamily residential
and commercial properties are likely to be affected by prepayment premium
provisions applicable to each of the Construction Loans, and by the extent to
which the Special Servicer is able to enforce such prepayment premium
provisions. Moreover, the Yield to Maturity on Construction Loans may also be
affected by any extension of the scheduled maturity dates of the Construction
Loans as a result of modifications of the Construction Loans by the servicer, if
permitted.
AGRICULTURAL LOANS. The Yield on the Company's investments in Agricultural
Loans will depend, among other things, upon (i) the interest rate, (ii) the rate
of payments of principal, (iii) whether there are any losses on such
Agricultural Loans, (iv) social, economic, geographic, climatic, demographic,
legal and other factors.
Yield to Maturity on Agricultural Loans can be reduced by prepayments. A
number of social, economic, geographic, climatic, demographic, legal and other
factors may influence prepayments, including the age of the Agricultural Loans,
the geographic distribution of the mortgaged properties, the payment terms of
the Agricultural Loans, the characteristics of the borrowers, weather, economic
conditions generally and in the geographic area in which the Mortgaged
Properties are located, enforceability of due-on-sale clauses, servicing
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decisions, the availability of mortgage funds, the extent of the borrowers' net
equity in the mortgaged properties and mortgage market interest rates in
relation to the effective interest rates on the Agricultural Loans. In general,
if prevailing interest rates fall significantly below the interest rates on the
Agricultural Loans, the Agricultural Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
such Agricultural Loans. Conversely, if prevailing interest rates rise above the
interest rates on the Agricultural Loans, the rate of prepayment would be
expected to decrease. There can be no certainty as to the rate of prepayments on
the Agricultural Loans during any period or over the life of the Guaranteed
Certificates. The rate of default on the Agricultural Loans will also affect the
rate of payment of principal on the Agricultural Loans. Prepayments,
liquidations and repurchases of the Agricultural Loans will result in
distributions to holders of amounts which would otherwise be distributed over
the remaining terms of the Agricultural Loans.
IOS AND INVERSE IOS. The Company's earnings resulting from its investments
in IOs and Inverse IOs will be extremely sensitive to changes in the prepayment
rates on the underlying Mortgage Loans, and investments in Inverse IOs will be
very sensitive to changes in the index used to calculate the interest on such
classes.
The Yield on IOs declines as prepayments on the underlying Mortgage Loans
increase. As market interest rates decline, prepayments on the underlying loans
typically increase as borrowers refinance their mortgage loans, although
commercial and multifamily loans typically have provisions that prohibit or
provide disincentives for prepayments for specified periods. Prepayment rates on
Mortgage Loans on which there is no prepayment penalty or prepayment "lock out"
period (as is typical for single-family residential loans) may be particularly
sensitive to changes in interest rates and, therefore, quite volatile. Faster
than anticipated prepayment rates can result in a loss of part or all of the
purchase price for the IO.
The Company intends to invest in Inverse IOs solely for the purpose of
hedging the Company's portfolio of IOs. In general, interest on an Inverse IO is
payable at a floating rate that varies inversely with (and often at a multiple
of) a specified index, such as the prime rate, one-month, three-month or
six-month London Interbank Offering Rate for one-month U.S. Dollar deposits
("LIBOR"), or a U.S. Treasury rate. Generally, if the index exceeds a certain
level, the Inverse IO receives no payments. Moreover, Inverse IOs generally have
a cap on the interest rate payable on such class.
Investors in Inverse IOs are subject to the risk that higher than
anticipated levels of the index could result in actual yields to investors that
are significantly lower than the anticipated Yields, and that the interest rate
on the class will be 0% at or above specified levels of the index. In addition,
the interest rate on an Inverse IO cannot exceed its specified maximum rate,
regardless of the level of the index. Further, high levels of the index
(especially in combination with fast prepayment rates on the Mortgage Loans) may
result in the failure of the Company to recover fully its investments in Inverse
IOs. For example, the holder of an Inverse IO with a per annum interest rate
equal to 8.5% minus one-month LIBOR, subject to a maximum rate of 8.5%, would
receive no interest if one-month LIBOR were to equal or exceed 8.5%. Moreover,
under no circumstance will such Inverse IO accrue interest at a rate greater
than 8.5% per annum.
Changes in the index may not correlate with changes in mortgage interest
rates. It is possible that lower prevailing mortgage interest rates (which would
be expected to result in faster prepayments) could occur concurrently with a
higher level of the index, thereby compounding the negative effects of each
separate factor on the Yields to investors in the Inverse IOs. Conversely,
higher prevailing mortgage interest rates (which would be expected to result in
slower prepayments) could occur concurrently with a lower level of the index.
It is highly unlikely that the index will remain constant at any level. The
timing of changes in the level of the index may affect the actual Yield to the
Company, even if the average level is consistent with the Company's expectation.
In general, the earlier a change in the level of the index, the greater the
effect on the Company's Yield. As a result, the effect on the Company's Yield of
the index level that is higher (or lower) than the rate anticipated by the
Company during earlier periods is not likely to be offset by a later equivalent
reduction (or increase).
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF LIQUIDITY AND CAPITAL RESOURCES
The Company has been organized and will elect to qualify as a REIT under
the Code and, as such, anticipates distributing annually at least 95% of its
"REIT taxable income," subject to certain adjustments. Cash for such
distributions is expected to be generated from the Company's operations,
although the Company also may borrow funds to make distributions. The Company's
revenues will be derived from (i) ownership of Subordinated Interests; (ii)
ownership of Mezzanine Investments; (iii) ownership of Opportunistic Real
Properties; (iv) ownership of Other Real Estate Related Assets and (v) interest
and revenues from other (generally short-term) investments. See "Distribution
Policy" and "Federal Income Tax Considerations."
The Company currently has only nominal assets. The principal sources of the
Company's funds will be the proceeds of this offering, borrowings under lines of
credit to be arranged on behalf of the Company, additional bank borrowings,
commercial paper borrowings, Mortgage Loans on the Company's real estate and
future equity offerings. The Company is in negotiations with two lenders to
provide $400 million of mortgage warehouse credit. Generally, the lenders are
expected to advance up to 95% of the value of Mortgage Loans originated and
being held for securitization. One of the lenders is also expected to provide up
to $300 million of credit to be secured by Real Estate Related Assets. Economic
terms of both credit facilities have been agreed to but final documents have not
yet been executed. Management believes that the net proceeds of this offering,
combined with the cash flow from operations and borrowings, will be sufficient
to enable the Company to meet its anticipated liquidity and capital
requirements. See "Operating Policies and Objectives" and "Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Charter provides that the Company may issue up to 225,000,000 shares of
capital stock, consisting of 200,000,000 shares of Common Stock, $0.01 par value
per share, and 25,000,000 shares of preferred stock, $0.01 par value per share
("Preferred Stock"). Upon consummation of this offering, 11,666,667 shares of
Common Stock will be issued and outstanding, 2,500,000 shares of Common Stock
will be reserved for issuance upon exercise of options, and no Preferred Stock
will be issued and outstanding.
COMMON STOCK
All outstanding shares of Common Stock will be duly authorized, fully paid
and nonassessable upon consummation of this offering. Subject to the
preferential rights of any other shares or series of shares of capital stock,
holders of Common Stock are entitled to receive dividends if and when authorized
and declared by the Board of Directors of the Company out of assets legally
available therefor and to share ratably in the assets of the Company legally
available for distribution to its shareholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all known
debts and liabilities of the Company. The Company intends to pay four regular
quarterly dividends. To the extent necessary to maintain its REIT qualification
or to avoid a corporate level tax in any particular year, the Company will
declare a fifth, special dividend.
Each outstanding share of Common Stock entitles the holder to one vote on
all matters submitted to a vote of shareholders, including the election of
directors, and, except as otherwise required by law or except as provided with
respect to any other class or series of shares of capital stock, the holders of
Common Stock will possess the exclusive voting power. Because there is no
cumulative voting in the election of directors, each holder of Common Stock has
the right to cast one vote for each share of stock for each candidate. For a
discussion of the voting rights of holders of the Common Stock, including the
provisions specifying the vote required by security holders to take action, see
"Certain Provisions of Georgia Law and of the Company's Articles of
Incorporation and Bylaws."
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No holder of any Common Stock shall have any preemptive right to subscribe
for a purchase of any stock or other securities of the Company other than such,
if any, as the Board of Directors, in its sole discretion, may determine.
Certain provisions of the Charter and Bylaws and certain provisions of
Georgia law could have the effect of delaying, deferring or preventing a change
in control of the Company. See "Certain Provisions of Georgia Law and of the
Company's Articles of Incorporation and Bylaws."
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. Because the Board of Directors has the
power to establish the preferences and rights of each class or series of
Preferred Stock, the Board of Directors may afford the holders of any series or
class of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of the holders of Common Stock. The Board could authorize
the issuance of Preferred Stock with terms and conditions which could have the
effect of discouraging a takeover or other transaction which holders of some, or
a majority, of the shares of Common Stock might believe to be in their best
interests or in which holders of some, or a majority, of the shares of Common
Stock might receive a premium for their shares of Common Stock over the then
market price of such shares of Common Stock. As of the date hereof, no shares of
Preferred Stock are outstanding.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Charter contains certain restrictions on the number of shares of Common
Stock that shareholders may own. For the Company to qualify as a REIT under the
Code, no more than 50% in value of its outstanding shares of capital stock 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 its first year as a REIT). The capital stock must also be
beneficially owned by 100 or more persons during at least 335 days of a taxable
year (other than its first year as a REIT) or during a proportionate part of a
shorter taxable year. Because the Company expects to qualify as a REIT, the
Charter contains restrictions on the ownership and transfer of capital stock
intended to ensure compliance with these requirements. See "Federal Income Tax
Consequences -- Requirements for Qualification."
The Ownership Limitation provides that, subject to certain exceptions
specified in the Charter, no person may own, actually and constructively under
the applicable attribution provisions of the Code, more than 9.8% of the total
number outstanding shares of any class of capital stock of the Company (except
for Lend Lease and its affiliates so long as Lend Lease is "publicly held"). The
Charter provides that Lend Lease will be considered to be "publicly held" so
long as no more than 20% of its outstanding capital stock is owned, directly or
indirectly, by any one individual.
The Board of Directors may (but in no event will be required to) waive the
Ownership Limitation with respect to a holder if it determines that such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Charter also prohibits ownership of any shares of Common Stock by a
"Disqualified Organization," which is defined under Section 860E of the Code to
include the United States, any state or political subdivision thereof, any
foreign government, any international organization, any agency or
instrumentality of any of the foregoing, any other tax-exempt organization
(other than a farmer's cooperative described in Section 521 of the Code) that is
exempt from taxation under the unrelated business taxable income provisions of
the Code, or any rural electrical or telephone cooperative (each, a
"Disqualified Organization"). This restriction is designed to prevent the
Company from becoming subject to a corporate-level tax with respect to any part
of Excess Inclusion that may be derived by the Company from REMIC Residual
Interests and which is allocable to stock of the Company held by a Disqualified
Organization. Any such tax would reduce the cash available for distribution from
the Company to all shareholders. See "Federal Income Tax Consequences --
Taxation of the Company." The Board of Directors may (but in no event will be
required to) waive the prohibition against stock ownership by a Disqualified
Organization, subject to whatever conditions and limitations as the Board of
Directors, in its sole discretion, might impose.
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If any purported transfer of capital stock of the Company or any other
event would result in any Disqualified Organization owning any shares of capital
stock of the Company, or any person or entity holding shares of capital stock of
the Company in excess of the applicable Ownership Limitation, then any such
purported transfer will be null and void as to that number of shares in excess
of such Ownership Limitation (or such number of shares that otherwise would be
owned by a Disqualified Organization), and the purported transferee (the
"Prohibited Transferee") shall acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to any such shares (the "Prohibited Owner") shall cease to own any right
or interest) in such excess shares. In addition, if any purported transfer of
capital stock or any other event would cause (i) the Company to be "closely
held" under Section 856(h) of the Code, or (ii) the Company's capital stock to
be owned by fewer than 100 persons, then any such purported transfer will be
null and void as to that number of shares in excess of the number that could
have been transferred without such result, and the Prohibited Transferee shall
acquire no right or interest (or, in the case of any event other than a
transfer, the Prohibited Owner shall cease to own any right or interest) in such
excess shares.
Any such excess shares described above (other than shares the transfer of
which would cause the Company's capital stock to be owned by fewer than 100
persons) will be transferred automatically, by operation of law, to a Trust, the
beneficiary of which will be a qualified charitable organization selected by the
Company (the "Beneficiary"). The trustee of the Trust will be empowered to sell
such excess shares to a qualified person or entity and distribute to a
Prohibited Transferee an amount equal to the lesser of the price paid by the
Prohibited Transferee for such excess shares or the sales proceeds received by
the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration,
the trustee will be empowered to sell such excess to the lesser of the fair
market value of such excess shares of the date of such event or the sales
proceeds received by the trust for such excess shares. Prior to a sale of any
such excess shares by the Trust, the trustee will be entitled to receive, in
trust for the benefit of the beneficiary, all dividends and other distributions
paid by the Company with respect to such excess shares, and also will be
entitled to exercise all voting rights with respect to such excess shares.
All certificates representing shares of capital stock will bear a legend
referring to the restrictions described above.
Every owner of more than 1% (or such lower percentage as may be required by
the Code or Treasury Regulations) of the outstanding shares of capital stock of
the Company must file a written notice with the Company containing the
information specified in the Charter no later than January 30 of each year. In
addition, each shareholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such shareholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limitation.
The Ownership Limitation could have the effect of discouraging a takeover
or other transaction in which holders of some, or a majority, of shares of
Common Stock might receive a premium for their shares of Common Stock over the
then prevailing market price or which such holders might believe to be otherwise
in their best interest.
REGISTRATION RIGHTS
In connection with the sale of shares of Common Stock to FBR Asset
Investment Corporation, the Company has agreed to enter into a registration
rights agreement (the "FBR Registration Rights Agreement") granting FBR Asset
Investment Corporation certain registration rights with respect to the shares of
Common Stock. The FBR Registration Rights Agreement provides that from and after
the one year anniversary of the consummation of this offering, FBR Asset
Investment Corporation will have unlimited piggyback registration rights,
subject to certain conditions, and may require the Company to file a shelf
registration statement on Form S-3 relating to the Common Stock. The Company may
prohibit offers and sales of securities pursuant to the shelf registration
statement under certain circumstances. The Company has
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also agreed to pay the costs and expenses of each such registration effected
under the FBR Registration Rights Agreement, other than underwriting discounts
and commissions.
In connection with the sale of shares of Common Stock to a subsidiary of
Lend Lease, the Company has agreed to enter into a registration rights agreement
(the "Lend Lease Registration Rights Agreement") granting Lend Lease certain
registration rights with respect to the shares of Common Stock. The Lend Lease
Registration Rights Agreement provides that from and after the two year
anniversary of the consummation of this offering, Lend Lease will have unlimited
piggyback registration rights, subject to certain conditions. In addition, if
ERE Yarmouth ceases to act as manager of the Company, Lend Lease may require the
Company to file a shelf registration statement on Form S-3 relating to the
Common Stock. The Company may defer filing the shelf registration statement
under certain circumstances. The Company has also agreed to pay the costs and
expenses of such shelf registration statement, other than underwriting discounts
and commissions.
DIVIDEND REINVESTMENT PLAN
The Company may implement a dividend reinvestment plan whereby shareholders
may automatically reinvest their dividends in the Company's Common Stock.
Details about any such plan would be sent to the Company's shareholders
following adoption thereof by the Board of Directors.
REPORTS TO SHAREHOLDERS
The Company will furnish its shareholders with annual reports containing
information regarding the business and performance of the Company, including
audited financial statements certified by independent public accountants.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Union
Shareholder Services.
LISTING OF THE COMMON STOCK
The Company's Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "CHAS."
CERTAIN PROVISIONS OF GEORGIA LAW AND
OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The Company believes that the following is a summary of the material terms
of provisions of Georgia law and of the Charter and Bylaws of the Company. Such
summary does not purport to be complete and is subject to and qualified in its
entirety by reference to Georgia law and the Charter and Bylaws of the Company.
Certain provisions of Georgia law and the Charter and Bylaws are described
elsewhere in this Prospectus. The Charter and Bylaws became effective on
December 16, 1997.
BOARD OF DIRECTORS
The Bylaws provide that the number of Directors of the Company may be
established by the Board of Directors and shall initially consist of five
persons. Any vacancy will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining Directors.
The Company's Bylaws also provide that a Director may be removed with or
without cause with the affirmative vote of at least a majority of the votes
entitled to be cast in the election of Directors. This provision, when coupled
with the provisions of the Bylaws authorizing the Board of Directors to fill
vacant directorships, as a practical matter precludes the Company's shareholders
from removing incumbent directors and filling the vacancies created by such
removal with their own nominees.
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AMENDMENT
The Charter may be amended by the affirmative vote of the holders of at
least a majority of the outstanding shares of Common Stock (and majority of the
outstanding shares of Preferred Stock, if any, to the extent that such amendment
would materially adversely affect the holders of the Preferred Stock), with the
shareholders voting as a class with one vote per share; provided, that the
Charter provision relating to the Company's election to be taxed as a REIT shall
not be amended, altered, changed or repealed without the affirmative vote of at
least 80% of the members of the Board of Directors and the affirmative vote of
holders of two-thirds of the outstanding shares of Common Stock and any other
shares of capital stock entitled to vote generally in the election of directors
voting as a class. The Company's Bylaws may be amended by the Board of Directors
or by vote of the holders of a majority of the outstanding shares of Common
Stock, however, the shareholders may prescribe that any bylaw or bylaws adopted
by them shall not be altered, amended or repealed by the Board of Directors.
GEORGIA ANTI-TAKEOVER STATUTES
The Georgia Business Corporation Code ("GBCC") restricts certain business
combinations with any holder of more than 10% of any class of outstanding voting
shares of company (an "interested shareholder") and contains fair price
requirements applicable to certain mergers with certain "interested
shareholders" that are summarized below. In accordance with the provisions of
these statutes, the Company must elect to be covered by the restrictions imposed
by these statutes. The Company has not elected to be covered by such
restrictions.
Sections 14-2-1131 to 14-2-1133 of the GBCC (the "Business Combination
Statute") regulates business combinations such as mergers, consolidations, share
exchanges and asset purchases where the acquired business has at least 100
shareholders residing in Georgia and has its principal office in Georgia, as the
Company does, and where the acquiror became an "interested shareholder" of the
corporation, unless either (i) the transaction resulting in such acquiror
becoming an "interested shareholder" or the business combination received the
approval of the corporation's board of directors prior to the date on which the
acquiror became an interested shareholder, or (ii) the acquiror became the owner
of at least 90% of the outstanding voting stock of the corporation (excluding
shares held by directors, officers and affiliates of the corporation and shares
held by certain other persons) in the same transaction in which the acquiror
became an interested shareholder. For purposes of this statute, an "interested
shareholder" generally is any person who directly or indirectly, alone or in the
concert with others, beneficially owns or controls 10% or more of the voting
power of the outstanding voting shares of the corporation. The law prohibits
business combinations with an unapproved interested shareholder for a period of
five years after the date on which such person became an interested shareholder.
The law restricting business combinations is broad in its scope and is designed
to inhibit unfriendly acquisitions.
Sections 14-2-1110 to 14-2-1113 of the GBCC (the "Fair Price Statute")
prohibits certain business combinations between a Georgia business corporation
and an interested shareholder. The Fair Price Statute would permit the business
combination to be effected if (i) certain "fair price" criteria are satisfied,
(ii) the business combination is unanimously approved by the continuing
directors, (iii) the business combination is recommended by at least two-thirds
of the continuing directors and approved by a majority of the votes entitled to
be cast by holders of voting shares, other than voting shares beneficially owned
by the interested shareholder, or (iv) the interested shareholder has been such
for at least three years and has not increased his ownership position in such
three-year period by more than one percent in a twelve-month period. The Fair
Price Statute is designed to inhibit unfriendly acquisitions that do not satisfy
the specified "fair price" requirements.
The anti-takeover statutes of the GBCC, the provisions of the Charter on
removal of directors and the advance notice provisions of the Bylaws could
delay, defer or prevent a change in control of the Company or other transaction
that might involve a premium price for holders of Common Stock or otherwise be
in their best interest.
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OPERATIONS
The Company is generally prohibited from engaging in certain activities and
acquiring or holding property or engaging in any activity that would cause the
Company to fail to qualify as a REIT.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Directors and
the proposal of business to be considered by such shareholders may be made only
(i) pursuant to the Company's notice of the meeting, (ii) by the Board of
Directors or (iii) by a shareholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, nominations of persons for
election to the Board of Directors may be made only (i) pursuant to the
Company's notice of meeting, (ii) by the Board of Directors or (iii) provided
that the Board of Directors has determined that Directors shall be elected at
such meeting, by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the Bylaws.
COMMON STOCK AVAILABLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have outstanding
(including shares reserved for issuance upon exercise of outstanding options)
11,666,667 shares of Common Stock. The 9,800,000 shares of Common Stock issued
in this offering will be freely tradeable by persons other than "affiliates" of
the Company without restriction under the Securities Act, subject to certain
Ownership Limitations set forth in the Charter. See "Description of Capital
Stock -- Restrictions on Ownership and Transfer."
Shares of Common Stock issued to holders of Units upon exercise of certain
Redemption Rights (as hereinafter defined) will be "restricted" securities under
the meaning of Rule 144 and may not be sold in the absence of registration under
the Securities Act unless an exemption from registration is available. See
"Operating Partnership Agreement -- Redemption Rights." The Company has granted
certain holders registration rights with respect to 1,866,667 Shares of Common
Stock. See "Risk Factors -- The Company Will Be Subject to Other
Risks -- Possible Adverse Effects on Share Price Arising from Shares of Common
Stock Eligible for Future Sale" and "Description of Capital
Stock -- Registration Rights."
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding Common Stock or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 also are subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. If two years have elapsed since
the date of acquisition of restricted shares from the Company or from any
Affiliate of the Company, and the acquiror or subsequent holder thereof is
deemed not to have been an Affiliate of the Company at any time during the three
months preceding a sale, such person would be entitled to sell such shares in
the public market under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice
requirements.
Additionally, upon the consummation of this offering and the Private
Placement there will be outstanding Options to purchase 1,166,667 shares of
Common Stock granted at the initial public offering price, to the Manager, none
of which will be exercisable until one year from the date of grant. Upon
consummation of this offering and the Private Placement, the Company expects to
grant Options to executive officers of the Company (all of whom are employees of
the Manager) and to other employees of the Manager. Subject to certain
limitations, the number of Options initially granted to the officers of the
Company and the Manager will be equal to the number of shares of Common Stock
that such individuals purchase in this offering. See "Underwriting." One-fifth
of these options will become exercisable on the date of grant and the remaining
Options will become exercisable in four equal installments commencing on the
first anniversary of the date of
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grant. Unexercised options will terminate on the tenth anniversary of the
consummation of this offering. Within one year of consummation of this offering,
the Company intends to file a Registration Statement on Form S-8 with the
Commission with respect to shares of Common Stock issuable pursuant to the
Option Plan.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales could occur, may affect adversely
prevailing market prices of the Common Stock.
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership is a Georgia limited partnership, the General
Partner of which is Chastain GP Holdings, Inc., a wholly owned subsidiary of the
Company, and the Initial Limited Partner of which is Chastain LP Holdings, Inc.,
a wholly owned subsidiary of the Company. Because the Company indirectly owns
100% of the partnership interests in the Operating Partnership, the Operating
Partnership will be disregarded as a separate entity from the Company for
federal income tax purposes unless and until a third party other than either (i)
the Company or (ii) a qualified REIT subsidiary of the Company is admitted as a
partner in the Operating Partnership. The Company organized the Operating
Partnership to provide potential sellers of assets with the opportunity to
transfer those assets to the Company in a tax-deferred exchange. The following
is a summary of the material terms of the agreement of limited partnership of
the Operating Partnership (the "Operating Partnership Agreement"), some of which
may be changed if a seller is admitted as a Partner in the Operating
Partnership.
GENERAL
Pursuant to the Operating Partnership Agreement, the General Partner, as
the sole general partner of the Operating Partnership, has full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership. The limited partners of the operating partnership (the
"Limited Partners") have no authority in their capacity as Limited Partners to
transact business for, or participate in the management activities or decisions
of, the Operating Partnership except as required by applicable law.
Consequently, the Company, by virtue of its ownership of the General Partner,
controls the assets and business of the Operating Partnership. However, any
amendment to the Operating Partnership Agreement that would (i) affect the
Redemption Rights, (ii) adversely affect the Limited Partners' rights to receive
cash distributions, (iii) alter the Operating Partnership's allocations of
income or loss, or (iv) impose on the Limited Partners any obligations to make
additional contributions to the capital of the Operating Partnership, requires
the consent of the minimum percentages of Limited Partners required under the
Georgia Revised Limited Partnership Act, as amended.
GENERAL PARTNER NOT TO WITHDRAW
The General Partner may not voluntarily withdraw from the Operating
Partnership or transfer or assign its interest in the Operating Partnership
unless the transaction in which such withdrawal or transfer occurs results in
the Limited Partners receiving property in an amount equal to the amount they
would have received had they exercised the Redemption Rights immediately prior
to such transaction.
CAPITAL CONTRIBUTION
The General Partner holds a 1% general partnership interest in the
Operating Partnership, and the Initial Limited Partner holds a 99% limited
partnership interest in the Operating Partnership. After the completion of this
offering, the Company will have a total of 11,666,667 shares of Common Stock
outstanding and will own, through the General Partner and the Initial Limited
Partner, 100% of the Units in the Operating Partnership.
The Operating Partnership Agreement provides that Units will be issued in
exchange for a contribution to the capital of the Operating Partnership, with
the number of Units to be determined by the General Partner in its sole
discretion.
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REDEMPTION RIGHTS
Pursuant to the Operating Partnership Agreement, the Limited Partners
(other than the Initial Limited Partner) have the right (the "Redemption
Rights") to cause the Operating Partnership to redeem their Units for cash or,
at the election of the General Partner, shares of Common Stock on a one-for-one
basis. The redemption price will be paid in cash at the discretion of the
Company or in the event that the issuance of shares of Common Stock to the
redeeming Limited Partner would (i) result in any person owning, directly or
indirectly, shares of stock in excess of the Ownership Limitation, (ii) result
in shares of capital stock of the Company being owned by fewer than 100 persons
(determined without reference to any rules of attribution), (iii) result in the
Company being "closely held" within the meaning of section 856(h) of the Code or
(iv) cause the acquisition of shares of Common Stock by such redeeming Limited
Partner to be "integrated" with any other distribution of shares of Common Stock
for purposes of complying with the Securities Act.
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT for federal income tax purposes, to avoid any
federal income or excise tax liability imposed by the Code, and to ensure that
the Operating Partnership will not be classified as a "publicly traded
partnership" for purposes of section 7704 of the Code.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
shall distribute cash from operations (including net sale or refinancing
proceeds, but excluding net proceeds from the sale of the Operating
Partnership's property in connection with the liquidation of the Operating
Partnership) on a quarterly (or, at the election of the General Partner, more
frequent) basis, in amounts determined by the General Partner in its sole
discretion, to the partners pro rata in proportion to their respective
percentage interests in the Partnership. Upon liquidation of the Operating
Partnership, after payment of, or adequate provision for, debts and obligations
of the Operating Partnership, including any partner loans, it is anticipated
that any remaining assets of the Operating Partnership will be distributed to
all partners with positive capital accounts in accordance with their respective
positive capital account balances. If the General Partner has a negative balance
in its capital account following a liquidation of the Operating Partnership, it
will be obligated to contribute cash to the Operating Partnership equal to the
negative balance in its capital account.
ALLOCATIONS
Income, gain and loss of the Operating Partnership for each fiscal year
generally will be allocated among the partners in accordance with their
respective interests in the Operating Partnership.
TERM
The Operating Partnership will continue until December 31, 2098, or until
sooner terminated as provided in the Operating Partnership Agreement or by
operation of law. The General Partner has the right to extend the term of the
Operating Partnership Agreement without the consent of the limited partners.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the General Partner is the
tax matters partner of the Operating Partnership and, as such, has authority to
handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences that
may be relevant to a prospective holder of Common Stock in the Company. King &
Spalding, counsel to the Company, has
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rendered an opinion that the following discussion fairly summarizes the United
States federal income tax consequences that are material to a holder of Common
Stock, and, to the extent such discussion contains statements of law or legal
conclusions, such statements and conclusions are the opinion of King & Spalding.
The discussion contained herein does not address all aspects of taxation that
may be relevant to particular shareholders in light of their personal investment
or tax circumstances, or to certain types of shareholders (including insurance
companies, tax-exempt organizations and financial institutions or broker-dealers
subject to special treatment under the federal income tax laws). As used in this
section the term "Company" refers solely to Chastain Capital Corporation.
The statements in this discussion and the opinion of King & Spalding are
based on current provisions of the Code, existing, temporary, and currently
proposed Treasury Regulations promulgated under the Code, the legislative
history of the Code, existing administrative rulings and practices of the
Service, and judicial decisions. There can be no assurance that future
legislative, judicial, or administrative actions or decisions, which may be
retroactive in effect, will not affect the accuracy of any statements in this
Prospectus with respect to the transactions entered into or contemplated prior
to the effective date of such changes.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT HIS OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING THE
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE,
OWNERSHIP, SALE, AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
The Company plans to make an election to be taxed as a REIT under sections
856 through 860 of the Code, commencing with its first REIT taxable year ending
on December 31, 1998. If the Company qualifies under Sections 856 through 860 of
the Code for taxation as a REIT, it generally will not be subject to federal
corporate income tax on its net income that is distributed currently to its
shareholders. That treatment substantially eliminates the "double taxation"
(i.e., taxation at both the corporate and shareholder levels) that generally
results from an investment in a corporation.
The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, Treasury Regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all of
which are subject to change prospectively or retroactively.
King & Spalding has acted as counsel to the Company in connection with this
offering and the Company's election to be taxed as a REIT. In the opinion of
King & Spalding, assuming that the elections and other procedural steps
described in this discussion of "Federal Income Tax Consequences" are completed
by the Company in a timely fashion, commencing with the Company's first REIT
taxable year ending on December 31, 1998, the Company will qualify to be taxed
as a REIT pursuant to sections 856 through 860 of the Code, and the Company's
organization and proposed method of operation will enable it to continue to meet
the requirements for qualification and taxation as a REIT under the Code.
Investors should be aware, however, that opinions of counsel are not binding
upon the Service or any court. It must be emphasized that King & Spalding's
opinion is based on various assumptions and is conditioned upon certain
representations made by the Company as to factual matters, including
representations regarding the nature of the Company's properties and the future
conduct and method of operation of its business. None of the factual assumptions
or representations upon which King & Spalding's opinion is based, including such
assumptions and representations regarding the actual and proposed method of
operation of the Company's business, differs from the statements made in this
Prospectus, nor is King & Spalding aware of any facts or circumstances that are
inconsistent with such assumptions and representations.
It also must be emphasized that the Company's qualification and taxation as
a REIT depends upon its ability to meet, on a continuing basis through actual
annual operating results, distribution levels, and stock
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ownership, the various qualification tests imposed under the Code that are
discussed below. King & Spalding will not review the Company's compliance with
those tests on a continuing basis. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements. For a discussion of the tax consequences of
failing to qualify as a REIT, see "Federal Income Tax Consequences -- Failure to
Qualify."
As noted above, if the Company qualifies for taxation as a REIT, it
generally will not be subject to federal corporate income tax on its net income
that is distributed currently to its shareholders. However, the Company will be
subject to federal income tax in the following circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed taxable income,
including undistributed net capital gains. Second, under certain circumstances,
the Company may be subject to the "alternative minimum tax" on its undistributed
items of tax preference, if any. Third, if the Company has (i) net income from
the sale or other disposition of Foreclosure Property that is held as inventory
or held primarily for sale to customers in the ordinary course of business or
(ii) other nonqualifying income from Foreclosure Property, it will be subject to
tax at the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property (other than Foreclosure Property) held as
inventory or held primarily for sale to customers in the ordinary course of
business), such income will be subject to a 100% tax. Fifth, if the Company
should fail to satisfy the 75% gross income test or the 95% gross income test
(as discussed below), and nonetheless has maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, if the Company
acquires any asset from a C corporation (i.e., a corporation generally subject
to full corporate-level tax) in a merger or other transaction in which the basis
of the asset in the Company's hands is determined by reference to the basis of
the asset (or any other asset) in the hands of the C corporation and the Company
recognizes gain on the disposition of such asset during the 10-year period
beginning on the date on which it acquired such asset, then to the extent of
such asset's "built-in-gain" (i.e., the excess of the fair market value of such
asset at the time of acquisition by the Company over the adjusted basis in such
asset at such time), the Company will be subject to tax at the highest regular
corporate rate applicable (as provided in Treasury Regulations that have been
announced but have not yet been promulgated). The results described above with
respect to the tax on "built-in-gain" assume that the Company will elect
pursuant to IRS Notice 88-19 to be subject to the rules described in the
preceding sentence if it were to make any such acquisition. Finally, the Company
will be subject to tax at the highest marginal corporate rate on the portion of
any Excess Inclusion derived by the Company from REMIC Residual Interests equal
to the percentage of the stock of the Company held by a Disqualified
Organization. Any such tax on the portion of any Excess Inclusion allocable to
stock of the Company held by a Disqualified Organization will reduce the cash
available for distribution from the Company to all shareholders.
REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust, or association (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding shares of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year) and satisfies all relevant filing and other
administrative requirements established by the Service that must be met in order
to elect and maintain REIT status; (viii) that uses a calendar year for federal
income tax purposes and complies with the recordkeeping requirements of the Code
and Treasury Regulations
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promulgated thereunder; and (ix) that meets certain other tests, described
below, regarding the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months. Conditions (v) and (vi) will not apply until after the first taxable
year for which an election is made by the Company to be taxed as a REIT. For
purposes of determining stock ownership under the 5/50 Rule, a supplemental
unemployment compensation benefits plan, a private foundation, or a portion of a
trust permanently set aside or used exclusively for charitable purposes
generally is considered an individual. A trust that is a qualified trust under
Code section 401(a), however, generally is not considered an individual, and
beneficiaries of such trust are treated as holding shares of a REIT in
proportion to their actuarial interests in such trust for purposes of the 5/50
Rule. The Company will be treated as having satisfied the 5/50 Rule if it has
complied with certain Treasury regulations for ascertaining the ownership of its
stock for the relevant taxable year and if it did not know (or after the
exercise of reasonable diligence would not have known) that its stock was
sufficiently closely held during such year to cause it to fail the 5/50 Rule.
Prior to the consummation of this offering, the Company did not satisfy
conditions (v) and (vi) in the preceding paragraph. However, the Company
anticipates issuing sufficient Common Stock with sufficient diversity of
ownership pursuant to this offering to allow it to satisfy requirements (v) and
(vi). In addition, the Charter imposes restrictions on the transfer of the
Common Stock that are intended to assist the Company in continuing to satisfy
the share ownership requirements described in clauses (v) and (vi) above. Such
transfer restrictions are described in "Description of Capital
Stock -- Restrictions on Ownership and Transfer."
Proposed tax legislation, if enacted, would impose additional stock
ownership requirements upon entities that first elect REIT status for taxable
years beginning on or after the date of first Congressional committee action.
For a description of the effect of this proposed legislation on the Company, see
"-- Effect of Proposed Changes in Tax Laws."
The Company currently has two wholly owned corporate subsidiaries (the
General Partner and the Initial Limited Partner), and it may acquire or create
additional wholly owned corporate subsidiaries in the future. Section 856(i) of
the Code provides that a corporation that is a "qualified REIT subsidiary" will
not be treated as a separate corporation for tax purposes, and all assets,
liabilities and items of income, deduction and credit of a "qualified REIT
subsidiary" will be treated as assets, liabilities and items of income,
deduction and credit of the REIT. A "qualified REIT subsidiary" is any
wholly-owned corporate subsidiary of a REIT. Because the General Partner and the
Initial Limited Partner are wholly owned subsidiaries of the Company, such
corporations will constitute "qualified REIT subsidiaries." Accordingly, in
applying the income and asset tests described below, the General Partner and the
Initial Limited Partner will be ignored for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and items of income,
deduction, and credit of the Company. Neither the General Partner nor the
Initial Limited Partner will be subject to federal corporate income taxation,
although each may be subject to state and local taxation.
Pursuant to Treasury Regulations effective January 1, 1997 relating to
entity classification (the "Check-the-Box Regulations"), an unincorporated
entity that has a single owner is disregarded as an entity separate from its
owner for federal income tax purposes. Because of the rules described above
applicable to a "qualified REIT subsidiary," the Company will be deemed to own
100% of the partnership interests in the Operating Partnership for federal
income tax purposes. As a result, the Operating Partnership will be disregarded
as an entity separate from the Company under the Check-the-Box Regulations
unless and until a party other than either (i) the Company or (ii) a qualified
REIT subsidiary of the Company is admitted as a partner in the Operating
Partnership.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership (based upon the REIT's capital interest in the
partnership) and will be deemed to be entitled to the gross income of the
partnership attributable to such share. In addition, the assets and gross income
of the partnership will retain the same character in the hands of the REIT for
purposes of section 856 of the Code, including satisfying the gross
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income and asset tests described below. If and when the Operating Partnership
admits a partner other than the Company or a qualified REIT subsidiary of the
Company, the Company's proportionate share of the assets and gross income of the
Operating Partnership will be treated as assets and gross income of the Company
for purposes of applying the requirements described herein.
INCOME TESTS. In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied annually. First, at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist of defined types of income derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and "interest on obligations secured by mortgages on
real property or on interests in real property") or temporary investment income.
Second, at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property, mortgages on real property, or temporary investments, and from
dividends, other types of interest, and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. The specific
application to the Company of the 75% and 95% tests is discussed below.
The term "interest," as defined for purposes of the 75% and 95% gross
income tests, generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person. However, an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed percentage or percentages of receipts or sales. In
addition, an amount received or accrued with respect to an obligation secured by
a mortgage on real property or an interest in real property generally will not
be excluded from the term "interest" solely by reason of being based on the
income or profits of a debtor if the debtor derives substantially all of its
gross income from such property through the leasing of substantially all of its
interests in the property, to the extent the amounts received by the REIT are
attributable to rents that would be characterized as "rents from real property"
if received by a REIT. Furthermore, to the extent that interest from a loan that
is based on the cash proceeds from the sale of the property securing the loan
constitutes a "shared appreciation provision" (as defined in the Code), income
attributable to such participation feature will be treated as gain from the sale
of the secured property, which generally is qualifying income for purposes of
the 75% and 95% gross income tests.
Interest on obligations secured by mortgages on real property or on
interests in real property is qualifying income for purposes of the 75% gross
income test. Any amount includible in gross income with respect to a regular or
residual interest in a REMIC generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC consists of real estate assets (determined as if the Company held
such assets), the Company will be treated as having received directly its
proportionate share of the income of the REMIC. In addition, the Company could
be required in certain circumstances to apportion interest income between real
and personal property when the income is received with respect to a mortgage
loan that is secured by both real property and other property. Such an
apportionment could cause the Company to recognize income that is not qualifying
income for purposes of the 75% gross income test.
The interest, OID, and market discount income that the Company derives from
its investments in Mortgage Loans, Subordinated Interests, IOs, and Inverse IOs
generally will be qualifying interest income for purposes of both the 75% and
the 95% gross income tests, except to the extent that less than 95% of the
assets of a REMIC in which the Company holds an interest consists of real estate
assets (determined as if the Company held such assets), and the Company's
proportionate share of the income of the REMIC includes income that is not
qualifying income for purposes of the 75% or 95% gross income test. In addition,
in some cases, however, the loan amount of a Mortgage Loan may exceed the value
of the real property securing the loan, which will result in a portion of the
income from the loan being classified as qualifying income for purposes of the
95% gross income test, but not for purposes of the 75% gross income test. It is
also possible that, in some instances, the interest income from a Distressed
Mortgage Loan may be based in part on the borrower's profits or net income,
which generally will disqualify the income from the loan for purposes of both
the 75% and the 95% gross income tests.
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The Company may receive income not described above that is not qualifying
income for purposes of the 75% and 95% gross income tests. The Company will
monitor the amount of nonqualifying income produced by its assets and has
represented that it will manage its portfolio in order to comply at all times
with the gross income tests.
The rent received by the Company from the tenants of its Real Property
("Rent") will qualify as "rents from real property" in satisfying the gross
income tests for a REIT described above only if several conditions are met.
First, the amount of Rent must not be based, in whole or in part, on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
the Code provides that the Rent received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
such tenant, taking into account both direct and constructive ownership (a
"Related Party Tenant"). Third, if Rent attributable to personal property,
leased in connection with a lease of Real Property, is greater than 15% of the
total Rent received under the lease, then the portion of Rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for the Rent to qualify as "rents from real property," the Company generally
must not operate or manage the Real Property or furnish or render services to
the tenants of such Real Property, other than through an "independent
contractor" who is adequately compensated and from whom the Company derives no
revenue. The "independent contractor" requirement, however, does not apply to
the extent the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant." In addition, the "independent
contractor" requirement does not apply to noncustomary services provided by the
Company, the value of which does not exceed 1% of the gross income derived in
the taxable year from the property with respect to which the services are
provided (the "1% de minimis exception"). For this purpose, such services may
not be valued at less than 150% of the Company's direct cost of providing the
services.
The Company has represented that it will not charge Rent for any portion of
any Real Property that is based, in whole or in part, on the income or profits
of any person (except by reason of being based on a fixed percentage or
percentages of receipts of sales, as described above) to the extent that the
receipt of such Rent would jeopardize the Company's status as a REIT. In
addition, the Company has represented that, to the extent that it receives Rent
from a Related Party Tenant, such Rent will not cause the Company to fail to
satisfy either the 75% or 95% gross income test. The Company also has
represented that it will not allow the Rent attributable to personal property
leased in connection with any lease of Real Property to exceed 15% of the total
Rent received under the lease, if the receipt of such Rent would cause the
Company to fail to satisfy either the 75% or 95% gross income test. Finally, the
Company has represented that, subject to the 1% de minimis exception, it will
not operate or manage its Real Property or furnish or render noncustomary
services to the tenants of its Real Property other than through an "independent
contractor," to the extent that such operation or the provision of such services
would jeopardize the Company's status as a REIT.
REITs generally are subject to tax at the maximum corporate rate on (i) any
net income derived from Foreclosure Property, other than income that otherwise
constitutes qualifying income for purposes of the 75% gross income test (such as
"rents from real property" and "interest on obligations secured by mortgages on
real property or on interests in real property") and (ii) any gain from the sale
or other disposition of Foreclosure Property that is held primarily for sale to
customers in the ordinary course of business. Although the income and gain
described in (i) and (ii) above are subject to tax, a special rule provides that
such income and gain automatically will be treated as qualifying income for
purposes of the 75% and 95% gross income tests. "Foreclosure Property" is
defined as any real property (including interests in real property) and any
personal property incident to such real property (i) that is acquired by a REIT
as the result of such REIT having bid on such property at foreclosure, or having
otherwise reduced such property to ownership or possession by agreement or
process of law, after there was a default (or default was imminent) on a lease
of such property or on an indebtedness owed to the REIT that such property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not imminent or anticipated, and (iii) for which such REIT makes a
proper election to treat such property as Foreclosure Property. If necessary to
take
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advantage of the special rule automatically classifying income from Foreclosure
Property as qualifying income for purposes of the 75% and 95% gross income
tests, or if necessary to avoid the 100% tax on "prohibited transactions" (which
is described below), the Company will make a Foreclosure Property election with
respect to all property eligible for such election.
If property is not eligible for the election to be treated as Foreclosure
Property ("Ineligible Property") (for example, because the related loan was
acquired by the REIT at a time when default was imminent or anticipated), the
special rule described in the preceding paragraph will not apply, and income and
gain with respect to such Ineligible Property will not automatically constitute
qualifying income for purposes of the 75% and 95% gross income tests. The
Company anticipates, however, that any income it receives with respect to
Ineligible Property will be qualifying income for purposes of the 75% and 95%
gross income tests without regard to the special rule for Foreclosure Property
(e.g., it will be either "rents from real property" or "interest on obligations
secured by mortgages on real property or on interests in real property").
Net income derived by a REIT from a "prohibited transaction" is subject to
a 100% tax, but is not taken into account for purposes of the 75% and 95% gross
income tests. The term "prohibited transaction" generally includes a sale or
other disposition of property (other than Foreclosure Property) that is held as
inventory or held primarily for sale to customers in the ordinary course of a
trade or business. The Company believes that no asset owned by the Company or
the Operating Partnership will be held as inventory or held for sale to
customers and that a sale of any such asset will not be in the ordinary course
of the Company's or the Operating Partnership's business. Whether property is
held as inventory or held "primarily for sale to customers in the ordinary
course of a trade or business" depends, however, on the facts and circumstances
in effect from time to time, including those related to a particular property.
Nevertheless, the Company will attempt to comply with the terms of safe-harbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited transactions. Complete assurance cannot be given, however, that the
Company can comply with the safe-harbor provisions of the Code or avoid owning
property that may be characterized as property held as inventory or held
"primarily for sale to customers in the ordinary course of a trade or business."
It is possible that, from time to time, the Company will enter into hedging
transactions with respect to one or more of its assets or liabilities. Any
payment to a REIT under an interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial instrument, which is
entered into by the REIT in a transaction to reduce the interest rate risks with
respect to any indebtedness incurred or to be incurred by the REIT to acquire or
carry any real estate assets, is treated as qualifying income for purposes of
the 95% gross income test, but not the 75% gross income test. To the extent that
the Company hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT. Accordingly, the Company
may conduct some of its hedging activities through a corporate subsidiary that
is fully subject to federal corporate income tax. The Company's ability to
invest in a taxable corporate subsidiary, however, could be affected by certain
proposed tax legislation. See "-- Effect of Proposed Changes in Tax Laws."
If the Company fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it nevertheless may qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions generally will be available if the Company's failure to meet such
tests is due to reasonable cause and not due to willful neglect, the Company
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
Company would be entitled to the benefit of these relief provisions. As
discussed above in "Federal Income Tax Consequences -- Taxation of the Company,"
even if those relief provisions apply, a 100% tax would be imposed on the gross
income attributable to the greater of the amount by which the Company fails the
75% or 95% gross income test, multiplied by a fraction intended to reflect the
Company's profitability.
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ASSET TESTS. The Company, at the close of each quarter of each taxable
year, also must satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
cash or cash items (including certain receivables), government securities, "real
estate assets," or, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments during the one-year period following the Company's receipt
of such capital. The term "real estate assets" includes interests in real
property, interests in mortgages on real property to the extent the principal
balance of a mortgage does not exceed the fair market value of the associated
real property, regular or residual interests in a REMIC (except that, if less
than 95% of the assets of a REMIC consists of "real estate assets" (determined
as if the Company held such assets), the Company will be treated as holding
directly its proportionate share of the assets of such REMIC), and shares of
other REITs. For purposes of the 75% asset test, the term "interest in real
property" includes an interest in mortgage loans or land and improvements
thereon, such as buildings or other inherently permanent structures (including
items that are structural components of such buildings or structures), a
leasehold of real property, and an option to acquire real property (or a
leasehold of real property). An "interest" in real property also generally
includes an interest in mortgage loans secured by controlling equity interests
in entities treated as partnerships for federal income tax purposes that own
real property, to the extent that the principal balance of the mortgage does not
exceed the fair market value of the real property that is allocable to the
equity interest. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class (which test
will of necessity be satisfied if the 75% asset test is satisfied). Third, of
the investments included in the 25% asset class, the value of any one issuer's
debt and equity securities owned by the Company may not exceed 5% of the value
of the Company's total assets, and the Company may not own more than 10% of any
one issuer's outstanding voting securities (except for interests in any entity
treated as a partnership for federal income tax purposes and the Company's
interests in the General Partner, the Initial Limited Partner and any other
qualified REIT subsidiary). Accordingly, if the Company conducts any of its
activities (such as hedging activities that do not give rise to qualifying
income) through a corporate subsidiary that is not a qualified REIT subsidiary,
the Company will be prohibited from owning more than 10% of the subsidiary's
voting securities, and the value of the subsidiary's debt and equity securities
owned by the Company may not exceed 5% of the value of the Company's total
assets. The Company's ability to invest in a taxable corporate subsidiary,
however, could be affected by certain proposed tax legislation. See "-- Effect
of Proposed Changes in Tax Laws."
The Company expects that any Underperforming Real Properties, Subordinated
Interests, IOs, Inverse IOs, and temporary investments that it acquires
generally will be qualifying assets for purposes of the 75% asset test, except
to the extent that less than 95% of the assets of a REMIC in which the Company
owns an interest consists of "real estate assets" and the Company's
proportionate share of those assets includes assets that are nonqualifying
assets for purposes of the 75% asset test. Mortgage Loans, Agricultural Loans,
Construction Loans and Mezzanine Investments, for example, also will be
qualifying assets for purposes of the 75% asset test to the extent that the
principal balance of each mortgage loan does not exceed the value of the
associated real property. The Company will monitor the status of the assets that
it acquires for purposes of the various asset tests and has represented that it
will manage its portfolio in order to comply at all times with such tests.
If the Company should fail to satisfy the asset tests at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market values of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
DISTRIBUTION REQUIREMENTS. To avoid corporate income taxation on its
earnings, the Company must distribute with respect to each taxable year
dividends (other than capital gain dividends) to its shareholders in an
aggregate amount at least equal to (i) the sum of (A) 95% of its "REIT taxable
income" (computed without regard to the dividends paid deduction and its net
capital gain) and (B) 95% of the net income (after
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tax), if any, from Foreclosure Property, minus (ii) the sum of certain items of
noncash income (including OID and Excess Inclusion). Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before the Company timely files its federal income tax return for
such year and if paid on or before the first regular dividend payment date after
such declaration. To the extent that the Company does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its taxable
income, as adjusted, it will be subject to tax thereon at regular ordinary and
capital gains corporate tax rates. Furthermore, if the Company should fail to
distribute during each calendar year (or, in the case of distributions with
declaration and record dates falling in the last three months of the calendar
year, by the end of the January immediately following such 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 Company would be subject to a 4% nondeductible excise
tax on the excess of such required distribution over the amounts actually
distributed. The Company intends to make timely distributions sufficient to
satisfy the annual distribution requirements.
It is possible that, from time to time, the Company may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its taxable income. For example, the Company will
recognize taxable income in excess of its cash receipts when, as generally
happens, OID accrues with respect to its Subordinated Interests. Furthermore,
some Mortgage Loans, IOs and Inverse IOs may be deemed to have OID, in which
case the Company may be required to recognize taxable income in advance of the
related cash flow. OID generally will be accrued using a methodology that does
not allow credit losses to be reflected until they are actually incurred. In
addition, the Company may recognize taxable market discount income upon the
receipt of proceeds from the disposition of, or principal payments on,
Subordinated Interests and Distressed Mortgage Loans that are "market discount
bonds" (i.e., obligations with a stated redemption price at maturity that is
greater than the Company's tax basis in such obligations), although such
proceeds often will be used to make non-deductible principal payments on related
borrowings. The Company also may recognize Excess Inclusion or other "Phantom
Income" from REMIC Residual Interests. It also is possible that, from time to
time, the Company may recognize net capital gain attributable to the sale of
depreciated property that exceeds its cash receipts from the sale. In addition,
pursuant to certain Treasury Regulations, the Company may be required to
recognize the amount of any payment to be made pursuant to a shared appreciation
provision over the term of the related loan using the constant yield method.
Finally, the Company may recognize taxable income without receiving a
corresponding cash distribution if it forecloses on or makes a "significant
modification" (as defined in Regulations section 1.1001-3(e)) to a loan, to the
extent that the fair market value of the underlying property or the issue price
of the modified loan, as applicable, exceeds the Company's basis in the original
loan. Therefore, the Company may have less cash than is necessary to meet the
annual distribution requirement or to avoid corporate income tax or the excise
tax imposed on certain undistributed income. In such a situation, the Company
may find it necessary to arrange for short-term (or possibly long-term)
borrowings or to raise funds through the issuance of Preferred Stock or
additional Common Stock.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirements for a year by paying "deficiency
dividends" to its shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Although the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends, it will be required to pay to the Service interest based upon the
amount of any deduction taken for deficiency dividends.
RECORDKEEPING REQUIREMENTS. Pursuant to applicable Treasury Regulations,
the Company must maintain certain records and request on an annual basis certain
information from its shareholders designed to disclose the actual ownership of
its outstanding stock. The Company intends to comply with such requirements.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to the Company's shareholders in any year
in which the
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Company fails to qualify will not be deductible by the Company nor will they be
required to be made. In such event, to the extent of the Company's current and
accumulated earnings and profits, all distributions to shareholders 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 Company also
will be disqualified from taxation as a REIT for the four taxable years
following the year during which the Company ceased to qualify as a REIT. It is
not possible to state whether in all circumstances the Company would be entitled
to such statutory relief.
EFFECT OF PROPOSED CHANGES IN TAX LAWS
On February 2, 1998, the revenue portion of President Clinton's fiscal 1999
budget proposal (the "Budget Proposal") was released. If enacted, the Budget
Proposal would affect the tax treatment of REITs in two significant respects.
First, the Budget Proposal would prohibit a REIT from owning stock of a
corporation (other than a qualified REIT subsidiary) possessing more than 10% of
the combined voting power or value of all classes of the corporation's stock.
Current law prevents a REIT from owning more than 10% of the outstanding voting
securities of a corporation (other than a qualified REIT subsidiary), but does
not restrict a REIT's ownership of non-voting securities of a corporation
(provided that the value of the corporation's debt and equity securities held by
the REIT does not exceed 5% of the total value of the REIT's assets). The
provision in the Budget Proposal would apply to corporate stock acquired on or
after the date of first Congressional committee action and to stock that was
held on such date if (i) the corporation engages in a trade or business that it
is not engaged in on such date or (ii) the corporation acquires substantial new
assets after that date. If enacted, this provision would restrict the Company's
ability to conduct activities giving rise to nonqualifying income through a
taxable corporate subsidiary.
Second, the Budget Proposal would provide, in addition to the 5/50 Rule
(see "-- Requirements for Qualification") that no person (including a
corporation) could own, actually or by operation of certain attribution rules,
stock of a REIT possessing more than 50% of the total combined voting power of
all classes of the REIT's voting stock or more than 50% of the total value of
the shares of all classes of the REIT's stock. This proposal would apply only to
entities electing REIT status for taxable years beginning on or after the date
of first Congressional committee action. Consequently, it would not apply to the
Company, because the Company's REIT election will apply to its taxable year that
began on January 1, 1998. There can be no assurance, however, that if the
proposal is enacted it will not have an effective date that would make it
applicable to the Company. If any such legislation were enacted, Lend Lease (or
any other person) would be prohibited from owning, actually or constructively,
more than 50% of the total combined voting power of the Company's voting stock
or more than 50% of the total value of the shares of all classes of the
Company's stock.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable U.S. shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. shareholders as ordinary income and will not be eligible
for the dividends received deduction generally available to corporations. As
used herein, the term "U.S. shareholder" means a holder of Common Stock that for
U.S. federal income tax purposes is (i) a citizen or resident of the U.S., (ii)
a corporation, partnership, or other entity created or organized in or under the
laws of the U.S. or of any political subdivision thereof, (iii) an estate whose
income is includible in gross income for U.S. federal income tax purposes
regardless of its source, or (iv) any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of such
trust and (B) one or more U.S. persons have the authority to control all
substantial decisions of the trust. Distributions that are designated as capital
gain dividends will be taxed to the Company's shareholders as a capital gain (to
the extent such distributions do not exceed the Company's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held his Common Stock. The tax rate applicable to such gain is
described under "--Capital Gains and Losses" below. However, corporate
shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. Distributions in excess of current and accumulated
earnings and
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profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Common Stock, but rather will
reduce the adjusted basis of such stock. To the extent that such distributions
in excess of current and accumulated earnings and profits exceed the adjusted
basis of a shareholder's Common Stock, such distributions will be included in
income as capital gain, assuming the Common Stock is a capital asset in the
hands of the shareholder. In addition, any distribution declared by the Company
in October, November, or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the shareholder on December 31 of such year,
provided that the distribution is actually paid by the Company during January of
the following calendar year. The Company will notify shareholders after the
close of the Company's taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return of capital or
capital gain.
The Company may elect to treat all or a part of its undistributed net
capital gain as if it had been distributed to the Company's shareholders
(including for purposes of the 4% excise tax discussed above). If the Company
should make such an election, the Company's shareholders would be required to
include in their income as long-term capital gain their proportionate share of
the Company's undistributed net capital gain, as designated by the Company. Each
such shareholder would be deemed to have paid his proportionate share of the
income tax imposed on the Company with respect to such undistributed net capital
gain, and this amount would be credited or refunded to the shareholder. In
addition, the tax basis of the shareholder's stock would be increased by his
proportionate share of undistributed net capital gains included in his income
less his proportionate share of the income tax imposed on the Company with
respect to such gains.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. Instead, such losses would be
carried over by the Company for potential offset against its future income
(subject to certain limitations). Taxable distributions from the Company and
gain from the disposition of the Common Stock will not be treated as passive
activity income and, therefore, shareholders generally will not be able to apply
any "passive activity losses" (such as losses from certain types of limited
partnerships in which a shareholder is a limited partner) against such income.
In addition, taxable distributions from the Company generally will be treated as
investment income for purposes of the investment interest limitations. Capital
gains from the disposition of Common Stock (or distributions treated as such),
however, will be treated as investment income only if the shareholder so elects.
Because the Company may own some REMIC Residual Interests, it is likely
that shareholders will not be permitted to offset certain portions of the
dividend income they derive from the Company with their current deductions or
net operating loss carryovers or carrybacks. The portion of a shareholder's
dividends that will be subject to this limitation will equal such shareholder's
allocable share of any Excess Inclusion income derived by the Company with
respect to the REMIC Residual Interests. The Company's Excess Inclusion income
for any calendar quarter will equal the excess of its income from REMIC Residual
Interests over its "daily accruals" with respect to such REMIC Residual
Interests for the calendar quarter. Daily accruals for a calendar quarter are
computed by allocating to each day on which a REMIC Residual Interest is owned a
ratable portion of the product of (i) the "adjusted issue price" of the REMIC
Residual Interest at the beginning of the quarter and (ii) 120% of the long-term
federal interest rate (adjusted for quarterly compounding) on the date of
issuance of the REMIC Residual Interest. The adjusted issue price of a REMIC
Residual Interest at the beginning of a calendar quarter equals the original
issue price of the REMIC Residual Interest, increased by the amount of daily
accruals for prior quarters and decreased by all prior distributions to the
Company with respect to the REMIC Residual Interest. To the extent provided in
future Treasury Regulations, the Excess Inclusion income with respect to any
REMIC Residual Interests owned by the Company that do not have significant value
will equal the entire amount of the income derived from such REMIC Residual
Interests. Furthermore, to the extent that the Company (or a qualified REIT
subsidiary) acquires or originates Mortgage Loans and issues non-REMIC CMOs
secured by such Mortgage Loans in a debt securitization ("Non-REMIC
Transactions"), it is possible that, to the extent provided in future Treasury
Regulations, shareholders will not be permitted to offset certain portions of
the dividend income that they derive from the Company that are attributable to
Non-REMIC Transactions with current deductions or net operating loss carryovers
or carrybacks. Although no applicable Treasury Regulations have yet been
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issued, no assurance can be provided that such regulations will not be issued in
the future or that, if issued, such regulations will not prevent the Company's
shareholders from offsetting some portion of their dividend income with
deductions or losses from other sources.
TAXATION OF SHAREHOLDERS ON THE DISPOSITION OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as a capital gain or loss. Lower marginal tax rates for non-corporate taxpayers
may apply in the case of capital gains, depending on the holding period of the
shares of the Company's Common Stock that are sold. See "-- Capital Gains and
Losses". Any loss upon a sale or exchange of Common Stock by a shareholder 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 Company required to be treated by such shareholder as
long-term capital gain. All or a portion of any loss realized upon a taxable
disposition of the Common Stock may be disallowed if other shares of Common
Stock are purchased within 30 days before or after the disposition.
CAPITAL GAINS AND LOSSES
For non-corporate taxpayers, the tax rate differential between capital gain
and ordinary income may be significant. The highest marginal income tax rate
applicable to a non-corporate taxpayer's ordinary income is 39.6 percent. Any
capital gain generally will be taxed to a non-corporate taxpayer at a maximum
rate of 20 percent with respect to capital assets held for more than 18 months,
and generally will be taxed at a maximum rate of 28 percent with respect to
capital assets held for more than one year but not more than 18 months. The tax
rates applicable to ordinary income apply to gain attributable to the sale or
exchange of capital assets held for one year or less. In the case of capital
gain attributable to the sale or exchange of certain real property held for more
than 18 months, an amount of such gain equal to the amount of all prior
depreciation deductions not otherwise required to be taxed as ordinary
depreciation recapture income will be taxed at a maximum rate of 25 percent.
With respect to distributions designated by a REIT as capital gain dividends,
the REIT may also designate (subject to certain limits) whether the dividend is
taxable to shareholders as a 20 percent rate distribution, an unrecaptured
depreciation distribution taxed at a 25 percent rate, or a 28 percent rate
distribution.
The characterization of income as capital gain or ordinary income may
affect the deductibility of capital losses. Capital losses not offset by capital
gains may be deducted against a non-corporate taxpayer's ordinary income only up
to a maximum annual amount of $3,000. Unused capital losses may be carried
forward indefinitely by a non-corporate taxpayer. All net capital gain of a
corporate taxpayer is subject to tax at ordinary corporate rates. A corporate
taxpayer can deduct capital losses only to the extent of capital gains, with
unused losses being carried back three years and forward five years.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Company will report to its U.S. Shareholders and to the Service the
amount of distributions paid during each calendar year, and the amount of tax
withheld, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 31% with respect to distributions
paid unless such holder (i) is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide the Company with
his correct taxpayer identification number also may be subject to penalties
imposed by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their nonforeign status to the Company. The Treasury
Department issued final regulations in October 1997 regarding the backup
withholding rules as applied to Non-U.S. Shareholders. The new regulations will
alter the current system of backup withholding compliance and generally will be
effective for distributions made after December 31, 1998. See "-- Taxation of
Non-U.S. Shareholders."
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TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts ("Exempt Organizations"),
generally are exempt from federal income taxation. However, they are subject to
taxation on their unrelated business taxable income ("UBTI"). While many
investments in real estate generate UBTI, the Service has issued a published
ruling that dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, provided that the shares of the REIT are not
otherwise used in an unrelated trade or business of the exempt employee pension
trust. Based on that ruling, amounts distributed by the Company to Exempt
Organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of the Common Stock with debt, a portion
of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules. Furthermore, social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans that are exempt from taxation under paragraphs (7),
(9), (17), and (20), respectively, of Code section 501(c) are subject to
different UBTI rules, which generally will require them to characterize
distributions from the Company as UBTI. In addition, in certain circumstances, a
pension trust that owns more than 10% of the Company's stock is required to
treat a percentage of the dividends from the Company as UBTI (the "UBTI
Percentage"). The UBTI Percentage is the gross income, less direct expenses,
derived by the Company from an unrelated trade or business (determined as if the
Company were a pension trust) divided by the gross income, less direct expenses,
of the Company for the year in which the dividends are paid. The UBTI rule
applies to a pension trust holding more than 10% of the Company's stock only if
(i) the UBTI Percentage is at least 5%, (ii)the Company qualifies as a REIT by
reason of the modification of the 5/50 Rule that allows the beneficiaries of the
pension trust to be treated as holding shares of the Company in proportion to
their actuarial interests in the pension trust, and (iii) either (A) one pension
trust owns more than 25% of the value of the Company's stock or (B) a group of
pension trusts individually holding more than 10% of the value of the Company's
stock collectively owns more than 50% of the value of the Company's stock.
Any dividends received by an Exempt Organization that are allocable to
Excess Inclusion will be treated as UBTI. In addition, the Company will be
subject to tax at the highest marginal corporate rate on the portion of any
Excess Inclusion income derived by the Company from any REMIC Residual Interest
that is allocable to stock of the Company held by Disqualified Organizations.
(It should be noted, however, that the Charter prohibits Disqualified
Organizations from owning any shares of the Company's stock. See "Description of
Capital Stock -- Restrictions on Ownership and Transfer.") Any such tax would be
deductible by the Company against its income other than Excess Inclusion income
with respect to the REMIC Residual Interest.
If the Company derives Excess Inclusion income from REMIC Residual
Interests, a tax similar to the tax on the Company described in the preceding
paragraph may be imposed on shareholders who are (i) pass-through entities
(i.e., partnerships, estates, trusts, regulated investment companies, REITs,
common trust funds, and certain types of cooperatives (including farmers'
cooperatives described in section 521 of the Code)) in which a Disqualified
Organization is a record holder of shares or interests and (ii) nominees who
hold Common Stock on behalf of Disqualified Organizations. Consequently, a
brokerage firm that holds shares of Common Stock in a "street name" account for
a Disqualified Organization may be subject to federal income tax on the Excess
Inclusion income derived from those shares.
The Treasury Department has been authorized to issue regulations regarding
issuances by a REIT of CMOs in Non-REMIC Transactions. If such Treasury
regulations are issued in the future preventing taxable shareholders from
offsetting some percentage of the dividends paid by the Company with deductions
or losses from other sources, that same percentage of the Company's dividends
would be treated as UBTI for shareholders that are Exempt Organizations. See
"-- Taxation of Taxable U.S. Shareholders."
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex and
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no attempt will be made herein to provide more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF FEDERAL, STATE, AND LOCAL INCOME TAX LAWS WITH REGARD TO
AN INVESTMENT IN THE COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions to Non-U.S. Shareholders that are neither attributable to
gain from sales or exchanges by the Company of U.S. real property interests nor
designated by the Company as capital gain dividends or retained capital gains
will be treated as dividends of ordinary income to the extent that they are made
out of the Company's current or accumulated earnings and profits. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common Stock
is treated as effectively connected with the Non-U.S. Shareholder's conduct of a
U.S. trade or business, the Non-U.S. Shareholder generally will be subject to
tax at graduated rates in the same manner as U.S. shareholders are taxed with
respect to such dividends (and may also be subject to the 30% branch profits tax
if the shareholder is a foreign corporation). The Company will withhold U.S.
income tax at the rate of 30% of the gross amount of any dividends paid to a
Non-U.S. Shareholder that are not designated as capital gain dividends unless
(i) a lower treaty rate or exemption applies and the required form (if any)
evidencing eligibility for that reduced rate or exemption is filed with the
Company or (ii) the Non-U.S. Shareholder files an IRS Form 4224 with the Company
claiming that the distribution is "effectively connected" income. The IRS issued
final regulations in October 1997 that will modify the manner in which the
Company complies with its obligations to withhold against distributions to
Non-U.S. Shareholders. The new regulations generally will be effective for
distributions made after December 31, 1998.
Any portion of the dividends paid to Non-U.S. Shareholders that is treated
as Excess Inclusion income will not be eligible for exemption from the 30%
withholding tax or for a reduced treaty rate. In addition, if Treasury
Regulations that allocate the Company's Excess Inclusion income from non-REMIC
transactions among its stockholders ultimately are issued, some percentage of
the Company's dividends paid to Non-U.S. Shareholders would not be eligible for
exemption from the 30% withholding tax or for a reduced treaty withholding tax
rate. See "-- Taxation of Taxable U.S. Shareholders."
Distributions in excess of the Company's current and accumulated earnings
and profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's Common Stock, but will instead
reduce the adjusted basis of such shares. To the extent that such distributions
exceed the adjusted basis of a Non-U.S. Shareholder's shares, they will be
taxable if the Non-U.S. Shareholder is otherwise subject to tax on any gain
realized from the sale or disposition of his shares of Common Stock as described
below. Because it generally cannot be determined at the time a distribution is
made whether such distribution is in excess of current and accumulated earnings
and profits, the Company generally will withhold from such distributions at the
rate applicable to dividends. The Company is required to withhold 10% of any
distribution to a Non-U.S. Shareholder in excess of the Company's current and
accumulated earnings and profits to the extent such shares of Common Stock
constitute "U.S. real property interests" under section 897(c) of the Code.
Accordingly, although the Company generally intends to withhold at a rate of 30%
on the entire amount of the distribution, any portion of the distribution not
subject to withholding at a rate of 30% may be subject to withholding at a rate
of 10%. A Non-U.S. Shareholder may seek a refund of withholding tax from the
Service to the extent that the amount withheld from a distribution was, in fact,
in excess of the U.S. income tax due with respect to such distribution.
The Company is required by currently applicable Treasury Regulations to
withhold 35% of any distribution that could be designated by the Company as a
capital gain dividend. The amount withheld may be credited against the Non-U.S.
Shareholder's U.S. federal income tax liability.
For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from sales or exchanges by the Company of U.S. real
property interests will be taxed to a Non-U.S. Shareholder under section 897(c)
of the Code as if such gain were effectively connected with a U.S. business.
Thus, Non-U.S. Shareholders will be taxed on such distributions at the normal
capital gain rates applicable to U.S.
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shareholders (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). Also,
distributions that are attributable to gain from sales or exchanges by the
Company of U.S. real property interests may be subject to a 30% branch profits
tax in the hands of a corporate Non-U.S. Shareholder that is not entitled to
treaty relief or exemption.
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
shares of Common Stock generally will not be subject to U.S. tax unless the
Common Stock constitutes a "United States real property interest" within the
meaning of section 897 of the Code. The Common Stock will not constitute a
"United States real property interest" so long as the Company qualifies as a
"domestically controlled REIT." A domestically controlled REIT is a REIT less
than 50% in value of whose stock is held, directly or indirectly, by Non-U.S.
Shareholders at all times during a specified testing period. Because the Company
will be publicly traded, there can be no assurance that it will qualify as a
domestically controlled REIT. If the Company does not qualify (or ceases to
qualify) as a domestically controlled REIT, whether gain arising from the sale
or exchange of Common Stock by a Non-U.S. Shareholder would be subject to U.S.
tax will depend upon the size of the selling Non-U.S. Shareholder's interest in
the Company. If gain on the sale or exchange of the Common Stock were subject to
tax under section 897 of the Code, then the Non-U.S. Shareholder would be
subject to regular U.S. income tax with respect to such gain in the same manner
as a U.S. Shareholder (subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals,
and the possible application of the 30% branch profits tax in the case of
foreign corporations).
Gain from the sale or exchange of Common Stock not otherwise taxable under
section 897 will be subject to U.S. federal income tax if (i) the investment in
Common Stock is treated as effectively connected with a U.S. trade or business
of the Non-U.S. Shareholder, in which case the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect to such gain, or
(ii) the Non.-U.S. Shareholder is a nonresident alien individual who is present
in the United States for 183 days or more during the taxable year and has a "tax
home" in the United States, in which case the individual will be subject to a
30% tax on the individual's capital gains.
STATE AND LOCAL TAXES
The Company, the General Partner, the Initial Limited Partner, the
Operating Partnership or the Company's shareholders may be subject to state and
local tax in various states and localities, including those states and
localities in which it or they transact business, own property, or reside. The
state and local tax treatment of the Company and its shareholders in such
jurisdictions may differ from the federal income tax treatment described above.
Consequently, prospective shareholders should consult their own tax advisors
regarding the effect of state and local tax laws upon an investment in the
Common Stock.
SALE OF THE COMPANY'S PROPERTY
Any gain realized by the Company on the sale of any property (other than
Foreclosure Property) held as inventory or held primarily for sale to customers
in the ordinary course of the Company's trade or business will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax. See
"-- Requirements for Qualification -- Income Tests." Any gain realized by the
Company on the sale of Foreclosure Property that is held as inventory or that is
held primarily for sale to customers in the ordinary course of the Company's
trade or business will be subject to tax at the maximum corporate rate. See
"-- Requirements for Qualification -- Income Tests." The Company does not
presently intend to acquire or hold properties that constitute inventory or
other property held primarily for sale to customers in the ordinary course of
the Company's trade or business.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA,
and the prohibited transaction provisions of section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "-- Status of the Company under ERISA," to a prospective
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purchaser that is not an employee benefit plan, another tax-qualified retirement
plan, or an individual retirement account ("IRA")). The discussion does not
purport to deal with all aspects of ERISA or section 4975 of the Code that may
be relevant to particular shareholders (including plans subject to Title I of
ERISA, other retirement plans and IRAs subject to the prohibited transaction
provisions of section 4975 of the Code, and governmental plans or church plans
that are exempt from ERISA and section 4975 of the Code but that may be subject
to state law requirements) in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial, or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON STOCK ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA SHOULD CONSULT ITS OWN LEGAL ADVISOR REGARDING THE
SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND STATE
LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON STOCK BY SUCH
PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of a certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts (a "Plan") subject to Title I
of ERISA should consider carefully whether an investment in the Common Stock is
consistent with his fiduciary responsibilities under ERISA. In particular, the
fiduciary requirements of Part 4 of Title I of ERISA require an Plan's
investment to be (i) prudent and in the best interests of the Plan, its
participants, and its beneficiaries, (ii) diversified in order to minimize the
risk of large losses, unless it is clearly prudent not to do so, and (iii)
authorized under the terms of the Plan's governing documents (provided the
documents are consistent with ERISA). In determining whether an investment in
the Common Stock is prudent for purposes of ERISA, the appropriate fiduciary of
a Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the Plan's portfolio for which
the fiduciary has investment responsibility, to meet the objectives of the Plan,
taking into consideration the risk of loss and opportunity for gain (or other
return) from the investment, the diversification, cash flow, and funding
requirements of the Plan's portfolio. A fiduciary also should take into account
the nature of the Company's business, the management of the Company, the length
of the Company's operating history, the fact that certain investment assets may
not have been identified yet, and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or because it does
not cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
Fiduciaries of Plans and persons making the investment decision for an IRA
or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an Plan
or with respect to a Plan or IRA subject to Code section 4975 is subject to (i)
an initial 15% excise tax on the amount involved in any prohibited transaction
involving the assets of the plan or IRA and (ii) an excise tax equal to 100% of
the amount involved if any prohibited transaction is not corrected. If the
disqualified person who engages in the transaction is the individual on behalf
of whom an IRA is maintained (or his beneficiary), the IRA will lose its
tax-exempt status and its assets will be deemed to have been distributed to such
individual in a taxable distribution (and no excise tax will be imposed) on
account of the prohibited transaction. In addition, a fiduciary who permits a
Plan to engage in a transaction that the fiduciary knows or should know is a
prohibited transaction may be liable to the Plan for any loss the Plan incurs as
a result of the transaction or for any profits earned by the fiduciary in the
transaction.
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STATUS OF THE COMPANY UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interests in the entity is a Plan or is a Non-ERISA
Plan or IRA subject to section 4975 of the Code. A Plan fiduciary also should
consider the relevance of those principles to ERISA's prohibition on improper
delegation of control over or responsibility for "plan assets" and ERISA's
imposition of co-fiduciary liability on a fiduciary who participates in, permits
(by action or inaction) the occurrence of, or fails to remedy a known breach by
another fiduciary.
If the assets of the Company are deemed to be "plan assets" under ERISA,
(i) the prudence standards and other provisions of Part 4 of Title I of ERISA
would be applicable to any transactions involving the Company's assets, (ii)
persons who exercise any authority over the Company's assets, or who provide
investment advice to the Company, would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each Plan that acquires
Common Stock, and transactions involving the Company's assets undertaken at
their direction or pursuant to their advice might violate their fiduciary
responsibilities under ERISA, especially with regard to conflicts of interest,
(iii) a fiduciary exercising his investment discretion over the assets of a Plan
to cause it to acquire or hold the Common Stock could be liable under Part 4 of
Title I of ERISA for transactions entered into by the Company that do not
conform to ERISA standards of prudence and fiduciary responsibility, and (iv)
certain transactions that the Company might enter into in the ordinary course of
its business and operations might constitute "prohibited transactions" under
ERISA and the Code.
Regulations of the DOL defining "plan assets" (the "Plan Asset
Regulations") generally provide that when a Plan or Non-ERISA Plan or IRA
acquires a security that is an equity interest in an entity and the security is
neither a "publicly-offered security" nor a security issued by an investment
company registered under the Investment Company Act of 1940, the Plan's or
Non-ERISA Plan's or IRA's assets include both the equity interest and an
undivided interest in each of the underlying assets of the issuer of such equity
interest, unless one or more exceptions specified in the Plan Asset Regulations
are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or sold pursuant to an effective registration statement under
the Securities Act (provided the securities are registered under the Exchange
Act within 120 days after the end of the fiscal year of the issuer during which
the offering occurred). The Common Stock is being sold in an offering registered
under the Securities Act and will be registered under the Exchange Act. The Plan
Asset Regulations provide that a security is "widely held" only if it is part of
a class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The Company
anticipates that upon completion of this offering, the Common Stock will be
"widely held."
The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state law or court
order, (ii) any requirement that advance notice of a transfer or assignment be
given to the issuer, (iii) any administrative procedure that establishes an
effective date, or an event (such as completion of an offering), prior to which
a transfer or assignment will not be effective, and (iv) any limitation or
restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Articles of Incorporation on the transfer of the
Company's stock will not result in the failure of the Common Stock to be
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"freely transferable." The Company also is not aware of any other facts or
circumstances limiting the transferability of the Common Stock that are not
enumerated in the Plan Asset Regulations as those not affecting free
transferability, and no assurance can be given that the DOL or the Treasury
Department will not reach a contrary conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Stock, the shares of Common
Stock should be publicly offered securities and the assets of the Company should
not be deemed to be "plan assets" of any Plan, IRA, or Non-ERISA Plan that
invests in the Common Stock.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
AND REAL PROPERTY INVESTMENTS
The Company intends primarily to acquire Subordinated Interests, Mezzanine
Loans and Opportunistic Real Property, but also may acquire Mortgage Loans and
other Real Property. Even though the Company will not own Mortgage Loans
directly in connection with its acquisition of Subordinated Interests, its
return thereon and on Opportunistic Mortgage Loans will depend upon, among other
things, the ability of the servicer of the underlying Mortgage Loans to
foreclose upon those Mortgage Loans in default and sell the underlying Real
Property. There are a number of legal considerations involved in the acquisition
of Mortgage Loans or Real Property or the foreclosure and sale of defaulted
Mortgage Loans (whether individually or as part of a series of mortgage-backed
securities). The following discussion provides general summaries of certain
legal aspects of loans secured by real property and the acquisition of real
property. Because such legal aspects are governed by applicable state law (which
laws vary from state to state), the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all
states. Accordingly, the summaries are qualified in their entirety by reference
to the applicable laws of the states where the property is located. The
summaries are not based upon opinions of legal counsel.
GENERAL
Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the prevailing
practice and law in the state in which the related Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as "mortgages." A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of separate
subordination agreements or intercreditor agreements with others that hold
interests in the real property, the knowledge of the parties to the mortgage
and, generally, the order of recordation of the mortgage in the appropriate
public recording office. However, the lien of a recorded mortgage will generally
be subordinate to later-arising liens for real estate taxes and assessments and
other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
borrower), a trustee to whom the real property is conveyed, and a beneficiary
(the lender) for whose benefit the conveyance is made. Under a deed of trust,
the trustor grants the property, irrevocably until the debt is paid, in trust
and generally with a power of sale, to the trustee to secure repayment of the
indebtedness evidenced by the related note. A deed to secure debt typically has
two parties. The grantor (the borrower) conveys title to the real property to
the grantee (the lender), generally with a power of sale, until such time as the
debt is repaid. The mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust and the grantee's authority under a deed to
secure debt are governed by the express
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provisions of the related instrument, the law of the state in which the real
property is located, certain federal laws and, in some deed of trust
transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
The potential payments from a property may be less than the periodic
payments due under the mortgage. For example, the net income that would
otherwise be generated from the property may be less than the amount that would
be needed to service the debt if the leases on the property are at below-market
rents, the market rents have fallen since the original financing, vacancies have
increased, or as a result of excessive or increased maintenance, repair or other
obligations to which a lender succeeds as landlord.
CONDEMNATION AND INSURANCE
The form of the mortgage or deed of trust used by many lenders confers on
the mortgagee or beneficiary the right both to receive all proceeds collected
under any hazard insurance policy and all awards made in connection with any
condemnation proceedings, and to apply such proceeds and awards to any
indebtedness secured by the mortgage or deed of trust, in such order as the
mortgage or beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or in the event the
property is taken by condemnation, the mortgagee or beneficiary under the senior
mortgage or deed of trust will have the prior right to collect any insurance
proceeds payable under a hazard insurance policy and any award of damages in
connection with the condemnation and to apply the same to the indebtedness
secured by the senior mortgage or deed of trust. Proceeds in excess of the
amount of senior mortgage indebtedness will, in most cases, be applied to the
indebtedness of a junior mortgage or trust deed to the extent the junior
mortgage or deed of trust so provides. The laws of certain states may limit the
ability of mortgagees or beneficiaries to apply the proceeds of hazard insurance
and partial condemnation awards to the secured indebtedness. In such states, the
mortgagor or trustor must be allowed to use the proceeds of hazard insurance to
repair the damage unless the security of the mortgagee or beneficiary has been
impaired. Similarly, in certain states, the mortgagee or beneficiary is entitled
to the award for a partial condemnation of the real property security only to
the extent that its security is impaired.
FORECLOSURE
GENERAL. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal remedies
under the mortgage. If the borrower defaults in payment or performance of its
obligations under the note or mortgage, the lender has the right to institute
foreclosure proceedings to sell the real property at public auction to satisfy
the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and non-judicial foreclosure pursuant to a power of sale granted in the mortgage
instrument. Other foreclosure procedures are available in some states, such as
strict foreclosure, but they are either infrequently used or available only in
limited circumstances.
JUDICIAL FORECLOSURE. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action is
initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. A foreclosure action is subject to most of the
delays and expenses of other lawsuits if defenses are raised or counterclaims
are interposed, and sometimes requires several years to complete. When the
lender's right to foreclose is contested, the legal proceedings can
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be time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints a
referee or other officer to conduct a public sale of the mortgaged property, the
proceeds of which are used to satisfy the judgment. Such sales are made in
accordance with procedures that vary from state to state.
NON-JUDICIAL FORECLOSURE/POWER OF SALE. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale pursuant to a power of
sale typically granted in the deed of trust. A power of sale may also be
contained in any other type of mortgage instrument if applicable law so permits.
A power of sale under a deed of trust allows a non-judicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable state
law. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without regard to the acceleration of the
indebtedness), plus the lender's expenses incurred in enforcing the obligation.
In other states, the borrower or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, state law governs the procedure for
public sale, the parties entitled to notice, the method of giving notice and the
applicable time periods.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS. United
States courts have traditionally imposed general equitable principles to limit
the remedies available to lenders in foreclosure actions. These principles are
generally designed to relieve borrowers from the effects of mortgage defaults
perceived as harsh or unfair. Relying on such principles, a court may alter the
specific terms of a loan to the extent it considers necessary to prevent or
remedy an injustice, undue oppression or overreaching, or may require the lender
to undertake affirmative actions to determine the cause of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose in the
case of a non-monetary default, such as a failure to adequately maintain the
mortgaged property or an impermissible further encumbrance of the mortgaged
property.
Even if the lender is successful in the foreclosure action and is able to
take possession of the property, the costs of operating and maintaining a
commercial or multifamily property may be significant and may be greater than
the income derived from that property. The costs of management and operation of
those mortgaged properties which are hotels, motels, restaurants, nursing homes,
convalescent homes or hospitals may be particularly significant because of the
expertise, knowledge and with respect to nursing or convalescent homes,
regulatory compliance, required to run such operations and the effect which
foreclosure and a change in ownership may have with respect to consent
requirements and on the public's and the industry's (including franchisors')
perception of the quality of such operations. The lender also will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale or lease of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Moreover, because of the expenses
associated with acquiring, owning and selling a mortgaged property, a lender
could realize an overall loss on a mortgage loan even if the mortgaged property
is sold at foreclosure, or resold after it is acquired through foreclosure, for
an amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
POST-SALE REDEMPTION. In a majority of states, after sale pursuant to a
deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property. In some
states, statutory redemption may occur only upon payment of the foreclosure sale
price. In other states, redemption may be permitted if the former borrower pays
only a portion of the sums due. In some
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states, the borrower retains possession of the property during the statutory
redemption period. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property because the exercise
of a right of redemption would defeat the title of any purchaser through a
foreclosure. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION. Any commercial or multi-family residential
mortgage loans acquired by the Company are likely to be nonrecourse loans, as to
which recourse in the case of default will be limited to the property and such
other assets, if any, that were pledged to secure the mortgage loan. However,
even if a mortgage loan by its terms provides for recourse to the borrower's
other assets, a lender's ability to realize upon those assets may be limited by
state law. For example, in some states a lender cannot obtain a deficiency
judgment against the borrower following foreclosure or sale under a deed of
trust or by non-judicial means. Other statutes may require the lender to exhaust
the security afforded under a mortgage before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of those states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and thus may be
precluded from foreclosing upon the security. Consequently, lenders in those
states where such an election of remedy provision exists may choose to proceed
first against the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
COOPERATIVES. Mortgage loans may be secured by a security interest on the
borrower's ownership interest in shares, and the proprietary leases appurtenant
thereto (or cooperative contract rights), allocable to cooperative dwelling
units that may be vacant or occupied by non-owner tenants. Such loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of a borrower in real property. Such a loan typically is
subordinate to the mortgage, if any, on the cooperative's building which, if
foreclosed, could extinguish the equity in the building and the proprietary
leases of the dwelling units derived from ownership of the shares of the
cooperative. Further, transfer of shares in a cooperative are subject to various
regulations as well as to restrictions (including transfer restrictions) under
the governing documents of the cooperative, and the shares may be canceled in
the event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, the lender with an opportunity to
cure a default under a proprietary lease but such recognition agreements may not
have been obtained in the case of all the mortgage loans secured by cooperative
shares (or contract rights).
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the Uniform Commercial Code (the "UCC") and the security agreement relating
to the shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner, which may be dependent upon, among other
things, the notice given to the debtor and the method, manner, time, place and
terms of the sale. Article 9 of the UCC provides that the proceeds of the sale
will be applied first to pay the costs and expenses of the sale and then to
satisfy the indebtedness secured by the lender's security interest. A
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative to receive sums due
under the proprietary leases.
BANKRUPTCY LAWS
Operation of Title 11 of the United States Code, as amended (the
"Bankruptcy Code") and related state laws may interfere with or affect the
ability of a lender to realize upon collateral and/or to enforce a deficiency
judgment. For example, under the Bankruptcy Code, virtually all actions
(including foreclosure actions and deficiency judgment proceedings) to collect a
debt are automatically stayed upon the filing of the bankruptcy petition and,
often, no interest or principal payments are made during the course of the
bankruptcy case. The delay and the consequences thereof caused by such automatic
stay can be significant. Moreover, a junior
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lienholder may encourage the filing of a bankruptcy petition, or participate in
an involuntary filing, in order to stay a senior lienholder from taking action
to foreclose out such junior lienholder's interest.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a mortgage
loan secured by a lien on property of the debtor may be modified under certain
circumstances. For example, the outstanding amount of the loan may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration of
the repayment schedule (with or without affecting the unpaid principal balance
of the loan), and/or by an extension (or shortening) of the term to maturity.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of the secured lender to enforce the borrower's assignment
of rents and leases related to the mortgaged property. Under section 362 of the
Bankruptcy Code, the lender will be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. In addition, the
Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in rents, fees, charges or other revenues from
hotels or other properties continues in such rents, fees, charges or other
revenues acquired after the filing of a petition in bankruptcy unless the
bankruptcy court orders to the contrary "based on the equities of the case."
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related mortgage loan to the owner of such mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust, and such priority generally will be upheld in the
event of a bankruptcy filing. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
The Company's acquisition of real property, particularly REO Property, may
be affected by many of the considerations applicable to mortgage loan lending.
For example, the Company's acquisition of certain property at foreclosure sale
could be affected by a borrower's post-sale right of redemption. In addition,
the Company's ability to derive income from real property will generally be
dependent on its receipt of rent payments under leases of the related property.
The ability to collect rents may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a lessee results in a stay
in bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a summary
eviction order with respect to a default under the lease that occurred prior to
the filing of the lessee's petition. In addition, the Bankruptcy Code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court, (i) assume the lease and retain it or assign it to a third party or (ii)
reject the lease. If the lease is assumed, the trustee or debtor-in-possession
(or assignee, if applicable) must cure any defaults under the lease (except for
certain defaults unrelated to breaches of monetary obligations under the lease),
compensate the lessor for its losses and provide the lessor with "adequate
assurance" of future performance. Such remedies may be insufficient, and any
assurances provided to the lessor may, in fact, be inadequate. If the lease is
rejected, the lessor will be treated as an unsecured creditor with respect to
its claim for damages for termination of the lease. The Bankruptcy Code also
limits a lessor's
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damages for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and in
some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges that a lender may collect from a borrower for
delinquent payments. Certain states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
ENVIRONMENTAL RISKS
GENERAL. The Company will be subject to environmental risks when taking a
security interest in real property, as well as when it acquires any real
property. Of particular concern may be properties that are or have been used for
industrial, manufacturing, military or disposal activity. Such environmental
risks include the risk of the diminution of the value of a contaminated property
or, as discussed below, liability for the costs of compliance with environmental
regulatory requirements or the costs of clean-up or other remedial actions.
These compliance or clean-up costs could exceed the value of the property or the
amount of the lender's loan. In certain circumstances, a lender could determine
to abandon a contaminated mortgaged property as collateral for its loan rather
than foreclose and risk liability for compliance or clean-up costs.
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators" of contaminated real property for the
costs of clean-up. A secured lender may be liable as an "owner" or "operator" of
a contaminated mortgaged property if agents or employees of the lender have
become sufficiently involved in the management of such mortgaged property or the
operations of the borrower. Such liability may exist even if the lender did not
cause or contribute to the contamination and regardless of whether the lender
has actually taken possession of a mortgaged property through foreclosure, deed
in lieu of foreclosure or otherwise. The magnitude of the CERCLA liability at
any given contaminated site is a function of the actions required to address
adequately the risks to human health and the environment posed by the particular
conditions at the site. As a result, such liability is not constrained by the
value of the property or the amount of the original or unamortized principal
balance of any loans secured by the property. Moreover, under certain
circumstances, liability under CERCLA may be joint and several -- i.e., any
liable party may be obligated to pay the entire cleanup costs regardless of its
relative contribution to the contamination.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "1996 Lender Liability Act") provides for a safe harbor for secured lenders
from CERCLA liability even though the lender
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forecloses and sells the real estate securing the loan, provided the secured
lender sells "at the earliest practicable, commercially reasonable time, at
commercially reasonable terms, taking into account market conditions and legal
and regulatory requirements." Although the 1996 Lender Liability Act provides
significant protection to secured lenders, it has not been construed by the
courts and there are circumstances in which actions taken could expose a secured
lender to CERCLA liability. And, the transferee from the secured lender is not
entitled to the protections enjoyed by a secured lender. Hence, the
marketability of any contaminated real estate continues to be suspect.
CERTAIN OTHER FEDERAL AND STATE LAWS. Many states have environmental
clean-up statutes similar to CERCLA, and not all those statutes provide for a
secured creditor exemption. In addition, underground storage tanks are commonly
found on a wide variety of commercial and industrial properties. Federal and
state laws impose liability on the owners and operators of underground storage
tanks for any cleanup that may be required as a result of releases from such
tanks. These laws also impose certain compliance obligations on the tank owners
and operators, such as regular monitoring for leaks and upgrading of older
tanks. The Company may become a tank owner or operator and subject to compliance
obligations and potential cleanup liabilities, either as a result of becoming
involved in the management of a site at which a tank is located or, more
commonly, by taking title to such a property. Federal and state laws also
obligate property owners and operators to maintain and, under some
circumstances, to remove asbestos-containing building materials and lead-based
paint. As a result, the presence of these materials can increase the cost of
operating a property and thus diminish its value. In a few states, transfers of
some types of properties are conditioned upon cleanup of contamination prior to
transfer. In these cases, a lender that becomes the owner of a property through
foreclosure, deed in lieu of foreclosure or otherwise, may be required to clean
up the contamination before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law causes
of action (for example, actions based on nuisance or on toxic tort resulting in
death, personal injury or damage to property) related to hazardous environmental
conditions on a property.
SUPERLIEN LAWS. Under the laws of many states, contamination of a property
may give rise to a lien on the property for clean-up costs. In several states,
such a lien has priority over all existing liens, including those of existing
mortgages. In these states, the lien of a mortgage may lose its priority to such
a "superlien."
ADDITIONAL CONSIDERATIONS. The cost of remediating environmental
contamination at a property can be substantial. To reduce the likelihood of
exposure to such losses, the Company will not acquire title to a Mortgaged
Property or take over its operation unless, based on an environmental site
assessment prepared by a qualified environmental consultant, it has made the
determination that it is appropriate to do so. The Company expects that it will
organize a special purpose subsidiary to acquire any environmentally
contaminated real property.
ENVIRONMENTAL SITE ASSESSMENTS. In addition to possibly allowing a lender
to qualify for the innocent landowner defense (see discussion under
"-- Environmental Risks" and " -- CERCLA" above), environmental site assessments
can be a valuable tool in anticipating, managing and minimizing environmental
risk. They are commonly performed in many commercial real estate transactions.
Environmental site assessments vary considerably in their content and
quality. Even when adhering to good professional practices, environmental
consultants will sometimes not detect significant environmental problems because
an exhaustive environmental assessment would be far too costly and
time-consuming to be practical. Nevertheless, it is generally helpful in
assessing and addressing environmental risks in connection with commercial real
estate (including multifamily properties) to have an environmental site
assessment of a property because it enables anticipation of environmental
problems and, if agreements are structured appropriately, can allow a party to
decline to go forward with a transaction.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply to
certain types of residential (including multifamily) first
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mortgage loans originated by certain lenders after March 31, 1980. Title V
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken action
to reimpose interest rate limits and/or to limit discount points or other
charges.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers that are
structural in nature from existing places of public accommodation to the extent
"readily achievable." In addition, under the ADA, alterations to a place of
public accommodation or a commercial facility are to be made so that, to the
maximum extent feasible, such altered portions are readily accessible to and
usable by disabled individuals. The "readily achievable" standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such requirements on a foreclosing lender who succeeds to the
interest of the borrower as owner or landlord. Furthermore, since the "readily
achievable" standard may vary depending on the financial condition of the owner
or landlord, a foreclosing lender who is financially more capable than the
borrower of complying with the requirements of the ADA may be subject to more
stringent requirements than those to which the borrower is subject.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the underwriters named
below (the "Underwriters") and each of the Underwriters, for whom Friedman,
Billings, Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as
representatives, has severally agreed to purchase, the number of shares of
Common Stock offered hereby set forth below opposite its name.
<TABLE>
<CAPTION>
UNDERWRITER
- ----------- NUMBER OF SHARES
<S> <C>
Friedman, Billings, Ramsey & Co., Inc. .....................
EVEREN Securities, Inc......................................
----------
Total............................................. 9,800,000
==========
</TABLE>
Under the terms and conditions of the agreement pursuant to which the
Underwriters will underwrite the Common Stock (the "Underwriting Agreement"),
the Underwriters are committed to purchase all the shares of Common Stock
offered hereby if any are purchased.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such offering price less a
concession not to exceed $ per share of Common Stock. The Underwriters
may allow and such dealers may reallow a concession not to exceed $ per
share of Common Stock to certain other dealers. After the shares of Common Stock
are released for sale to the public, the offering price and other selling terms
may be changed by the Underwriters.
At the request of the Company, the Underwriters have reserved up to 196,000
shares of Common Stock (225,400 shares if the Underwriters' over-allotment
option is exercised) to be sold in this offering for sale to directors and
officers of the Company and the Manager at the initial public offering price set
forth on the cover page of this Prospectus. Subject to certain limitations, such
individuals will be granted one Option under the Option Plan for each share of
Common Stock purchased in this offering. See "Management of Operations -- Stock
Options." The officers and employees of Lend Lease and its subsidiaries who buy
shares of Common Stock pursuant to such reservation will be required to agree
not to offer or sell or contract to sell or otherwise dispose of any Common
Stock of the Company without the prior consent of the representatives for a
period of one year from the date of the consummation of this offering. In
addition, the Underwriters have reserved up to 686,000 shares of Common Stock to
be sold in this offering (788,900 shares if the Underwriters' over-allotment
option is exercised) for sale to certain clients of the Manager at the initial
public offering price. No underwriting discount will be paid with respect to
such shares. The number of shares of Common Stock available for sale to the
general public in this offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.
The Company has granted to the Underwriters an option exercisable during a
30-day period after the date hereof to purchase, at the initial offering price
less underwriting discounts and commissions, up to an additional 1,470,000
shares of Common Stock for the sole purpose of covering over-allotments, if any.
To the extent that the Underwriters exercise such option, each Underwriter will
be committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment.
FBR Asset Investment Corporation, an affiliate of Friedman, Billings,
Ramsey & Co., Inc., one of the representatives of the Underwriters has agreed to
purchase 700,000 shares of Common Stock in the Private Placement, representing
6.0% of the shares of Common Stock to be outstanding upon consummation of this
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offering and the Private Placement, at a purchase price equal to the initial
public offering price less underwriting discount.
The Company has agreed to indemnify the several Underwriters against
certain civil liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the shares of
Common Stock. The initial public offering price was determined by negotiation
between the Company and the representatives of the Underwriters. Among the
factors considered in making such determination were the history of, and the
prospects for, the industry in which the Company will compete, an assessment of
the skills of the Manager and the Company's prospects for future earnings, the
general conditions of the economy and the securities market and the prices of
offerings by similar issuers. There can, however, be no assurance that the price
at which the shares of Common Stock will sell in the public market after this
offering will not be lower than the price at which they are sold by the
Underwriters.
The representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales of the shares offered hereby to any
accounts over which they exercise discretionary authority.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase Common Stock at a price that exceeds the higher independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two-month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids as such on the
Nasdaq electronic inter-dealer reporting system. Passive market making may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters and dealers are not required to engage in
passive market making and may end passive market making activities at any time.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot this Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase Common Stock in the open market to cover syndicate short positions
or to stabilize the price of the Common Stock. Finally, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
In general, purchases of securities 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. Reclaiming selling concessions
from syndicate members might also have an effect on the price of a security to
the extent that it were to discourage resales of the security.
Neither the Company 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 Common Stock. In addition, neither
the Company 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.
The Company has agreed not to offer, sell or contract to sell or otherwise
dispose of any Common Stock of the Company without the prior consent of the
representatives for a period of 180 days from the date of this Prospectus. Lend
Lease has agreed not to offer, sell or contract to sell or otherwise dispose of
the Common Stock acquired upon consummation of this offering without the prior
consent of the representatives, for a period of two years from consummation of
this offering, provided that the Manager continues to serve as the manager
during such period.
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LEGAL MATTERS
Certain legal matters will be passed upon for the Company by King &
Spalding, Atlanta, Georgia, and for the Underwriters by Hunton & Williams,
Richmond, Virginia.
EXPERTS
The consolidated balance sheet of Chastain Capital Corporation and its
subsidiaries included in this Prospectus has been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and is
included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
THE COMPANY
The Company has filed with the Commission a Registration Statement (of
which this Prospectus forms a part) under the Securities Act, with respect to
the Common Stock offered pursuant to the Prospectus. This Prospectus contains
summaries of the material terms of the documents referred to herein and therein,
but does not contain all of the information set forth in the Registration
Statement pursuant to the rules and regulations of the Commission. For further
information, reference is made to such Registration Statement and the exhibits
thereto. Such Registration Statement and exhibits as well as reports and other
information filed by the Company can be inspected without charge and copied at
prescribed rates at the public reference facilities maintained by the Commission
at the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its Regional Offices located as follows: Chicago
Regional Office, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and New York Regional Office, Seven World Trade Center,
Suite 1300, New York, New York 10048. The Commission maintains a web site that
contains the Registration Statement, reports, proxy, and information statements
and other information regarding registrants that file electronically with the
Commission. The web site is located at http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. In addition to
applicable legal requirements, if any, holders of Common Stock will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accountants.
LEND LEASE
Lend Lease is an Australian publicly held corporation that files reports
and other information with the Australian Securities Commission. Additional
information about Lend Lease may be obtained from the Australian Securities
Commission, Level 16 Chifley Tower, 2 Chifley Square, Sydney NSW 2001, GPO Box
4866 or from their web site, which is located at http://www.asc.gov.au.
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GLOSSARY OF TERMS
Except as otherwise specified or as the context may otherwise require, the
following terms used herein shall have the meanings assigned to them below. All
terms in the singular shall have the same meanings when used in the plural and
vice-versa.
"1996 Lender Liability Act" shall mean the Asset Conservation, Lender
Liability and Deposit Insurance Act of 1996.
"ADA" shall mean the Americans with Disabilities Act of 1990, as amended.
"Advisors Act" shall mean the Investment Advisors Act of 1940, as amended.
"affiliate" shall mean (i) any person directly or indirectly owning,
controlling, or holding, with power to vote ten percent or more of the
outstanding voting securities of such other person, (ii) any person ten percent
or more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held, with power to vote, by such other person, (iii) any person
directly or indirectly controlling, controlled by, or under common control with
such other person, (iv) any executive officer, director, trustee or general
partner of such other person, and (v) any legal entity for which such person
acts as an executive officer, director, trustee or general partner. The term
"person" means and includes any natural person, corporation, partnership,
association, limited liability company or any other legal entity. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters- or brothers-in-law is or has
been associated with a person.
"Agricultural Loan" shall mean a loan that is secured by agricultural
property.
"Allocation Committee" shall mean the committee that determines the
allocation of investments among the Manager's clients.
"Allocation Process" shall mean the Manager's process of allocating new
business opportunities among its various clients without preference being
accorded to any particular client.
"Audit Committee" shall mean the audit committee of the Board of Directors.
"Average Invested Assets" shall mean the average of the aggregate book
value of the assets of the Company (including a proportionate amount of the
Company's direct and indirect subsidiaries), before reserves for depreciation or
bad debts or other similar noncash reserves less (i) uninvested cash balances
and (ii) the book value of the Company's CMO liabilities, computed by taking the
daily average of such values during such period.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended.
"Beneficiary" shall mean a qualified charitable organization selected by
the Company to be the beneficiary of the Trust.
"Board of Directors" shall mean the Board of Directors of the Company.
"Budget Proposal" shall mean the revenue portion of President Clinton's
fiscal 1999 budget proposal released on February 2, 1998.
"Business Combination Statute" shall mean sections 14-2-1131 to 14-2-1133
of the GBCC.
"Bylaws" shall mean the Bylaws of the Company.
"CERCLA" shall mean the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended.
"Charter" shall mean the Articles of Incorporation of the Company.
"Chastain" shall mean Chastain Capital Corporation, a Georgia corporation.
"Check-the-Box Regulations" shall mean the Treasury Regulations effective
January 1, 1997 relating to entity classification.
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"Closing Price" shall mean the average of the high bid and low asked prices
in the over-the-counter market, as reported by The Nasdaq Stock Market.
"CMBS" shall mean commercial, multifamily or agricultural MBS.
"CMO or CMO Bonds" shall mean collateralized mortgage obligations which are
debt obligations of special purpose corporations, owner trusts or other special
purpose entities secured by commercial mortgage loans or MBS.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Column Financial" shall mean Column Financial, Inc.
"Commission" shall mean the Securities and Exchange Commission.
"Common Stock" shall mean the Common Stock, par value $0.01 per share, of
the Company.
"Company" shall mean Chastain Capital Corporation, a Georgia corporation,
together with its subsidiaries, unless the context indicates otherwise.
"Company Expenses" shall mean all administrative costs and expenses of the
Company and the General Partner.
"COMPASS" means Compass Management and Leasing, Inc., an affiliate of the
Manager.
"Compensation Committee" shall mean the Compensation Committee of the Board
of Directors or, if none, the Board of Directors who will be authorized to grant
Options pursuant to the Option Plan.
"Construction Loan" shall mean a loan the proceeds of which are to be used
to finance the costs of construction or rehabilitation of Real Property.
"Crime Control Act" shall mean the Comprehensive Crime Control Act of 1984.
"Directors" means the members of the Company's Board of Directors.
"Directors Stock Plan" shall mean a plan pursuant to which Common Stock
will be issued to each Independent Director as part of their annual director's
fee.
"Disqualified Organization" shall mean the United States, any state or
political subdivision thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, any other
tax-exempt organization (other than a farmer's cooperative described in section
521 of the Code) that is exempt from taxation under the unrelated business
taxable income provisions of the Code, any rural electrical or telephone
cooperative, or any other entity specified in section 860E of the Code.
"Distressed Mortgage Loans" shall mean Subperforming Mortgage Loans and
Nonperforming Mortgage Loans.
"Distressed Real Property" shall mean REO Property and properties that are
at a low point in their particular property cycle and require capital and/or
professional management to improve their condition, appeal and marketability,
but still exhibit good locational characteristics. Distressed Real Property also
includes properties that are subject to conflicts among owners, which may lead
to lost leasing opportunities due to delays in decisions making, capital
programs that lack focus, on site property management that is uncertain as to
how to market the asset, or the inability of one or more of the owners to
provide its costs of ownership.
"DOL" shall mean the Department of Labor.
"Eligible Recipients" shall mean all employees (including officers),
directors and others providing services to the Company, as well as the Manager
and employees (including officers) and directors of the Manager who are eligible
to receive Options at the discretion of the Compensation Committee.
"EQ Services" shall mean EQ Services Inc., an affiliate of ERE that
provided servicing for commercial mortgage backed securities and third party
client portfolios.
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"Equitable Companies" shall mean The Equitable Companies Incorporated.
"Equitable Life" shall mean The Equitable Life Assurance Society of the
United States.
"ERE" shall mean Equitable Real Estate Investment Management Co., Inc.
"ERE Acquisition" shall mean Lend Lease's purchase of ERE from the
Equitable Companies Incorporated in June 1997.
"ERE Hyperion" shall mean Equitable Real Estate Hyperion Capital Advisors,
LLC.
"ERE Yarmouth" shall mean ERE Yarmouth, Inc.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Inclusion" shall have the meaning specified in section 860E(c) of
the Code.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exempt Organizations" shall mean tax-exempt entities, including, but not
limited to, charitable organizations, qualified employee pension and profit
sharing trusts and individual retirement accounts.
"Fair Price Statute" shall mean sections 14-2-1110 to 14-2-1113 of the
GBCC.
"Farmer Mac" shall mean Federal Agricultural Mortgage Corporation.
"FBR" shall mean Friedman, Billings, Ramsey & Co., Inc.
"FBR Registration Rights Agreement" shall mean the registration rights
agreement the Company will enter into with FBR Asset Investment Corporation upon
consummation of the Private Placement.
"FIRPTA" shall mean the Foreign Investment in Real Property Tax Act of
1980.
"Foreclosure Property" shall mean any real property (including interests in
real property) and any personal property incident to such real property (i) that
is acquired by a REIT as the result of such REIT having bid on such property at
foreclosure, or having otherwise reduced such property to ownership or
possession by agreement or process of law, after there was a default (or default
was imminent) on a lease of such property or on an indebtedness owed to the REIT
that such property secured, (ii) for which the related loan was acquired by the
REIT at a time when default was not imminent or anticipated, and (iii) for which
such REIT makes a proper election to treat such property as foreclosure
property.
"Funds From Operations" shall mean net income (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring or sales of property,
plus depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and adjustments for unconsolidated
partnerships and joint ventures.
"GAAP" shall mean generally accepted accounting principles applied on a
consistent basis.
"Garn Act" shall mean the Garn-St Germain Depository Institutions Act of
1982.
"General Partner" shall mean Chastain GP Holdings, Inc., as the sole
general partner of the Operating Partnership.
"GBCC" shall mean the Georgia Business Corporation Code.
"Guidelines" shall mean guidelines that set forth general parameters for
the Company's investments, borrowings and operations.
"High Yield Real Property" shall mean performing Real Property which may
present opportunities for high risk-adjusted returns.
"Hyperion" shall mean Hyperion Capital Management, Inc.
"Independent Director" shall mean a director who is not an affiliate of
Lend Lease, the Manager or the Company.
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"Ineligible Property" shall mean property not eligible for election to be
treated as Foreclosure Property.
"Initial Limited Partner" shall mean Chastain LP Holdings, Inc., as limited
partner of the Operating Partnership.
"Interested Shareholder" shall mean any holder of more than 10% of any
class of outstanding voting shares of the Company.
"Inverse IO" shall mean a class of MBS that is entitled to no (or only
nominal) distributions of principal, but is entitled to interest at a floating
rate that varies inversely with a specified index.
"Investment Committee" shall mean the investment committee of the Manager.
"Investment Company Act" shall mean the Investment Company Act of 1940, as
amended.
"IO" shall mean a class of MBS that is entitled to only payments of
interest and no (or only nominal) distributions of principal.
"IRA" shall mean an individual retirement account.
"Lease" shall mean, with respect to each Mortgaged Property or Real
Property, the agreement pursuant to which the Borrower rents and leases to the
Lessee and the Lessee rents and leases from the Borrower, such Mortgaged
Property or Real Property.
"Lend Lease" shall mean Lend Lease Corporation Limited.
"Lend Lease Registration Rights Agreement" shall mean the registration
rights agreement the Company will enter into with Lend Lease upon consummation
of the Private Placement.
"LIBOR" shall mean the London Interbank Offering Rate for one-month U.S.
Dollar deposits.
"Limited Partners" shall mean the Initial Limited Partner and any
additional persons admitted as limited partners of the Operating Partnership.
"LLPISG" shall mean Lend Lease Property Investment Services.
"Management Agreement" shall mean an agreement or agreements between the
Company and the Manager pursuant to which the Manager performs various services
for the Company.
"Manager" shall mean ERE Yarmouth.
"Market Price" shall mean the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"MBS" shall mean mortgage-backed securities or collateralized mortgage
obligations.
"Mezzanine Investment" shall mean a loan secured by a lien on Real Property
that is subordinate to a lien on such Real Property securing another loan.
Mezzanine Investments may also take the form of preferred equity and will have a
claim against both the operating cash flow and liquidation proceeds from the
specific real estate assets.
"Mortgage Collateral" shall mean mortgage pass-through securities or pools
of whole loans securing or backing a series of MBS.
"Mortgage Loan" shall mean a mortgage loan underlying a series of MBS or a
whole commercial or multifamily mortgage loan held by the Company, as the
context indicates.
"Mortgaged Property" shall mean the real property securing a mortgage loan.
"Mortgage Seller" shall mean a seller of Mortgage Loans.
"NAREIT" shall mean the National Association of Real Estate Investment
Trusts, Inc.
"Net income" shall mean the income of the Company as reported for federal
income tax purposes before the Manager's incentive compensation, net operating
loss deductions arising from losses in prior periods and
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the deduction for dividends paid, plus the effects of adjustments, if any,
necessary to record hedging and interest transactions in accordance with
generally accepted accounting principles.
"Non-ERISA Plan" shall mean a plan that does not cover common law
employees.
"Nonperforming Mortgage Loans" shall mean commercial and multifamily
mortgage loans for which the payment of principal and interest is more than 90
days delinquent.
"Non-REMIC Transaction" shall mean acquiring or originating Mortgage Loans
and issuing non-REMIC CMOs secured by such Mortgage Loans in a debt
securitization.
"Non-U.S. Shareholders" shall mean nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign shareholders.
"Offering Price" shall mean the initial offering price per share to the
public of the Common Stock offered hereby as set forth on the cover page of the
Company's final prospectus.
"OID" shall mean original issue discount.
"Operating Partnership" shall mean Chastain Investments, L.P.
"Operating Partnership Agreement" shall mean the agreement of limited
partnership of the Operating Partnership, as amended from time to time.
"Opportunistic Real Properties" shall mean Distressed Real Property, High
Yield Real Property and Distressed Mortgage Loans.
"Options" shall mean the right to purchase shares of Common Stock or, if
necessary to prevent the recipient from exceeding the Ownership Limitation,
Units in the Operating Partnership that may be redeemed for cash or at the
election of the General Partner, shares of Common Stock on a one-for-one basis
pursuant to the Option Plan.
"Option Plan" shall mean an incentive plan which provides for options to
purchase shares of Common Stock or Units.
"Other Real Estate Related Assets" shall mean real estate related assets
other than Subordinated Interests, Mezzanine Investments and Opportunistic Real
Properties, including, without limitation, other classes of MBS and other
interests in real estate.
"OTS" shall mean the Office of Thrift Supervision.
"Ownership Limitation" shall mean the restriction on ownership (or deemed
ownership by virtue of the attribution provisions of the Code) of more than 9.8%
of the total number of outstanding shares of any class of capital stock of the
Company by any shareholder (except for Lend Lease or its affiliates so long as
Lend Lease is publicly held). The Charter provides that Lend Lease will be
considered to be "publicly held" so long as no more than 20% of its outstanding
capital stock is owned, directly or indirectly, by any one individual.
"Pass-Through Certificates" shall mean interests in trusts, the assets of
which are primarily mortgage loans.
"Phantom Income" shall mean income for federal income tax purposes
recognized in advance of cash receipts.
"Plan" shall mean certain pension, profit-sharing, employee benefit, or
retirement plans or individual retirement accounts.
"Plan Asset Regulations" shall mean regulations of the Department of Labor
that define "plan assets."
"Preferred Stock" shall mean the preferred stock of the Company, $0.01 par
value per share.
"Private Placement" shall mean the offering by the Company in a separate
transaction at the public offering price less underwriting discounts and
commissions of 1,166,567 shares of Common Stock to
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Yarmouth Lend Lease Holdings, Inc., a wholly-owned indirect subsidiary of Lend
Lease, and 700,000 shares of Common Stock to FBR Asset Investment Corporation.
"Prohibited Owner" shall mean the record holder of the shares of Common
Stock or Preferred Stock that are designated as Shares-in-Trust.
"Prohibited Transferee" shall mean a person or entity who would hold shares
of capital stock of the Company in excess of the applicable Ownership Limitation
as a result of a purported transfer of capital stock of the Company or any other
event.
"Qualifying Interests" shall mean mortgages and other liens on and
interests in real estate.
"Real Estate Related Assets" shall mean Subordinated Interests and other
classes of CMBS, Mortgage Loans (including Distressed Mortgage Loans),
Opportunistic Real Properties, Mezzanine Investments and Other Real Estate
Related Assets.
"Real Property" shall mean commercial and multifamily real property owned
by the Company.
"Realized Losses" shall mean, generally, the aggregate amount of losses
realized on loans that are liquidated and losses on loans due to fraud,
mortgagor bankruptcy or special hazards.
"Redemption Rights" shall mean the rights that it is anticipated the
Limited Partners (other than the Initial Limited Partner) will have pursuant to
the Operating Partnership Agreement to redeem all or a portion of their
interests in the Operating Partnership for Common Stock on a one-for-one basis
or, at the option of the Company, an equivalent amount of cash.
"REIT" shall mean real estate investment trust, as defined in section 856
of the Code.
"Related Party Tenant" shall mean a tenant of the Company or the Operating
Partnership in which the Company owns 10% or more of the ownership interests,
taking into account both direct ownership and constructive ownership.
"REMIC" shall mean real estate mortgage investment conduit, as defined in
section 860D of the Code.
"REMIC Residual Interest" shall mean a class of MBS that is designated as
the residual interest in one or more REMICs.
"Rent" shall mean rent received by the Company from tenants of Real
Property owned by the Company.
"REO Property" shall mean real property acquired by a mortgage lender at
foreclosure (or by deed in lieu of foreclosure).
"RICO" shall mean the Racketeer Influenced and Corrupt Organizations laws,
18 U.S.C.A. Section 1961, et seq.
"Rule 144" shall mean the rule promulgated under the Securities Act that
permits holders of restricted securities as well as affiliates of an issuer of
the securities, pursuant to certain conditions and subject to certain
restrictions, to sell their securities publicly without registration under the
Securities Act.
"SAIF" shall mean the Savings Association Insurance Fund.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Service" shall mean the Internal Revenue Service.
"Shares-in-Trust" shall mean shares of Common Stock or Preferred Stock the
purported transfer of which would result in a violation of the Ownership
Limitation, result in the stock of the Company being held by fewer than 100
persons, result in the Company being "closely held," or cause the Company to own
10% or more of the ownership interests in a tenant of the Company's Real
Property.
"Special Servicer" shall mean a company that engages in Special Servicing.
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"Special Servicing" shall mean servicing of defaulted mortgage loans,
including oversight and management of the resolution of such mortgage loans by
modification, foreclosure, deed in lieu of foreclosure or otherwise.
"Sub IO" shall mean an IO with characteristics of a Subordinated Interest.
"Subordinated Interests" shall mean classes of MBS that are subordinated in
right of payments of principal and interest to more senior classes and absorb
the first losses on the underlying mortgage loans.
"Sub-performing Mortgage Loans" shall mean loans for which default is
likely or imminent or loans to which the borrower is currently making monthly
payments in accordance with a forebearance plan.
"Ten-Year U.S. Treasury Rate" shall mean the arithmetic average of the
weekly average yield to maturity for actively traded current coupon U.S.
Treasury fixed interest rate securities (adjusted to constant maturities of ten
years) published by the Federal Reserve Board during a quarter, or, if such rate
is not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company.
"Title V" shall mean Title V of the Depository Institutions Deregulation
and Monetary Control Act of 1980.
"Trading Day" shall mean any day other than a Saturday, a Sunday or a day
on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Treasury Regulations" shall mean the income tax regulations promulgated
under the Code.
"Trust" shall mean a trust created in the event of a purported transfer of
capital stock of the Company that would result in the Company's failure to
qualify as a REIT under the Code.
"UBTI" shall mean unrelated business taxable income.
"UBTI Percentage" shall mean the gross income, less direct expenses,
derived by the Company from an unrelated trade or business (determined as if the
Company were a pension trust) divided by the gross income, less direct expenses,
of the Company for the year in which the dividends are paid.
"UCC" shall mean the Uniform Commercial Code.
"Unaffiliated Director" shall mean, with respect to a particular Interested
Shareholder, a member of the Company's Board of Directors who was (i) a member
on the date on which an Interested Shareholder became an Interested Shareholder
and (ii) recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Unaffiliated Directors then
on the Board.
"Underwriters" shall mean Friedman, Billings, Ramsey & Co., Inc. and EVEREN
Securities, Inc. and each of the underwriters for whom Friedman, Billings,
Ramsey & Co., Inc. and EVEREN Securities, Inc. are acting as representatives.
"Underwriting Agreement" shall mean the agreement pursuant to which the
Underwriters will underwrite the Common Stock.
"Units" shall mean units of limited partnership interest in the Operating
Partnership.
"Yarmouth" shall mean The Yarmouth Group, Inc.
"Yield" or "Yield to Maturity" shall mean the interest rate that will cause
the present value of the future cash flow from an investment to equal its price.
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INDEPENDENT AUDITORS' REPORT
To the Shareholder of Chastain Capital Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Chastain
Capital Corporation and subsidiaries as of December 31, 1997. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company and its subsidiaries at
December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1998
F-1
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CHASTAIN CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash........................................................ $1,000
------
Total assets...................................... $1,000
======
Shareholder's equity:
Preferred stock, $0.01 par value, authorized 25,000,000
shares, no shares issued............................... 0
Common stock, $0.01 par value, authorized 200,000,000
shares, 100 shares issued and outstanding.............. 1
Additional paid-in capital................................ 999
------
Total shareholders' equity........................ $1,000
======
</TABLE>
See accompanying notes to balance sheet.
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CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
NOTE 1 -- ORGANIZATION
Chastain Capital Corporation (the "Company") was incorporated in Georgia on
December 16, 1997 and was initially capitalized on such date through the sale of
100 shares of Common Stock for $1,000. The Company will seek to originate
commercial and multifamily Mortgage Loans for the purpose of issuing
collateralized mortgage obligations ("CMOs") collateralized by its Mortgage
Loans and retaining the Mortgage Loans subject to the CMO debt. As a result of
such transactions, the Company will retain a "first loss" subordinated equity
ownership interest in the Mortgage Loans that has economic characteristics
similar to those of subordinated interests in commercial mortgage-backed
securities ("CMBS"). The Company also intends to acquire subordinated interests
in CMBS, originate and acquire Mezzanine Investments and acquire other Real
Property.
Through December 31, 1997, the Company had no operations.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPALS OF CONSOLIDATION
The consolidated balance sheet of the Company includes the accounts of the
Company and its wholly owned subsidiaries. All material intercompany accounts
have been eliminated in consolidation.
INCOME TAXES
The Company will elect to be taxed as a real estate investment trust under
the Internal Revenue Code. As a result, the Company will not be subject to
federal income taxation at the corporate level to the extent it distributes
annually its predistribution taxable income of at least 95% of its real estate
investment trust taxable income so distributable.
INCOME RECOGNITION
Income and expenses are to be recorded on the accrual basis of accounting.
NOTE 3 -- TRANSACTION WITH AFFILIATES
The Company intends to enter into a Management Agreement (the "Management
Agreement") with ERE Yarmouth (the "Manager"), an indirect wholly-owned
subsidiary of Lend Lease, under which the Manager will advise the Company on
various facets of its business and manage its day-to-day operations, subject to
the supervision of the Company's Board of Directors.
Pursuant to the Management Agreement, the Company will pay the Manager a
quarterly base management fee equal to the following:
<TABLE>
<S> <C>
For the first four fiscal quarters... 1.00% per annum of the Average Invested Assets of the
Company
During each fiscal quarter
thereafter......................... 0.85% per annum of the Average Invested Assets up to
$1 billion
0.75% per annum of the Average Invested Assets from
$1 billion to $1.25 billion
0.50% per annum of the Average Invested Assets in
excess of $1.25 billion
</TABLE>
The Management Agreement also provides for a quarterly incentive management
fee equal to the product of (A) 25% of the dollar amount by which (1) (a) Funds
From Operations (before the incentive fee) of the
F-3
<PAGE> 123
CHASTAIN CAPITAL CORPORATION
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
Company for the applicable quarter per weighted average number of shares of
Common Stock outstanding plus (b) gains (or minus losses) from debt
restructuring or sales of assets not included in Funds From Operations of the
Company for such quarter per weighted average number of shares of Common Stock
outstanding, exceed (2) an amount equal to (a) the weighted average of the price
per share at initial offering and the prices per share at any secondary
offerings by the Company multiplied by (b) 25% of the sum of the Ten-Year U.S.
Treasury Rate plus four percent, and (B) the weighted average number of shares
of Common Stock outstanding.
In addition, the Management Agreement provides for a termination fee equal
to the sum of the base management fee and incentive management fee, if any,
earned during the immediately preceding four fiscal quarters.
The Company intends to adopt a stock option plan to provide a means of
incentive compensation for the Manager, whereby the Manager will be granted an
option to purchase 1,166,667 shares of Common Stock of the Company exercisable
at the initial public offering price. One-fourth of the Manager's options will
be exercisable on each of the first four anniversaries of the Closing Date of
the initial public offering.
The Company further intends to issue 1,166,567 shares of Common Stock to
Yarmouth Lend Lease Holdings, Inc., an indirect wholly-owned subsidiary of Lend
Lease, and 700,000 shares of Common Stock to FBR Asset Investment Corporation,
an affiliate of Friedman, Billings, Ramsey & Co., Inc., concurrent with the
closing of the initial public offering, at the initial public offering price net
of any underwriting discount.
NOTE 4 -- PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of filing a Registration Statement for sale
of up to 11,270,000 shares of Common Stock. Contingent upon the consummation of
the public offering, the Company will be liable for organization and offering
expenses in connection with the sale of the shares of Common Stock offered.
F-4
<PAGE> 124
APPENDIX A
PRIOR PERFORMANCE TABLES
The following tables present certain information with respect to the nine
commingled, discretionary funds managed by ERE Yarmouth that have investment
objectives that are similar to those of the Company and therefore may be used to
evaluate the real estate experience of the Manager and its affiliates. These
funds are collectively referred to as the "Programs."
Fund A. Fund A is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund A was closed in October 1995. Fund A has raised approximately
$51 million from three investors and invested approximately $93.6 million. Fund
A has sold two properties.
Fund B. Fund B is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund B was closed in August 1997. Fund B has raised approximately
$50 million from four investors and invested approximately $27.8 million. Fund B
has sold no properties.
Fund C. Fund C is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund C was closed in August 1996. Fund C has raised approximately
$186.5 million from 17 investors and invested approximately $158.5 million. Fund
C has sold no properties.
Fund D. Fund D is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund D was closed in January 1997. Fund D has raised approximately
$225 million from 14 investors and invested approximately $214.1 million. Fund D
has sold no properties.
Fund E. Fund E is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund E was closed in June 1994. Fund E has raised approximately
$295.5 million from 16 investors and invested approximately $607.3 million. Fund
E has sold two properties.
Fund F. Fund F is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund F was closed in November 1994 and liquidated in December 1997.
Fund F has raised approximately $25.5 million from two investors and invested
approximately $28 million. Fund F has sold 15 properties.
Fund G. Fund G is an open-ended commingled, discretionary fund that
invests primarily in mortgage loans on commercial properties. Fund G was closed
in December 1994. Fund G has raised $161 million from four investors and
invested approximately $161 million. These investments are diversified by
geographic location and include as mortgage loan collateral urban and suburban
office buildings, regional shopping centers, multi-use office/research and
development facilities, industrial buildings, apartment complexes and hotels.
Fund H. Fund H is a commingled, discretionary fund that invests in office
buildings, retail centers, hotels, apartment complexes and industrial
properties. Fund H was closed in November 1993. Fund H has raised approximately
$256 million from 21 investors and invested approximately $433.2 million. Fund H
has sold three properties.
Fund I. Fund I is an open-ended commingled, discretionary fund that
invests primarily in commercial properties with substantial potential for
additional development through renovation and expansion. Fund I was closed in
August 1987. Fund I has raised approximately $89.4 million from 11 investors and
invested approximately $118.6 million. These investments are diversified by
geographic location and include urban and suburban office buildings, regional
shopping centers, multi-use office/research and development facilities,
industrial buildings, apartment complexes and hotels. Fund I has sold one
property.
A-1
<PAGE> 125
Additional information concerning the acquisition of properties by certain
Programs is contained in Table VI, which appears in Part II of the Registration
Statement of which this Prospectus is a part. The purpose of the tables is not
to give a full financial picture of the operating history of the separate
accounts, but rather to present certain specific information required by certain
rules of the Commission.
Upon request, the Company will furnish, without charge, copies of Table VI
and the most recent annual report on Form 10-K filed with the Commission for any
program listed below which is required to file such report. Upon request and
payment of copying and mailing costs, the Company will also furnish copies of
the exhibits to any such report.
THE PRIOR PERFORMANCE INFORMATION INCLUDED IN THIS PROSPECTUS IS HISTORICAL
AND INVESTORS SHOULD NOT CONSTRUE THE INCLUSION OF SUCH INFORMATION AS IMPLYING
OR INDICATING IN ANY MANNER THAT THE COMPANY WILL MAKE INVESTMENTS WHICH ARE
COMPARABLE TO THOSE MADE BY THE PROGRAMS DISCUSSED BELOW, OR THAT THE RESULTS
ACHIEVED BY THE COMPANY WILL IN ANY WAY RESEMBLE OR BE COMPARABLE TO THOSE
ACHIEVED BY SUCH OTHER PROGRAMS. INVESTORS IN THE COMPANY WILL NOT BE ACQUIRING
ANY INTEREST IN THE PROGRAMS DESCRIBED BELOW. IN ADDITION, THE REAL ESTATE
MARKETS HAVE GENERALLY BEEN FAVORABLE DURING MUCH OF THE PERIOD FOR WHICH DATA
IS PROVIDED. THEREFORE THE FOLLOWING INFORMATION MAY NOT BE INDICATIVE OF THE
RESULTS THAT WILL BE EXPERIENCED BY THE MANAGER IN CONNECTION WITH ITS
MANAGEMENT OF THE COMPANY'S ASSETS.
TABLE I -- EXPERIENCE IN RAISING AND INVESTING FUNDS (ON A PERCENTAGE BASIS)
(UNAUDITED)
The following table summarizes the amounts raised and invested with respect
to the Programs that have closed since January 1, 1995.
<TABLE>
<CAPTION>
FUND A FUND B FUND C FUND D
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Dollar amount offered............... $51,000,000 $50,000,000 $300,000,000 $300,000,000
Dollar amount raised (100%)......... 51,000,000 50,000,000 186,500,000 225,000,000
Less offering expenses
Selling commissions and
discounts...................... -- -- -- --
Retained by affiliates............ -- -- -- --
Organizational expenses........... 0.29% 0.50% 0.13% 0.19%
Reserves............................ -- -- -- --
----------- ----------- ------------ ------------
Percent available for investment.... 99.71% 99.50% 99.87% 99.81%
=========== =========== ============ ============
Acquisition costs:
Prepaid items and fees related to
purchase property.............. 6.53% 1.09% 2.75% 1.14%
Cash down payment................. 44.61% 13.48% 43.59% 52.50%
Acquisition fees.................. 0.99% 0.17% 0.46% 0.42%
Reserve(1)........................ 47.58% 84.76% 53.07% 45.74%
----------- ----------- ------------ ------------
Total acquisition cost.............. 99.71% 99.50% 99.87% 99.81%
=========== =========== ============ ============
Percent leverage(2)................. 58.13% 25.03% 46.59% 43.23%
Date offering began................. May-95 Aug-97 Apr-96 Jun-96
Length of offering (in months)...... 6 12 9 7
Months to invest 90% of amount
available for investment (from
beginning of offering)............ 11 (3) (3) (3)
</TABLE>
- ---------------
(1) Large reserve percentages are due to significant capital requirements of
acquired properties or Programs that are still in their investment period.
(2) Represents the mortgage financing at the date of purchase divided by the
total acquisition costs.
(3) These Programs were still in their investment period as of December 31, 1997
A-2
<PAGE> 126
TABLE II -- COMPENSATION TO SPONSOR (FROM INCEPTION TO DECEMBER 31, 1997)
(UNAUDITED)
The following table summarizes compensation paid to ERE Yarmouth with
respect to Programs that have closed since January 1, 1995 and, on an aggregated
basis, five other Programs with investment objectives that are similar to those
of the Company. Unless otherwise indicated, fees paid since January 1, 1995 by
each of the separate Programs are included.
<TABLE>
<CAPTION>
FIVE OTHER
FUND A FUND B FUND C FUND D PROGRAMS(1)
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Date offering commenced.... May-95 Aug-97 Apr-96 Jun-96 n/a
Dollar amount raised....... $51,000,000 $50,000,000 $186,500,000 $225,000,000 $525,526,489
Amount paid to sponsor from
proceeds of offering:
Underwriting fees........ -- -- -- -- --
Acquisition fees:
-- real estate
commissions......... -- -- -- -- --
-- advisory fees...... 504,680 87,125 860,938 953,205 5,558,654
Dollar amount of cash
generated from operations
before deducting payments
to sponsor............... 2,969,491 (2) 8,045,083 10,778,681 223,726,191
Amount paid to sponsor from
operations:
Property management and
leasing fees.......... 196,652 -- -- 49,437 884,611
Partnership/advisory
management fees....... 1,005,619 4,099 848,083 1,379,762 21,549,792
Reimbursements........... -- -- -- -- 851,602
Loan originations........ -- -- -- -- 1,490,000
Development fees......... -- -- -- 290,250 1,904,076
Dollar amount of property
sales and refinancing
before deducting payments
to
sponsor.................. 17,273,133 -- -- -- 123,003,031
Amount paid to sponsor from
property sales and
refinancing:
Real estate
commissions........... 186,567 -- -- -- 274,130
Incentive fees........... -- -- -- -- 215,900
</TABLE>
- ---------------
(1) These programs closed prior to January 1, 1995 but have investment
objectives similar to those of the Company.
(2) Fund B had conducted no operations as of December 31, 1997.
A-3
<PAGE> 127
TABLE III -- OPERATING RESULTS OF PRIOR PROGRAMS (UNAUDITED)
The following table summarizes annual operating results of each Program
that has closed since January 1, 1993. Such information has been presented on
the basis of generally accepted accounting principles, where applicable.
<TABLE>
<CAPTION>
FUND A FUND C
------------------------- ----------------------------
1995 1996 1996 1997
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Gross revenues........................................... $ 31,801 $ 7,232,200 $ 2,655,000 $ 25,687,000
Profit on sale of properties............................. -- -- -- --
Less: Operating expenses................................. 4,466 3,565,954 2,244,000 14,196,000
Interest expense....................................... -- 1,790,088 260,000 5,394,000
Depreciation........................................... -- 1,554,474 -- --
---------- ------------ ------------- ------------
Net income -- GAAP basis................................. 27,335 321,684 151,000 6,097,000
Taxable Income:
-- from operations..................................... 31,075 980,507 418,029 n/a
-- from gain on sale................................... -- -- -- --
Cash generated from operations........................... (158,776) 2,671,269 492,000 6,705,000
Capital expenditures and property
acquisitions........................................... (195,057) (88,028,576) (128,977,000) (36,647,000)
Cash generated from sales................................ -- -- -- --
Cash generated from refinancing less
principal payments..................................... 154,408 42,876,766 63,296,000 12,299,000
---------- ------------ ------------- ------------
Net cash generated from operations,
sales and refinancing.................................. (199,425) (42,480,541) (65,189,000) (17,643,000)
Contributions from investors............................. 8,798,017 37,952,691 68,815,000 21,093,000
Less: Cash distributions to investors:
-- from operating cash flow............................ 0 1,769,099 815,000 893,000
-- from sales and refinancing.......................... -- -- -- --
---------- ------------ ------------- ------------
Cash generated (deficiency) after cash
distributions.......................................... $8,598,592 $ (6,296,949) 2,811,000 2,557,000
========== ============ ============= ============
GAAP Basis Distributions:
Income................................................. -- 349,019 815,000 893,000
Return of capital...................................... -- 1,420,080 -- --
---------- ------------ ------------- ------------
Total distributions.................................... -- 1,769,099 815,000 893,000
Tax and Distribution Data Per $1000
Invested:
Federal Income Tax Results
Ordinary Income (loss):
-- from operations..................................... 0.61 19.23 0.01 n/a
-- from recapture...................................... -- -- -- n/a
Capital Gain (loss).................................... -- -- -- n/a
Cash Distributions to Investors
Source (on GAAP basis):
-- Investment income................................... -- 6.84 0.01 0.01
-- Return of capital................................... -- 27.84 -- --
Source (on cash basis):
-- Sales............................................... -- -- -- --
-- Refinancing......................................... -- -- -- --
-- Operations.......................................... -- 34.69 -- --
Amount (in percentage terms)
remaining invested in program
properties at the end of 1997(1)....................... -- 100% -- 100%
</TABLE>
- ---------------
(1) Amount represents the original total acquisition cost of properties retained
divided by original total acquisition cost of all properties in program.
A-4
<PAGE> 128
<TABLE>
<CAPTION>
FUND D FUND E
---------------------------- -----------------------------------------------------------
1996 1997 1994 1995 1996 1997
------------ ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
$ 4,299,621 $ 16,990,788 $ 7,924,883 $ 63,054,875 $ 93,557,650 $ 87,942,122
-- -- -- -- 21,639,717 22,833,429
2,190,854 13,674,951 4,726,864 31,233,732 38,170,136 37,319,139
1,088,001 4,925,430 1,953,182 18,297,141 25,168,826 23,913,938
1,362,952 5,873,918 1,387,057 11,655,072 19,802,978 18,815,625
------------ ------------- ------------- ------------- ------------ ------------
(342,186) (7,483,511) (142,220) 1,868,930 32,055,427 30,726,849
1,499,153 n/a 522,592 7,123,768 11,270,732 n/a
-- -- 21,352,897 n/a
(317,851) 9,716,770 (967,870) 18,677,369 29,762,390 21,853,377
(92,158,538) (153,759,188) (107,248,592) (266,654,621) (42,812,512) (35,293,668)
-- -- -- -- 40,839,594 37,838,857
32,566,157 69,468,896 (193,225) 87,613,851 21,533,343 7,010,391
------------ ------------- ------------- ------------- ------------ ------------
(59,910,232) (74,573,522) (108,409,687) (160,373,401) 49,322,815 31,408,957
69,662,671 69,000,003 115,141,365 173,240,435 -- 6,118,200
-- 1,860,576 1,793,235 7,701,100 11,902,765 --
-- -- -- -- 40,839,594 38,000,000
------------ ------------- ------------- ------------- ------------ ------------
$ 9,752,439 $ (7,434,095) $ 5,938,443 $ 5,165,934 $ (3,419,544) $ (472,843)
============ ============= ============= ============= ============ ============
-- -- -- 1,726,710 32,055,427 30,726,849
-- 1,860,576 1,793,235 5,974,390 20,686,932 7,273,151
------------ ------------- ------------- ------------- ------------ ------------
-- 1,860,576 1,793,235 7,701,100 52,742,359 38,000,000
6.66 n/a 1.77 24.11 38.14 n/a
-- n/a -- -- -- n/a
-- n/a -- -- 72.26 n/a
-- -- -- 5.84 108.48 103.98
-- 8.27 6.07 20.22 70.01 24.61
-- -- -- -- 138.21 128.60
-- -- -- -- -- --
-- 8.27 6.07 26.06 40.28 --
-- 100% -- -- -- 84%
</TABLE>
A-5
<PAGE> 129
TABLE III -- OPERATING RESULTS OF PRIOR PROGRAMS -- (CONTINUED)
<TABLE>
<CAPTION>
FUND F
------------------------------------------------------
1994 1995 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Gross revenues.............................................. $ -- $ 1,460,448 $ 3,977,634 $ 3,882,575
Profit on sale of properties................................ -- 474,033 1,613,664 3,003,798
Less: Operating expenses.................................... -- 834,575 2,348,017 1,901,517
Interest expense.......................................... -- 77,066 136,375 --
Depreciation.............................................. -- 88,584 221,910 230,829
----------- ------------ ----------- -----------
Net income -- GAAP basis.................................... -- 934,256 2,884,996 4,754,027
Taxable Income:
-- from operations........................................ -- 2,496,293 1,778,089 n/a
-- from gain on sale...................................... -- (410,595) 1,842,874 n/a
Cash generated from operations.............................. -- 143,286 959,951 n/a
Capital expenditures and property
acquisitions.............................................. (3,886,400) (24,567,264) (2,606,106)
Cash generated from sales................................... 5,086,980 10,497,042 n/a --
Cash generated from refinancing less
principal payments........................................ -- 2,850,373 (1,237,583) n/a
----------- ------------ ----------- -----------
Net cash generated from operations,
sales and refinancing..................................... (3,886,400) (16,486,625) 7,613,304 n/a
Contributions from investors................................ 3,886,400 21,756,621 24,155 11,813
Less: Cash distributions to investors:
-- from operating cash flow............................... -- -- -- --
-- from sales and refinancing............................. -- 809,444 7,904,685 25,456,787
----------- ------------ ----------- -----------
Cash generated (deficiency) after cash
distributions............................................. $ -- $ 4,460,552 $ (267,226) $25,456,787
=========== ============ =========== ===========
GAAP Basis Distributions:
Income.................................................... -- 809,444 3,009,808 4,754,027
Return of capital......................................... -- -- 4,894,877 20,702,760
----------- ------------ ----------- -----------
Total distributions....................................... -- 809,444 7,904,685 25,456,787
Tax and Distribution Data Per $1000
Invested:
Federal Income Tax Results
Ordinary Income (loss):
-- from operations........................................ -- 97.21 69.24 n/a
-- from recapture......................................... -- -- -- n/a
Capital Gain (loss)....................................... -- (15.99) 71.77 n/a
Cash Distributions to Investors
Source (on GAAP basis):
-- Investment income...................................... -- 31.52 117.21 185.13
-- Return of capital...................................... -- -- 190.62 806.21
Source (on cash basis):
-- Sales.................................................. 31.52 307.83 991.35
-- Refinancing............................................ -- -- -- --
-- Operations............................................. -- -- -- --
Amount (in percentage terms)
remaining invested in program
properties at the end of 1997(1).......................... -- -- -- 0%
</TABLE>
A-6
<PAGE> 130
<TABLE>
<CAPTION>
FUND G FUND H
-------------------------------------------------------- -----------------------------------------------------------
1994 1995 1996 1997 1993 1994 1995 1996
----------- ------------ ------------ ------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 26,197 $ 3,612,356 $ 10,179,996 $ 11,778,633 $ 633,626 $ 18,422,630 $ 75,197,000 $107,908,000
-- -- -- -- -- -- 23,598,000
716 1,046,084 583,711 655,700 569,231 10,655,451 45,175,000 58,673,000
-- -- -- -- 28,515 2,245,261 9,506,000 12,980,000
-- -- -- -- --
----------- ------------ ------------ ------------ ------------ ------------- ------------- ------------
25,481 2,566,272 9,596,285 11,122,933 35,880 5,521,918 20,516,000 59,853,000
n/a n/a n/a n/a (2) (2) (2) (2)
n/a n/a n/a n/a
(716) 2,251,919 9,489,459 11,130,760 120,903 5,634,841 22,622,000 31,423,000
(9,500,000) (96,075,000) (29,225,000) (27,100,000) (11,689,653) (174,711,236) (224,281,000) (54,590,000)
-- 340,708 2,258,497 4,111,908 -- -- -- 67,880,000
-- -- -- -- 616,916 59,634,841 75,456,000 14,169,000
----------- ------------ ------------ ------------ ------------ ------------- ------------- ------------
(9,500,716) (93,482,373) (17,487,110) (11,856,650) (10,951,834) (109,441,554) (126,203,000) 58,882,000
9,500,716 96,468,647 29,572,688 26,622,275 11,671,170 121,157,099 127,751,000 2,199,000
-- 2,251,203 9,479,393 11,131,442 -- 5,000,000 4,500,000 --
-- 469,436 2,559,923 3,275,819 -- -- -- 60,500,000
----------- ------------ ------------ ------------ ------------ ------------- ------------- ------------
$ -- $ 265,635 $ 56,328 $ 357,682 719,336 6,715,545 (2,952,000) 581,000
=========== ============ ============ ============ ============ ============= ============= ============
25,481 2,566,272 9,596,285 11,122,933 5,000,000 4,500,000 60,500,000
(25,481) 154,367 2,443,031 3,284,328 -- 8,879,202
----------- ------------ ------------ ------------ ------------ ------------- ------------- ------------
-- 2,720,639 12,039,316 14,407,261 -- 5,000,000 4,500,000 60,500,000
n/a n/a n/a n/a (2) (2) (2) (2)
n/a n/a n/a n/a (2) (2) (2) (2)
n/a n/a n/a n/a (2) (2) (2) (2)
-- 15.94 59.60 69.09 -- 19.53 17.58 236.33
-- 0.96 15.17 20.40 -- -- -- --
-- 2.92 15.90 20.35 -- -- -- 236.33
-- -- -- --
-- 13.98 58.88 69.14 -- 19.53 17.58 --
-- -- -- 100% -- -- -- --
<CAPTION>
FUND H
------------
1997
------------
<S> <C>
$104,285,000
25,759,000
56,235,000
11,615,000
------------
62,194,000
(2)
37,212,000
(12,109,000)
68,704,000
(9,046,000)
------------
84,761,000
1,851,000
18,296,000
68,704,000
------------
(388,000)
============
78,120,798
------------
87,000,000
(2)
(2)
(2)
305.16
34.68
268.38
71.47
84.2%
</TABLE>
- ---------------
(2) Fund H is a separate account of an insurance company account. Federal income
tax data is not available to the sponsor.
A-7
<PAGE> 131
TABLE IV -- RESULTS OF COMPLETED PROGRAMS (UNAUDITED)
The following table summarizes the results of Programs that have closed
since January 1, 1993. The investment objectives of Fund F were similar to those
of the Company. The investment objectives of Funds J, K and L were to invest in
larger "core" institutional properties that provided lower and more stable
returns than properties that will be considered by the Company.
<TABLE>
<CAPTION>
FUND F FUND J FUND K FUND L
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Dollar amount raised........... $25,500,000 $46,200,000 $290,000,000 $ 37,010,084
Number of properties
purchased.................... 15 2 1 4
Date of closing of offering.... Nov-94 11-Sep-90 16-Dec-88 Jun-82
Date of first sale of
property..................... 31-Aug-95 19-Dec-96 19-Mar-95 1989
Date of final sale of
property..................... 25-Nov-97 19-Dec-96 19-Mar-95 1996
Tax and distribution data per
$1000 invested:
Federal income tax results:
Ordinary income (loss).... (2) (1) (1) (1)
-- from operations...... (2) (1) (1) (1)
-- from recapture....... (2) (1) (1) (1)
Capital gain (loss)....... (2) (1) (1) (1)
Deferred gain............. (2) (1) (1) (1)
Capital................. (2) (1) (1) (1)
Ordinary................ (2) (1) (1) (1)
Cash distributions to investors
Source (on GAAP basis):
-- Investment income...... 340.04 424.61 637.98 929.61
-- Return of capital...... 1,000.00 855.89 1,000.00 1,000.00
Source (on cash basis):
-- Sales..................... 1,190.73 855.89 1,289.66 713.28
-- Refinancing............... -- -- -- --
-- Operations................ 149.30 424.61 338.09 1,216.33
-- Other..................... -- -- 10.24 --
Receivable on net purchase
money financing.............. -- -- -- --
</TABLE>
- ---------------
(1) Programs are separate accounts of Equitable Life Insurance. Taxable amounts
are not available.
(2) Final cumulative tax data as of December 31, 1997 are not yet available.
A-8
<PAGE> 132
TABLE V -- SALES OR DISPOSALS OF PROPERTIES
The following table summarizes sales or disposals of properties by the
Programs since January 1, 1995.
<TABLE>
<CAPTION>
PROPERTY DATE DATE
FUND TYPE ACQUIRED OF SALE
- ---- ------------ --------- ---------
<S> <C> <C> <C>
A.......................... CMBS 31-Aug-95 23-May-96
Hotel 01-Mar-96 01-Nov-97
E.......................... Hotel 27-Oct-94 15-May-96
Hotel 21-Feb-95 24-Jun-97
F.......................... Multi-Family 24-Mar-95 31-Aug-95
Multi-Family 24-Mar-95 31-Aug-95
Multi-Family 24-Mar-95 30-Sep-95
Office 28-Jun-95 28-Feb-96
Retail 28-Jun-95 28-Feb-96
Multi-Family 28-Jun-95 07-Oct-96
Multi-Family 28-Jun-95 30-Sep-96
Land 28-Jun-95 08-Oct-96
Multi-Family 24-Mar-95 27-Nov-96
Office 28-Jun-95 31-Dec-96
Retail 28-Jun-95 06-May-97
Retail 28-Dec-94 19-May-97
Retail 28-Jun-95 20-May-97
Retail 30-Jun-95 24-Oct-97
Office 29-Aug-95 25-Nov-97
G.......................... CMBS 29-May-96 21-Jul-97
H.......................... Office 01-Jun-95 31-Dec-96
Hotel 01-Sep-93 31-May-96
Office 01-May-94 01-Jun-96
I.......................... Industrial 28-Mar-88 31-Dec-96
<CAPTION>
SELLING PRICE, NET OF CLOSING COSTS AND GAAP ADJUSTMENTS
----------------------------------------------------------------------
ADJUSTMENTS
CASH MORTGAGE PURCHASE RESULTING
RECEIVED, BALANCE MONEY FROM
NET OF AT TIME MORTGAGE APPLICATION
FUND CLOSING COSTS OF SALE TAKEN BACK OF GAAP TOTAL
- ---- ------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
A.......................... $ 7,572,592 $ -- $ -- $ -- $ 7,572,592
16,000,000 14,000,000 -- -- 30,000,000
E.......................... 40,839,594 -- -- -- 40,839,594
41,838,857 32,000,000 -- (2,705,401) 71,133,456
F.......................... 1,740,000 -- -- -- 1,740,000
1,765,000 -- -- -- 1,765,000
745,000 -- -- -- 745,000
266,950 -- -- -- 266,950
2,265,344 -- -- -- 2,265,344
647,440 1,250,000 -- -- 1,897,440
447,157 -- -- -- 447,157
682,098 -- -- -- 682,098
2,465,000 -- -- -- 2,465,000
1,920,030 -- -- -- 1,920,030
2,074,117 -- -- -- 2,074,117
3,381,310 -- -- -- 3,381,310
3,865,589 -- -- -- 3,865,589
1,625,641 1,660,000 -- -- 3,285,641
6,473,000 -- -- -- 6,473,000
G.......................... 1,022,813 -- -- -- 1,022,813
H.......................... 45,558,280 21,000,000 -- 1,353,815 67,912,095
38,158,684 18,500,000 -- 1,578,473 58,237,157
10,680,152 -- -- 639,142 11,319,294
I.......................... 6,298,088 -- -- -- 6,298,088
------------ ----------- ----------- ----------- ------------
$244,282,496 $80,997,938 $ -- $ 866,029 $326,146,463
============ =========== =========== =========== ============
<CAPTION>
COST OF PROPERTIES INCLUDING CLOSING AND
SALES COSTS
------------------------------------------
TOTAL
ACQUISITION
COST, CAPITAL OPERATING
ORIGINAL IMPROVEMENTS, CASH RECEIPTS
MORTGAGE CLOSING AND OVER OPERATING CASH
FUND FINANCING SOFT COSTS TOTAL COST EXPENDITURES
- ---- ----------- ------------- ------------ -------------------
<S> <C> <C> <C> <C>
A.......................... $ -- $ 6,449,571 $ 6,449,571 $ 836,910
14,000,000 10,950,255 24,950,255 2,035,910
E.......................... -- 22,277,768 22,277,768 6,335,607
25,000,000 23,300,027 48,300,027 6,695,195
F.......................... -- 1,554,223 1,554,223 71,800
-- 1,580,472 1,580,472 73,269
-- 641,050 641,050 18,818
-- 191,160 191,160 (10,496)
-- 1,923,417 1,923,417 306,789
1,250,000 787,929 2,037,929 263,901
-- 409,612 409,612 64,274
-- 508,988 508,988 --
-- 2,203,523 2,203,523 452,858
-- 1,175,250 1,175,250 100,212
-- 1,909,855 1,909,855 450,256
-- 3,959,422 3,959,422 1,451,583
-- 3,768,720 3,768,720 762,695
1,660,000 921,605 2,581,605 518,950
-- 5,221,772 5,221,772 1,471,129
G.......................... -- 1,000,000 1,000,000 46,182
H.......................... 21,000,000 23,032,797 44,439,970 5,907,518
18,500,000 16,181,641 34,681,641 11,420,413
-- 9,081,390 9,081,390 2,532,777
I.......................... -- 12,277,246 12,277,246 6,891,265
----------- ------------ ------------ -----------
$81,410,000 $149,845,391 $231,662,564 $48,697,815
=========== ============ ============ ===========
</TABLE>
A-9
<PAGE> 133
APPENDIX B
ERE HYPERION PRIOR PERFORMANCE TABLES
The following tables present certain information with respect to the three
discretionary client accounts managed by ERE Hyperion that invest in CMBS
similar to those of the Company and therefore may be used to evaluate the CMBS
experience of the Manager and ERE Hyperion. Each client account may have one or
more allocations of funds awarded to ERE Hyperion to manage on the client's
behalf. These client accounts are collectively referred to as the "Programs."
TABLE I -- EXPERIENCE IN RAISING AND INVESTING FUNDS (UNAUDITED)
The following table summarizes the amounts raised and invested with respect
to the Programs that have been allocated to ERE Hyperion since January 1, 1995.
There have been no organizational costs or expenses incurred by the Programs.
<TABLE>
<CAPTION>
CLIENT A CLIENT B CLIENT C
----------- ----------- -----------
<S> <C> <C> <C>
Date of first allocation(1)........................ October-95 November-97 March-97
Dollar amount first allocation..................... $100,000,000 $50,000,000 $70,000,000
Dollar amount invested............................. $100,000,000 $42,000,000 $60,000,000
Months to invest 90% of amount available for
investment....................................... 7 n/a(2) 4
Date of second allocation.......................... October-96
Dollar amount second allocation.................... $100,000,000
Dollar amount invested............................. $100,000,000
Months to invest 90% of amount available for
investment....................................... 2
Date of third allocation........................... December-96
Dollar amount third allocation..................... $50,000,000
Dollar amount invested............................. $50,000,000
Months to invest 90% of amount available for
investment....................................... 6
</TABLE>
- ---------------
(1) Over time each client may allocate additional funds to be invested in CMBS
by ERE Hyperion.
(2) 90% of the allocation had not been invested as of December 31, 1997.
TABLE II -- COMPENSATION TO SPONSOR (FROM INCEPTION TO DECEMBER 31, 1997)
(UNAUDITED)
The following table summarizes compensation paid to ERE Hyperion with
respect to the Programs that have been allocated to ERE Hyperion since January
1, 1995.
<TABLE>
<CAPTION>
CLIENT A CLIENT B CLIENT C
------------ ----------- -----------
<S> <C> <C> <C>
Date of first allocation............................. October-95 November-97 March-97
Total dollar amount allocated........................ $250,000,000 $50,000,000 $70,000,000
Amount paid to advisor:
Acquisition fees................................... -- -- --
Advisory fees...................................... 589,314 12,067 102,291
Dollar amount of cash generated from operations
before deducting payments to sponsor............... 24,489,473 165,041 10,961,003
Dollar amount of CMBS sales before deducting payments
to sponsor......................................... 108,662,228 -- 24,233,967
Amount paid to sponsor from CMBS sales............... -- -- --
</TABLE>
B-1
<PAGE> 134
TABLE III -- OPERATING RESULTS (UNAUDITED)
The following table summarizes annual operating results of each Program
that has closed since January 1, 1993. Such information has been presented on
the basis of generally accepted accounting principles where applicable. Each
client is a separate account of an insurance company or governmental agency and
thus Federal income tax information is not made available to ERE Hyperion.
<TABLE>
<CAPTION>
CLIENT A CLIENT B CLIENT C
-------------------------------------------- ------------ ------------
1995 1996 1997 1997 1997
------------ ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Total interest income.... $ 170,166 $ 6,439,014 $ 17,880,293 $ 165,041 $ 10,961,003
Advisory fee............. (5,241) (162,804) (421,269) (12,067) (102,291)
------------ ------------- ------------- ------------ ------------
Net income from
operations............. 164,925 6,276,210 17,459,024 152,974 10,858,712
Gain on sale of CMBS..... -- (248,409) (763,193) -- 967,608
------------ ------------- ------------- ------------ ------------
Net income.......... $ 164,925 $ 6,027,801 $ 16,695,831 $ 152,974 $ 11,826,320
============ ============= ============= ============ ============
Cash generated from
operations............. 164,925 6,276,210 17,459,024 152,974 10,858,712
Cash invested in CMBS.... (35,063,274) (189,422,348) (130,300,260) (40,530,909) (88,109,043)
Cash proceeds of CMBS
sales.................. -- 15,223,866 93,438,362 -- 24,233,967
Reinvestment of
income(1).............. (164,925) (6,276,210) (17,459,024) (152,974) (10,858,712)
------------ ------------- ------------- ------------ ------------
Net cash from
investment
activity.......... (35,063,274) (174,198,482) (36,861,898) (40,530,909) (63,875,076)
Contributions from
clients................ 35,063,274 174,198,482 36,861,898 40,530,909 63,875,076
Distributions to
investors(1)........... -- -- -- -- --
------------ ------------- ------------- ------------ ------------
Net cash flow....... $ -- $ -- $ -- $ -- $ --
============ ============= ============= ============ ============
</TABLE>
- ---------------
(1) As of December 31, 1997 all income and sales proceeds have been reinvested
in CMBS and, therefore, there have been no distributions to clients.
TABLE V -- SALES OF CMBS (UNAUDITED)
The following table summarizes CMBS sales by the Programs since January 1,
1995.
<TABLE>
<CAPTION>
OPERATING
CASH
RECEIPTS
CMBS CREDIT PURCHASE SALE PURCHASE SALE OVER OPERATING
CLIENT ISSUE RATING DATE DATE PRICE PRICE CASH EXPENDITURES
------ --------------- -------- ----------- ----------- ----------- ----------- -----------------
<C> <S> <C> <C> <C> <C> <C> <C>
A ACMF 97-C1 BB 30-Jun-97 14-Oct-97 $ 3,644,000 $ 3,703,125 $ 82,444
A ASC 95-MD IV BBB/BBB- 7-Nov-95 03-Sep-96 6,996,248 6,732,310 473,174
A CMAC 96-C1 BBB 18-Dec-96 11-Apr-97 13,688,849 13,397,141 326,248
A DLJ 95-CF2 BBB 11-Dec-95 07-May-97 7,055,300 6,960,625 748,125
A DLJ 95-CF2 BBB 20-Nov-96 27-Jun-97 17,005,040 16,861,969 757,375
A DLJ 95-CF2 A 11-Dec-95 22-Oct-97 2,518,500 2,522,754 333,406
A DLJ 96-CF2 AAA 7-Nov-96 03-Feb-97 1,015,000 1,016,094 17,820
A DLJ 96-CF2 AAA 7-Nov-96 03-Feb-97 2,030,000 2,032,188 35,640
A DLJ 96-CF2 AAA 7-Nov-96 03-Apr-97 1,015,000 994,219 29,768
A DLJ 96-CF2 AAA 7-Nov-96 09-May-97 1,811,760 2,008,750 74,115
A DLJ 96-CF2 AAA 7-Nov-96 07-Aug-97 3,065,700 3,091,875 165,848
A FNMA DUS AAA 13-Dec-96 20-Dec-96 2,721,912 2,730,136 3,558
A FNMA DUS AAA 13-Dec-96 20-Dec-96 2,986,105 2,992,811 3,999
A MLMI 95-C3 BBB 20-Nov-96 27-Jun-97 10,444,685 10,336,825 475,762
A MLMI 96-C2 BBB 15-Nov-96 21-Nov-97 12,697,100 12,817,188 932,447
A MLMI 96-C2 AAA 15-Nov-96 09-May-97 7,065,800 6,891,719 232,069
</TABLE>
B-2
<PAGE> 135
TABLE V -- SALES OF CMBS (CONTINUED)
<TABLE>
<CAPTION>
OPERATING
CASH
RECEIPTS
CMBS CREDIT PURCHASE SALE PURCHASE SALE OVER OPERATING
CLIENT ISSUE RATING DATE DATE PRICE PRICE CASH EXPENDITURES
------ --------------- -------- ----------- ----------- ----------- ----------- -----------------
<C> <S> <C> <C> <C> <C> <C> <C>
A SASCO 96-CFL A/BBB 9-Feb-96 01-May-97 $ 6,415,000 $ 6,319,777 $559,960
C ASC 97-MD VII BB 20-Mar-97 16-Sep-97 3,900,066 4,176,394 166,093
C DLJ 96-CF1 BB 8-Jul-97 22-Oct-97 1,533,984 1,524,612 36,517
C MLMI 97-C1 BB 13-Jun-97 14-Nov-97 2,667,656 2,747,813 91,373
C ACMF 97-C1 BB 30-Jun-97 14-Nov-97 3,644,375 3,703,125 106,556
C ACMF 97-C1 BB 30-Jun-97 03-Dec-97 3,644,375 3,687,600 121,333
C DLJ 96-CF1 Ba2/BB 8-Jul-97 03-Dec-97 2,454,375 2,443,500 81,597
C DLJ 96-CF1 Ba2/BB 8-Jul-97 03-Dec-97 1,524,844 1,527,188 50,998
C CMAC 96-C2 BB 9-Jul-97 03-Dec-97 2,390,300 2,724,648 93,876
</TABLE>
TABLE VI -- CMBS PURCHASES (UNAUDITED)
The following table summarizes the CMBS purchased by the Programs since
January 1, 1995.
<TABLE>
<CAPTION>
CMBS CREDIT PURCHASE PURCHASE
CLIENT ISSUE RATING PRICE DATE
- ------ --------------------- ------ ----------- ---------
<C> <S> <C> <C> <C>
A 277 Park Ave Fin Corp A $ 8,175,000 01-May-97
A ACMF 97-C1 A 9,130,781 27-Jun-97
A FU-LB 97-C2 A 8,296,599 21-Nov-97
A JPMorgan 97-C5 A 2,537,500 12-Sep-97
A MSC 97-HF1 A 9,153,281 27-Jun-97
A CSFB 95-WF1 A- 6,834,844 07-May-97
A GACC 96-2 A/A 7,133,438 19-Apr-96
A Malan 95-A A/A 6,410,469 05-Jun-96
A MLMI 95-C3 A/A 5,051,563 22-Nov-95
A CSFB 95-WF-1 A-/A 2,500,000 14-Dec-95
A DLJ 95-CF2 A+/A 2,518,375 11-Dec-95
A ASC 97-D4 AA 9,383,910 30-Jun-97
A Aetna 95-C5 AA/A 2,496,325 07-Dec-95
A DLJ 96-CF2 AAA 5,109,375 07-Nov-96
A DLJ 96-CF2 AAA 5,075,000 07-Nov-96
A FNMA DUS AAA 2,986,086 13-Dec-96
A FNMA DUS AAA 2,721,942 13-Dec-96
A MLMI 96-C2 AAA 7,065,625 15-Nov-96
A ACMF 97-C1 BB 10,933,125 30-Jun-97
A ASC 97-D4 BB 7,337,500 10-Jun-97
A CCMSC 97-1 BB 1,132,350 05-Jun-97
A CMAC 96-C1 BB 7,945,939 18-Dec-96
A CMAC 96-C2 BB 4,729,187 20-Dec-96
A DLJ 96-CF1 BB 2,249,844 08-Jul-97
A DLJ 97-CF1 BB 1,799,200 25-Apr-97
A DLJ 97-CF1 BB 322,315 20-May-97
A FU-LB 97-C1 BB 9,426,011 09-May-97
A GSMSC 97-GL I BB 6,867,656 07-Aug-97
A JPMorgan 97-C4 BB 2,513,910 03-Feb-97
A JPMorgan 97-C4 BB 1,759,375 02-Apr-97
A MCF 96-MC2 BB 5,300,260 10-Dec-96
</TABLE>
B-3
<PAGE> 136
TABLE VI -- CMBS PURCHASES (CONTINUED)
<TABLE>
<CAPTION>
CMBS CREDIT PURCHASE PURCHASE
CLIENT ISSUE RATING PRICE DATE
- ------ --------------------- ------ ----------- ---------
<C> <S> <C> <C> <C>
A MCF 97-MC2 BB $ 6,155,152 21-Nov-97
A MLMI 97-C1 BB 2,417,786 13-Jun-97
A MRAC 96-C2 BB 5,266,232 23-Dec-96
A MSC 97-C1 BB 1,720,110 20-Mar-97
A CSFB 95-WF1 BB/BB- 4,510,938 14-Nov-96
A SASCO 96-CFL BB+/BB 7,286,250 16-Dec-96
A 1345 Funding BBB 6,600,000 20-May-96
A CMAC 96-C1 BBB 13,689,418 18-Dec-96
A DLJ 95-CF2 BBB 7,559,475 11-Dec-95
A DLJ 95-CF2 BBB 16,492,438 20-Nov-96
A DLJ 96-CF1 BBB 7,612,500 17-May-96
A DLJ 96-CF2 BBB 5,125,500 07-Nov-96
A Freemall Finance BBB 3,556,875 18-Nov-96
A MCF 96-MC1 BBB 5,228,330 27-Jun-96
A MLMI 95-C3 BBB 10,444,810 20-Nov-96
A MLMI 96-C1 BBB 4,807,031 29-Mar-96
A MLMI 96-C2 BBB 12,697,344 15-Nov-96
A QI Capital 97-1 BBB 11,625,000 11-Apr-97
A ASC 97-MD VII BBB- 5,262,768 22-Oct-97
A DLJ 96-CF1 BBB- 2,345,250 17-May-96
A GACC 96-2 BBB/BBB 3,211,155 19-Apr-96
A CSFB 95-WF1 BBB-/BBB 1,600,000 14-Dec-95
A ASC 95-MD IV BBB/BBB- 6,996,530 07-Nov-95
A MCF 96-MC1 BBB/BBB- 2,184,766 27-Jun-96
A MCF 96-MC1 BBB/BBB- 2,000,000 28-Jun-96
A ASC 95-MD IV BBB+/BBB 2,421,484 07-Nov-95
A MLMI 95-C2 Baa3/BBB 2,973,250 13-Feb-96
A MLMI 95-C2 Baa3/BBB 3,989,360 14-Jun-96
A MLIC 96-1 A/BBB 6,723,076 05-Mar-96
A SASCO 96-CFL A/BBB 6,500,130 09-Feb-96
A Aetna 95-C5 A-/BBB 3,915,440 07-Dec-95
B ASC 97-MD VII BB 4,197,858 20-Nov-97
B MLMI 97-C1 BB 2,760,938 20-Nov-97
B MCF 97-MC2 BB 4,713,800 21-Nov-97
B GSMSC 97-GL I BB 4,410,035 02-Dec-97
B CMAC 96-C2 BB 2,738,398 03-Dec-97
B ACMF 97-C1 BB 3,700,000 03-Dec-97
B MCF 96-MC1 BB 4,743,750 17-Dec-97
B GMAC 97-C2 AA 4,020,000 17-Dec-97
B CMAC 97-ML1 A 4,649,961 17-Dec-97
B SASCO 96-CFL B 4,591,797 30-Dec-97
C MSC 97-C1 BB 1,720,110 20-Mar-97
C ASC 97-MD VII BB 11,711,250 20-Mar-97
C JPMorgan 97-C4 BB 2,639,100 02-Apr-97
C DLJ 97-CF1 BB 3,733,340 25-Apr-97
C FU-LB 97-C1 BB 7,712,191 09-May-97
C DLJ 97-CF1 BB 5,341,438 20-May-97
</TABLE>
B-4
<PAGE> 137
TABLE VI -- CMBS PURCHASES (CONTINUED)
<TABLE>
<CAPTION>
CMBS CREDIT PURCHASE PURCHASE
CLIENT ISSUE RATING PRICE DATE
- ------ --------------------- ------ ----------- ---------
<C> <S> <C> <C> <C>
C CCMSC 97-1 BB $ 7,926,450 05-Jun-97
C MLMI 97-C1 BB 5,335,313 13-Jun-97
C ACMF 97-C1 BB 7,288,750 30-Jun-97
Ba2,
C DLJ 96-CF1 BB 7,976,719 08-Jul-97
C CMAC 96-C2 BB 4,780,600 09-Jul-97
C NationsLink 96-1 B 7,634,460 01-Aug-97
C DLJ 96-CF1 BB 1,524,844 22-Oct-97
</TABLE>
B-5
<PAGE> 138
COMPASS MANAGEMENT MAP
<PAGE> 139
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................... 1
Organization and Relationships.............. 13
Risk Factors................................ 15
Operating Policies and Objectives........... 31
Prior Performance........................... 45
Certain Relationships; Conflicts of
Interest.................................. 48
The Private Placement....................... 51
Use of Proceeds............................. 52
Capitalization.............................. 53
Management of Operations.................... 54
The Company................................. 64
Distribution Policy......................... 67
Yield Considerations Related to the
Company's Investments..................... 68
Management's Discussion and Analysis of
Liquidity and Capital Resources........... 72
Description of Capital Stock................ 72
Certain Provisions of Georgia Law and of the
Company's Articles of Incorporation and
Bylaws.................................... 75
Common Stock Available for Future Sale...... 77
Operating Partnership Agreement............. 78
Federal Income Tax Consequences............. 79
ERISA Considerations........................ 93
Certain Legal Aspects of Mortgage Loans and
Real Property Investments................. 96
Underwriting................................ 104
Legal Matters............................... 106
Experts..................................... 106
Additional Information...................... 106
Glossary of Terms........................... 107
Financial Statements........................ F-1
Prior Performance Tables.................... A-1
ERE Hyperion Prior Performance Tables....... B-1
</TABLE>
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERING HEREBY, 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.
======================================================
======================================================
9,800,000 SHARES
[CHASTAIN CAPITAL LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
FRIEDMAN, BILLINGS, RAMSEY
& CO., INC.
EVEREN SECURITIES, INC.
, 1998
======================================================
<PAGE> 140
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and NASD filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 49,870
NASD filing fee............................................. 16,203
Nasdaq National Market Listing Fee.......................... 46,667
Accounting fees and expenses................................ 40,000
Legal fees and expenses..................................... 350,000
Blue Sky fees and expenses (including counsel fees)......... 2,000
Printing and Engraving expenses............................. 150,000
Transfer Agent and Registrar fees and expenses.............. 10,000
Miscellaneous Expenses...................................... 85,260
--------
Total............................................. $750,000
========
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
In connection with the Company's formation, on December 16, 1997, the
Company sold 100 shares of Common Stock to ERE Yarmouth Holdings, Inc. at a
purchase price of $10.00 per share.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On December 16, 1997, the Company sold 100 shares of Common Stock to ERE
Yarmouth Holdings, Inc. in a private placement under Section 4(2) of the
Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code permits a corporation to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of duty of care or other duty as a
director, provided that no provisions shall eliminate or limit the liability of
a director: (A) for any appropriation, in violation of his duties, of any
business opportunity of the corporation; (B) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (C) for unlawful corporate
distributions; or (D) for any transaction from which the director received an
improper personal benefit. This provision pertains only to breaches of duty by
directors in their capacity as directors (and not in any other corporate
capacity, such as officers) and limits liability only for breaches of fiduciary
duties under Georgia corporate law (and not for violation of other laws, such as
the Federal securities laws). The Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") exonerate the Company's directors from
monetary liability to the extent permitted by this statutory provision.
The Company's Articles and Bylaws (the "Bylaws") also provide that the
Company shall indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (including any action
by or in the right of the Company), by reason of the fact that such person is or
was a director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the Company
(and with respect to any criminal action or proceeding, if such person had no
reasonable cause to believe such person's conduct was
II-1
<PAGE> 141
unlawful), to the maximum extent permitted by, and in the manner provided by,
the Georgia Business Corporation Code. In addition, the Bylaws provide that the
Company will advance to its directors or officers reasonable expenses of any
such proceeding.
Notwithstanding any provision of the Company's Articles and Bylaws to the
contrary, the Georgia Business Corporation Code provides that the Company shall
not indemnify a director or officer for any liability incurred in a proceeding
in which the director is adjudged liable to the Company or is subjected to
injunctive relief in favor of the Company: (1) for any appropriation, in
violation of his duties, of any business opportunity of the Company; (2) for
acts or omissions which involve intentional misconduct or a knowing violation of
law; (3) for unlawful corporate distributions; (4) for any transaction from
which the director or officer received an improper personal benefit.
Section 9 of the Underwriting Agreement filed as Exhibit 1.1 hereto also
contains certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified by the
underwriters named therein.
The Company has purchased insurance with respect to, among other things,
any liabilities that may accrue under the statutory provisions referred to
above.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......... F-1
Balance Sheet as of December 31, 1997....................... F-2
Notes to Balance Sheet...................................... F-3
</TABLE>
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NUMBER DESCRIPTION
------- ------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement
3.1 -- Form of Amended and Restated Articles of Incorporation of
the Company
3.2* -- Bylaws of the Company
4.1 -- Specimen Common Stock Certificate
5.1 -- Opinion of King & Spalding
8.1 -- Opinion of King & Spalding as to tax matters
10.1 -- Form of Management Agreement
10.2 -- Form of Registration Rights Agreement between the Company
and Yarmouth Lend Lease Holdings, Inc.
10.3 -- Form of Registration Rights Agreement between the Company
and FBR Asset Investment Corporation
10.4 -- Chastain Capital Corporation 1998 Non-Incentive Stock Option
Plan
10.5 -- Chastain Capital Corporation Directors Stock Incentive Plan
10.6 -- Form of Agreement of Limited Partnership of Chastain
Investments, L.P.
21.1* -- List of Subsidiaries of the Company
23.1 -- Consent of King and Spalding (contained in Exhibit 5.1)
23.2 -- Consent of Deloitte & Touche
24.1 -- Powers of Attorney (contained on signature page and as a
separate exhibit)
27.1 -- Financial data schedule (for SEC filing purposes only)
</TABLE>
- ---------------
* Previously filed
** To be filed by amendment
II-2
<PAGE> 142
(b) Financial Statement Schedules.
Not Applicable
ITEM 37. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities being registered 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 Act and will be governed by the final adjudication of such
issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 143
TABLE VI -- ACQUISITIONS OF PROPERTIES BY PROGRAMS
The following table summarizes the acquisition of properties by the
Programs since January 1, 1995.
<TABLE>
<CAPTION>
FUND E E E E
- ---- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Location.................................. Atlanta, GA Denver, CO Denver, CO Denver, CO
Type of property.......................... Office Office Pad Retail
Gross leasable space or # of units........ 415,103 557,047 117,598
Date of purchase.......................... 15-Feb-95 21-Feb-95 21-Feb-95 21-Feb-95
Mortgage financing at date of purchase.... $30,900,000 $37,486,761 $4,223,990 $ 9,464,511
Cash down payment......................... 20,400,000 16,785,850 1,891,421 5,922,692
Contract purchase price plus acquisition
fee...................................... 51,509,000 54,490,448 6,139,958 15,448,964
Other cash expenditures expensed..........
Other cash expenditures capitalized....... 414,668 1,732,895 0 393,767
------------------ ----------------- --------------- ------------------
Total acquisition costs................... $51,923,668 $56,223,342 $6,139,958 $15,842,731
================== ================= =============== ==================
<CAPTION>
FUND E E
- ---- ------------------ -----------------
<S> <C> <C>
Location.................................. Denver, CO Atlanta, GA
Type of property.......................... Hotel Office
Gross leasable space or # of units........ 420 220,659
Date of purchase.......................... 21-Feb-95 28-Apr-95
Mortgage financing at date of purchase.... $22,500,000
Cash down payment......................... 17,702,033 $24,500,000
Contract purchase price plus acquisition
fee...................................... 40,363,394 24,622,500
Other cash expenditures expensed..........
Other cash expenditures capitalized....... 168,980 110,426
------------------ -----------------
Total acquisition costs................... $40,532,374 $24,732,926
================== =================
</TABLE>
<TABLE>
<CAPTION>
FUND A A A A
- ---- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Location.................................. Los Angeles, CA Los Angeles, CA Anaheim, CA Ft. Washington, MD
Type of property.......................... Multifamily Multifamily Multifamily Office
Gross leasable space or # of units........
Date of purchase.......................... 24-Mar-95 24-Mar-95 24-Mar-95 28-Jun-95
Mortgage financing at date of purchase.... $ -- $ -- $ -- $ --
Cash down payment......................... 1,554,223 1,580,472 641,050 191,160
Contract purchase price plus acquisition
fee...................................... 1,561,863 1,588,236 644,153 191,931
Other cash expenditures expensed.......... -- --
Other cash expenditures capitalized....... -- --
------------------ ----------------- --------------- ------------------
Total acquisition costs................... $1,561,863 $1,588,236 $644,153 $191,931
================== ================= =============== ==================
<CAPTION>
FUND A A
- ---- ------------------ -----------------
<S> <C> <C>
Location.................................. Forest City, NC Baltimore, MD
Type of property.......................... Retail Multifamily
Gross leasable space or # of units........
Date of purchase.......................... 28-Jun-95 28-Jun-95
Mortgage financing at date of purchase.... $ -- $ --
Cash down payment......................... 1,923,417 2,037,929
Contract purchase price plus acquisition
fee...................................... 1,932,644 2,047,937
Other cash expenditures expensed..........
Other cash expenditures capitalized.......
------------------ -----------------
Total acquisition costs................... $1,932,644 $2,047,937
================== =================
</TABLE>
<TABLE>
<CAPTION>
FUND B B B B
- ---- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Location.................................. Bradenton, FL Sarasota, FL Deerfield, IL N/A
Type of property.......................... Office Retail Office CMBS
Gross leasable space or # of units........
Date of purchase.......................... 26-Jan-96 12-Feb-96 01-Mar-96 23-May-96
Mortgage financing at date of purchase.... $ -- $ 5,200,000 $14,000,000 $ --
Cash down payment......................... 1,750,000 (2,684,460) 4,500,000 6,349,509
Contract purchase price plus acquisition
fee...................................... 1,758,663 2,556,198 18,606,552 6,380,947
Other cash expenditures expensed.......... 0
Other cash expenditures capitalized....... -- --
------------------ ----------------- --------------- ------------------
Total acquisition costs................... $1,758,663 $ 2,556,198 $18,606,552 $6,380,947
================== ================= =============== ==================
<CAPTION>
FUND B B
- ---- ------------------ -----------------
<S> <C> <C>
Location.................................. Las Vegas, NV Miami, FL
Type of property.......................... Hotel Retail
Gross leasable space or # of units........
Date of purchase.......................... 30-May-96 30-May-96
Mortgage financing at date of purchase.... $10,400,000 $ --
Cash down payment......................... 4,850,000 1,485,000
Contract purchase price plus acquisition
fee...................................... 15,325,488 1,492,351
Other cash expenditures expensed..........
Other cash expenditures capitalized.......
------------------ -----------------
Total acquisition costs................... $15,325,488 $1,492,351
================== =================
</TABLE>
<TABLE>
<CAPTION>
FUND G G G G
- ---- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Location.................................. Austin, TX Austin, TX Ontario, CA Murrietta, CA
Type of property.......................... Industrial Industrial Industrial Retail
Gross leasable space or # of units........ 186,583 -- 485,555 131,341
Date of purchase.......................... 27-Jun-95 21-Sep-95 19-Jul-95 24-Aug-95
Mortgage financing at date of purchase.... $ -- $ -- $ -- $ --
Cash down payment......................... 5,560,000 1,240,000 13,150,000 7,600,000
Contract purchase price plus acquisition
fee...................................... 5,560,000 1,240,000 13,150,000 7,600,000
Other cash expenditures expensed.......... -- -- -- --
Other cash expenditures capitalized....... -- -- -- --
----------------- ---------------- -------------- -----------------
Total acquisition costs................... $5,560,000 $1,240,000 $13,150,000 $7,600,000
================= ================ ============== =================
<CAPTION>
FUND G G
- ---- ------------------ -----------------
<S> <C> <C>
Location.................................. Orlando, FL Philadelphia, PA
Type of property.......................... Industrial Retail
Gross leasable space or # of units........ 595,564 153,751
Date of purchase.......................... 28-Sep-95 25-Oct-95
Mortgage financing at date of purchase.... $ -- $ --
Cash down payment......................... 11,550,000 10,200,000
Contract purchase price plus acquisition
fee...................................... 11,550,000 10,200,000
Other cash expenditures expensed.......... -- --
Other cash expenditures capitalized....... -- --
------------------ -----------------
Total acquisition costs................... $11,550,000 $10,200,000
================== =================
</TABLE>
<TABLE>
<CAPTION>
FUND G G G G
- ---- ------------------ ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
Location.................................. Mesa, AZ Greenwood Vlg, CO Pompano Bch, FL Aventura, FL
Type of property.......................... Hotel Office Industrial Retail
Gross leasable space or # of units........ 263 162,526 124,886 70,875
Date of purchase.......................... 14-Dec-95 21-Dec-95 28-Dec-95 27-Feb-96
Mortgage financing at date of purchase.... $ -- $ -- $ -- $ --
Cash down payment......................... 11,000,000 8,000,000 3,975,000 7,500,000
Contract purchase price plus acquisition
fee...................................... 11,000,000 8,000,000 3,975,000 7,500,000
Other cash expenditures expensed.......... -- -- -- --
Other cash expenditures capitalized....... -- -- -- --
------------------ ----------------- --------------- ------------------
Total acquisition costs................... $11,000,000 $8,000,000 $3,975,000 $7,500,000
================== ================= =============== ==================
<CAPTION>
FUND G G
- ---- ------------------ -----------------
<S> <C> <C>
Location.................................. Lafayette, CA Atlanta, GA
Type of property.......................... Hotel Apartment
Gross leasable space or # of units........ 139 165
Date of purchase.......................... 29-May-96 3-Jul-96
Mortgage financing at date of purchase.... $ -- $ --
Cash down payment......................... 9,200,000 9,125,000
Contract purchase price plus acquisition
fee...................................... 9,200,000 9,125,000
Other cash expenditures expensed.......... -- --
Other cash expenditures capitalized....... -- --
------------------ -----------------
Total acquisition costs................... $9,200,000 $9,125,000
================== =================
</TABLE>
II-4
<PAGE> 144
TABLE VI -- ACQUISITION OF PROPERTIES BY PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
E E E C C C
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Grapevine, TX Pittsburgh, PA Charlotte, NC Central Philadelphia, PA Phoenix, AZ
Hotel Office Hotel Office Office Office
395 622,838 409 491,808 981,545 212,437
30-Jun-95 5-Dec-95 29-Dec-95 28-Aug-96 12-Dec-96 20-Feb-97
$23,531,156 $50,000,000 $16,746,469 $ -- $64,000,000 $ 9,500,000
22,968,844 32,100,000 17,468,622 48,604,411 12,936,000 9,050,000
46,732,500 82,460,000 34,386,166 49,102,168 77,100,222 18,641,142
245,539 1,352,917 236,151 1,171,312 4,139,772 68,741
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
$46,978,039 $83,812,917 $34,622,317 $50,273,480 $81,239,994 $18,709,883
================ =================== ================ ================== ================ ==================
<CAPTION>
E C C D
- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Grapevine, TX Chicago, IL Chicago, IL Stevenson, WA
Hotel Office Office Hotel
395 622,487 311,823 195
30-Jun-95 29-May-97 27-Jun-97 1-Aug-96
$23,531,156 $ -- $2,850,000 $ 4,316,239
22,968,844 10,697,500 -- 27,726,184
46,732,500 10,805,317 2,850,000 32,200,348
245,539 629,581
- ---------------- ------------------ ----------------- ----------------
$46,978,039 $10,805,317 $2,850,000 $32,829,929
================ ================== ================= ================
</TABLE>
<TABLE>
<CAPTION>
F F F F F F
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Midland, TX Potomac, MD Los Angeles, CA College Park, MD Salisbury, MD Laurel, MD
Multifamily Land Multifamily Office Retail Retail
28-Jun-95 28-Jun-95 24-Mar-95 28-Jun-95 28-Jun-95 28-Jun-95
$ -- $ -- $ -- $ -- $ -- $ --
409,612 508,988 2,203,523 1,175,250 1,909,855 3,768,720
411,383 511,358 2,214,360 1,180,949 1,919,230 3,787,120
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
$411,383 $511,358 $2,214,360 $1,180,949 $1,919,230 $3,787,120
================ =================== ================ ================== ================ ==================
<CAPTION>
F F F D
- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Midland, TX Wethersfield, CT Albany, NY Lakeway, TX
Multifamily Retail Office Hotel
137
28-Jun-95 30-Jun-95 29-Aug-95 29-Jul-96
$ -- $ -- $2,910,000 $5,100,000
409,612 2,581,605 2,311,772 4,551,047
411,383 2,594,190 5,239,963 9,700,297
--
206,870
- ---------------- ------------------ ----------------- ----------------
$411,383 $2,594,190 $5,239,963 $9,907,167
================ ================== ================= ================
</TABLE>
<TABLE>
<CAPTION>
A A A A A B
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Marco Island, FL Atlanta, GA N. Hollywood, CA Corpus Christi, TX Phoenix, AZ Alpharetta, GA
Retail Hotel Hotel Multifamily Hotel Office
144 suite 74,623
26-Jun-96 18-Nov-96 06-Dec-96 27-Jan-97 16-Dec-97 17-Dec-97
$ 9,500,000 $11,125,000 $ -- $11,125,000 $3,400,000 $5,500,000
2,500,000 250,000 4,850,000 8,350,000 1,100,000 2,500,000
12,059,400 11,431,306 4,874,007 19,569,817 4,518,000 8,026,325
-- --
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
$12,059,400 $11,431,306 $4,874,007 $19,569,817 $4,518,000 $8,026,325
================ =================== ================ ================== ================ ==================
<CAPTION>
A B D D
- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Marco Island, FL Anaheim, CA Forth Worth, TX Gleneden Bch, OR
Retail Hotel Office Hotel
124 suites 300,728 205
26-Jun-96 18-Dec-97 5-Nov-97 1-Aug-96
$ 9,500,000 $ 8,400,000 $ -- $ --
2,500,000 4,950,000 30,752,438 27,053,304
12,059,400 13,392,800 30,910,438 27,193,204
496,674 353,445
- ---------------- ------------------ ----------------- ----------------
$12,059,400 $13,392,800 $31,849,738 $27,546,649
================ ================== ================= ================
</TABLE>
<TABLE>
<CAPTION>
G G G H H H
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Madison, WI New York, NY Boston, MA San Fran, CA San Fran, CA Portland, OR
Apartment Apartment Office Office Office Office
180 185 75,015 683,026 408,352 309,241
3-Nov-95 30-Nov-95 14-Dec-95 Jun-95 Jun-95 Jun-95
$ -- $ -- $ -- $33,000,000 $21,000,000 $17,500,000
6,500,000 10,300,000 7,000,000 38,658,029 20,995,021 17,030,846
6,500,000 10,300,000 7,000,000 71,658,029 42,207,388 34,700,846
-- -- --
-- -- -- 392,811 88,971 75,841
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
$6,500,000 $10,300,000 $7,000,000 $72,050,839 $42,296,359 $34,776,687
================ =================== ================ ================== ================ ==================
<CAPTION>
G H H D
- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Madison, WI Marietta, GA Sunset Hills, MO Maui, HA
Apartment Hotel Retail site Hotel
180 200 Units -- 194
3-Nov-95 Sep-95 Feb-95 5-Sep-96
$ -- $ -- $ --
6,500,000 12,748,989 $2,897,000 20,192,385
6,500,000 12,906,229 2,897,000 20,294,885
--
-- 282,074 253,999 134,379
- ---------------- ------------------ ----------------- ----------------
$6,500,000 $13,188,303 $3,150,999 $20,429,264
================ ================== ================= ================
</TABLE>
<TABLE>
<CAPTION>
G G G G H D
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Burbank, CA Tampa, FL San Fran, CA New York, NY La Jolla, CA Aurora, CO
Office Apartment Office Office Mixed use Office
45,696 240 111,588 -- 265,553sf/400rm 208,022
28-May-97 11-Jun-97 25-Sep-97 29-May-96 Mar-95 31-Jan-97
$ -- $ -- $ -- $ -- $35,000,000 $ --
5,500,000 11,100,000 10,500,000 3,400,000 39,995,010 14,691,647
5,500,000 11,100,000 10,500,000 3,400,000 73,355,693 14,757,147
-- -- -- --
-- -- -- -- 113,256 35,370
- ---------------- ------------------- ---------------- ------------------ ---------------- ------------------
$5,500,000 $11,100,000 $10,500,000 $3,400,000 $75,468,949 $14,792,517
================ =================== ================ ================== ================ ==================
<CAPTION>
G D D D
- ---------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Burbank, CA Salt Lake City, UT Stratford, CT Coral Gables, FL
Office Office Office Office
45,696 160,843 160,166 325,295
28-May-97 3-Feb-97 9-May-97 14-Oct-97
$ -- $ -- $ -- $ --
5,500,000 14,483,152 15,545,000 41,502,405
5,500,000 14,543,052 15,602,730 41,642,405
--
-- 13,583 61,973 534,768
- ---------------- ------------------ ----------------- ----------------
$5,500,000 $14,556,635 $15,664,703 $42,177,173
================ ================== ================= ================
</TABLE>
II-5
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on February 26, 1998.
CHASTAIN CAPITAL CORPORATION
By: /s/ KURT L. WRIGHT
---------------------------------
Kurt L. Wright
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on February 26, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ KURT L. WRIGHT Chief Executive Officer and Director
- -------------------------------------------------------- (Principal Executive Officer)
Kurt L. Wright
* Chief Financial Officer (Principal Financial
- -------------------------------------------------------- and Principal Accounting Officer)
Steven G. Grubenhoff
* Chairman of the Board
- --------------------------------------------------------
Matthew Banks
* Director
- --------------------------------------------------------
Harald R. Hansen
* Director
- --------------------------------------------------------
Elizabeth T. Kennan
* Director
- --------------------------------------------------------
W.J. Smith
By: /s/ KURT L. WRIGHT
------------------------------------------------------
Kurt L. Wright
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF AMENDMENT AND RESTATEMENT TO
ARTICLES OF INCORPORATION
OF
CHASTAIN CAPITAL CORPORATION
Chastain Capital Corporation, a corporation organized and existing
under the laws of the State of Georgia, hereby certifies as follows:
1. The name of the corporation is Chastain Capital Corporation (the
"Corporation").
2. Pursuant to Section 14-2-1007 of the Georgia Business Corporation
Code, these Articles of Incorporation amend and restate the Articles of
Incorporation of the Corporation (the "Articles of Amendment and Restatement").
These Articles of Amendment and Restatement were duly adopted by the
shareholders of the Corporation in accordance with the provisions of Section
14-2-1003 of the Georgia Business Corporation Code on February __, 1998.
3. The Articles of Incorporation of the Corporation are hereby restated
and further amended to read in their entirety as follows:
<PAGE> 2
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CHASTAIN CAPITAL CORPORATION
1.
The name of the Corporation is Chastain Capital Corporation.
2.
The street address and county of the Corporation's initial registered
office is 1201 Peachtree Street, N.E., Suite 1240, Atlanta, Fulton County,
Georgia 30361. The initial registered agent of the Corporation at such address
is CT Corporation.
3.
Intentionally omitted.
4.
The mailing address of the initial principal office of the Corporation
is 3424 Peachtree Road, N.E., Suite 800, Atlanta, Georgia 30326.
5.
Section 5.1. Common Stock. The aggregate number of common shares
(referred to in these Articles of Incorporation as "Common Stock") that the
Corporation shall have the authority to issue is 200,000,000 with a par value of
$.01 per share. Each share of Common Stock shall have one vote on each matter
submitted to a vote of the shareholders of the Corporation. Subject to the
provisions of applicable law and the rights of the holders of the outstanding
shares of Preferred Stock, if any, the holders of shares of Common Stock shall
be entitled to receive, when and as declared by the Board of Directors of the
Corporation, out of the assets of the Corporation legally available therefor,
dividends or other distributions, whether payable in cash, property or
securities of the Corporation. The holders of shares of Common Stock shall be
entitled to receive, in proportion to the number of shares of Common Stock held,
the net assets of the Corporation upon
-2-
<PAGE> 3
dissolution after any preferential amounts required to be paid or distributed to
holders of outstanding shares of Preferred Stock, if any, are so paid or
distributed.
Section 5.2. Preferred Stock. The aggregate number of preferred shares
(referred to in these Articles of Incorporation as "Preferred Stock") that the
Corporation shall have authority to issue is 25,000,000 with a par value of $.0l
per share. The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more series. The description of shares of each
series of Preferred Stock, including any designations, preferences, conversion
and other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption shall be as set forth in
resolutions adopted by the Board of Directors, and articles of amendment shall
be filed with the Georgia Secretary of State as required by law to be filed with
respect to issuance of such Preferred Stock, prior to the issuance of any shares
of such series.
The Board of Directors is expressly authorized, at any time, by
adopting resolutions providing for the issuance of, or providing for a change in
the number of, shares of any particular series of Preferred Stock and, if and to
the extent from time to time required by law, by filing articles of amendment
that are effective without shareholder action, to increase or decrease the
number of shares included in each series of Preferred Stock, but not below the
number of shares then issued, and to set in any one or more respects the
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms and
conditions of redemption relating to the shares of each such series (provided,
however, that no such issuance or designation shall result in any holder of
shares of Equity Stock being in violation of the General Ownership Limit, as may
be applicable pursuant to Section 8.2(a) hereof, or otherwise result in the
Corporation failing to qualify as a REIT). The authority of the Board of
Directors with respect to each series of Preferred Stock shall include, but not
be limited to, setting or changing the following:
(1) the dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be
accumulated, if dividends are to be cumulative;
(ii) whether the shares of such series shall be redeemable
and, if so, the redemption price and the terms and conditions of such
redemption;
(iii) the obligation, if any, of the Corporation to redeem
shares of such series pursuant to a sinking fund or otherwise;
(iv) whether shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class, classes or
series, or any other security, and, if so, the terms and conditions of
such conversion or exchange, including the price or prices or the rate
or rates of conversion or exchange and the terms of adjustment, if any;
(v) whether the shares of such series shall have voting
rights, in addition to the voting rights provided by law, and, if so,
the extent of such voting rights;
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(vi) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation;
(vii) restrictions on transfer to preserve the status of the
Corporation as a REIT; and
(viii) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such
series.
Section 5.3. Shares Acquired by the Corporation. Shares of Common Stock
that have been acquired by the Corporation shall become treasury shares and may
be resold or otherwise disposed of by the Corporation for such consideration,
not less than the par value thereof, as shall be determined by the Board of
Directors, unless or until the Board of Directors shall by resolution provide
that any or all treasury shares so acquired shall constitute authorized, but
unissued shares.
Section 5.4. Change in REIT Status. The Corporation shall not
voluntarily elect not to be qualified as a REIT unless such action has been
approved by the affirmative vote of 80% of the members of the Board of Directors
and the affirmative vote of two-thirds of the outstanding shares of Common Stock
and any other shares of Equity Stock entitled to vote generally in the election
of directors voting as a class.
6.
No shareholder shall have any preemptive right to subscribe for or to
purchase any shares or other securities issued by the Corporation.
7.
Section 7.1. Personal Liability of Directors. No director of the
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for any action taken, or for failure to take action, as a
director, except liability (i) for any appropriation, in violation of the
director's duties, of any business opportunity of the Corporation (ii) for acts
or omissions which involved intentional misconduct or a knowing violation of
law, (iii) for the types of liabilities set forth in Section 14-2-832 of the
Georgia Business Corporation Code, or (iv) for any transaction from which the
director received an improper personal benefit. If the Georgia Business
Corporation Code is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Georgia Business Corporation Code, as amended.
Section 7.2. Indemnification of Directors. The Corporation shall
indemnify to the fullest extent permitted by the Georgia Business Corporation
Code and, to the extent that applicable law from time to time in effect shall
permit indemnification that is broader than provided in these Articles, to the
maximum extent authorized by law, any individual made a party to a proceeding
(as
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defined in the Georgia Business Corporation Code), because he or she is or was a
director or officer against liability (as defined in the Georgia Corporation
Code), incurred in the proceeding, if he or she acted in a manner he or she
believed in good faith to be in or not opposed to the best interests of the
Corporation and, in the case of any criminal proceeding, he or she had no
reasonable cause to believe his or her conduct was unlawful.
Section 7.3. Effect of Repeal or Modification. Neither the repeal or
modification of this Article 7 nor the adoption of any provision of these
Articles of Incorporation inconsistent with these Articles shall eliminate or
adversely affect any right or protection of a director of the Corporation
existing immediately prior to such repeal, modification or adoption.
8.
Section 8.1. Definitions. The following terms shall have the following
meanings for purposes of these Articles of Incorporation:
"Beneficial Ownership" shall mean ownership of Equity Stock by a person
who (i) either would own such shares directly (other than as a nominee or
custodian) or would have beneficial ownership under a nominee or custodial
arrangement (in either case without taking into account the application of
Section 544 of the Code, as modified by Section 856(h)(l)(B) of the Code) or
(ii) would be treated as the indirect or constructive owner of such shares
through the application of Section 544 of the Code, as modified by Section
856(h)(1)(B) of the Code. The terms "Beneficial owner," "Beneficially Owns" and
"Beneficially Owned" shall have correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or more
organizations described in each of Section 170(b)(1)(A) and Section 170(c) of
the Code that are named by the Corporation as the beneficiary or beneficiaries
of such Trust, in accordance with the provisions of Section 8.12(a) of this
Article 8.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Disqualified Organization" shall have the meaning ascribed to such
term by Section 860E of the Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Equity Stock" shall mean, as of any particular time, all the
outstanding shares of Common Stock and Preferred Stock, including all shares of
Common Stock and Preferred Stock that are held as Shares-in-Trust at such time
in accordance with the provisions of Section 8.12 of this Article 8.
"General Ownership Limit" shall initially mean, with respect to each
class of Equity Stock of the Corporation outstanding as of any particular time,
9.8% of the total number of shares
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of such class of Equity Stock outstanding as of such time, except with respect
to Lend Lease there shall be no limit so long as the capital stock of Lend Lease
is publicly held. For this purpose, Lend Lease will be deemed to be publicly
held so long as no more than 20% of its outstanding capital stock is owned
(including beneficial ownership through a nominee or custodial arrangement),
directly or constructively (as determined under the rules of Section 544 of the
Code), by any one individual.
"Initial Public Offering" means the sale of shares of Common Stock
pursuant to the Corporation's first effective registration statement for such
Common Stock filed under the Securities Act of 1933, as amended.
"Lend Lease" means Lend Lease Corporation Limited and its subsidiaries
and affiliates.
"Market Price" on any date shall mean the average of the Closing Price
for the ten consecutive Trading Days ending on such date. The "Closing Price" on
any date shall mean with respect to the Equity Stock the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported, in
the principal consolidated transaction reporting system with respect to
securities listed or admitted to trading on the New York Stock Exchange or, if
the Equity Stock is not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which the Equity Stock is listed or admitted to trading or, if the Equity
Stock is not listed or admitted to trading on any national securities exchange,
the last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotation System or, if such
system is no longer in use, such other reliable automated quotations system as
is selected by the Corporation, or, if the Equity Stock is not quoted by any
such organization, the average of the closing bid and asked prices as furnished
by a professional market maker making a market in the Equity Stock selected by
the Corporation or, if there is no such professional market maker such amount as
an independent investment banking firm selected by the Corporation determines to
be the value of a share of Equity Stock. "Trading Day" shall mean a day on which
the principal national securities exchange on which the Equity Stock is listed
or admitted to trading is open for the transaction of business or, if the Equity
Stock is not listed or admitted to trading on any national securities exchange,
shall mean any day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or obligated by law or
executive order to close.
"Non-Transfer Event" shall mean any event other than a purported
Transfer that would cause (i) any Person to Beneficially Own shares of Equity
Stock in excess of the General Ownership Limit as provided in Section 8.2(a) of
this Article 8, (ii) the Corporation to become "closely held" within the meaning
of Section 856(h) of the Code, and/or (iii) the Corporation to otherwise fail to
qualify as a REIT (other than as a result of a violation of the
"100-shareholder" requirement of Section 856(a) (5) of the Code); in each case
including, but not limited to, the
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granting of any option or entering into any agreement for the sale, transfer or
other disposition of Equity Stock or the sale, transfer, assignment or other
disposition of any securities or rights convertible into or exchangeable for
Equity Stock.
"Permitted Transferee" shall mean any Person designated as a Permitted
Transferee in accordance with the provisions of Section 8.12(e) hereof.
"Person" shall mean an individual, corporation, limited liability
company, partnership, estate, trust, association, joint stock company,
government agency or political subdivision thereof, charitable organization, or
other entity, and also includes a group as that term is used for purposes of
Section 13(d) (3) of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported Transfer
or Non-Transfer Event, any Person who, but for the provisions of Section 8.3 of
this Article 8, would own record title to shares of Equity Stock.
"REIT" shall mean a "real estate investment trust" as defined in
Section 856(a) of the Code.
"Restriction Termination Date" shall mean the first day after the date
of the Initial Public Offering on which the Board of Directors and the
shareholders of the Corporation determine, in accordance with Section 5.4 that
it is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
other disposition of Equity Stock, whether voluntary or involuntary, whether of
record, constructively or beneficially and whether by operation of law or
otherwise.
"Trust" shall mean any separate trust created pursuant to Section 8.3
of this Article 8 and administered in accordance with the terms of Section 8.12
of this Article 8, for the exclusive benefit of any Beneficiary.
"Trustee" shall mean any person or entity unaffiliated with both the
Corporation and any Prohibited Owner, such Trustee to be designated by the
Corporation to act as trustee of any Trust, or any successor trustee thereof.
Section 8.2. Restrictions on Ownership and Transfers.
(a) From the date of the Initial Public Offering and prior to
the Restriction Termination Date, except as provided in Section 8.9 of this
Article 8, no Person shall Beneficially Own shares of the outstanding Equity
Stock in excess of the General Ownership Limit, and no Disqualified Organization
shall own any shares of the outstanding Equity Stock.
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(b) Except as provided in Section 8.9 of this Article 8, from
the date of the Initial Public Offering and prior to the Restriction Termination
Date, any Transfer that, if effective, would result in any Person Beneficially
Owning shares of the outstanding Equity Stock in excess of the General Ownership
Limit, or that results in a Disqualified Organization owning any shares of the
outstanding Equity Stock, shall be void ab initio as to the Transfer of that
number of shares of Equity Stock (i) that would be otherwise Beneficially Owned
by such Person in excess of the General Ownership Limit or (ii) that would be
otherwise owned by the Disqualified Organization, as the case may be; and the
intended transferee shall acquire no rights in such excess shares of Equity
Stock.
(c) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer that, if
effective, would result in the Equity Stock being directly or indirectly owned
by fewer than 100 Persons (determined without reference to any rules of
attribution) shall be void ab initio in its entirety; and the intended
transferee shall acquire no rights in any of such shares of Equity Stock
intended to be Transferred.
(d) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h) of the Code shall be void ab
initio as to the Transfer of that number of shares of Equity Stock that would
cause the Corporation to be "closely held" within the meaning of Section 856(h)
of the Code; and the intended transferee shall acquire no rights in such excess
shares of Equity Stock.
(e) Notwithstanding any other provision herein (subject,
however, to Section 8.13 of this Article 8), from the date of the Initial Public
Offering and prior to the Restriction Termination Date, any Transfer of shares
of Equity Stock that, if effective, would cause the Corporation to fail to
qualify as a REIT shall be void ab initio as to the Transfer of that number of
shares of Equity Stock in excess of the number that could have been Transferred
without such result; and the intended transferee shall acquire no rights in such
excess shares of Equity Stock.
Section 8.3. Transfer in Trust.
(a) If, notwithstanding the other provisions contained in this
Article 8, at any time after the date of the Initial Public Offering and prior
to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event such that any Disqualified Organization would own any shares
of outstanding Equity Stock or any Person would Beneficially Own shares of the
outstanding Equity Stock in excess of the General Ownership Limit, then, (i)
except as otherwise provided in Section 8.9, (A) the purported transferee shall
acquire no right or interest (or, in the case of a Non-Transfer Event, the
Person holding record title to the Equity Stock Beneficially Owned by such
Beneficial Owner shall cease to own any right or interest) in such number of
shares of Equity Stock that would cause such Beneficial Owner to Beneficially
Own shares of Equity Stock in excess
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of the General Ownership Limit, and (B) if the purported transferee is a
Disqualified Organization, such Disqualified Organization shall acquire no right
or interest (or, in the case of a Non-Transfer Event, shall cease to own any
right or interest) in any shares of Equity Stock; and (ii) such number of shares
of Equity Stock in excess of the General Ownership Limit, (rounded up to the
nearest whole share) or such number of shares that otherwise would be owned by a
Disqualified Organization shall be designated Shares-in-Trust and, in accordance
with Section 8.12 of this Article 8, transferred automatically and by operation
of law to a Trust to be held in accordance with that Section 8.12. Such transfer
to a Trust and the designation of the shares as Shares-in-Trust shall be
effective as of the close of business on the business day prior to the date of
the purported Transfer or Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in this
Article 8, at any time after the date of the Initial Public Offering and prior
to the Restriction Termination Date, there is a purported Transfer or
Non-Transfer Event that, if effective, would cause the Corporation to become
"closely held" within the meaning of Section 856(h) of the Code or to otherwise
fail to qualify as a REIT (other than as a result of a violation of the
100-shareholder requirement of Section 856(a) (5) of the Code), then (i) the
purported transferee shall not acquire any right or interest (or, in the case of
a Non-Transfer Event, the Person holding record title to the Equity Stock with
respect to which such Non-Transfer Event occurred shall cease to own any right
or interest) in such number of shares of Equity Stock, the ownership of which by
such purported transferee or record holder would cause the Corporation to be
"closely held" within the meaning of Section 856(h) of the Code or to otherwise
fail to qualify as a REIT (other than as a result of a violation of the
100-shareholder requirement of Section 856(a) (5) of the Code); and (ii) such
number of shares of Equity Stock (rounded up to the nearest whole share) shall
be designated Shares-in-Trust and, in accordance with the provisions of Section
8.12 of this Article 8, transferred automatically and by operation of law to the
Trust to be held in accordance with that Section 8.12. Such transfer to a Trust
and the designation of shares as Shares-in-Trust shall be effective as of the
close of business on the business day prior to the date of the Transfer or
Non-Transfer Event, as the case may be.
Section 8.4. Remedies For Breach. If the Corporation or its designees
shall at any time determine in good faith that Transfer has taken place in
violation of Section 8.2 of this Article 8 or that a Person intends to acquire
or has attempted to acquire Beneficial Ownership of any shares of Equity Stock
in violation of Section 8.2 of this Article 8, the Corporation shall take such
action as it deems advisable to refuse to give effect to or to prevent such
Transfer or acquisition, including, but not limited to, refusing to give effect
to such Transfer on the books of the Corporation or instituting proceedings to
enjoin such Transfer or acquisition.
Section 8.5. Notice of Restricted Transfer. Any Person who acquires or
attempts to acquire shares of Equity Stock in violation of Section 8.2 of this
Article 8, or any Person who owned shares of Equity Stock that were transferred
to the Trust pursuant to the provisions of Section 8.3 of this Article 8, shall
immediately give written notice to the Corporation of such event and shall
provide to the Corporation such other information as the Corporation may request
in order to
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determine the effect, if any, of such Transfer or the Non-Transfer Event, as the
case may be, on the Corporation's status as a REIT.
Section 8.6. Owners Required to Provide Information. From the date of
the Initial Public Offering and prior to the Restriction Termination Date:
(a) Every Beneficial Owner of more than 1%, or such lower
percentage as may be required pursuant to the Code or the regulations
thereunder, of the outstanding Equity Stock shall within 30 days after January 1
of each year give written notice to the Corporation stating the name and address
of such Beneficial Owner, the number of shares of Equity Stock Beneficially
Owned, and a description of how such shares are held. In addition, at such times
Lend Lease shall provide to the Corporation a list of all beneficial owners of
10% or more of its capital stock. Each such Beneficial Owner shall provide to
the Corporation such additional information as the Corporation may request in
order to determine the effect, if any, of such Beneficial Ownership on the
Corporation's status as a REIT and to ensure compliance with the General
Ownership Limit.
(b) Each Person who is a Beneficial Owner of Equity Stock and
each Person (including the shareholder of record) who is holding Equity Stock
for a Beneficial Owner shall provide to the Corporation such information as the
Corporation may request in order to determine the Corporation's status as a REIT
and to ensure compliance with the General Ownership Limit.
Section 8.7. Remedies Not Limited. Nothing contained in this Article 8
(subject, however, to Section 8.13 of this Article 8) shall limit the authority
of the Corporation to take such other action as it deems necessary or advisable
to protect the Corporation and the interests of its shareholders by preservation
of the Corporation's status as a REIT and to ensure compliance with the General
Ownership Limit.
Section 8.8. Ambiguity. In the case of an ambiguity in the application
of any of the provisions of this Article 8, including any definition contained
in Section 8.1, the Board of Directors shall have the power to determine the
application of the provisions of this Section 8 with respect to any situation,
based on the facts known to it.
Section 8.9. Exception. The restrictions on ownership and transfers set
forth in Sections 8.2(a) and 8.2(b) of this Article 8 (other than the
restrictions relating to Disqualified Organizations) shall not apply to the
acquisition of shares of Equity Stock of the Corporation by an underwriter in a
public offering of those shares or in any transaction involving the issuance of
shares of Equity Stock by the Corporation in which the Board of Directors
determines that the underwriter (or other Person initially acquiring those
shares) will timely distribute those shares to or among others so that,
following such distribution, the ownership of those shares will not be in
violation of Section 8.2 of this Article 8. The Board of Directors may, in its
sole and absolute discretion, waive the provisions of Sections 8.2(a) and 8.2(b)
of this Article 8 insomuch as such provisions relate to Disqualified
Organizations; provided, however, that the Board of Directors may place any
conditions
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it deems advisable upon any such waiver. The Board of Directors, in the exercise
of its sole and absolute discretion, also may exempt from the operation of
Sections 8.2(a) and 8.2(b) of this Article 8 certain specified shares of Equity
Stock of the Corporation proposed to be Transferred to, and/or Beneficially
Owned by, a Person who has provided the Board of Directors with such evidence,
undertakings and assurances as the Board of Directors may require that such
Transfer to, and/or Beneficial Ownership by, such Person of the specified shares
will not prevent the continued qualification of the Corporation as a REIT under
the Code and the regulations thereunder. The Board of Directors may, but shall
not be required to, condition the grant of any such exemption upon the obtaining
of an opinion of counsel, a ruling from the Internal Revenue Service, or such
other assurances as the Board of Directors may deem to be satisfactory.
Section 8.10. Legend. Each certificate for Equity Stock shall bear the
following legend:
"The shares of [ ] Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance of its
status as a real estate investment trust (a "REIT") under the Internal Revenue
Code of 1986, as amended (the "Code") and for the purpose of preventing
"Disqualified Organizations" (within the meaning of Section 860E of the Code)
from owning any shares of the Corporation's Stock. No Disqualified Organization
may at any time own any shares of any class of Equity Stock. In addition, no
Person (other than Lend Lease so long as the capital stock of Lend Lease is
publicly held) may at any time (1) Beneficially Own shares of any class of
Equity Stock in excess of 9.8% (or such other percentage as may be determined by
the Board of Directors of the Corporation) of the total number of shares of such
class of Equity Stock outstanding as of such time; or (2) Beneficially Own
Equity Stock that would result in the Corporation being "closely held" under
Section 856(h) of the Code or otherwise failing to qualify as a REIT. Any
Disqualified Organization that attempts to own any shares of Equity Stock, and
any Person who attempts to Beneficially Own shares of Equity Stock in excess of
the above limitations must immediately notify the Corporation in writing. If the
restrictions above are violated, the shares of Equity Stock represented hereby
will be transferred automatically and by operation of law to a Trust and shall
be designated Shares-in-Trust. All capitalized terms in this legend have the
meanings defined in the Corporation's Articles of Incorporation, as the same may
be further amended from time to time, a copy of which, including the
restrictions on transfer, will be sent without charge to each shareholder who so
requests."
Section 8.11. Severability. If any provision of this Article 8 or any
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
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Section 8.12. Shares-in-Trust.
(a) Any shares of Equity Stock transferred to a Trust and
designated Shares-in-Trust pursuant to Section 8.3 of this Article 8 shall be
held for the exclusive benefit of the Beneficiary. The Corporation shall name a
beneficiary of each Trust within five (5) days after discovery of the existence
thereof. Any transfer to a Trust, and subsequent designation of shares of Equity
Stock as Shares-in-Trust, pursuant to Section 8.3 of this Article 8 shall be
effective as of the close of business on the business day prior to the date of
the Transfer or Non-Transfer Event that results in the transfer to the Trust.
Shares-in-Trust shall remain issued and outstanding shares of Equity Stock of
the Corporation and shall be entitled to the same rights and privileges on
identical terms and conditions as are all other issued and outstanding shares of
Equity Stock of the same class and series. When transferred to the Permitted
Transferee in accordance with the provisions of Section 8.12(e) of this Article
8, such Shares-in Trust shall cease to be designated as Shares-in-Trust.
(b) Dividend Rights. The Trustee, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends and distributions as
may be declared by the Board of Directors of the Corporation on such shares of
Equity Stock and shall hold such dividends or distributions in trust for the
benefit of the Beneficiary. The Prohibited Owner with respect to Shares-in-Trust
shall repay to the Trustee the amount of any dividends or distributions received
by it that (i) are attributable to any shares of Equity Stock designated
Shares-in-Trust and (ii) the record date of which is on or after the date that
such shares became Shares-in-Trust. The Corporation shall take all measures that
it determines reasonably necessary to recover the amount of any such dividend or
distribution paid to a Prohibited Owner, including, if necessary, withholding
any portion of future dividends or distributions payable on shares of Equity
Stock Beneficially Owned by the Person who, but for the provisions of Section
8.3 of this Article 8, would Beneficially Own the Shares-in-Trust; and, as soon
as reasonably practicable following the Corporation's receipt or withholding
thereof, shall pay over to the Trustee for the benefit of the Beneficiary the
dividends so received or withheld, as the case may be.
(c) Rights Upon Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of, or any distribution of
the assets of, the Corporation, each Trustee of Shares-in-Trust shall be
entitled to receive, ratably with each other holder of Equity Stock of the same
class or series, that portion of the assets of the Corporation that is available
for distribution to the holders of such class and series of Equity Stock. The
Trustee shall distribute to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution; provided, however,
that the Prohibited Owner shall not be entitled to receive amounts pursuant to
this Section 8.13(e) in excess of, in the case of a purported Transfer in which
the Prohibited Owner gave value for shares of Equity Stock and which Transfer
resulted in the transfer of the shares to the Trust, the price per share, if
any, such Prohibited Owner paid for the Equity Stock and, in the case of a
Non-Transfer Event or Transfer in which the Prohibited Owner did not give value
for such shares (e.g., if the shares were received through a gift or devise) and
which Non-Transfer Event or Transfer, as the case may be, resulted in the
transfer of shares to the Trust, the
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price per share equal to the Market Price on the date of such Non-Transfer Event
or Transfer. Any remaining amount in such Trust shall be distributed to the
Beneficiary.
(d) Voting Rights. The Trustee shall be entitled to vote all
Shares-in-Trust. Any vote by a Prohibited Owner as a holder of shares of Equity
Stock prior to the discovery by the Corporation that the shares of Equity Stock
are Shares-in-Trust shall, subject to applicable law and only to the extent that
no Person other than the Corporation and/or the Prohibited Owner are materially
and adversely affected, be rescinded and shall be void ab initio with respect to
such Shares-in-Trust and the Prohibited Owner shall be deemed to have given, as
of the close of business on the business day prior to the date of the purported
Transfer or Non-Transfer Event that results in the transfer to the Trust of the
shares of Equity Stock under Section 8.3 of this Article 8, an irrevocable proxy
to the Trustee to vote the Shares-in-Trust in the manner in which the Trustee,
in its sole and absolute discretion, desires.
(e) Designation of Permitted Transferee. The Trustee shall
have the exclusive and absolute right to designate a Permitted Transferee of any
and all Shares-in-Trust. As soon as reasonably practicable, in an orderly
fashion so as not to materially adversely affect the Market Price of the
Shares-in-Trust, the Trustee shall designate any Person as a Permitted
Transferee, provided, however, that (i) the Permitted Transferee so designated
purchases for valuable consideration (whether in a public or private sale) the
Shares-in-Trust and (ii) the Permitted Transferee so designated may acquire such
Shares-in-Trust without such acquisition resulting in a transfer to a Trust and
the redesignation of such shares of the Equity Stock so acquired as
Shares-in-Trust under Section 8.3 of this Article 8. Upon the designation by the
Trustee of a Permitted Transferee in accordance with the provisions of this
paragraph, the Trustee of a Trust shall (i) cause to be transferred to the
Permitted Transferee that number of Shares-in-Trust acquired by the Permitted
Transferee; (ii) cause to be recorded on the books of the Corporation that the
Permitted Transferee is the holder of record of such number of shares of Equity
Stock; and (iii) distribute to the Beneficiary any and all amounts held with
respect to the Shares-in-Trust after making that payment to the Prohibited Owner
pursuant to Section 8.12(f) of this Article 8.
(f) Compensation to Record Holder of Shares of Equity Stock
that Become Shares-In-Trust. Any Prohibited Owner shall be entitled (following
discovery of the Shares-in-Trust and subsequent designation of the Permitted
Transferee in accordance with Section 8.12(e) of this Article 8) to receive from
the Trustee the lesser of (i) in the case of (a) a purported Transfer in which
the Prohibited Owner gave value for shares of Equity Stock and which Transfer
resulted in the transfer of the shares to the Trust, the price per share, if
any, such Prohibited Owner paid for the Equity Stock, or (b) a Non-Transfer
Event or Transfer in which the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted in the transfer of
shares to the Trust, the price per share equal to the Market Price on the date
of such Non-Transfer Event or Transfer, and (ii) the price per share received by
the Trustee of the Trust from the sale or other disposition of such
Shares-in-Trust in accordance with Section 8.12(e) of this Article 8. Any
amounts received by the Trustee in respect of such Shares-in-Trust in excess of
such amounts to be
-13-
<PAGE> 14
paid the Prohibited Owner pursuant to this Section 8.12(f) of this Article 8
shall be distributed to the Beneficiary in accordance with the provisions of
Section 8.12(e) of this Article 8. Each Beneficiary and Prohibited Owner waives
any and all claims that they may have against the Trustee and the Corporation
arising out of the disposition of Shares-in-Trust, except for claims arising out
of the gross negligence or willful misconduct of, or any failure to make
payments in accordance with this Section 8.12 by such Trustee or the
Corporation.
(g) Purchase Right in Share-in-Trust. Shares-in-Trust shall
be deemed to have been offered for sale to the Corporation, or its designee, at
a price per share equal to the lesser of (i) the price per share in the
transaction that created such Shares-in-Trust (or, in the case of devise, gift
or Non-Transfer Event, the Market Price at the time of such devise, gift or
Non-Transfer Event) and (ii) the Market Price on the date the Corporation, or
its designee, accepts such offer. The Corporation shall have the right to accept
such offer for a period of ninety days after the later of (i) the date of the
Non-Transfer Event or purported Transfer that resulted in such Shares-in-Trust
and (ii) the date the Corporation determines in good faith that a Transfer or
Non-Transfer Event resulting in Shares-in-Trust has occurred, if the Corporation
does not receive a notice of such Transfer or Non-Transfer Event pursuant to
Section 8.5 of this Article 8.
Section 8.13. Settlement. Nothing in these Articles of Incorporation
shall preclude the settlement of any transaction entered into through the
facilities of the New York Stock Exchange or any national securities exchange on
which any capital stock of the Company is listed.
9.
Section 9.1. Number of Directors. The number of directors shall be as
set forth in the Bylaws of the Corporation.
Section 9.2. Director Conflicts of Interest. A majority of the
Corporation's Board of Directors must not be affiliates of Lend Lease or the
Corporation.
10.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such directors consider
pertinent; provided, however, that this provision solely grants discretionary
authority to the directors and no constituency shall be deemed to have been
given any right to consideration hereby.
-14-
<PAGE> 15
11.
The mailing address of the principal office of the Corporation is 3424
Peachtree Road, N.E. Suite 800, Atlanta, Fulton County, Georgia 30326.
12.
These Articles of Incorporation may not be amended without the
affirmative vote of at least a majority of the outstanding shares of Common
Stock (and majority of the outstanding shares of Preferred Stock, if any, to the
extent that such amendment would materially adversely affect the holders of the
Preferred Stock), with the shareholders voting as a class with one vote per
share; provided, that the Articles of Incorporation provision relating to the
Corporation's election to be taxed as a REIT shall not be amended, altered,
changed or repealed without the affirmative vote of at least 80% of the members
of the Board of Directors and the affirmative vote of holders of two-thirds of
the outstanding shares of Common Stock and any other shares of Equity Stock
entitled to vote generally in the election of directors voting as a class.
-15-
<PAGE> 16
Said Amended and Restated Articles of Incorporation supersede the
original Articles of Incorporation.
IN WITNESS WHEREOF, Chastain Capital Corporation has caused these
Amended and Restated Articles of Incorporation to be executed, its corporate
seal to be affixed, and its seal and execution hereof to be attested, all by its
duly authorized officers, this ___ day of February, 1998.
CHASTAIN CAPITAL CORPORATION
By:_______________________________
Name:_____________________________
Title:____________________________
(CORPORATE SEAL)
Attest:_____________________
Name:_____________________
Title:______________________
<PAGE> 1
EXHIBIT 4.1
-------- --------
NUMBER SHARES
CC
-------- --------
COMMON STOCK CUSIP 161697 10 7
PAR VALUE $.01 PER SHARE SEE REVERSE FOR CERTAIN DEFINITIONS
CHASTAIN CAPITAL CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Chastain Capital Corporation transferable on the books of said Corporation in
person or by Attorney on the surrender of this certificate properly endorsed.
This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
Witness the seal of said Corporation and the signatures of its duly
authorized Officers.
Dated:
Countersigned and Registered: First Union Shareholder Services
- -------------------------------------------------
Transfer Agent
and Registrar
By
-----------------------------------------------
Authorized Signature
[SEAL]
/s/
- -------------------------------------------------
Secretary
/s/
- -------------------------------------------------
Chief Executive Officer
-----------------------------------------------------
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215) 657-3480
-----------------------------------------------------
SALES: A. HOBBS: 404-525-1455
-----------------------------------------------------
/NET/BANKNOTE/HOME51/CHASTAIN54892/c
-----------------------------------------------------
-----------------------------------------------------
PRODUCTION COORDINATOR: TRICIA O'CONNOR: 215-830-2154
PROOF OF JANUARY 26, 1998
CHASTAIN
H54892fc
-----------------------------------------------------
OPERATOR: hj
-----------------------------------------------------
new
-----------------------------------------------------
<PAGE> 2
CHASTAIN CAPITAL CORPORATION
The shares of Common Stock represented by this certificate are subject to
certain restrictions on transferability and ownership in order to comply with
provisions of the U.S. Internal Revenue Code of 1986, as amended, relating to
real estate investment trust. The terms and conditions of these restrictions
are set forth in the Articles of Incorporation of the Corporation, a copy of
which will be furnished without charge to the registered holder of this
certificate upon request to the Secretary of the Corporation at its principal
office or to the Transfer Agent.
The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class authorized to be issued and the
variations in the rights, preferences, and limitations between the shares of
each series of preferred stock so far as the same have been fixed and
determined. The Board of Directors of the Corporation has been expressly
authorized and empowered to fix and determine, in the manner, and to the
extent, provided by law and not provided in the Articles of Incorporation of
the Corporation the rights, preferences and limitations of the shares of any
series of preferred stock hereafter established, including, without limitation,
rights as to redemption, dividend preference, liquidation preference,
conversion, voting rights and accumulation of dividends.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT ______ Custodian _______
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value recieved, _____ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------
--------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANCE WHATEVER.
SIGNATURE(S) GUARANTEED:
--------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
-----------------------------------------------------
AMERICAN BANK NOTE COMPANY
680 BLAIR MILL ROAD
HORSHAM, PA 19044
(215) 657-3480
-----------------------------------------------------
SALES: A. HOBBS: 404-525-1455
-----------------------------------------------------
/NET/BANKNOTE/HOME51/CHASTAIN54892/c
-----------------------------------------------------
-----------------------------------------------------
PRODUCTION COORDINATOR: TRICIA O'CONNOR: 215-830-2154
PROOF OF JANUARY 26, 1998
CHASTAIN
H54892BK
-----------------------------------------------------
OPERATOR: hj
-----------------------------------------------------
new
-----------------------------------------------------
<PAGE> 1
EXHIBIT 5.1
[KING & SPALDING LETTERHEAD]
February 23, 1998
Chastain Capital Corporation
3424 Peachtree Road, N.E.
Suite 800
Atlanta, Georgia 30326
Re: Chastain Capital Corporation -- Registration Statement on Form
S-11 relating to 11,270,000 shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel for Chastain Capital Corporation, a Georgia
corporation (the "Company"), in connection with the preparation of a
Registration Statement on Form S-11 (the "Registration Statement") filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to the proposed public offering and sale of up to 11,270,000
shares of the Company's Common Stock, par value $.01 per share (the "Shares"),
by the Company pursuant to the Underwriting Agreement (the "Underwriting
Agreement") to be entered into among the Company and Friedman, Billings, Ramsey
& Co., Inc. and EVEREN Securities, Inc. as representatives of the several
underwriters.
In connection with this opinion, we have examined and relied upon such
records, documents, certificates and other instruments as in our judgment are
necessary or appropriate to form the basis for the opinions hereinafter set
forth. In all such examinations, we have assumed the genuineness of signatures
on original documents and the conformity to such original documents of all
copies submitted to us as certified, conformed or photographic copies, and as to
certificates of public officials, we have assumed the same to have been properly
given and to be accurate. As to matters of fact material to this opinion, we
have relied upon statements and representations of representatives of the
Company and of public officials.
The opinions expressed herein are limited in all respects to the
Georgia Business Corporation Code, and no opinion is expressed with respect to
the laws of any other jurisdiction or
<PAGE> 2
Chastain Capital Corporation
February 23, 1998
Page 2
any effect which such laws may have on the opinions expressed herein. This
opinion is limited to the matters stated herein, and no opinion is implied or
may be inferred beyond the matters expressly stated herein.
Based upon and subject to the foregoing, we are of the opinion
that:
(i) The Shares are duly authorized.
(ii) Upon the issuance of the Shares against payment
therefore as provided in the Underwriting Agreement, the Shares will be
validly issued, fully paid and nonassessable.
This opinion is given as of the date hereof, and we assume no
obligation to advise you after the date hereof of facts or circumstances that
come to our attention or changes in law that occur which could affect the
opinions contained herein. This letter is being rendered solely for the benefit
of the Company in connection with the matters addressed herein. This opinion may
not be furnished to or relied upon by any person or entity for any purpose
without our prior written consent.
We hereby consent to the filing of this opinion as an Exhibit
to the Registration Statement and to the reference to us under the caption
"Legal Matters" in the Prospectus that is included in the Registration
Statement.
Very truly yours,
King & Spalding
<PAGE> 1
KING & SPALDING
191 PEACHTREE STREET
ATLANTA, GEORGIA 30303-1763
TELEPHONE: 404/572-4600
FACSIMILE: 404/572-5100
EXHIBIT 8.1
February 27, 1998
Chastain Capital Corporation
c/o ERE Yarmouth, Inc.
3424 Peachtree Road, N.E.
Suite 800
Atlanta, Georgia 30326
Ladies and Gentlemen:
We have acted as counsel to Chastain Capital Corporation, a Georgia
corporation (the "Company") in connection with its registration under the
Securities Act of 1933, as amended, of the Common Stock of the Company, as
described in that certain Registration Statement filed with the Securities and
Exchange Commission on December 18, 1997 (the "Registration Statement"). In
connection therewith, the Company has requested our opinion with respect to (i)
the qualification of the Company as a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended (the "Code") and (ii) the
accuracy of the information contained in the Prospectus, which is part of the
Registration Statement, under the heading "Federal Income Tax Consequences."
We understand that our opinion will be referred to in the Prospectus
and attached as an exhibit to the Registration Statement. We hereby consent to
such use of our opinion.
Unless otherwise indicated, all terms used herein with initial capital
letters shall have the same meaning as in the Prospectus, and all section
references herein are to the Code.
FACTS AND ASSUMPTIONS RELIED UPON
In rendering the opinions expressed herein, we have examined such
documents as we have deemed appropriate, including, without limitation, the
Registration Statement and the Company's Articles of Incorporation. In our
examination of documents, we have assumed, with your consent, that all
documents submitted to us are authentic originals, or if submitted as
photocopies or telecopies, that they faithfully reproduce the originals
thereof, that all such documents have been or will be duly executed to the
extent required, that all representations and statements set forth in such
documents are true and correct, and that all obligations imposed by any such
documents on the parties thereto have been or will be performed or satisfied in
accordance with their terms. We also have obtained such additional information
and representations as we have deemed relevant and necessary through
consultation with officers of the Company, including certain representations
set forth in a letter to us of even date herewith.
<PAGE> 2
February 27, 1998
Page 2
OPINIONS
Based upon and subject to the foregoing, we are of the following
opinions:
(1) The Company has been organized in conformity with the requirements
for qualification and taxation as a REIT under the Code, and its proposed
method of operation will enable it to meet the requirements for qualification
and taxation as a REIT beginning with its taxable year ended December 31, 1998.
(2) The information in the Prospectus under the heading "Federal
Income Tax Consequences" constitutes, in all material respects, a fair and
accurate summary of the material United States federal income tax consequences
of the purchase, ownership and disposition of the Common Stock, and, to the
extent such discussion contains statements of law or legal conclusions, such
statements and conclusions are the opinion of King & Spalding.
The opinions expressed herein are based upon the Code, the U.S.
Treasury regulations promulgated thereunder, current administrative positions
of the U.S. Internal Revenue Service, and existing judicial decisions, any of
which could be changed at any time, possibly on a retroactive basis. Any such
changes could adversely affect the opinions rendered herein and the tax
consequences to the Company and the investors in the Common Stock. In addition,
as noted above, our opinions are based solely on the documents that we have
examined, the additional information that we have obtained, and the
representations that have been made to us, and cannot be relied upon if any of
the facts contained in any such documents or in any such additional information
is, or later becomes, inaccurate or if any of the representations made to us
is, or later becomes, inaccurate. Moreover, we assume no obligation to advise
you after the date hereof of any facts or circumstances that come to our
attention or of any changes in law that could affect the opinions expressed
herein.
The Company's qualification as a REIT depends upon the Company's
ability to meet, on a continuing basis through actual annual operating results,
distribution levels, and stock ownership, several requirements imposed by the
Code. We assume no obligation to review the Company's compliance with those
requirements on a continuing basis. Accordingly, no assurance can be given that
the actual results of the Company's operations for any particular taxable year
will satisfy such requirements.
Finally, our opinions are limited to the tax matters specifically
covered thereby, and we have not been asked to address, nor have we addressed,
any other tax consequences of an investment in the Common Stock.
Very truly yours,
/s/
<PAGE> 1
EXHIBIT 10.1
MANAGEMENT AGREEMENT
----------------------------
CHASTAIN CAPITAL CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1
DEFINITIONS..............................................................................................1
1.1. Defined Terms..........................................................................1
SECTION 2
ENGAGEMENT AND TERM......................................................................................3
2.1. Appointment............................................................................3
2.2. Term...................................................................................3
2.3. Termination............................................................................3
2.4. Authority..............................................................................3
2.5. Relationship...........................................................................4
2.6. Other Business Activities..............................................................4
2.7. Execution of Documents.................................................................4
2.8. Errors & Omissions Insurance...........................................................4
SECTION 3
OBLIGATIONS OF COMPANY...................................................................................4
SECTION 4
DUTIES AND SERVICES OF MANAGER...........................................................................5
4.1. General Standard.......................................................................5
4.2. General Services.......................................................................5
4.3. Portfolio Management...................................................................5
4.3.1. Investment Criteria...................................................5
4.3.2. Borrowings............................................................5
4.3.3. Purchase of Assets....................................................6
4.3.4. Reports...............................................................6
4.3.5. Dealer Information....................................................6
4.3.6. Office Services.......................................................6
4.3.7. Administration........................................................6
4.3.8. Communication With Security Holders...................................6
4.3.9. SEC Reporting.........................................................6
4.3.10. Servicer.....................................................6
4.3.11. Board of Directors...........................................6
4.3.12. Hedging......................................................6
4.3.13. Investing....................................................7
4.3.14. Professional Services........................................7
4.3.15. Cash Management and Investments..............................7
4.3.16. Tax Matters..................................................7
4.3.17. Financial Statements.........................................7
4.3.18. Investment Company Status....................................7
4.3.19. REIT Status..................................................7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
4.4. Equity Acquisition and Loan Origination................................................7
4.5. Equity Asset Management. .............................................................8
4.6. Interim Servicing......................................................................8
4.7. Special Servicing......................................................................8
4.8. Monitoring Servicing...................................................................9
4.9. Management of Administrative Matters...................................................9
4.9.1. Operations............................................................9
4.9.2. Legal Requirements....................................................9
4.9.3. Good Standing.........................................................9
4.10. Records................................................................................9
4.11. Manager's Representations and Warranties...............................................9
SECTION 5
OBLIGATIONS OF MANAGER..................................................................................10
5.1. Representations and Warranties of Sellers.............................................10
5.2. REIT Status...........................................................................10
5.3. Compliance with Guidelines............................................................10
SECTION 6
COMPENSATION AND ADDITIONAL SERVICES....................................................................10
6.1. Compensation..........................................................................10
6.2. Reimbursement of Expenses.............................................................11
6.2.1. Reimbursable Expenses................................................11
6.2.2. Timing of Reimbursement..............................................11
SECTION 7
TERMINATION.............................................................................................11
7.1. Termination by Company for Cause......................................................11
7.1.1. Definition of Cause..................................................11
7.1.2 Notice...............................................................12
7.2. No Termination Fee....................................................................12
7.3. Duties Upon Termination...............................................................12
7.4. Remedies..............................................................................13
7.5. Survival..............................................................................13
SECTION 8
INDEMNIFICATION.........................................................................................13
8.1. Indemnification by Company............................................................13
8.2. Indemnification by Manager............................................................13
8.3. No Joint Venture......................................................................13
SECTION 9
NO WARRANTY AS TO VALUE OR PROFITABILITY................................................................14
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
SECTION 10
MISCELLANEOUS...........................................................................................14
10.1. Notices...............................................................................14
10.2. Estoppel Letters......................................................................15
10.3. Assignment............................................................................15
10.3.1. Company.....................................................15
10.3.2. Manager.....................................................15
10.4. Successors and Assigns................................................................15
10.5. Entire Agreement......................................................................15
10.6. Amendments in Writing.................................................................15
10.7. No Waiver.............................................................................15
10.8. Severability..........................................................................15
10.9. Interpretation........................................................................16
10.10. Costs of Litigation...................................................................16
10.11. Governing Law.........................................................................16
10.12. Further Assurances....................................................................16
10.13. No Third Party Beneficiary............................................................16
10.14. Unavoidable Delays....................................................................16
10.15. Exhibits..............................................................................16
10.16. Time of the Essence...................................................................16
10.17. Computing Time Periods................................................................16
10.18. Confidentiality.......................................................................16
10.19. Execution in Counterparts.............................................................17
</TABLE>
<PAGE> 5
MANAGEMENT AGREEMENT
THIS AGREEMENT is entered into and shall be effective as of the ____
day of __________, 1998, between ERE YARMOUTH, INC. a Delaware corporation
("Manager"), and CHASTAIN CAPITAL CORPORATION, a Georgia corporation
("Company").
BACKGROUND STATEMENT
Company desires to engage Manager to act as the manager of Company.
Manager has agreed to accept such engagement on the terms and conditions set
forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the background, the mutual
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Company and Manager
hereby agree as follows:
SECTION 1
DEFINITIONS
1.1. Defined Terms. The following terms shall, when used herein,
have the meaning set forth below:
"Affiliate" shall mean, with respect to any Person, (i) any Person
directly or indirectly controlling, controlled by or under common control with
such Person, (ii) any officer, director or employee of such Person, or (iii) any
Person who is an officer, director or employee of any Person described in clause
(i) of this definition.
"Approve", or any variation thereof, shall mean an express approval in
a written statement signed by an authorized representative of the approving
Person.
"Board of Directors" shall mean the Board of Directors of Company.
"Business Day" shall mean any day other than a Saturday, Sunday, or a
day on which banking institutions in Atlanta, Georgia are authorized or
obligated by law or executive order to be closed.
"Commencement Date" shall mean the date of the closing of Company's
initial public offering of common stock.
"Compensation" shall have the meaning set forth in Section 6.1 of this
Agreement.
"Fee Schedule" shall mean the schedule attached hereto as Exhibit A.
<PAGE> 6
"Fees" shall mean the compensation to Manager provided for in the Fee
Schedule.
"Governing Instruments" shall mean the articles of incorporation and
bylaws in the case of a corporation, or the partnership agreement in the case of
a partnership.
"Guidelines" shall mean guidelines that set forth general parameters
for Company's REIT Investments, borrowings and operations.
"Hold Harmless" shall mean to hold harmless from, indemnify and defend
against, and pay promptly on demand therefor as incurred, any and all claims,
demands, actions, causes of actions, losses, expenses (including, without
limitation, reasonable attorneys' fees at both trial and appellate levels),
costs (including, without limitation, court costs at both trial and appellate
levels), damages and all liabilities arising out of or incurred in connection
with an identified circumstance, incident, relationship, time period or other
matter, whether or not the indemnified Person is a party to such claim, demand
or action.
"Independent Directors" shall mean a director who within the last two
years, has not (i) been employed by Manager or any of its Affiliates, (ii) been
an officer or director of Manager or any of its Affiliates, (iii) performed
services for Manager or any of its Affiliates, and (iv) had any material
business or professional relationship with Manager or any of its Affiliates.
"Law" or "Laws" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order or
other requirement of any municipal, county, state, federal or other government
agency or authority having jurisdiction over one or more of the Parties in
effect on the date of this Agreement or at any time during the Term.
"Parties" shall mean Company and Manager, and "Party" shall mean either
of them.
"Person" means any individual, corporation, limited liability company,
trust or other entity.
"REIT Investments" shall mean Subordinated Interests and other classes
of CMBS, Mortgage Loans, Opportunistic Real Property, Mezzanine Investments and
other real estate related assets.
"Shareholders" shall mean the shareholders of Company.
"Subsidiary" shall mean any subsidiary of Company and any partnership,
the general partner of which is Company or any subsidiary of Company.
"Term" shall have the meaning set forth in Section 2.2.
"Terminate" or "Termination" shall mean termination of this Agreement
in accordance with Section 2.2, Section 2.3 or Section 7 of this Agreement.
2
<PAGE> 7
"Unavoidable Delays" shall mean an act of God, fire, earthquake, flood,
explosion, war, insurrection, riot, violence, sabotage, inability to procure
labor, equipment, facilities, materials or supplies, strikes, walk-outs, action
of labor unions, condemnations, Laws, litigation involving a Party, inability to
obtain governmental permits or approvals, and other matters not within the
control of the Party in question excluding, however, the lack of funds or
financing.
Capitalized terms used herein without definition shall have the
meanings assigned to them in the Registration Statement of the Company (SEC File
No. 333-42629).
SECTION 2
ENGAGEMENT AND TERM
2.1. Appointment. Company hereby appoints Manager, and Manager
hereby accepts the appointment, to act as the Manager of the Company, and in
connection therewith to furnish (i) general management and administrative
services in respect of Company, (ii) advice and investment services to Company
with respect to the investment and reinvestment of the assets of Company, (iii)
management and disposition services with respect to Company's investments, and
(iv) all other services incident to the foregoing and necessary for management
of Company as set forth in Section 4 of this Agreement.
2.2. Term. This Agreement shall commence on the Commencement Date
and shall continue in force until two (2) years from the Commencement Date
unless earlier terminated in accordance with Section 7.1. Thereafter, it may be
extended only with the consent of Manager and by the affirmative vote of a
majority of the Board of Directors, including a majority of the Independent
Directors. Each extension shall be executed in writing by the parties hereto
before the expiration of this Agreement or any extension thereof. Each such
extension shall be effective for a period of twenty-four months. If this
Agreement is terminated as a result of a failure to extend pursuant to this
Section 2.2, such termination shall be without any further liability or
obligation of either Party to the other, except as provided in Sections 2.3, 7
and 8 of this Agreement. The word "Term" shall include any time period from the
Commencement Date until the effective date of Termination.
2.3. Termination. Notwithstanding any other provision to the
contrary, following the initial two (2) year term of this Agreement, this
Agreement, or any extension hereof, may be terminated by the Company prior to
its expiration, upon 60 days' written notice, by majority vote of the
Independent Directors; provided that upon termination or non-renewal of this
Agreement (other than due to failure of the parties to agree to the terms of
renewal after negotiating in good faith), a termination fee, equal to the sum of
the base management fee and incentive management fee, if any, earned with
respect to the immediately preceding four (4) fiscal quarters, will be due. If
this Agreement is terminated pursuant to this Section 2.3, such termination
shall be without any further liability or obligation of either Party to the
other, except as provided in Sections 7 and 8 of this Agreement.
2.4. Authority. Manager shall have the authority set forth herein
and shall have full authority to take any action necessary or desirable to
perform its duties and services pursuant to this
3
<PAGE> 8
Agreement, subject to any limitations specifically set forth in this Agreement.
Manager, however, shall not, on behalf of Company, take any action for which the
Governing Instruments requires the approval of the Shareholders without the
requisite approval of the Shareholders.
2.5. Relationship. In the performance of its duties hereunder,
whether or not it is also a Shareholder, Manager shall be an agent and not an
employee, partner or joint venturer of Company for any purpose whatsoever.
Company shall remain the owner of its interests in the REIT Investments,
whatever they may be from time to time.
2.6. Other Business Activities. So long as Manager allocates all
investment opportunities among its clients, including Company, in a fair and
impartial manner, taking into account each client's individual investment goals
and criteria, Manager may, even if such activities result in competition between
Manager and Company or between Company and other clients of Manager, and
notwithstanding the first sentence of Section 4.1 of this Agreement, act and
continue to act as an advisor for other Persons, perform investment or
management or other services for any other Person, conduct any other business
venture of any nature, make investments for its own account or the accounts of
any other Person, or have an ownership or other interest in any other business
ventures of any nature or description. In addition, Manager may allocate
investments to itself, so long as such investments are allocated according to
the same allocation process used with respect to Manager's clients.
2.7. Execution of Documents. Each document executed by Manager with
respect to Company or REIT Investments or otherwise on behalf of Company shall
state that Manager is executing on behalf of Company, and Manager is authorized
to seek to have each such document provide that Manager is acting solely as
agent of Company and shall have no liability whatsoever under the document.
2.8. Errors & Omissions Insurance. Manager shall maintain during
the entire Term a professional liability insurance policy or policies covering
loss occasioned by certain errors and omissions of Manager's officers,
directors, employees and agents, as specified in such policies, in connection
with Manager's obligations hereunder in an amount of $5,000,000, which shall
include a provision that the insurer will not cancel or materially change the
coverage provided by such policy without thirty (30) days' prior written notice
to Company. On or prior to the Commencement Date, Manager shall deliver to
Company a certificate of the insurer confirming such coverage.
SECTION 3
OBLIGATIONS OF COMPANY
The Manager at all times will be subject to the supervision of the
Board of Directors and will have only such functions and authority as Company
may delegate to it. Manager is authorized to execute all day-to-day financial
transactions on behalf of Company. Specifically, Manager is authorized to pay
out of the funds of Company the Compensation and all of the costs and expenses
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incurred on behalf of Company that are reimbursable pursuant to this Agreement.
Manager shall maintain detailed records of all such payments and reimbursements
with appropriate cash and disbursement controls. If for any reason Company funds
available to Manager are insufficient to enable Manager to perform each of the
duties and responsibilities set forth herein, Manager shall notify Company of
such insufficiency and request that Company provide Manager such sums as are
necessary in order to enable Manager to perform its duties and responsibilities
under this Agreement. Should Company fail to fund such amounts within ten (10)
days of receipt of Manager's notice, Manager shall be released from its
responsibilities hereunder for which Manager has not been provided sufficient
funds. Under no circumstances shall Manager be obligated to incur any expenses
of Company with Manager's own funds in order to discharge its duties and
responsibilities hereunder.
SECTION 4
DUTIES AND SERVICES OF MANAGER
4.1. General Standard. Manager agrees to use its commercially
reasonable efforts at all times in performing services for Company hereunder.
4.2. General Services. Manager will be responsible for the
day-to-day operations of the Company and will perform (or cause to be performed)
such services and activities relating to the assets and operations of Company as
may be appropriate, including the specific duties set forth in this Section 4,
or as may be agreed upon by the Manager and the Board of Directors.
4.3. Portfolio Management. Manager will perform portfolio
management services on behalf of Company and its subsidiaries and Affiliates
with respect to Company's REIT Investments. Such services will include, but not
be limited to, consulting with the Company on mortgage originations, purchase,
sale and leasing opportunities, collection of information and submission of
reports pertaining to Company's assets, interest rates, and general economic
conditions, periodic review and evaluation of the performance of Company's
portfolio of assets, acting as liaison between Company and banking, mortgage
banking, investment banking and other parties with respect to the purchase,
financing and disposition of assets, and other customary functions related to
portfolio management. Manager may enter into subcontracts with other parties,
including its Affiliates, to provide any such services to Company. In addition,
Manager will be responsible for:
4.3.1. Investment Criteria. Manager shall serve as Company's
consultant with respect to formulation of investment criteria and preparation of
policy guidelines (the "Guidelines") by the Board of Directors.
4.3.2. Borrowings. Manager shall advise Company regarding,
and arrange for, (i) the issuance of CMOs collateralized by Company's Mortgage
Loans, (ii) reverse repurchase agreements on Company's MBS and (iii) other
borrowings, as appropriate.
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4.3.3. Purchase of Assets. Manager shall represent Company
in connection with the purchase and commitment to purchase assets, the sale and
commitment to sell assets, and the maintenance and administration of its
portfolio of assets.
4.3.4. Reports. Manager shall furnish, or cause to be
furnished, reports and statistical and economic research to Company regarding
Company's activities and the services performed for Company by the Manager.
4.3.5. Dealer Information. Manager shall monitor and provide
to the Board of Directors on an ongoing basis price information and other data,
obtained from certain nationally recognized dealers that maintain markets in
assets identified by the Board of Directors from time to time, and providing
data and advice to the Board of Directors in connection with the identification
of such dealers.
4.3.6. Office Services. Manager shall provide the executive
and administrative personnel and office space and office services required in
rendering services to Company.
4.3.7. Administration. Manager shall administer the
day-to-day operations of Company and perform and supervise the performance of
such other administrative functions necessary in the management of Company as
may be agreed upon by the Manager and the Board of Directors, including the
collection of revenues and the payment of Company's debts and obligations and
maintenance of appropriate computer services to perform such administrative
functions.
4.3.8. Communication With Security Holders. Manager shall
communicate on behalf of Company with the holders of any equity or debt
securities of Company as required to satisfy the reporting and other
requirements of any governmental bodies or agencies or trading markets and to
maintain effective relations with such holders.
4.3.9. SEC Reporting. Manager shall prepare, or cause to be
prepared, on behalf of Company all reports that are required to be filed with
the Securities and Exchange Commission.
4.3.10. Servicer. Manager shall, to the extent not otherwise
subject to an agreement executed by Company, provide interim servicing or
designate a third-party servicer for Mortgage Loans originated by Company or
sold to Company by originators that have elected not to service such loans and
arrange for the monitoring and administering of such servicers.
4.3.11. Board of Directors. Manager shall counsel Company in
connection with policy decisions to be made by the Board of Directors.
4.3.12. Hedging. Manager shall engage in hedging activities
on behalf of Company, consistent with Company's status as a REIT and with the
Guidelines.
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4.3.13. Investing. Manager shall, upon request by and in
accordance with the directions of the Board of Directors, invest or reinvest any
money of Company.
4.3.14. Professional Services. Manager shall arrange for and
review legal, accounting and tax services for the Company.
4.3.15. Cash Management and Investments. Manager shall
establish, maintain and administer a bank account or accounts in the name of
Company at banks to be selected by Manager, on which the officers of Manager
shall be authorized signatories. Manager shall be responsible for short-term
cash management and investment of funds generated by the Company's assets
(including, without limitation, the REIT Investments) on a short term basis.
4.3.16. Tax Matters. Manager shall cause the timely
preparation and filing of all federal, state and local income tax, real estate
tax and information returns for Company and payment of any taxes thereunder due
on behalf of Company and, to the extent Manager deems to be appropriate, shall
liaison with tax consultants and legal counsel regarding all tax planning and
structuring matters for Company. Manager shall perform all administrative work
in paying taxes owed, and, where appropriate, seeking refunds of taxes paid.
4.3.17. Financial Statements. Manager will prepare and
maintain books and records for each REIT Investment. Manager will arrange for
the financial statements of Company to be audited annually in accordance with
generally accepted accounting principles by independent public accountants of
nationally recognized standing.
4.3.18. Investment Company Status. Manager will counsel
Company regarding the maintenance of an exemption from investment company status
under the Investment Company Act of 1940, as amended, and monitor compliance
with the requirements for maintaining exemption from that Act.
4.3.19. REIT Status. Manager shall counsel Company regarding
the maintenance of its status as a REIT and monitoring compliance with the
various REIT qualification tests and other rules set out in the Code and
regulations thereunder.
4.4. Equity Acquisition and Loan Origination. Manager will acquire
Opportunistic Real Property, Subordinated Interests and Mezzanine Investments
and will originate commercial Mortgage Loans and Mezzanine Investments on behalf
of Company. Such services will include developing and maintaining a transaction
log and pipeline report(s) for review of potential acquisitions and loans,
preparing investment submissions, negotiating and completing purchase and sale
agreements, loan applications/commitments and loan documents, preparing and
maintaining competitive pricing information, preparing closing papers, and
performing all services necessary or appropriate in conjunction with the
transaction activities of Company.
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4.5. Equity Asset Management. Manager will perform the full range
of asset management services on behalf of Company with respect to Company's
portfolio of Opportunistic Real Property, Mezzanine Investments and REO Property
with equity characteristics. These responsibilities include but are not limited
to budgeting, oversight of capital improvement programs, selection of property
managers and leasing agents, oversight of property management and leasing
activities, liaison with key tenants and joint venture partners and reporting.
4.6. Interim Servicing. From such time as Mortgage Loans have been
originated by Company until said Mortgage Loans are included in any
securitization, Manager will service and administer Company's portfolio of
Mortgage Loans. Such servicing activities will be in accordance with this
Agreement, the terms of the Mortgage Loans, and to the extent consistent with
such terms, the usual and customary standards of practice of prudent commercial
mortgage lenders and servicers and said activities will include, but not be
limited to, the following activities: collection of Mortgage Loan payments,
creation of accounts, including custodial and escrow accounts; deposits into and
withdrawals from custodial accounts; deposits into and withdrawals from escrow
accounts; approval of and disbursement of funds from escrow accounts; payment of
taxes and insurance due on any of the Mortgage Loans; collection of repair
deposits and periodic reserve payments; the enforcement of any due on sale
clauses or a negotiation of assumption agreements; monitoring any non-performing
loans; bookkeeping and accounting for all Mortgage Loans and accounts; timely
remittance of funds to Company; review of and recommendations as to fire losses,
easement problems and condemnation, delinquency and foreclosure procedures with
regard to Mortgage Loans; supervise claims filed under any mortgage insurance
policies; enforce the obligation of any servicer to repurchase Mortgage Loans;
and collect information and submit reports pertaining to Mortgage Loans and to
moneys remitted to Company. Manager may enter into subcontracts with other
parties, including its Affiliates, to provide any such services for Manager.
4.7. Special Servicing. For any Mortgage Loan for which Manager is
not directly providing interim servicing, Manager will perform monitoring
services on behalf of Company with respect to Company's portfolio of special
servicing rights. Such monitoring services will include, but not be limited to,
the following activities: negotiating special servicing agreements; serving as
Company's consultant with respect to the special servicing of mortgage loans;
collection of information and submission of reports pertaining to the mortgage
loans and to moneys remitted to Manager or Company; acting as a liaison between
the servicers of the mortgage loans and Company and working with servicers to
the extent necessary to improve their servicing performance; with respect to
mortgage loans for which Company is special servicer, periodic review and
evaluation of the performance of each servicer to determine its compliance with
the terms and conditions of the related servicing agreement; review of and
recommendations as to fire losses, easement problems and condemnation,
delinquency and foreclosure procedures with regard to mortgage loans; review of
servicers' delinquency, foreclosures and other reports on mortgage loans;
supervising claims filed under any mortgage insurance policies; and enforcing
the obligation of any servicer to repurchase mortgage loans. Manager may enter
into subcontracts with other parties, including its Affiliates, to provide any
such services for Manager.
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4.8. Monitoring Servicing. For any Mortgage Loans for which Manager
is not directly providing interim servicing, Manager will monitor and administer
the servicing of Company's Mortgage Loans, other than loans pooled to back MBS
or pledged to secure MBS. Such monitoring and administrative services will
include, but not be limited to, the following activities: serving as Company's
consultant with respect to the servicing of loans; collection of information and
submission of reports pertaining to the mortgage loans and to moneys remitted to
Manager or Company by servicers; periodic review and evaluation of the
performance of each servicer to determine its compliance with the terms and
conditions of the servicing agreement and, if deemed appropriate, recommending
to Company the termination of such servicing agreement; acting as a liaison
between servicers and Company and working with servicers to the extent necessary
to improve their servicing performance; review of and recommendations as to fire
losses, easement problems and condemnation, delinquency and foreclosure
procedures with regard to the Mortgage Loans; review of servicers' delinquency,
foreclosing and other reports on Mortgage Loans; advising as to and supervising
claims filed under any mortgage insurance policies; and enforcing the obligation
of any servicer to repurchase Mortgage Loans from Company.
4.9. Management of Administrative Matters. Manager shall provide
the following administrative management services to Company:
4.9.1. Operations. Take appropriate actions to manage
Company's operations and assets and perform the day-to-day administrative
functions of Company;
4.9.2. Legal Requirements. In coordination with legal
counsel, take appropriate actions to perfect and maintain the status of Company
as a corporation under the laws of Georgia and to ensure compliance with all
legal requirements pertaining to governance applicable to Company; and
4.9.3. Good Standing. Take appropriate actions to ensure
compliance with any requirements for the qualification of Company to conduct
business as a foreign corporation, and take any and all other actions as may be
reasonably necessary to perfect and maintain the status of Company as a
corporation or similar type of entity under the laws of any states or
jurisdictions other than Georgia in which Company engages in business.
4.10. Records. Manager shall maintain a complete and accurate set of
files, books and records of all business activities and operations conducted by
Manager in connection with Manager's performance under this Agreement. All such
books and records shall be open to inspection by the authorized representatives
of Company or their designees at the office of the Manager during normal
business hours at all times during the Term and for a period of three (3) years
following the Termination.
4.11. Manager's Representations and Warranties. Manager hereby
represents and warrants to Company that the undersigned authorized
representative of Manager has the requisite power and authority to enter into
this Agreement on behalf of Manager and to bind Manager; Manager is fully
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authorized under the instruments and Laws governing Manager to perform the
duties and services of Manager set forth in this Agreement; and the execution
and performance of this Agreement by Manager will not conflict with, or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, or result in any violation of, any agreement or instrument to which
Manager may be subject.
SECTION 5
OBLIGATIONS OF MANAGER
5.1. Representations and Warranties of Sellers. Manager shall
require each seller or transferor of REIT Investments to the Company to make
such representations and warranties regarding such REIT Investments as may be
directed by the Board of Directors, or, if no such directions are given, as may,
in the judgment of the Manager, be necessary and appropriate. In addition, the
Manager shall take such other action as may be directed by the Board of
Directors, or, if no such directions are given, as it deems necessary or
appropriate with regard to the protection of the Company's investments.
5.2. REIT Status. Manager shall refrain from any action that, in
its sole judgment made in good faith, would adversely affect the status of
Company as a REIT, or as exempt from regulation under the Investment Company Act
of 1940, as amended or that, in its sole judgment made in good faith, would
violate any law, rule or regulation of any governmental body or agency having
jurisdiction over Company or any Subsidiary or that would otherwise not be
permitted by Company's or Subsidiary's Governing Instruments. If Manager is
ordered to take any such action by the Board of Directors, Manager shall
promptly notify the Board of Directors of Manager's judgment that such action
would adversely affect such status or violate any such law, rule or regulation
or the Governing Instruments. Notwithstanding the foregoing, Manager, its
directors, officers, shareholders and employees shall not be liable to Company,
any Subsidiary, the Independent Directors, or Company's or a Subsidiary's
shareholders or partners for any act or omission by Manager, its directors,
officers, shareholders or employees except as provided in Section 8 of this
Agreement.
5.3. Compliance with Guidelines. Absent written directions from the
Board of Directors, Managers shall use reasonable efforts to comply with the
Guidelines, as they may be revised from time to time.
SECTION 6
COMPENSATION AND ADDITIONAL SERVICES
6.1. Compensation. Manager shall be entitled to compensation
("Compensation") for management services as provided in the Fee Schedule.
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6.2. Reimbursement of Expenses.
6.2.1. Reimbursable Expenses. Manager may charge Company for
Manager's out-of-pocket expenses paid to third-parties to perform due diligence
tasks on assets considered for purchase by Company. In addition, Company or any
Subsidiary shall pay all of its out of pocket expenses and shall reimburse
Manager for documented out-of-pocket expenses (including all travel expenses) of
Manager incurred on its behalf.
6.2.2. Timing of Reimbursement. Expenses incurred by Manager
on behalf of Company pursuant to Section 6.2.1 shall be reimbursed quarterly to
Manager within sixty (60) days after the end of each quarter. Manager shall
prepare a statement documenting the expenses of Company and those incurred by
Manager on behalf of Company during each quarter, and shall deliver such
statement to Company within forty-five (45) days after the end of each quarter.
SECTION 7
TERMINATION
7.1. Termination by Company for Cause.
7.1.1. Definition of Cause. This Agreement, or any extension
hereof, may be terminated by either Party for cause immediately upon written
notice, (i) by a majority vote of the Independent Directors in the case of
termination by Company, or (ii) by Manager. Grounds for termination for cause
will occur with respect to a Party if:
(a) such Party shall violate any provision of this
Agreement and, after notice of such violation, shall not cure such
violation within thirty (30) days;
(b) there is entered an order for relief or similar
decree or order with respect to the other Party by a court having
competent jurisdiction in an involuntary case under the federal
bankruptcy laws as now or hereafter constituted or under any applicable
federal or state bankruptcy, insolvency or other similar laws; or the
other Party (i) ceases, or admits in writing its inability, to pay its
debts as they become due and payable, or makes a general assignment for
the benefit of, or enters into any composition or arrangement with,
creditors; (ii) applies for, or consents (by admission of material
allegations of a petition or otherwise) to the appointment of a
receiver, trustee, assignee, custodian, liquidator or sequestrator (or
other similar official) of the other Party or of any substantial part
of its properties or assets, or authorizes such an application or
consent, or proceedings seeking such appointment are commenced without
such authorization, consent or application against the other Party and
continue undismissed for thirty (30) days; (iii) authorizes or files a
voluntary petition in bankruptcy, or applies for or consents (by
admission of material allegations of a petition or otherwise) to the
application of any bankruptcy, reorganization, arrangement,
readjustment of debt, insolvency, dissolution, liquidation or other
similar law of any jurisdiction, or
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authorizes such application or consent, or proceedings to such end are
instituted against the other Party without such authorization,
application or consent and are approved as properly instituted and
remain undismissed for thirty (30) days or result in adjudication of
bankruptcy or insolvency; or (iv) permits or suffers all or any
substantial part of its properties or assets to be sequestered or
attached by court order and the order remains undismissed for thirty
(30) days;
(c) the Manager engages in acts constituting bad faith,
willful misconduct, gross negligence or reckless disregard of its
duties hereunder; or
(d) (i) any person or group other than Lend Lease shall
become, directly or indirectly, the owner of more than 50% of the
voting stock of the Manager; (ii) the Manager sells, leases or
transfers all or substantially all of its assets to any person or
group; or (iii) the Manager consolidates with or merges with or into
any person or any person consolidates with or merges into the Manager
and, immediately after the consummation of such transaction, Lend Lease
is not directly or indirectly the owner of more than 50% of the voting
stock of the Manager or such surviving person, provided however, that
it shall not be cause for termination if no more than 67% of the voting
stock of Manager is offered to the public and, in connection therewith,
Lend Lease retains, directly or indirectly, at least 33% of the voting
stock of the Manager, and it shall not be cause for termination for so
long as Lend Lease continues to hold at least 33% of the voting stock
of the Manager.
7.1.2 Notice. Each Party agrees that if any of the events
specified in Section 7.1 of this Agreement shall occur, it will give prompt
written notice thereof to the other party's Board of Directors as well as to the
individuals set forth in Section 10 after the happening of such event.
7.2. No Termination Fee. Upon the occurrence of termination of the
Agreement by Company for cause as set forth in this Section 7, Manager shall not
be entitled to payment of any termination fee.
7.3. Duties Upon Termination. On the effective date of Termination,
Manager shall deliver to Company promptly any and all of Company's funds held by
Manager and shall prepare and deliver to Company a full accounting showing all
payments collected for Company's account, all expenses paid on Company's
account, and a statement of all funds held by it on Company's account covering
the period following the date of the last accounting furnished to Company.
Manager shall also deliver to Company any funds received by Manager after the
date of Termination which relate to Company. All materials, supplies, keys,
deeds, leases, contracts, other instruments and documents, insurance policies,
plans, specifications, promotional materials and such other accounting papers
and records as pertain to this Agreement shall be delivered to Company upon or
within a reasonable period of time after the effective date of Termination. No
further services shall be performed by Manager under this Agreement after the
effective date of Termination.
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7.4. Remedies. If an event of default as set forth in Section 7.1.1
occurs with respect to either Party under this Agreement, the other Party may
exercise any and all remedies available at law or in equity for breach of
contract, unless and to the extent expressly limited herein, whether or not such
Party elects to Terminate this Agreement on account of the event of default,
subject, if any event, to the terms and provisions of Section 8 hereof.
7.5. Survival. Upon Termination both Parties shall remain liable
for all obligations accrued and not fully performed under this Agreement during
the Term, and the obligations and liabilities set forth in Sections 7.3, 8.1 and
8.2 shall survive any Termination of this Agreement whether or not such
obligations occurred during the Term. Upon the proper termination of the
Agreement pursuant to Section 7.1, all unexercisable options to purchase common
stock of the Company granted to the Manager shall expire. All exercisable
options to purchase common stock of the Company shall remain exercisable for
thirty (30) days or, if less, during the remaining life of the option.
SECTION 8
INDEMNIFICATION
8.1. Indemnification by Company. Manager assumes no responsibility
under this Agreement other than to render the services called for hereunder in
good faith and shall not be responsible for any action of the Board of Directors
in following or declining to follow any advice or recommendations of Manager,
including as set forth in Section 5.2 of this Agreement. Manager, its directors,
officers, shareholders and employees will not be liable to Company, any
Subsidiary, the Independent Directors or Company's or any Subsidiary's
shareholders or partners for any acts or omissions by Manager, its directors,
officers, shareholders or employees under or in connection with this Agreement,
except by reason of acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of their duties. Company or a Subsidiary shall
reimburse, indemnify, defend and hold harmless Manager, its shareholders,
directors, officers and employees of and from any and all expenses, losses,
damages, liabilities, demands, charges and claims of any nature whatsoever,
(including attorneys' fees) in respect of or arising from any acts or omissions
of the Manager, its shareholders, directors, officers and employees made in the
performance of the Manager's duties under this Agreement and not constituting
bad faith, willful misconduct, gross negligence or reckless disregard of its
duties.
8.2. Indemnification by Manager. Manager shall Hold Harmless
Company, its Affiliates and their respective directors, officers, managers,
members, employees, agents and controlling Persons with respect to Manager's
failure to perform its obligations hereunder, to the extent such failure
constitutes bad faith, willful misconduct, gross negligence or reckless
disregard of its duties.
8.3. No Joint Venture. Company and Manager are not partners or
joint venturers with each other and nothing herein shall be construed to make
them such partners or joint venturers or impose any liability as such on either
of them.
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SECTION 9
NO WARRANTY AS TO VALUE OR PROFITABILITY
Notwithstanding any provision of this Agreement to the contrary,
Manager makes no representation or warranty as to the performance of any REIT
Investment or that Company or any REIT Investment recommended or managed by
Manager will be profitable.
SECTION 10
MISCELLANEOUS
10.1. Notices. Any notice, payment, demand or communication required
or permitted to be given pursuant to any provision of this Agreement shall be in
writing and shall be (i) delivered personally, (ii) sent by postage prepaid,
registered mail (airmail internationally), (iii) transmitted by telecopy, or
(iv) delivered by nationally recognized overnight courier, addressed as follows,
or to such other address as such Person may from time to time specify by notice
to the other Party:
COMPANY: c/o ERE Yarmouth, Inc.
3424 Peachtree Road, N.E., Suite 800
Atlanta, Georgia 30326-1102
Attn: Mr. Kurt L. Wright
Telecopier: (404) 848-8901
MANAGER: ERE Yarmouth, Inc.
3424 Peachtree Road, N.E., Suite 800
Atlanta, Georgia 30326-1102
Attn: Mr. Kurt L. Wright
Telecopier: (404) 848-8901
With a copy to:
ERE Yarmouth, Inc.
3424 Peachtree Road, N.E., Suite 800
Atlanta, Georgia 30326-1102
Attn: Samuel F. Hatcher, Esq.
Telecopier: (404) 848-8904
Any such notice, payment, demand or communication shall be deemed to be
delivered, given, and received for all purposes hereof (x) on the date of
receipt if delivered personally or by courier, (y) five (5) days after posting
if transmitted by mail, or (z) the date of transmission by telecopy, provided
that the Person to whom the telecopy was sent acknowledges that such telecopy
was received by such Person in legible form, or that such Person responds to the
telecopy without indicating any part of it was received in illegible form,
whichever shall first occur.
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10.2. Estoppel Letters. Upon request of the other Party from time to
time by notice, each Party shall furnish promptly to the other Party a written
statement of the status of any matter pertaining to this Agreement to the best
knowledge and belief of the Party making such statement, including, without
limitation, whether an Event of Default exists under this Agreement. The written
statement shall be sent by notice within ten (10) days after the notice
requesting it.
10.3. Assignment. Neither Party shall assign its rights under this
Agreement without the Approval of the other Party except as follows:
10.3.1. Company. Company may assign all of its rights under
this Agreement (but not part of them) in connection with any disposition of all
of the REIT Investments, provided that the acquiring Person of the REIT
Investments assumes all of Company's obligations under this Agreement in writing
and provides a copy of such assumption to Manager, and provided that Company
retains an ownership interest in and has effective management control of the
acquiring Person. Upon an assignment and assumption as provided above, Company
shall be released from all obligations accruing under this Agreement after the
date of such agreement and assumption.
10.3.2. Manager. Manager may assign all of its rights under
this Agreement (but not part of them) to any Affiliate of Manager, provided that
such Affiliate assumes all of the Manager's obligations under this Agreement in
writing and provides a copy of such assumption to Company. Manager may not
otherwise assign its rights under this Agreement without the prior written
consent of the Company approved by a majority of the Independent Directors. Upon
an assignment and assumption as provided above, the Manager shall be released
from all obligations accruing under this Agreement after the date of such
agreement and assumption. The Manager may enter into a subcontract with any
third party to provide part or all of the management services hereunder,
provided such party is approved by the Company and a majority of Independent
Directors.
10.4. Successors and Assigns. Subject to the provisions of Section
10.3, this Agreement shall be binding upon the Parties and their respective
successors and permitted assigns.
10.5. Entire Agreement. This Agreement constitutes the entire
agreement of Parties with respect to the subject matter hereof. There are no
further agreements or understandings, written or oral, in effect between the
Parties with respect to the subject matter hereof.
10.6. Amendments in Writing. All amendments of or modifications to
this Agreement must be in writing and signed by both Parties.
10.7. No Waiver. The failure of either Party to insist upon the
strict performance of any covenant, agreement, provision, or condition of this
Agreement shall not constitute a waiver thereof.
10.8. Severability. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this
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Agreement and the application of such provisions to any other Person or
circumstance shall not be affected thereby and shall be enforced to the greatest
extent permitted by Law.
10.9. Interpretation. All personal pronouns used in this Agreement,
whether used in the masculine, feminine or neuter gender, shall include all
other genders; the singular shall include the plural; and the plural shall
include the singular. Titles of articles and sections in this Agreement are for
convenience only and neither limit nor amplify the provisions of this Agreement.
All references in this Agreement to articles, sections, subsections or
paragraphs shall refer to articles, sections, subsections and paragraphs of this
Agreement, unless specific reference is made to the articles, sections, or other
subdivisions of another document or instrument. This Agreement shall not be
interpreted in favor of either Party by virtue of said Party not having prepared
this Agreement.
10.10. Costs of Litigation. If either Party shall institute an action
or proceeding against the other Party relating to this Agreement, the
unsuccessful Party in such action or proceeding shall reimburse the successful
Party for its disbursements incurred in connection therewith and for its
reasonable attorneys' fees actually incurred.
10.11. Governing Law. The laws of the State of Georgia (to the extent
not preempted by federal law) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation of the rights and duties of
the Parties hereunder.
10.12. Further Assurances. The Parties agree to execute such other
documents and perform such other actions as may be necessary or desirable to
carry out the purposes of this Agreement.
10.13. No Third Party Beneficiary. No Person other than Company and
Manager is or shall be entitled to bring any action to enforce any provision of
this Agreement. The provisions of this Agreement are solely for the benefit of
and shall be enforceable only by Company and Manager and their respective
successors and assigns as permitted hereunder.
10.14. Unavoidable Delays. Each party shall be excused from
performing its obligations under this Agreement for so long as, and to the
extent that, performance is prevented or delayed by Unavoidable Delays.
10.15. Exhibits. Any exhibits referred to in and attached to this
Agreement are incorporated herein in full and by reference.
10.16. Time of the Essence. Time is of the essence of this Agreement.
10.17. Computing Time Periods. If any time period provided for in
this Agreement ends on a day other than a Business Day, the time period shall be
extended to the next Business Day.
10.18. Confidentiality. Manager will treat as confidential all
non-public information received with respect to Company and the REIT Investments
and use it solely to carry out its duties and
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<PAGE> 21
responsibilities under this Agreement. Company acknowledges, however, that the
performance of Manager's duties may include the disclosure of non-public
information to accountants, attorneys, appraisers, tax authorities and other
public officials or as may be required by law or order of a court or other
tribunal having requisite jurisdiction.
10.19. Execution in Counterparts. This Agreement may be executed in
any number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together
shall bear the signatures of all of the parties reflected hereon as the
signatories.
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<PAGE> 22
IN WITNESS WHEREOF, the Parties have executed this Agreement effective
as of the date first written above.
ERE YARMOUTH, INC.
By:
--------------------------------
Name:
Title:
CHASTAIN CAPITAL CORPORATION
By:
--------------------------------
Name:
Title:
18
<PAGE> 23
MANAGEMENT AGREEMENT
EXHIBIT A
FEE SCHEDULE
FEES PAYABLE
As compensation for the services to be rendered by Manager under this
Agreement, Manager is authorized to disburse to itself from funds of the Company
the following investment management fees, all as more particularly described in
this Exhibit A:
A Base Fee
An Incentive Fee
THE BASE FEE
Company shall pay to Manager, for services rendered under this
Agreement, in arrears, a quarterly base management fee in an amount equal to the
following beginning with the Commencement Date:
For the first four fiscal quarters: 1.00% per annum of the Average
Invested Assets
of Company
During each fiscal quarter thereafter (pro
rata based on the number of days elapsed
during any partial fiscal quarter): 0.85% per annum of the Average
Invested Assets up to $1
billion
0.75% per annum of the Average
Invested Assets from $1 billion
to $1.25 billion
0.50% per annum of the Average
Invested Assets in excess of
$1.25 billion
"Average Invested Assets" for any period shall mean the average of the
aggregate book value of the assets of Company, including its proportionate
amount of the assets of all of its direct and indirect subsidiaries, before
reserves for depreciation or bad debts or other similar noncash reserves less
(i) uninvested cash balances and (ii) the book value of Company's CMO
liabilities, computed by dividing (a) the sum of such values for each of the
three months during such quarter (based on the book value of such assets as of
the last day of each month) by (b) three.
<PAGE> 24
THE INCENTIVE FEE
Manager shall be entitled to receive incentive compensation for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount
by which (1)(a) Funds from Operations (before the incentive fee) of Company for
the applicable quarter per weighted average number of shares of Common Stock
outstanding plus (b) gains (or minus losses) from debt restructuring or sales of
assets not included in Funds From Operations of Company for such quarter per
weighted average number of shares of Common Stock outstanding, exceed (2) an
amount equal to (a) the weighted average of the price per share at the initial
offering and the prices per share at any secondary offerings by Company
multiplied by (b) 25% of the sum of the Ten-Year U.S. Treasury Rate plus four
percent, and (B) the weighted average number of shares of Common Stock
outstanding.
"Funds from Operations" shall be computed in accordance with the
definition thereof adopted by the National Association of Real Estate Investment
Trusts ("NAREIT") and shall mean net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after deduction of
preferred stock dividends, if any, and similar adjustments for unconsolidated
partnerships and joint ventures. As used in calculating the Manager's
compensation, the term "Ten-Year U.S. Treasury Rate" means the arithmetic
average of the weekly average yield to maturity for actively traded current
coupon U.S. Treasury fixed interest rate securities (adjusted to constant
maturities of ten years) published by the Federal Reserve Board during a
quarter, or, if such rate is not published by the Federal Reserve Board, any
Federal Reserve Bank or agency or department of the federal government selected
by Company. If Company determines in good faith that the Ten-Year U.S. Treasury
Rate cannot be calculated as provided above, then the rate shall be the
arithmetic average of the per annum average yields to maturities, based upon
closing asked prices on each business day during a quarter, for each actively
traded marketable U.S. Treasury fixed interest rate security with a final
maturity date not less than eight nor more than twelve years from the date of
the closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S. government
securities selected by the Company.
COMPUTATION OF FEES
Manager shall compute the compensation payable under this Agreement
within 45 days after the end of each fiscal quarter, and such computations shall
be based upon Company's financial results as set forth in reports filed with the
Securities and Exchange Commission. A copy of the computations made by Manager
to calculate its compensation shall thereafter promptly be delivered to the
Board of Directors and, upon such delivery, payment of the compensation earned
under this Agreement shown therein shall be due and payable within 60 days after
the end of such fiscal quarter.
A-2
<PAGE> 1
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT ("Agreement") is entered into as of
the ____ day of __________, 1998 by and among Chastain Capital Corporation (the
"Company"), Lend Lease Corporation Limited (together with its affiliates, "Lend
Lease") and ERE Yarmouth, Inc. (the "Manager" together with Lend Lease, the
"Holders").
RECITALS
WHEREAS, the Company and a wholly owned indirect subsidiary of Lend
Lease ("Purchaser") have entered into an agreement (the "Purchase Agreement")
pursuant to which the Company has agreed to sell to Purchaser, and Purchaser has
agreed to purchase the number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), equal to (a)10% of the Company's issued and
outstanding Common Stock immediately following consummation of the Company's
initial public offering minus (b) 100 shares.
WHEREAS, the Company and the Manager have entered into an agreement
(the "Management Agreement") pursuant to which the Manager will perform
managerial services for the Company and its subsidiaries;
WHEREAS, the Company has established a stock option plan (the "Plan")
pursuant to which options to acquire shares of Common Stock may be granted, and,
pursuant to a certificate (the "Stock Option Certificate") the Company has
granted options to purchase 1,166,667 shares of Common Stock (the "Options") to
the Manager (or, if necessary, to prevent Lend Lease from exceeding the
Ownership Limitation set forth in the Articles of Incorporation of the Company,
units of limited partnership interest in Chastain Partnership, L.P., which units
will be redeemable for shares of Common Stock) over a four-year vesting period.
WHEREAS, neither the shares of Common Stock to be acquired by Lend
Lease nor the shares of Common Stock subject to the Options have been registered
under the Securities Act of 1933, as amended (the "Securities Act");
WHEREAS, from time to time, the Holders may acquire additional shares
of Common Stock;
WHEREAS, the parties hereto desire to set forth certain rights of the
Holders as holders of Common Stock;
NOW, THEREFORE, for and in consideration of the mutual promises and
agreements contained in this Agreement, the parties hereto mutually agree as
follows:
<PAGE> 2
ARTICLE 1
DEFINITIONS
"Affiliate" means (i) any Person that, directly or indirectly, controls
or is controlled by or is under common control with such Person, (ii) any other
Person that beneficially owns, directly or indirectly, 5% or more of the
outstanding capital stock, shares or equity interests of such Person, or (iii)
any officer, director, employee, partner or trustee of such Person or any Person
controlling, controlled by or under common control with such Person (excluding
trustees and persons serving in similar capacities who are not otherwise
Affiliates of such Person). For the purposes of this definition, "control"
(including the correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, through the ownership
of voting securities, partnership interests or other equity interests.
"Agreement" means this Registration Rights Agreement, as the same may
be amended, modified, or supplemented from time to time.
"Closing" means the date on which the Company's initial public offering
of Common Stock is consummated.
"Closing Date" means the date on which the Closing occurs.
"Closing Price" means the average of the high bid and low asked prices
in the over-the-counter market, as reported by The Nasdaq Stock Market, or any
national securities exchange on which the Common Stock is listed.
"Code" means the Internal Revenue Code of 1986, as amended, and as
hereafter amended from time to time. Reference to any particular provision of
the Code shall mean that provision of the Code as of the date hereof and any
succeeding provision of the Code.
"Market Price" means, as of any determination date, the average of the
Closing Prices for the five consecutive Trading Days ending on such date.
"Person" means a natural person, a corporation, a partnership, a trust,
a joint venture, any regulatory authority, or any other entity or organization.
"Registrable Shares" means each of the shares of Common Stock which may
be registered pursuant to this Agreement, as defined in Section 2.01.
"SEC" means the United States Securities and Exchange Commission.
2
<PAGE> 3
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Shelf Registration" shall mean the registration of the shares owned by
the Holders effected pursuant to Section 2.01 hereof.
"Shelf Registration Period" shall mean the period of time the Company
is required to make and maintain the Shelf Registration as defined in Section
2.01 hereof.
"Trading Day" means any day other than a Saturday, a Sunday or a day on
which banking institutions in the State of New York are authorized or obligated
by law or executive order to close.
"Underwritten Offering" means a sale of securities of the Company to an
underwriter or underwriters pursuant to a Registration Statement for reoffering
to the public.
ARTICLE 2
SHELF REGISTRATION
SECTION 2.01. Shelf Registration. If the Manager ceases to act as
manager of the Company pursuant to the Management Agreement dated as of
_________, 1998, then, upon the request of either Holder, the Company agrees to
file with the SEC, no later than thirty days after the request, a shelf
registration statement under Rule 415 of the Securities Act, or similar rule
that may be adopted by the SEC (a "Shelf Registration") with respect to all
shares of Common Stock beneficially owned by the Holders (the "Registrable
Shares") (or, if so requested by the Holders, a specified portion of such
shares). The Company will use commercially reasonable efforts to have such Shelf
Registration declared effective under the Securities Act as soon as practicable.
The Holders shall notify the Company of the method or methods of disposition
that may be utilized by them in disposing of such shares and such information
shall be included in the prospectus included in such Shelf Registration to the
extent such methods are permitted by applicable law.
The Company will use its best efforts to keep the Shelf Registration
continuously effective until the date when all of the shares of Common Stock
covered thereby are sold thereunder (the "Shelf Registration Period").
SECTION 2.02. Suspension. If the Company shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its shareholders for such
Shelf Registration Statement to be filed at such time, then the Company shall
have the right to defer the filing of the Shelf Registration Statement for a
period of not more than 120 days after receipt of the request from the Holders
under this Article 2.
3
<PAGE> 4
ARTICLE 3
OTHER REGISTRATIONS
SECTION 3.01. Piggyback Registration.
(a) If at any time on or after the date that is two (2) years
after the Closing, the Company shall propose the registration under the
Securities Act of a public offering of Common Stock, the Company shall give
written notice of such proposed registration as promptly as practicable to the
Holders, and if, within seven (7) days after the giving of such notice, the
Holders request the Company in writing to include any shares of Common Stock
that are owned by the Holders and that have not previously been registered under
a Shelf Registration declared effective by the SEC, the Company shall include in
the registration such amount of such shares of Common Stock as the Holders shall
request; provided, however, that the Company shall not be required to give
notice or include such shares in any such registration if the proposed
registration relates solely to (i) securities to be offered to employees
pursuant to a stock option, stock savings, or other employee benefit plan, (ii)
securities proposed to be issued in exchange for securities or assets of, or in
connection with a merger of consolidation with, another entity, (iii) securities
to be offered by the Company generally to any class or series of its then
existing security holders, (iv) securities issuable upon the conversion of
securities which are the subject of an underwritten redemption, or (v)
securities to be offered or issued pursuant to a combination of transactions
referred to in clauses (i) through (iv).
(b) The Company shall have the right, in its sole discretion to
terminate or withdraw any registration initiated by its under this Article 3
prior to the effectiveness of such registration whether or not the Holders have
elected to include shares in such registration.
(c) If a registration statement under which the Company gives
notice under this Article 3 is for an Underwritten Offering, then the Company
shall so advise the Holders. In such event, the right of the Holders to include
their shares in a registration pursuant to this Article 3 shall be conditioned
upon such entity's participation in such underwriting and the inclusion of such
entity's shares in the underwriting to the extent provided herein. All entities
proposing to distribute their Registrable Shares through such underwriting shall
enter into an underwriting agreement in customary form with the underwriter(s)
selected from such underwriting. Notwithstanding any other provision of this
Agreement, if the managing underwriter(s) determine(s) in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, then the managing underwriter(s) may exclude shares (including
Registrable Shares) from the registration and the underwriting, and the number
of shares that may be included in the registration and the underwriting shall be
allocated, first, to the Company, and second, to each of the holders (including
the Holders) requesting inclusion of their shares in such registration statement
on a pro rata basis based on the total number of shares then held by each such
holder provided, however, that the right of the underwriters to exclude shares
(including Registrable Shares) from the registration and all shares that are not
Registrable Shares and that are held by persons who are officers or directors of
the Company (or any subsidiary of the Company) shall first be excluded from such
registration and underwriting
4
<PAGE> 5
before any Registrable Shares are so excluded and, further provided, that
pursuant to the Registration Rights Agreement between the Company and FBR Asset
Investment Corporation ("FBR"), shares of FBR included in the registration shall
not be reduced below 25% of the shares that FBR requested to be included in the
registration. If the Holders disapprove of the terms of any such underwriting,
such entity may elect to withdraw therefrom by written notice to the Company and
the managing underwriter(s), delivered at least ten (10) business days prior to
the effective date of the registration statement. Any Registrable Shares
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the registration. For any Holder that is a partnership or corporation, the
partners, retired partners and shareholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "Holder,"
and any pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(d) By electing to include Registrable Shares in any registration
pursuant to Article 3 hereof, the Holders shall be deemed to have agreed not to
effect any public sale or distribution of securities of the Company of the same
or similar class or classes of the securities included in the Registration
Statement or any securities convertible into or exchangeable or exercisable for
such securities, including a sale pursuant to Rule 144 or Rule 144A under the
Securities Act, during such periods as reasonably requested by the managing
underwriter(s), if an Underwritten Offering, or the Company, in any other
registration. Any period up to 180 days shall be deemed reasonable.
ARTICLE 4
OTHER MATTERS
SECTION 4.01. Registration Procedures. In connection with the
obligations of the Company with respect to any registration pursuant to this
Agreement, the Company shall use commercially reasonable efforts to effect or
cause to be effected the registration of the Registrable Shares under the
Securities Act to permit the sale of such Registrable Shares by the Holders in
accordance with the Holders' intended method or methods of distribution, and the
Company shall:
(a) subject to Section 4.01(h) hereof, prepare and file with the
SEC such amendments and post-effective amendments to each such Registration
Statement as may be necessary to keep such Registration Statement effective for
the applicable period; cause each such Prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 or any similar rule that may be adopted under the Securities Act; and
comply with the provisions of the Securities Act applicable to the Company with
respect to such Registration Statement during the applicable period;
(b) furnish to the Holder of Registrable Shares without charge as
many copies of each Prospectus, including each preliminary Prospectus, and any
amendment or supplement thereto and
5
<PAGE> 6
such other documents as such Holder may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable Shares;
(c) use commercially reasonable efforts to register or qualify, or
obtain an exemption from registration or qualification for, all Registrable
Shares by the time the applicable Registration Statement is declared effective
by the Commission under all applicable state securities or "blue sky" laws of
such jurisdictions as the Holders of Registrable Shares covered by a
Registration Statement shall reasonably request in writing, keep each such
registration or qualification or exemption effective during the period such
Registration Statement is required to be kept effective and do any and all other
acts and things that may be reasonably necessary or advisable to enable such
Holder to consummate the disposition in each such jurisdiction of such
Registrable Shares owned by such Holder; provided, however, that the Company
shall not be required to (i) qualify generally to do business in any
jurisdiction or to register as a broker or dealer in such jurisdiction where it
would not otherwise be required to qualify but for this Section 4.01(c), (ii)
subject itself to taxation in any such jurisdiction, or (iii) submit to the
general service of process in any such jurisdiction; provided, further, that if
the Company fails to list the Registrable Shares on a national stock exchange or
qualify for quotation on an automatic quotation system at or prior to the time
the Registration Statement is declared effective by the SEC because it fails to
meet requirements for such listing or quotation regarding the number of holders,
the obligation in this Section 4.01(c) shall not require the Company to register
or qualify the Registrable Shares in any jurisdiction where the Company
reasonably concludes, based upon the advice of securities counsel, that such
registration or qualification would require unreasonable effort (including,
without limitation, amendments to the Company's charter or bylaws) or expense;
(d) notify the Holder of Registrable Shares promptly and, if
requested by such Holder, confirm such advice in writing (i) when a Registration
Statement has become effective and when any post-effective amendments and
supplements thereto become effective, (ii) of the issuance by the SEC or any
state securities authority of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose,
and (iii) of the happening of any event during the period a Registration
Statement is effective as a result of which such Registration Statement or the
related Prospectus contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iv) at the written request of any such
Holder, promptly to furnish to such Holder a reasonable number of copies of a
supplement to or an amendment of such Prospectus as may be necessary so that, as
thereafter delivered to the purchaser of such securities, such Prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading;
(e) upon written request by the Holder, furnish to the Holder of
Registrable Shares copies of any request by the SEC or any state securities
authority of amendments or supplements to a Registration Statement and
Prospectus or for additional information;
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<PAGE> 7
(f) make every reasonable effort to avoid the issuance of, or if
issued to obtain the withdrawal of, any enjoining order suspending the use or
effectiveness of a Registration Statement or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the Registrable
Shares for sale in any jurisdiction, at the earliest possible moment;
(g) upon written request furnish to the Holder of Registrable
Shares, without charge, at least one conformed copy of each Registration
Statement and any post-effective amendment thereto (without documents
incorporated therein by reference or exhibits thereto, unless requested);
(h) upon the occurrence of any event contemplated by Section
4.01(d)(iii) hereof, use commercially reasonable efforts to prepare a supplement
or post-effective amendment to a Registration Statement or the related
Prospectus or any document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers of the
Registrable Shares, such Prospectus will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(i) if requested by the representative underwriters, if any, or
any Holders of Registrable Shares being sold in connection with such offering,
(i) promptly incorporate in a prospectus supplement or post-effective amendment
such information as the representative of the underwriters, if any, or such
Holders indicate relates to them or otherwise reasonably request be included
therein, and (ii) make all required filings of such prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment; provided, however, that the Company
shall not be required to take any action pursuant to this Section 4.01 that
would, in the opinion of counsel for the Company, violate applicable law;
(j) make available to inspection by representatives of the Holder
of the Registrable Shares and the representative of any underwriters
participating in any disposition pursuant to a Registration Statement and any
special counsel or accountant retained by such Holders or underwriters, all
financial and other records, pertinent corporate documents and properties of the
Company and cause the respective officers, directors and employees of the
Company to supply all information reasonably requested by any such
representatives, the representative of the underwriters, the special counsel or
accountants in connection with a Registration Statement; provided, however, that
such records, documents or information that the Company determines, in good
faith, to be confidential and notifies such representatives, representative of
the underwriters, special counsel or accountants are confidential shall not be
disclosed by the representatives, representative of the underwriters, special
counsel or accountants unless (i) the disclosure of such records, documents or
information is necessary to avoid or correct a misstatement or omission in a
Registration Statement, (ii) the release of such records, documents or
information is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, or (iii) such records, documents or information have
been generally made available to the public;
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<PAGE> 8
(k) use commercially reasonable efforts (including, without
limitation, seeking to cure any deficiencies (within the Company's control)
cited by the exchange or market in the Company's listing application) to list
all Registrable Shares on the American Stock Exchange or The Nasdaq National
Market (or the Nasdaq Small Cap Market) if not qualified for the Nasdaq National
Market (unless the Company qualifies and chooses to list all Registrable Shares
on the New York Stock Exchange, in which event the Company shall use its best
efforts to list all Registrable Shares on the New York Stock Exchange);
(l) otherwise use commercially reasonable efforts to comply with
all applicable rules and regulations of the SEC and make generally available to
its security holders, as soon as reasonably practicable, earnings statements
covering at least 12 months that satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act) thereunder;
(m) provide and cause to be maintained a transfer agent for all
Registrable Shares covered by any Registration Statement from and after a date
not later than the effective date of such Registration Statement; and
(n) in connection with any sale or transfer of the Registrable
Shares that will result in such securities no longer being the Registrable
Shares, cooperate with the Holders and the representative of the underwriters,
if any, to facilitate the timely preparation and delivery of certificates
representing the Registrable Shares to be sold, which certificates shall not
bear any restrictive legends and to enable such Registrable Shares to be in such
denominations and registered in such names as the representative of the
underwriters, if any, or Holders may request at least two Business Days prior to
any sale of the Registrable Shares.
In addition, the Company may require the Holder of Registrable Shares
to furnish to the Company such information regarding the proposed distribution
by such Holder of such Registrable Shares as the Company may from time to time
reasonably request in writing or as shall be required to effect the registration
of their Registrable Shares.
The Holder agrees that, upon receipt of any notice from the Company of
the happening of any event of the kind described in Section 4.01(d)(iii) hereof,
such Holder will immediately discontinue disposition of Registrable Shares
pursuant to a Registration Statement until such Holder's receipt of the copies
of the supplemented or amended Prospectus. If so directed by the Company, such
Holder will deliver to the Company (at the expense of the Company) all copies in
its possession, other than permanent file copies then in such Holder's
possession, of the Prospectus covering such Registrable Shares current at the
time of receipt of such notice.
SECTION 4.02. Black-Out Period. (a) Following the effectiveness of a
Registration Statement (and the filings with any state securities commissions),
the Company may direct the Holder to suspend sales of the Registrable Shares for
such times as the Company reasonably may determine are necessary and advisable,
including upon the occurrence of the following events: (i)
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<PAGE> 9
an Underwritten Offering by the Company where the Company is advised by the
managing underwriter(s) for such Underwritten Offering that sale of Registrable
Shares under the Registration Statement would have a material adverse effect on
the offering, or (ii) pending negotiations relating to, or consummation of, a
transaction or the occurrence of an event (x) that would require additional
disclosure of material information by the Company in the Registration Statement
(or such filings), (y) as to which the Company has a bona fide business purpose
for preserving confidentiality, or (z) that renders the Company unable to comply
with SEC requirements, in each case under circumstances that would make it
impractical or inadvisable to cause the Registration Statement (or such filings)
to become effective or to promptly amend or supplement the Registration
Statement on a post-effective basis, as applicable (a "Suspension Event").
(b) In the case of a Suspension Event, the Company shall give
written notice (a "Suspension Notice") to the Holders to suspend sales of the
Registrable Shares so that the Company may correct or update the Registration
Statement (or such filings); provided, however, that such suspension shall
continue only for so long as the Suspension Even or its effect is continuing. No
Holder shall effect any sales of the Registrable Shares pursuant to such
Registration Statement (or such filings) at any time after it has received a
Suspension Notice from the Company. If so directed by the Company, the Holders
will deliver to the Company all copies of the Prospectus covering the
Registrable Shares held by them at the time of receipt of the Suspension Notice.
The Holders may recommence effecting sales of the Registration Shares pursuant
to the Registration Statement (or such filings) following further notice to such
effect (an "End of Suspension Notice") from the Company, which End of Suspension
Notice shall be given by the Company promptly following the conclusion of any
Suspension Event.
SECTION 4.03. Conditions to Obligations of the Company. The obligations
of the Company to use its best efforts to cause the shares owned by the Holders
to be registered under the Securities Act are subject to the following
conditions:
(a) Any request by the Holders for registration shall specify the
amount of shares intended to be sold, contain the undertaking of such Holder, to
provide all such information as may be reasonably required in order to permit
the Company to comply with all applicable requirements of the SEC and to obtain
acceleration of the effective date of the registration statement, identify any
proposed underwriters, and specify the proposed method of offering and sale.
(b) The Company may require, as a condition to fulfilling its
obligations hereunder, the indemnification agreements described in Article 5
from the Holders, and their underwriters.
(c) The Company shall not be required to register shares pursuant
to Section 2.01 if, within ten (10) calendar days following receipt of the
request for registration, the Company shall provide written notice that it
intends to repurchase the shares at the Market Price of such shares as of the
date the Company received such request.
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<PAGE> 10
SECTION 4.04. Expenses of Registration. The Company shall pay all
expenses in connection with the Shelf Registration, including, without
limitation (a) all expenses incident to filing with the National Association of
Securities Dealers, Inc., (b) registration fees, (c) printing expenses, (d)
accounting and legal fees and expenses, except to the extent the Holders elect
to engage accountants or attorneys in addition to the accountants and attorneys
engaged by the Company, (e) accounting expenses incident to or required by any
such registration or qualification, and (f) expenses of complying with the
securities or blue sky laws of any jurisdictions in connection with such
registration or qualifications; provided, however, the Company shall not be
liable for (i) any underwriting discounts or commissions to any broker
attributable to the sale of the Holders' shares, or (ii) any fees or expenses
incurred by the Holders in connection with such registration which, according to
the written instructions of any regulatory authority, the Company is not
permitted to pay.
ARTICLE 5
INDEMNIFICATION
SECTION 5.01. Indemnification by the Company. In the case of each
registration pursuant to Article 2 or 3 hereof, the Company agrees to indemnify
and hold harmless the Holders and the directors and officers of the Holders,
each underwriter of the shares of the Holders so registered, and each person (if
any) who controls the Holders or any such underwriter within the meaning of
Section 15 of the Securities Act, against any and all losses, claims, damages,
or liabilities to which they or any of them may become subject under the
Securities Act or any other statute or common law, including any amount paid in
settlement of any litigation, commenced or threatened, if such settlement is
effected with the written consent of the Company, and to reimburse them for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as any such losses, claims, damages,
liabilities, or actions arise out of or are based upon (a) any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement filed to register the sale of such shares or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under blue sky or other securities laws of jurisdictions in which
the shares are offered (a "Blue Sky Filing"), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, or (b) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, if used prior to the effective date of such registration statement,
or contained in the final prospectus (as amended or supplemented if the Company
shall have filed with the SEC any amendment thereof or supplement thereto) if
used within the period during which the Company is required to keep the
registration statement to which such prospectus relates current, or the omission
or alleged omission to state therein (if so used) a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the indemnification
agreement contained in this Section 5.01 shall not (i) apply to such losses,
claims, damages, liabilities, or actions arising out of, or based upon, any such
untrue statement or alleged untrue statement, or any such omission or alleged
omission,
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<PAGE> 11
if such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company by the Holders or such underwriter
specifically for use in connection with preparation of the registration
statement, any preliminary prospectus or final prospectus contained in the
registration statement, any such amendment or supplement thereto or any Blue Sky
Filing, or (ii) inure to the benefit of any underwriter or any person
controlling such underwriter, if such underwriter failed to send or give a copy
of the final prospectus to the person asserting the claim at or prior to the
written confirmation of the sale of such shares to such person and if the untrue
statement or omission concerned has been corrected in such final prospectus.
SECTION 5.02. Indemnification by the Holders. In the case of each
registration pursuant hereto, the Holders and each underwriter of the shares of
the Holders so registered shall agree in the same manner and to the same extent
as set forth in Section 5.01 hereof to indemnify and hold harmless the Company,
each person (if any) who controls the Company within the meaning of Section 15
of the Securities Act, the directors of the Company, and those officers of the
Company who shall have signed any such registration statement, with respect to
any untrue statement or alleged untrue statement in, or omission or alleged
omission from, such registration statement or any post-effective amendment
thereto or any preliminary prospectus or final prospectus (as amended or
supplemented if amended or supplemented as aforesaid) contained in such
registration statement or any Blue Sky Filing, if such statement or omission was
made in reliance upon and in conformity with written information furnished to
the Company by such indemnifying party specifically for use in accordance with
the preparation of the registration statement, any preliminary prospectus or
final prospectus contained in the registration statement, any such amendment or
supplement thereto, or any Blue Sky Filing.
SECTION 5.03. Indemnification Procedures.
(a) Each indemnified party shall, with reasonable promptness after
its receipt of written notice of the commencement of any action against such
indemnified party in respect of which indemnity may be sought from an
indemnifying party on account of an indemnity agreement contained herein, notify
the indemnifying party in writing of the commencement thereof.
(b) The omission to notify the indemnifying party shall not
relieve it from any liability which it may have to any indemnified party unless
the failure to give notice materially adversely affects the ability of the
indemnifying party to defend a claim which is the subject of indemnification
hereunder (in which case the indemnifying party shall be relieved of its
obligation only to the extent of offsetting any loss, damage, or liability it
suffers as a consequence of the failure against its monetary obligation to the
indemnified party).
(c) In case any such action shall be brought against any
indemnified party and the indemnified party shall so notify an indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and to the extent it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party and, after notice from
the indemnifying party to
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<PAGE> 12
such indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party hereunder for
any legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation, except as provided below.
(d) The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel (other than reasonable costs of investigation)
shall be paid by the indemnified party unless (i) the indemnifying party agrees
to pay the same, (ii) the indemnifying party fails to assume the defense of such
action with counsel reasonably satisfactory to the indemnified party, or (iii)
the named parties to any such action (including any impleaded parties) have been
advised by such counsel that representation of such indemnified party and the
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of such
indemnified party). No indemnifying party shall be liable for any settlement
entered into without its consent.
(e) The indemnity agreements contained herein shall be in addition
to any liabilities which the indemnifying party may have pursuant to law.
SECTION 5.04. Contribution.
(a) If for any reason the indemnification provisions contemplated
herein are either unavailable or insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, or liabilities referred to
therein, then the party that otherwise would be required to provide
indemnification or the indemnifying party (in either case, for purposes of this
section, the "Indemnifying Party") in respect of such losses, claims, damages,
or liabilities, shall contribute to the amount paid or payable by the party that
would otherwise be entitled to indemnification or the indemnified party (in
either case, for purposes of this section, the "Indemnified Party") as a result
of such losses, claims, damages, liabilities, or expense, in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party and the
Indemnified Party, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state a
material fact related to information supplied by the Indemnifying Party or
Indemnified Party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities, and expenses referred to above shall be deemed to include
any legal or other fees or expenses reasonably incurred by such party. In no
event shall any holder of shares covered by the registration be required to
contribute an amount greater than the dollar amount of the proceeds received by
such holder from the sale of shares pursuant to the registration giving rise to
the liability.
(b) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this section were determined by pro rata
allocation (even if the holders or any
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underwriters or all of them were treated as one entity for such purpose) or by
any other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No person or
entity determined to have committed a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person or entity who was not guilty of such fraudulent
misrepresentation.
ARTICLE 6
GENERAL
SECTION 6.01. Notices. All communications required or permitted under
this Agreement shall be in writing and shall be deemed to have been given when
delivered personally or upon deposit in the United States mail, registered,
postage prepaid return receipt requested, to Lend Lease and the Manager at 3242
Peachtree Road, N.E., Suite 800, Atlanta, Georgia (Attention: Samuel F.
Hatcher); provided, however, that Lend Lease or the Manager may specify a
different address by notifying the Company in writing of such different address.
Notices to the Company shall be delivered at or mailed to 3242 Peachtree Road,
N.E., Suite 800, Atlanta, Georgia (Attention: Samuel F. Hatcher), or such
different address as the Company may notify Lend Lease and the Manager in
writing.
SECTION 6.02. Entire Agreement. This Agreement and exhibits attached
hereto constitute the entire agreement of the parties and supersede all prior
written agreements and prior and contemporaneous oral agreements, understandings
and negotiations with respect to the subject matter hereof.
SECTION 6.03. Pronouns and Plurals. When the context in which words are
used in this Agreement indicates that such is the intent, words in the singular
number shall include the plural and the masculine gender shall include the
neuter or female gender as the context may require.
SECTION 6.04. Headings. The article headings or sections in this
Agreement are for convenience only and shall not be used in construing the scope
of this Agreement or any particular article.
SECTION 6.05. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original copy and all of
which together shall constitute one and the same instrument binding on all
parties hereto, notwithstanding that all parties shall not have signed the same
counterpart.
SECTION 6.06. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Georgia.
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IN WITNESS WHEREOF, each party hereto, through its officer thereunto
duly authorized, has duly executed this Agreement as of the day and year first
above written.
CHASTAIN CAPITAL CORPORATION
------------------------------------------
Name:
Title:
LEND LEASE CORPORATION LIMITED
------------------------------------------
Name:
Title:
ERE YARMOUTH, INC
------------------------------------------
Name:
Title:
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<PAGE> 1
EXHIBIT 10.3
CHASTIAN CAPITAL CORPORATION
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made and entered
into as of _________________, 1998, by and between Chastain Capital Corporation,
a Georgia corporation (the "Company"), and FBR Asset Investment Corporation, a
Virginia corporation (the "Purchaser").
This Agreement is made pursuant to the Stock Purchase Agreement (the
"Purchase Agreement"), dated December 17, 1997 between the Company and the
Purchaser. In order to induce the Purchaser to enter into this Purchase
Agreement, the Company has agreed to provide the registration rights provided
for in this Agreement to the Purchaser and its respective direct and indirect
transferees. The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Purchase Agreement.
The parties hereby agree as follows:
1. Definitions
As used in this Agreement, the following terms shall have the following
meanings:
Affiliate: (1) Any person directly or indirectly owning, controlling, or
holding with power to vote ten percent or more of the outstanding voting
securities of such other person, (ii) any person ten percent or more of whose
outstanding voting securities are directly or indirectly owned, controlled, or
held, with power to vote, by such other person, (iii) any person directly or
indirectly controlling, controlled by, or under common control with such other
person, (iv) any executive officer, director, trustee or general partner of such
other person, and (v) any legal entity for which such person acts as an
executive officer, director, trustee or general partner. An indirect
relationship shall include circumstances in which a person's spouse, children,
parents, siblings or mothers-, fathers-, sisters or brothers-in-law is or has
been associated with a person.
Agreement: This Registration Rights Agreement, as the same may be amended,
supplemented or modified from time to time in accordance with the terms hereof.
Business Day: With respect to any act to be performed hereunder, each
Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which
banking institutions in New York, New York, or other applicable place where
such act is to occur are authorized or obligated by applicable law, regulation
or executive order to close.
Closing Date: The Closing Date for the IPO.
Commission: The Securities and Exchange Commission.
Common Stock: Common stock of the Company.
<PAGE> 2
Company: Chastain Capital Corporation, a Georgia corporation, and any
successor corporation thereto.
Controlling person: As defined in Section 7(a) hereof.
Exchange Act: The Securities Act of 1934, as amended, and the rules and
regulations promulgated by the Commission pursuant thereto.
Form S-3: Such form under the Securities Act as is in effect on the date
hereof or any successor registration form under the Securities Act subsequently
adopted by the Commission that permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the
Commission.
Holder: Each holder of any Registrable Shares.
Indemnified Party: As defined in Section 7(a) hereof.
IPO: as defined in the Purchase Agreement.
Person: An individual, partnership, corporation, trust, unincorporated
organization, government or agency or political subdivision thereof, or any
other legal entity.
Proceeding: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or, to the knowledge of the person subject thereto,
threatened.
Prospectus: The prospectus included in any Registration Statement,
including any preliminary prospectus, and all other amendments and supplements
to any such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
Purchase Agreement: The Purchase Agreement is as defined in the preamble.
Purchaser: FBR Asset Investment Corporation.
Register, registered and registration: Such terms shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
Registrable Shares: Each of the Shares until (i) the date on which it has
been registered effectively pursuant to the Securities Act and disposed of in
accordance with a Registration Statement relating to it, (ii) the date on which
it is sold pursuant to Rule 144 (or any similar provisions then in effect) or
(iii) the date on which it can be sold without restriction, pursuant to an
available exemption from registration under the Securities Act, or (iv) the date
on which it is sold to the Company.
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<PAGE> 3
Registration Statement: Any registration statement of the Company that
covers the resale of any of the Registrable Shares pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference, if any, in such registration statement.
Rule 144: Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 144A: Rule 144A promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Rule 424: Rule 424 promulgated by the Commission pursuant to the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission as a replacement thereto
having substantially the same effect as such rule.
Securities Act: The Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
Shares: The Shares of Common Stock being offered and sold pursuant to
the terms and conditions of the Purchase Agreement.
Underwritten Offering: A sale of securities of the Company to an
underwriter or underwriters pursuant to a Registration Statement for reoffering
to the public.
2. Piggyback Registration
(a) Piggyback Registration Rights and Notice of Registration. The Company
shall notify all Holders of Registrable Shares in writing at least fourteen (14
days prior to filing any registration statement under the Securities Act for the
purpose of effecting a public offering of securities of the Company (including,
but not limited to, registration statements relating to offerings of securities
of the Company by any shareholders of the Company, but excluding registration
statements relating to any registration under Section 3 of this Agreement or to
any employee benefit plan or corporate reorganization) and will afford each such
Holder an opportunity to include in such registration statement all or any part
of the Registrable Shares then held by such Holder. Each Holder desiring to
include in any such registration statement all or any part of the Registrable
Shares held by such Holder shall, within seven (7) days after receipt of the
above-described notice from the Company, so notify the Company in writing, and
in such notice shall inform the Company of the number of Registrable Shares such
Holder wishes to include in such registration statement. If a Holder decides not
to include all of its Registrable Shares in any registration statement
thereafter filed by the Company, such Holder shall nevertheless continue to have
the right to include any Registrable Shares in any subsequent
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<PAGE> 4
registration statement or registration statements as may be filed by the Company
with respect to offerings of its securities, all upon the terms and conditions
set forth therein.
(b) Right to Terminate Registration. The Company shall have the
right, in its sole discretion to terminate or withdraw any registration
initiated by it under this Section 2 prior to the effectiveness of such
registration whether or not any Holder has elected to include Registrable Shares
in such registration.
(c) Underwriting. If a registration statement under which the
Company gives notice under this Section 2 is for an Underwritten Offering, then
the Company shall so advise the Holders of Registrable Shares. In such event,
the right of any Holder to include its Registrable Shares in a registration
pursuant to this Section 2 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Shares in
the underwriting to the extent provided herein. All Holders proposing to
distribute their Registrable Shares through such underwriting shall enter into
an underwriting agreement in customary form with the underwriter(s) selected for
such underwriting. Notwithstanding any other provision of this Agreement, if the
managing underwriter(s) determine(s) in good faith that marketing factors
require a limitation of the number of shares to be underwritten, then the
managing underwriter(s) may exclude shares (including Registrable Shares) from
the registration and the underwriting, and the number of shares that may be
included in the registration and the underwriting shall be allocated, first, to
the company, and second, to each of the holders (including the Holders)
requesting inclusion of their shares in such registration statement on a pro
rata basis based on the total number of shares then held by each such holder
[provide, however, that the right of the underwriters to exclude shares
(including Registrable Shares) from the registration and underwriting as
described above shall be restricted so that (i) the number of Registrable Shares
including in any such registration is not reduced below twenty-five percent
(25%) of the shares included in the registration, and (ii) all shares that are
not Registration Shares and are held by persons who are employees or directors
of the Company (or any subsidiary of the Company) shall first be excluded from
such registration and underwriting before any Registrable Shares are so
excluded.] If any Holder disapproves of the terms of any such underwriting, such
Holder may elect to withdraw therefrom by written notice to the Company and the
underwriter, delivered at least ten (10) business days prior to the effective
date of the registration statement. Any Registrable Shares excluded or
withdrawn from such underwriting shall be excluded and withdrawn from the
registration. For any Holder that is a partnership or corporation, the
partners, retired partners and shareholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "Holder,"
and any pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(d) Holdback Agreement. By electing to include Registrable Shares in any
registration pursuant to Section 2 hereof, the Holder of the Registrable Shares
shall be deemed to have agreed not to effect any public sale or distribution of
securities of the Company of the same or similar class or classes of the
securities included in the Registration Statement or any securities convertible
into or exchangeable or exercisable for such securities, including a sale
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<PAGE> 5
pursuant to Rule 144 or Rule 144A under the Securities Act, during such periods
as reasonably requested by the managing underwriter(s), if an Underwritten
Offering, or the Company, in any other registration. Any period up to 180 days
shall be deemed reasonable.
(e) The Company shall not be obligated to effect, or to take any action to
effect any such registration of Registrable Shares pursuant to this Section 2;
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process or to qualify to do
business in a foreign corporation in affecting such registration, qualification,
or compliance, unless the Company is already subject to service or required to
be so qualified in such jurisdiction and except as may be required by the
Securities Act, or
(ii) if within 14 days after its receipt of a written request to
effect such registration, the Company causes to be delivered to the Holders an
opinion of counsel reasonably acceptable to the Holders to the effect that the
proposed disposition of Registrable Shares by the Holders will not require
registration or qualification under the Securities Act, it being specifically
understood and agreed that the Holders will promptly furnish to the Company and
such counsel all information such counsel may reasonably request in order to
enable such counsel to determine whether it would be able to render such option.
(iii) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2 (excluding underwriters' and brokers'
discounts and commissions), including without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees and fees
and disbursement of one counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company. Each Holder participating in a registration pursuant to this Section 2
shall bear such Holder's proportionate share (based on the total number of
shares sold in such registration other than for the account of the Company) of
all discounts, commissions or other amounts payable to underwriters or brokers
in connection with such offering.
3. Form S-3 Registration
In case the Company shall receive from the Holders of at least twenty-five
(25) percent of all outstanding Registrable Shares a written request or requests
that the Company effect a shelf registration on Form S-3 covering the resale of
the Registrable Shares and any related qualification or compliance with respect
to all or a part of the Registrable Shares owned by such Holders, then the
Company will:
(a) Notice. Promptly give written notice of the proposed registration and
the Holders' request therefor, and any related qualification or compliance, to
all other Holders of Registrable Shares; and
(b) Registration. as soon as practicable, use commercially reasonably
efforts to effect such registration and all such qualifications and compliances
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Holders'
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<PAGE> 6
Registrable Shares as are specified in such request, together with all or such
portion of the Registrable Shares of any other Holders joining in such request
as are specified in a written request given within twenty (20) days after
receipt of such written notice from the Company; provided, however, that the
Company shall not be obligated to effect any such registration, qualification
or compliance pursuant to this Section 3:
(1) if Form S-3 is not available for such offering by the
Holders;
(2) if the Holders, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose
to sell Registrable Shares and such other securities (if any) at an aggregate
price to the public of less than $2,500,000;
(3) if the Company shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be detrimental to the Company and its shareholders for such
Form S-3 registration to be effected at such time, then the Company shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 120 days after receipt of the request of the Holders
under this Section 4;
(4) if the Company has, within the twelve (12) month period
preceding the date of such request, effected two registrations on Form S-3 for
the Holders pursuant to this Section 3;
(5) if the Company has already effected three registrations
pursuant to Section this 3;
(6) in any particular jurisdiction in which the Company
would be required to qualify to do business as a foreign corporation or to
execute a general consent to service of process in effecting such registration,
qualification, or compliance, unless the Company is already subject to service
or required to be so qualified in such jurisdiction and except as may be
required by the Securities Act; or
(7) if within 14 days after its receipt of a written
request to effect such registration, the Company causes to be delivered to the
Holders an opinion of counsel reasonably acceptable to the Holders to the effect
that the proposed disposition of Registrable Shares by the Holders will not
require registration or qualification under the Securities Act; it being
specifically understood and agreed that the Holders will promptly furnish to the
Company and such counsel all information such counsel may reasonably request in
order to enable such counsel to determine whether it would be able to render
such opinion.
(c) Expenses. The Company shall pay all expenses incurred in
connection with each registration requested pursuant to this Section 3,
(excluding underwriters' or brokers' discounts and commissions), including
without limitation all filing, registration and qualification, printers' and
accounting fees and the fees and disbursements of counsel for the Company, and
the reasonable fees and disbursements of one counsel for the selling Holders.
6
<PAGE> 7
Securities Act; and comply with the provisions of the Securities Act applicable
to the Company with respect to such Registration Statement during the
applicable period;
(c) furnish to the Holder of Registrable Shares without charge as many
copies of each Prospectus, including each preliminary Prospectus, and any
amendment or supplement thereto and such other documents as such Holder may
reasonably request, in order to facilitate the public sale or other disposition
of the Registrable Shares; the Company consents to the use of any such
Prospectus, including each preliminary Prospectus, by the Holder of Registrable
Shares, if any, in connection with the offering and sale of the Registrable
Shares covered by any such Prospectus;
(d) use commercially reasonable efforts to register or qualify, or obtain
and for registration or qualification for, all Registrable Shares by the time
the applicable Registration Statement is declared effective by the Commission
under all applicable state securities or "blue sky" laws of such jurisdictions
as the Holder of Registrable Shares covered by a Registration Statement shall
reasonably request in writing, keep each such registration or qualification or
exemption effective during the period such Registration Statement is required
to be kept effective and do any and all other acts and things that may be
reasonably necessary or advisable to enable such Holder to consummate the
disposition in each such jurisdiction of such Registrable Shares owned by such
Holder; provided, however, that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction or to register as a broker
or dealer in such jurisdiction where it would not otherwise be required to
qualify but for this Section 5(d), (ii) subject itself to taxation in any such
jurisdiction, or (iii) submit to the general service of process in any such
jurisdiction; provided, further, that if the Company fails to list the
Registrable Shares on a national stock exchange or qualify for quotation on an
automatic quotation system at or prior to the time the Registration Statement is
declared effective by the Commission because it fails to meet requirements for
such listing or quotation regarding the number of holders, the obligation in
this Section 5(d) shall not require the Company to register or qualify the
Registrable Shares in any jurisdiction where the Company reasonably concludes,
based upon the advice of securities counsel, that such registration or
qualification would require unreasonable effort (including, without limitation,
amendments to the Company's charter or bylaws) or expense;
(e) notify the Holder of Registrable Shares promptly and, if requested
by such Holder, confirm such advice in writing (i) when a Registration
Statement has become effective and when any post-effective amendments and
supplements thereto become effective, (ii) of the issuance by the Commission or
any state securities authority of any stop order suspending the effectiveness of
a Registration Statement or the initiation of any proceedings for that purpose,
and (iii) of the happening of any event during the period a Registration
Statement is effective as a result of which such Registration Statement or the
related Prospectus contains any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (iv) at the request of any such Holder,
promptly to furnish to such Holder a reasonable number of copies of a
supplement to or an amendment of such Prospectus as may be necessary so that,
as thereafter delivered to the purchaser of such securities, such Prospectus
shall not include an untrue statement of a material
8
<PAGE> 8
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading;
(f) upon request by the Holder, furnish to the Holder of Registrable
Shares copies of any request by the Commission or any state securities
authority of amendments or supplements to a Registration Statement and
Prospectus or for additional information;
(g) make every reasonable effort to avoid the issuance of, or if issued
to obtain the withdrawal of, any enjoining order suspending the use or
effectiveness of a Registration Statement or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the Registrable
Shares for sale in any jurisdiction, at the earliest possible moment;
(h) upon the request furnish to the Holder of Registrable Shares,
without charge, at least one conformed copy of each Registration Statement and
any post-effective amendment thereto (without documents incorporated therein by
reference or exhibits thereto, unless requested);
(i) upon the occurrence of any event contemplated by Section 5(c)(iii)
hereof, use commercially reasonable efforts to prepare a supplement or
post-effective amendment to a Registration Statement or the related Prospectus
or any document incorporated therein by reference or file any other required
document so that, as thereafter delivered to the purchasers of the Registrable
Shares, such Prospectus will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading;
(j) If requested by the representative underwriters, if any, or any
Holders of Registrable Shares being sold in connection with such offering; (i)
promptly incorporate in a prospectus supplement or post-effective amendment
such information as the representative of the underwriters, if any, or such
Holders indicate relates to them or otherwise reasonably request be included
therein, and (ii) make all required filings of such prospectus supplement or
such post-effective amendment as soon as practicable after the Company
has received notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment; provided, however, that the Company
shall not be required to take any action pursuant to this Section 6 that would,
in the opinion of counsel for the Company, violate applicable law;
(k) make available to inspection by representatives of Holder of the
Registrable Shares and the representative of any underwriters participating in
any disposition pursuant to a Registration Statement and any special counsel or
accountant retained by such Holders or underwriters, all financial and other
records, pertinent corporate documents and properties of the Company and cause
the respective officers, directors and employees of the Company to supply all
information reasonably requested by any such representatives, the
representative of the underwriters, the special counsel or accountants in
connection with a Registration Statement; provided, however, that such records,
documents or information that the Company determines, in good faith, to be
confidential and notifies such representatives, representative of the
underwriters, special counsel or accountants are confidential shall not be
disclosed by the representatives, representative of the underwriters, special
counsel or accountants unless (i) the disclosure of such records, documents or
information is necessary to avoid or correct a misstatement or omission in
9
<PAGE> 9
a Registration Statement, (ii) the release of such records, documents or
information is ordered pursuant to a subpoena or other order from a court of
competent jurisdiction, or (iii) such records, documents or information have
been generally made available to the public;
(l) use commercially reasonable efforts (including, without limitations,
seeking to cure any deficiencies (within the Company's control) cited by the
exchange or market in the Company's listing application) to list all
Registrable Shares on the American Stock Exchange or The Nasdaq National Market
(or the Nasdaq Small Cap Market) if not qualified for the Nasdaq National
Market (unless the Company qualifies and chooses to list all Registrable Shares
on the New York Stock Exchange, in which event the Company shall use its best
efforts to list all Registrable Shares on the New York Stock Exchange);
(m) otherwise use commerically reasonable efforts to comply with all
applicable rules and regulations of the Commission and make generally available
to its securityholders, as soon as reasonably practicable, earnings statements
covering at least 12 months that satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 (or any similar rule promulgated under the
Securities Act) thereunder;
(n) provide and cause to be maintained a transfer agent for all
Registrable Shares covered by any Registration Statement from and after a date
not later than the effective date of such Registration Statement; and
(o) In connection with any sale or transfer of the Registrable Shares
that will result in such securities no longer being the Registrable Shares,
cooperate with the Holders and the representative of the underwriters, if any,
to facilitate the timely preparation and delivery of certificates representing
the Registrable Shares to be sold, which certificates shall not bear any
restrictive legends and to enable such Registrable Shares to be in such
denominations and registered in such names as the representative of the
underwriters, if any, or Holders may request at least two Business Days prior
to any sale of the Registrable Shares.
(p) The Company may require the Holder of Registrable Shares to furnish
to the Company such information regarding the proposed distribution by such
Holder of such Registrable Shares as the Company may from time to time
reasonably request in writing or as shall be required to effect the
registration of their Registrable Shares.
(q) The Holder agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 5(e)(iii)
hereof, such Holder will immediately discontinue disposition of Registrable
Shares pursuant to a Registration Statement until such Holder's receipt of the
copies of the supplemented or amended Prospectus. If so directed by the
Company, such Holder will deliver to the Company (at the expense of the
Company) all copies in its possession, other than permanent file copies then
in such Holder's possession, of the Prospectus covering such Registrable Shares
current at the time of receipt of such notice.
6. Black-Out Period. (a) Following the effectiveness of a Registration
Statement (and the filings with any state securities commissions), the Company
may direct the Holder to suspend
10
<PAGE> 10
sales of the Registrable Shares for such times as the Company reasonably may
determine is necessary and advisable, including the following events: (i) an
Underwritten Offering by the Company where the Company is advised by the
managing underwriter(s) for such Underwritten Offering that sale of Registrable
Shares under the Registration Statement would have a material adverse effect on
the offering, or (ii) pending negotiations relating to, or consummation of, a
transaction or the occurrence of an event (x) that would require additional
disclosure of material information by the Company in the Registration Statement
(or such filings), (y) as to which the Company has a boa fide business purpose
for preserving confidentiality, or (z) that renders the Company unable to comply
with Commission requirements, in each case under circumstances that would make
it impractical or inadvisable to cause the Registration Statement (or such
filings) to become effective or to promptly amend or supplement the Registration
Statement on a post-effective basis, as applicable.
(b) In the case of an event that causes the Company the suspend the
effectiveness of a Registration Statement (a "Suspension Event"), the Company
may give notice (a "Suspension Notice") to the Holders to suspend sales of the
Registrable Shares so that the Company may correct or update the Registration
Statement (or such filings); provided, however, that such suspension shall
continue only for so long as the Suspension Event or its effect is continuing.
No Holder shall effect any sales of the Registrable Shares pursuant to such
Registration Statement (or such filings) at any time after it has received a
Suspension Notice from the Company. If so directed by the Company, the Holders
will deliver to the Company all copies of the Prospectus covering the
Registrable Shares held by them at the time of receipt of the Suspension
Notice. The Holders may recommence effecting sales of the Registrable Shares
pursuant to the Registration Statement (or such filings) following further
notice to such effect (an "End of Suspension Notice") from the Company, which
End of Suspension Notice shall be given by the Company promptly following the
conclusion of any Suspension Event.
(c) Notwithstanding Section 2 hereof, if the Company shall give a
Suspension Notice pursuant to this Section 7, the Company agrees that it shall
extend the period during which the Registration Statement shall be maintained
effective pursuant to this Agreement by the number of days during the period
from the date of the giving of the Suspension Notice to and including the date
when the Holders shall have received the End of Suspension Notice and copies of
the supplemented or amended Prospectus necessary to resume sales.
7. Indemnification Contribution
(a) Indemnification of the Company. The Company agrees to indemnify
and hold harmless (i) the Purchaser, (ii) each Holder of the Registrable
Shares, (iii) each person, if any, who controls (within the meaning of the
Securities Act or the Exchange Act) any of the foregoing (any of the persons
referred to in this clause (iii) being hereinafter referred to as a
"controlling person"),and (iv) the respective officers, directors, partners,
employees, representatives and agents of the Purchaser, each Holder of the
Registrable Shares, or any controlling person thereof (any person referred to
in clause (i), (ii), (iii) or (iv) may hereinafter be referred to as an
"Indemnified Party"), as follows:
11
<PAGE> 11
(i) from and against any and all loss, claim, liability, damage
and expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement (or any amendment thereto) pursuant to which Registrable Shares were
registered under the Securities Act including all documents incorporated
therein by reference, or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading or
arising out of any untrue statement or alleged untrue statement of a material
fact contained in any Prospectus (or any amendment or supplement thereto),
including all documents incorporated therein by reference; provided, however,
that such indemnity with respect to any Prospectus shall not inure to the
benefit of the Holder (or any controlling person thereof) to the extent that
any such loss, claim, liability, damage or expense arises out of such Holder's
failure to send or give a copy of the final Prospectus, as the same may be then
supplemented or amended, to the person asserting an untrue statement or alleged
untrue statement or omission or alleged omission at or prior to the written
confirmation of the sale of Registrable Shares to such person if such statement
or omission was corrected in such final Prospectus.
(ii) from and against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate amount paid
in settlement of any litigation, or investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, if such settlement
is effected with the written consent of the Company (which consent shall not be
unreasonably withheld); and
(iii) from and against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of one counsel, except as
otherwise provided in Section 7(c) hereof), incurred in investigating,
preparing or defending against any litigation, or investigation or proceeding
by any governmental agency or body, commenced or threatened, in each case
whether or not a party, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (i) or (ii) above;
provided, however, that this indemnity agreement does not apply to the Holder
with respect to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with written information
furnished to the Company by such Holder expressly for use in a Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto).
(b) Indemnification by Holders. Each Holder severally agrees to
indemnify and hold harmless the Company, each of its directors and officers
(including each officer of the Company who signed the Registration Statement),
each person, if any, who controls the Company, within the meaning of the
Securities Act and the Exchange Act, any underwriter and any Holder selling
securities under such Registration Statement or any of such other Holder's
partners, directors or officers or any person who controls such Holder within
the meaning of the Securities Act or the
12
<PAGE> 12
Exchange Act, against any and all loss, liability, claim, damage and expenses
described in the indemnity contained in Section 7(a) hereof (provided, however,
that any settlement described in Section 7(a)(ii) hereof is effected with the
written consent of such Holder, which consent shall not be unreasonably
withheld), as incurred, but only with respect to such untrue statement or
omission, or alleged untrue statements or omissions, made in a Registration
Statement (or any amendment thereto) or any Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by the Holder expressly for use in such Registration
Statement (or any amendment thereto) or such Prospectus (or any amendment or
supplement thereto). If the Holder elects to include Registrable Shares in an
Underwritten Offering pursuant to Section 2, the Holder shall be required to
agree to such indemnification provisions as may be required by the underwriter
in connection with such Underwritten Offering.
(c) Conduct of Indemnification Proceedings. Each Indemnified Party
shall give reasonably prompt notice to each indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve it
from any liability that it may have under this indemnity agreement except to
the extent that the indemnifying party is actually prejudiced by such failure
to give notice. If the indemnifying party so elects within a reasonable time
after receipt of such notice, the indemnifying party may assume the defense of
such action or proceeding at such indemnifying party's own expense with counsel
chosen by the indemnifying party and approved by the Indemnified Party or
parties in such action or proceeding, which approval shall not be unreasonably
withheld; provided, however, that if such Indemnified Party or parties
reasonably determines that a conflict of interest exists where it is advisable
for such Indemnified Party or parties to be represented by separate counsel or
that, upon advice of counsel, there may be legal defenses available to them
that are different from or in addition to those available to the indemnifying
party, then the indemnifying party shall not be entitled to assume such defense
and the Indemnified Party or parties shall be entitled to one separate counsel
at the indemnifying party's expense. If an indemnifying party is not entitled
to assume the defense of such action or proceeding as a result of the proviso to
the preceding sentence, such indemnifying party's counsel shall be entitled
to conduct such indemnifying party's defense, and counsel for the Indemnified
Party or parties shall be entitled to conduct the defense of such Indemnified
Party or parties, it being understood that both such counsel will cooperate
with each other to conduct the defense of such action or proceeding as
efficiently as possible. If an indemnifying party is not so entitled to assume
the defense of such action or does not assume such defense, after having
received the notice referred to in the first sentence of this paragraph, the
indemnifying party or parties will pay the reasonable fees and expenses counsel
for the Indemnified Party or parties. In such event, however, no indemnifying
party will be liable for any settlement effected without the written consent of
such indemnifying party. No indemnifying party shall, without the consent of
the Indemnified Party, consent to entry of any judgment or enter into a
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. If an indemnifying party is
entitled to assume, and assumes, the defense of such action or proceeding in
accordance with this paragraph, such indemnifying party shall not be liable for
any fees and
13
<PAGE> 13
expenses for counsel for the Indemnified Parties incurred thereafter in
connection with such action or proceeding.
(d) Contribution. In order to provide for just and equitable contribution
in circumstances in which the indemnity agreement provided for in this Section 7
is for any reason held to be unenforceable, unavailable or insufficient
although applicable in accordance with it terms, the Company and Holder shall
contribute to the aggregate losses, liabilities, claims, damages and expenses
of the nature contemplated by such indemnity agreement incurred by the Company
and the Holder in such proportion so that the Holder is responsible for the
portion represented by the percentage that the public offering price of its
Registrable Shares offered by and sold under the Registration Statement bears
to the public offering of all securities offered by and sold under such
Registration Statement. Notwithstanding the foregoing, no person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 7,
each person, if any, who controls a Holder within the meaning of Section 15 of
the Securities Act shall have the same rights to contribution as such Holder,
and each director of the Company, each officer of the Company who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act shall have the same rights to
contribution as the Company. Each party entitled to contribution agrees that
upon the service of a summons or other initial legal process upon it in any
action instituted against it in respect of which contribution may be sought, it
shall promptly give written notice of such service to the party or parties from
whom contribution may be sought, but the omission so to notify such party or
parties of any such service shall not relieve the party from whom contribution
may be sought from any obligation it may have hereunder or otherwise.
(e) Survival. The obligations of the Company and the Holders under this
Section 7 shall survive the completion of any offering of Registrable Shares in
a Registration Statement and otherwise.
8. Termination of the Company's Obligations. The Company shall have no
obligations pursuant to this Agreement with respect to: (a) any request or
requests for registration made by any Holder on a date more than two (2) years
after the closing date of the Company's initial public offering; or (b) any
Registrable Shares proposed to be sold by a Holder in a registration pursuant
to this Agreement if, in the opinion of counsel to the Company, all such
Registrable Shares proposed to be sold by a Holder may be sold in a three-month
period without registration under the Securities Act pursuant to Rule 144 under
the Securities Act.
9. Miscellaneous
(a) Remedies. In the event of a breach by the Company, or by a Holder of
the Registrable Shares, of any of their obligations under this Agreement, each
Holder of the Registrable Shares of the Company, in addition to being entitled
to exercise all rights granted by law, including recovery and damages, will be
entitled to specific performance of its rights under this Agreement; provided,
however, that no holder shall have any right to obtain or seek an
14
<PAGE> 14
injunction restraining or otherwise delaying any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Agreement.
(b) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given, except if the written consent of the Holders of a majority in aggregate
principal amount of the then outstanding Registrable Shares is obtained;
provided, however, that for the purposes of this Agreement, Registrable Shares
that are owned, directly or indirectly, by either the Company or an Affiliate
of the Company are not deemed outstanding. Notwithstanding the foregoing, a
waiver or consent to depart from the provisions hereof with respect to a matter
that relates exclusively to the rights of Holders of the Registrable Shares
whose securities are being sold pursuant to a Registration Statement and that
does not directly or indirectly affect the rights of other Holders of the
Registrable Shares may be given by Holders of a majority of the Registrable
Shares being sold by such Holders pursuant to such Registration Statement;
provided, however, that the provisions of this sentence may not be amended,
modified, or supplemented except in accordance with the provisions of the
immediately preceding sentence.
(c) Notices. All notices and other communications provided for herein
shall be made in writing by hand-delivery, next-day air courier, certified
first-class mail, return receipt requested, telex or telecopy;
(i) if to the Company, to 3424 Peachtree Road, N.E., Suite 800,
Atlanta, Georgia 30326, ATTN: Samuel F. Hatcher, Secretary;
(ii) if to the Purchaser, to 1001 Nineteenth Street, North,
Arlington, VA 22209, ATTN: Eric F. Billings, Chief Executive Officer;
(iii) if to any person who is then the registered Holder of any
Registrable shares, to the address of such Holder as it appears in the Common
Stock register of the Company.
Except as otherwise provided in this Agreement, all such communications
shall be deemed to have been duly given (v) when delivered by hand, if
personally delivered, (w) one Business Day after being timely delivered to a
next-day air courier, (x) five Business Days after being deposited in the mail,
postage prepaid, if mailed (y) when answered back, if telexed, or (z) when
receipt is acknowledged by the recipient's telecopier machine, if telecopied.
(d) Successors and Assigns. Notwithstanding anything herein to the
contrary, the registration rights of a Holder under Sections 2 or 3 hereof may
be assigned only to a party who acquires at least 10,000 Common Shares;
provided, however, that no party may be assigned any of the foregoing rights
unless the Company is given written notice by the assigning party at the time of
such assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and provided, further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation the provisions of this Section 12(d).
15
<PAGE> 15
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same Agreement.
(f) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia, as applied to contracts
made and performed within the State of Georgia without regard to principles of
conflicts of law.
(g) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the
parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(h) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the terms of this
Agreement. All references made in this Agreement to "Section" refer to such
Section of this Agreement, unless expressly stated otherwise.
(i) Costs and Attorneys' Fees. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the prevailing party, as determined by the
court, shall be entitled to recover its reasonable costs and attorneys' fees in
addition to any other available remedy.
(j) Adjustment for Stock Splits, etc. Wherever in this Agreement there
is a reference to a specific number of shares, then upon the occurrence of any
subdivision, combination, or stock dividend of such shares, the specific number
of shares so referenced in this Agreement shall automatically be proportionally
adjusted to reflect the affect on the outstanding shares of such class or
series of stock by such subdivision, combination, or stock dividend.
(k) Aggregation of Stock. All shares held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
SIGNATURE PAGE FOLLOWS
16
<PAGE> 16
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of the date first written above.
THE COMPANY: CHASTAIN CAPITAL CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THE PURCHASER: FBR ASSET INVESTMENT CORPORATION
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
17
<PAGE> 1
EXHIBIT 10.4
CHASTAIN CAPITAL CORPORATION
1998 NON-INCENTIVE STOCK OPTION PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ss.1. PURPOSE..............................................................1
ss.2. DEFINITIONS..........................................................1
2.1. Board.......................................................1
2.2. Change in Control...........................................1
2.3. Chastain Capital............................................2
2.4. Code........................................................2
2.5. Committee...................................................2
2.6 Exchange Act................................................2
2.7. Fair Market Value...........................................2
2.8. Key Individual..............................................3
2.9. 1933 Act....................................................3
2.10. Manager.....................................................3
2.11. Option......................................................3
2.12. Option Certificate..........................................3
2.13. Option Price................................................3
2.14. Parent......................................................3
2.15. Plan........................................................3
2.16. Rule 16b-3..................................................3
2.17. Stock.......................................................3
2.18. Subsidiary..................................................3
ss. 3. SHARES SUBJECT TO OPTIONS............................................4
ss. 4. EFFECTIVE DATE.......................................................5
ss. 5. COMMITTEE............................................................5
ss. 6. ELIGIBILITY..........................................................6
ss. 7. GRANT OF OPTIONS.....................................................6
ss. 8. OPTION PRICE.........................................................7
ss. 9. EXERCISE PERIOD......................................................7
ss. 10. NONTRANSFERABILITY...................................................8
ss. 11. SECURITIES REGISTRATION AND RESTRICTIONS.............................8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
ss. 12. LIFE OF PLAN.........................................................9
ss. 13. ADJUSTMENT..........................................................10
ss. 14. CHANGE IN CONTROL...................................................11
ss. 15. AMENDMENT OR TERMINATION............................................11
ss. 16. MISCELLANEOUS.......................................................12
16.1. No "Incentive Stock Option" Treatment......................12
16.2. No Shareholder Rights......................................12
16.3. No Contract of Employment..................................12
16.4. Shareholder Agreement......................................12
16.5. Withholding................................................13
16.6. Loans......................................................13
16.7. Rule 16b-3.................................................13
16.8. Construction...............................................13
</TABLE>
ii
<PAGE> 4
SS. 1.
PURPOSE
The purpose of this Plan is to promote the interests of Chastain
Capital by authorizing the Committee to grant Options to purchase Stock to Key
Individuals in order (a) to attract and retain Key Individuals, (b) to provide
an additional incentive to each Key Individual to work to increase the value of
Stock and (c) to provide each Key Individual with a stake in the future of
Chastain Capital which corresponds to the stake of each of Chastain Capital's
shareholders. The Plan also provides for the grant of Options to the Manager.
SS. 2.
DEFINITIONS
Each term set forth in this ss. 2 shall have the meaning set forth
opposite such term for purposes of this Plan.
2.1. Board -- means the Board of Directors of Chastain Capital.
2.2. Change in Control -- means either (a) the acquisition of the
power to direct, or cause the direction of, the management and policies of
Chastain Capital by a person (not previously possessing such power), acting
alone or in conjunction with others, whether through the ownership of Stock, by
contract or otherwise, or (b) the acquisition, directly or indirectly, of the
power to vote 20% or more of the outstanding Stock by a person or persons (other
than a person possessing such power on the date this Plan becomes effective or
Chastain Capital or an employee benefit plan established and maintained by
Chastain Capital) unless (c) the Board before any such acquisition determines
that such acquisition will not constitute a Change in Control. For purposes of
this definition, (x) the term "person" means a natural person, corporation,
partnership, joint
<PAGE> 5
venture, trust, government or instrumentality of a government and (y) customary
agreements with or between underwriters and selling group members with respect
to a bona fide public offering of Stock shall be disregarded.
2.3. Chastain Capital -- means Chastain Capital Corporation, a
Georgia corporation, and any successor to such corporation.
2.4. Code -- means the Internal Revenue Code of 1986, as amended.
2.5. Committee -- means a committee of the Board that shall have at
least two members, each member of which shall be appointed by and shall serve at
the pleasure of the Board.
2.6. Exchange Act -- means the Securities Exchange Act of 1934, as
amended.
2.7. Fair Market Value -- means as of any date (a) the price that
the Committee acting in good faith determines through any reasonable valuation
method that a share of Stock might change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts; provided, however, if the
Stock is publicly traded on such date, "Fair Market Value" means (b) the closing
price on such date for a share of Stock as reported by The Wall Street Journal
under the quotation system under which such closing price is reported or, if The
Wall Street Journal does not report such closing price, such closing price as
reported by a newspaper or trade journal selected by the Committee or, if no
such closing price is available on such date, (c) such closing price as so
reported in accordance with ss. 2.6(b) for the immediately preceding business
day or, if no newspaper or trade journal reports such closing price or if no
such price quotation is available, (d) the price as determined in accordance
with ss. 2.6(a).
2
<PAGE> 6
2.8. Key Individual -- means an employee, officer, consultant or
member of the Board of Directors of Chastain Capital, the Manager or any Parent
or Subsidiary who, in the judgment of the Committee acting in its absolute
discretion, is a key to the success of Chastain Capital.
2.9. 1933 Act -- means the Securities Act of 1933, as amended.
2.10. Manager -- means ERE Yarmouth, Inc. and its successors.
2.11. Option -- means an option granted under this Plan to purchase
stock, which is not intended to be treated as an "incentive stock option" under
ss. 422 of the Code.
2.12. Option Certificate -- means the written agreement or
instrument that sets forth the terms and conditions of an Option granted to a
Key Individual or to the Manager, as the case may be, under this Plan.
2.13. Option Price -- means the price that shall be paid to purchase
one share of Stock upon the exercise of an Option granted under this Plan.
2.14. Parent -- means any corporation that is a parent corporation
(within the meaning of ss. 424(e) of the Code) of Chastain Capital or the
Manager.
2.15. Plan -- means this Chastain Capital 1998 Non-Incentive Stock
Option Plan as effective as of the date adopted by the Board and as amended from
time to time thereafter.
2.16. Rule 16b-3-- means the exemption under Section 16(b) of the
Exchange Act, or any successor to such rule.
2.17. Stock -- means the $.01 par value common stock of Chastain
Capital.
2.18. Subsidiary -- means any corporation that is a subsidiary
corporation (within the meaning of ss. 424(f) of the Code) of Chastain Capital
or the Manager.
3
<PAGE> 7
SS. 3.
SHARES SUBJECT TO OPTIONS
There shall be 2,500,000 shares of Stock reserved for issuance under
this Plan. Of such shares of Stock, Options to purchase 1,166,667 shares of
Stock (plus 10% of any shares of Stock purchased in Chastain Capital pursuant to
the underwriters' over-allotment option) shall be granted, in accordance with
ss. 7 of this Plan, to the Manager as of the closing date of Chastain Capital's
initial public offering. Subsequent to such grant, 80% of the remaining shares
of Stock reserved for issuance under this Plan will be reserved solely for the
grant of Options to the Manager and its officers, employees and affiliates or,
if necessary to prevent Manager from being obligated to disgorge short-swing
profits pursuant to Section 16(b) under the Exchange Act, to Key Individuals who
are employees, consultants or members of the Board of Directors of the Manager
or any Parent or Subsidiary of the Manager, and 20% of the remaining shares of
Stock reserved for issuance under this Plan will be reserved solely for the
grant of Options to Key Individuals who are employees, consultants or members of
the Board of Directors of Chastain Capital or any Parent or Subsidiary of
Chastain Capital.
The shares of Stock reserved pursuant to this ss. 3 shall be reserved
to the extent that the Board deems appropriate from authorized but unissued
shares of Stock and from shares of Stock that have been reacquired by Chastain
Capital. Any shares of Stock subject to an Option that remain unissued after the
cancellation, expiration or exchange of such Option for another Option shall
again become available for use under this Plan, but any shares of Stock used to
satisfy a withholding obligation under ss. 16.5 of this Plan shall not again be
available for use under this Plan.
4
<PAGE> 8
SS. 4.
EFFECTIVE DATE
The effective date of this Plan shall be the date of the closing of
Chastain Capital's initial public offering, provided that on or prior to that
date the Board has adopted this Plan, and further provided that Chastain
Capital's shareholders (acting at a duly called meeting of such shareholders)
approve the establishment of this Plan within 12 months after the date the Board
adopts this Plan. Any Option granted before such shareholder approval
automatically shall be granted subject to such approval.
SS. 5.
COMMITTEE
This Plan shall be administered by the Committee. The Committee, acting
in its absolute discretion, shall exercise such powers and take such action as
expressly called for under this Plan and, further, the Committee shall have the
power to interpret this Plan and to take such other action in the administration
and operation of this Plan as the Committee deems equitable under the
circumstances and not contrary to the terms of this Plan, which action shall be
binding on Chastain Capital, on the Manager, on each affected Key Individual and
on each other person directly or indirectly affected by such action.
5
<PAGE> 9
SS. 6.
ELIGIBILITY
Only Key Individuals and the Manager shall be eligible for the grant
of Options under this Plan.
SS. 7.
GRANT OF OPTIONS
The Manager shall be granted Options under this Plan to purchase
1,166,667 shares of Stock as of the closing date of Chastain Capital's initial
public offering. The Committee, acting in its absolute discretion subject to the
terms of this Plan, shall have the right to grant additional Options to the
Manager and to Key Individuals under this Plan from time to time to purchase
shares of Stock and, further, shall have the right to grant new Options in
exchange for the cancellation of outstanding Options which have a higher or
lower Option Price. Each grant of an Option shall be evidenced by an Option
Certificate, and each Option Certificate shall incorporate such terms and
conditions as the Committee, acting in its absolute discretion, deems consistent
with the terms of this Plan, including (without limitation) a limitation on the
number of shares subject to the Option that first become exercisable during any
particular period.
6
<PAGE> 10
SS. 8.
OPTION PRICE
The Option Price for each share of Stock subject to an Option shall be
no less than the Fair Market Value of a share of Stock on the date the Option is
granted. The Option Price shall be payable in full upon the exercise of any
Option, and an Option Certificate at the discretion of the Committee may provide
for the payment of the Option Price either by (i) cash or certified check, (ii)
in Stock held by the Key Individual for at least six months, (iii) cancellation
of indebtedness owed by the Company to the Key Individual, (iv) a full-recourse
promissory note, if approved by the Committee, (v) a "cashless" exercise
pursuant to a Sale through a broker of all or a portion of the Shares covered by
the Option or (vi) any combination of the foregoing. Any payment made in Stock
shall be treated as equal to the Fair Market Value of the Stock on the date the
properly endorsed certificate for the Stock is delivered to the Committee.
SS. 9.
EXERCISE PERIOD
Each Option granted under this Plan shall be exercisable in whole or in
part at such time or times as set forth in the related Option Certificate, but
no Option Certificate shall make an Option exercisable on or after the date that
is the tenth anniversary of the date the Option is granted. An Option
Certificate may provide for the exercise of an Option after the employment of a
Key Individual has terminated for any reason whatsoever, including death or
permanent and total disability.
7
<PAGE> 11
SS. 10.
NONTRANSFERABILITY
No Option shall be transferable by a Key Individual other than by will
or by the laws of descent and distribution, and any Option shall be exercisable
during a Key Individual's lifetime only by the Key Individual. The person or
persons to whom an Option is transferred by will or by the laws of descent and
distribution thereafter shall be treated as the Key Individual under this Plan.
An Option may be transferable by the Manager to employees, consultants
or members of the Board of Directors of the Manager or any Parent or Subsidiary
of the Manager, provided, however, that such transfer shall not become effective
until the Manager has provided written notice of such transfer to Chastain
Capital. The individual to whom an Option is transferred by the Manager
thereafter shall be treated as a Key Individual under this Plan.
SS. 11.
SECURITIES REGISTRATION AND RESTRICTIONS
Each Option Certificate shall provide that, upon the receipt of shares
of Stock as a result of the exercise of an Option, the Key Individual or the
Manager, as the case may be, shall, if so requested by Chastain Capital, agree
to hold such shares of Stock for investment and not with a view to resale or
distribution to the public and, if so requested by Chastain Capital, shall
deliver to Chastain Capital a written statement satisfactory to Chastain Capital
to that effect. Each Option Certificate also shall provide that, if so requested
by Chastain Capital, the Key Individual or the Manager, as the case may be,
shall make a written representation to Chastain Capital that he or she will not
sell or offer for sale any of such Stock unless a registration statement shall
be in effect with
8
<PAGE> 12
respect to such Stock under the 1933 Act and any applicable state securities law
or he or she shall have furnished to Chastain Capital an opinion in form and
substance satisfactory to Chastain Capital of legal counsel satisfactory to
Chastain Capital that such registration is not required. Certificates
representing the Stock transferred upon the exercise of an Option may, at the
discretion of Chastain Capital, bear a legend to the effect that such Stock has
not been registered under the 1933 Act or any applicable state securities law
and that such Stock cannot be sold or offered for sale in the absence of an
effective registration statement as to such Stock under the 1933 Act and any
applicable state securities law or an opinion in form and substance satisfactory
to Chastain Capital of legal counsel satisfactory to Chastain Capital that such
registration is not required.
SS. 12.
LIFE OF PLAN
No Option shall be granted under this Plan on or after the
earlier of
(a) the tenth anniversary of the effective date of this
Plan (as determined under ss. 4 of this Plan), at
which point this Plan shall continue in effect
thereafter until all outstanding Options have been
exercised in full or no longer are exercisable, or
(b) the date on which all of the Stock reserved under ss.
3 of this Plan has (as a result of the exercise of
Options) been issued or no longer is available for
use under this Plan, in which event this Plan also
shall terminate on such date.
9
<PAGE> 13
SS. 13.
ADJUSTMENT
The number, kind or class (or any combination thereof) of shares of
Stock reserved under ss. 3 of this Plan and the number, kind or class (or any
combination thereof) of shares of Stock subject to Options granted under this
Plan and the Option Price of such Options shall be adjusted by the Committee in
an equitable manner to reflect any change in the capitalization of Chastain
Capital, including, but not limited to, such changes as stock dividends or stock
splits. Furthermore, the Committee as part of any corporate transaction
described in ss. 424(a) of the Code shall have the right to adjust (in a manner
which the Committee in its discretion deems to satisfy the requirements of ss.
424(a) of the Code) the number, kind or class (or any combination thereof) of
shares of Stock reserved under ss. 3 of this Plan and the number, kind or class
(or any combination thereof) of shares subject to Options previously granted
under this Plan and the Option Price of such Options. In addition, the Committee
shall have the right (in a manner which the Committee in its discretion deems
satisfies the requirements of ss. 424(a) of the Code) to grant Options to effect
the assumption of, or substitution for, options previously granted by any other
corporation to the extent that such corporate transaction calls for such
substitution or assumption of such options. If any adjustment under this ss. 13
would create a fractional share of Stock or a right to acquire a fractional
share of Stock, such fractional share shall be disregarded and the number of
shares of Stock reserved under this Plan and the number subject to any Options
granted under this Plan shall be the next lower number of shares of Stock,
rounding all fractions downward. An adjustment made under this ss. 13 by the
Committee shall be conclusive and binding on all affected persons.
10
<PAGE> 14
SS. 14.
CHANGE IN CONTROL
If Chastain Capital agrees to sell all or substantially all of its
assets for cash or property or for a combination of cash and property or agrees
to any merger, consolidation, reorganization, division or other corporate
transaction in which Stock is converted into another security or into the right
to receive securities or property or there is an agreement with respect to a
Change in Control and such agreement does not provide for the assumption or
substitution of the Options granted under this Plan in accordance with ss. 13 of
this Plan on a basis that is fair and equitable to holders of such Options as
determined by the Board, the Board shall have the right to take such action, if
any, with respect to any or all then outstanding Options under this Plan as the
Board deems appropriate under the circumstances to protect the interest of
Chastain Capital in maintaining the integrity of such grants under this Plan,
including waiving any conditions to the exercise of such Options and canceling
such Options. The Board shall have the right to take different action under this
ss. 14 with respect to the Manager, different Key Individuals or different
groups of Key Individuals, as the Board deems appropriate under the
circumstances.
SS. 15.
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent
that the Board deems necessary or appropriate; provided, however, no such
amendment shall be made absent the proper approval of the shareholders of
Chastain Capital to comply with applicable provisions of the Code, state law or
NASD or exchange listing requirements which require such shareholder
11
<PAGE> 15
approval. The Board also may suspend the granting of Options under this Plan at
any time and may terminate this Plan at any time; provided, however, the Board
shall not have the right unilaterally to modify, amend or cancel any Option
granted before such suspension or termination unless (a) the Key Individual or
the Manager, as the case may be, consents in writing to such modification,
amendment or cancellation or (b) there is a dissolution or liquidation of
Chastain Capital or a transaction described in ss. 13 or ss. 14 of this Plan.
SS. 16.
MISCELLANEOUS
16.1. No "Incentive Stock Option" Treatment. No Option granted under
this Plan shall be treated as an "incentive stock option" within the meaning of
ss. 422 of the Code.
16.2. No Shareholder Rights. A Key Individual or the Manager shall
have no rights as a shareholder of Chastain Capital as a result of the grant of
an Option to the Key Individual or the Manager under this Plan or the exercise
of such Option pending the actual delivery of Stock subject to such Option to
the Key Individual or the Manager.
16.3. No Contract of Employment. The grant of an Option to a Key
Individual under this Plan shall not constitute a contract of employment and
shall not confer on a Key Individual any rights upon his or her termination of
employment in addition to those rights, if any, expressly set forth in the
Option Certificate which evidences his or her Option.
16.4. Shareholder Agreement. Chastain Capital shall have the right
to require a Key Individual or the Manager, as the case may be, to enter into
such shareholder, buy-sell or other
12
<PAGE> 16
agreement or agreements as Chastain Capital deems appropriate under the
circumstances as a condition to the exercise of any Option.
16.5. Withholding. Each Option grant shall be made subject to the
condition that a Key Individual consents to whatever action the Committee
directs to satisfy the federal and state tax withholding requirements, if any,
that the Committee in its discretion deems applicable to the exercise of such
Option. The Committee also shall have the right to provide in an Option
Certificate that a Key Individual may elect to satisfy federal and state tax
withholding requirements through a reduction in the number of shares of Stock
actually transferred to him or to her under this Plan.
16.6. Loans. If approved by the Committee, Chastain Capital may lend
money to, or guarantee loans by third parties to, any Key Individual to finance
the exercise of any Option granted under this Plan to him or her, and the
exercise of an Option with the proceeds of any such loan shall be treated as an
exercise for cash under this Plan. If approved by the Committee, Chastain
Capital also may, in accordance with a Key Individual's instructions, transfer
Stock upon the exercise of an Option directly to a third party in connection
with any arrangement made by the Key Individual for financing the exercise of
such Option.
16.7. Rule 16b-3. The Committee shall have the right to amend any
Option or to withhold or otherwise restrict the transfer of any Stock under this
Plan to a Key Individual as the Committee deems appropriate in order to satisfy
any condition or requirement under Rule 16b-3 to the extent Section 16(b) of the
Securities Exchange Act of 1934, as amended, might be applicable to such grant
or transfer.
16.8. Construction. All references to sections (ss.) are to sections
(ss.) of this Plan unless otherwise indicated. All references to the singular
shall include the plural, and all references
13
<PAGE> 17
to the plural shall include the singular. This Plan shall be construed under the
laws of the State of Georgia.
IN WITNESS WHEREOF, Chastain Capital Corporation has caused its duly
authorized officer to execute this Plan this ___ day of _______________, 1998 to
evidence its adoption of this Plan.
CHASTAIN CAPITAL CORPORATION
By:
-------------------------------------
Title:
----------------------------------
14
<PAGE> 1
EXHIBIT 10.5
CHASTAIN CAPITAL CORPORATION
1998 DIRECTORS STOCK INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ss.1 PURPOSE.............................................................1
ss.2 DEFINITIONS.........................................................1
2.1 Board......................................................1
2.2 Chastain Capital...........................................1
2.3 Code.......................................................1
2.4 Fair Market Value..........................................1
2.5 1933 Act...................................................2
2.6 Manager....................................................2
2.7 Outside Director...........................................2
2.8 Plan.......................................................2
2.9 Rule 16b-3.................................................2
2.10 Stock......................................................2
ss.3 AVAILABLE SHARES....................................................2
ss.4 EFFECTIVE DATE......................................................3
ss.5 ADMINISTRATION......................................................3
ss.6 ELIGIBILITY.........................................................3
ss.7 ISSUANCE OF STOCK...................................................4
7.1 Annual Issuance............................................4
7.2 Optional Issuance..........................................4
7.3 Insufficient Shares........................................5
ss.8 SECURITIES REGISTRATION AND RESTRICTIONS............................5
ss.9 LIFE OF PLAN........................................................6
ss.10 ADJUSTMENT..........................................................6
ss.11 AMENDMENT OR TERMINATION............................................7
ss.12 MISCELLANEOUS.......................................................7
12.1 No Shareholder Rights......................................7
12.2 Withholding................................................8
12.3 Rule 16b-3.................................................8
12.4 Construction...............................................8
</TABLE>
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<PAGE> 3
SS. 1
PURPOSE
The purpose of this Plan is to promote the interests of Chastain
Capital by providing for the annual issuance of Stock to Outside Directors in
lieu of cash fees, in order (a) to attract and retain Outside Directors, (b) to
provide an additional incentive to each Outside Director to work to increase the
value of Stock, and (c) to provide each Outside Director with a stake in the
future of Chastain Capital that corresponds to the stake of each of Chastain
Capital's shareholders.
SS. 2
DEFINITIONS
Each term set forth in this ss. 2 shall have the meaning set forth
opposite such term for purposes of this Plan.
2.1 Board -- means the Board of Directors of Chastain Capital.
2.2 Chastain Capital -- means Chastain Capital Corporation, a
Georgia corporation, and any successor to such corporation.
2.3 Code -- means the Internal Revenue Code of 1986, as amended.
2.4 Fair Market Value -- means as of any date (a) the price that
the Board acting in good faith determines through any reasonable valuation
method that a share of Stock might change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and both
having reasonable knowledge of the relevant facts; provided, however, if the
Stock is publicly traded, "Fair Market Value" means (b) the average of the
closing price for a share of Stock for the 10 immediately preceding business
days as reported
<PAGE> 4
by The Wall Street Journal under the quotation system under which such closing
price is reported or, if The Wall Street Journal no longer reports such closing
prices, the average of such closing prices as reported by a newspaper or trade
journal selected by the Board or, if no newspaper or trade journal reports such
closing prices or if no such price quotation is available, (c) the price as
determined in accordance with ss. 2.4(a).
2.5 1933 Act -- means the Securities Act of 1933, as amended.
2.6 Manager -- means ERE Yarmouth, Inc., its successors or assigns
or any entity that is serving as the manager of Chastain Capital.
2.7 Outside Director -- means a member of the Board who is not an
officer or employee of Chastain Capital or the Manager.
2.8 Plan -- means this Chastain Capital Corporation 1998 Directors
Stock Incentive Plan as effective as of the date adopted by the Board and as
amended from time to time thereafter.
2.9 Rule 16b-3 -- means the exemption under Section 16(b) of the
Securities Exchange Act of 1934, as amended, or any successor to such rule.
2.10 Stock -- means the $.01 par value common stock of Chastain
Capital.
SS. 3
AVAILABLE SHARES
There shall be 25,000 shares of Stock reserved for issuance under this
Plan. Such shares of Stock shall be reserved to the extent that Chastain Capital
deems appropriate from
-2-
<PAGE> 5
authorized but unissued shares of Stock and from shares of Stock that have been
reacquired by Chastain Capital.
SS. 4
EFFECTIVE DATE
The effective date of this Plan shall be the date the Board adopts this
Plan.
SS. 5
ADMINISTRATION
This Plan shall be administered by the Board. The Board, acting in its
absolute discretion, shall exercise such powers and take such action as
expressly called for under this Plan and, further, the Board shall have the
power to interpret this Plan and to take such other action in the administration
and operation of this Plan as the Board deems equitable under the circumstances
and not contrary to the terms of this Plan, which action shall be binding on
Chastain Capital, on each affected Outside Director and on each other person
directly or indirectly affected by such action.
SS. 6
ELIGIBILITY
Only Outside Directors shall be eligible for the issuance of Stock
under this Plan.
-3-
<PAGE> 6
SS. 7
ISSUANCE OF STOCK
7.1 Annual Issuance. Each Outside Director serving as such as of
the closing date of Chastain Capital's initial public offering automatically
shall receive (without any further action on the part of the Board), as
compensation for serving as such, the number of shares of Stock determined by
dividing $15,000 by the Fair Market Value of a share of Stock as of such date,
rounding down to the nearest whole share of Stock. Such shares shall be issued
to each Outside Director as of the closing date of the initial public offering.
Thereafter, each Outside Director serving as such as of the date of the annual
meeting of the Board (following the annual meeting of the shareholders)
automatically shall receive (without any further action on the part of the
Board), as compensation for serving as such, the number of shares of Stock
determined by dividing $15,000 by the Fair Market Value of a share of Stock as
of such date, rounding down to the nearest whole share of Stock. Such shares
shall be issued to each Outside Director as of the date of the annual meeting of
the Board.
7.2 Optional Issuance. Any Outside Director may, in his or her
sole discretion, receive shares of Stock under this Plan in lieu of the balance
of such Outside Director's annual fee. Any Outside Director requesting stock in
lieu of such fees shall provide written notice to Chastain Capital at least 30
days in advance of the annual meeting of the Board on which such fees are to be
paid. The number of shares of Stock to be issued shall be determined by dividing
the balance of such fees by the Fair Market Value of a share of Stock as of such
date, rounding down to the nearest whole share of Stock.
-4-
<PAGE> 7
7.3 Insufficient Shares. If the number of shares of Stock
available under this Plan is insufficient as of any date to issue the Stock
called for under ss. 7.1, Chastain Capital shall issue Stock under ss. 7.1 to
each eligible Outside Director based on a fraction of the then available shares
of Stock, the numerator of which fraction shall equal the number of shares of
Stock that otherwise was to be issuable as of such date to the Outside Director
under ss. 7.1 and the denominator of which shall equal the total number of
shares of Stock that otherwise was to be issuable as of such date to all
eligible Outside Directors under ss. 7.1.
SS. 8
SECURITIES REGISTRATION AND RESTRICTIONS
Upon the receipt of shares of Stock issued under this Plan, an Outside
Director shall, if so requested by Chastain Capital, agree to hold such shares
of Stock for investment and not with a view to resale or distribution to the
public and, if so requested by Chastain Capital, shall deliver to Chastain
Capital a written statement satisfactory to Chastain Capital to that effect. In
addition, if so requested by Chastain Capital, the Outside Director shall make a
written representation to Chastain Capital that he or she will not sell or offer
for sale any of such Stock unless a registration statement shall be in effect
with respect to such Stock under the 1933 Act and any applicable state
securities law or he or she shall have furnished to Chastain Capital an opinion
in form and substance satisfactory to Chastain Capital of legal counsel
satisfactory to Chastain Capital that such registration is not required.
Certificates representing the Stock issued under this Plan may, at the
discretion of Chastain Capital, bear a legend to the effect that such Stock has
not been registered under the 1933 Act or any applicable state securities law
and that
-5-
<PAGE> 8
such Stock cannot be sold or offered for sale in the absence of an effective
registration statement as to such Stock under the 1933 Act and any applicable
state securities law or an opinion in form and substance satisfactory to
Chastain Capital of legal counsel satisfactory to Chastain Capital that such
registration is not required.
SS. 9
LIFE OF PLAN
No Stock shall be issued under this Plan on or after the earlier of (a)
the tenth anniversary of the effective date of this Plan (as determined under
ss. 4 of this Plan), or (b) the date on which all of the Stock reserved under
ss. 3 of this Plan has been issued or no longer is available for use under this
Plan, in which event this Plan also shall terminate on such date.
SS. 10
ADJUSTMENT
The number, kind or class (or any combination thereof) of shares of
Stock reserved under ss. 3 of this Plan shall be adjusted by the Board in an
equitable manner to reflect any change in the capitalization of Chastain
Capital, including, but not limited to, such changes as stock dividends or stock
splits. Furthermore, the Board as part of any corporate transaction described in
ss. 424(a) of the Code shall have the right to adjust (in a manner which the
Board in its discretion deems to satisfy the requirements of ss. 424(a) of the
Code) the number, kind or class (or any combination thereof) of shares of Stock
reserved under ss. 3 of this Plan. If any adjustment under this ss. 10 would
create a fractional share of Stock or a right to acquire a
-6-
<PAGE> 9
fractional share of Stock, such fractional share shall be disregarded and the
number of shares of Stock reserved under this Plan shall be the next lower
number of shares of Stock, rounding all fractions downward. An adjustment made
under this ss. 10 by the Board shall be conclusive and binding on all affected
persons.
SS. 11
AMENDMENT OR TERMINATION
This Plan may be amended by the Board from time to time to the extent
that the Board deems necessary or appropriate; provided, however, no such
amendment shall be made absent the proper approval of the shareholders of
Chastain Capital to comply with applicable provisions of the Code, state law or
Nasdaq Stock Market or exchange listing requirements, which require such
shareholder approval, if any. The Board also may suspend the issuance of Stock
under this Plan at any time and may terminate this Plan at any time.
SS. 12
MISCELLANEOUS
12.1 No Shareholder Rights. An Outside Director shall have no
rights as a shareholder in connection with an issuance of Stock contemplated
hereunder (a) unless the Outside Director serves as such as of the applicable
issuance date, and (b) until such Stock is delivered to such Outside Director.
-7-
<PAGE> 10
12.2 Withholding. Each issuance of Stock shall be made subject to
the condition that the Outside Director consents to whatever action the Board
directs to satisfy the federal and state tax withholding requirements, if any,
that the Board in its discretion deems applicable to the issuance of such Stock.
12.3 Rule 16b-3. The Board shall have the right to withhold or
otherwise restrict the transfer of any Stock under this Plan to an Outside
Director as the Board deems appropriate in order to satisfy any condition or
requirement under Rule 16b-3 to the extent Section 16(b) of the Securities
Exchange Act of 1934, as amended, might be applicable to such transfer.
12.4 Construction. All references to sections (ss.) are to sections
(ss.) of this Plan unless otherwise indicated. All references to the singular
shall include the plural, and all references to the plural shall include the
singular. This Plan shall be construed under the laws of the State of Georgia.
IN WITNESS WHEREOF, Chastain Capital Corporation has caused its duly
authorized officer to execute this Plan this ______ day of _______________, 1998
to evidence its adoption of this Plan.
CHASTAIN CAPITAL CORPORATION
By:
-------------------------------------
Title:
----------------------------------
-8-
<PAGE> 1
EXHIBIT 10.6
AGREEMENT
OF LIMITED PARTNERSHIP
OF
CHASTAIN INVESTMENTS, L.P.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Article 1. Partnership............................................................................1
1.1 Formation; Partnership Interest...............................................1
1.2 Name..........................................................................1
1.3 Number of Partners...........................................................2
Article 2. Definitions............................................................................2
Article 3. Capitalization.........................................................................5
3.1 Initial Capital Contributions.................................................5
3.2 Issuance and Conversion of Units..............................................5
3.3 Additional Funds..............................................................8
3.4 Capital Accounts..............................................................9
3.5 Interest on and Return of Capital.............................................9
3.6 Negative Capital Accounts.....................................................9
3.7 Limitation on Contributions and Obligations of Partners.......................9
Article 4. Principal Office......................................................................10
Article 5. Purpose and Powers of Partnership.....................................................10
5.1 Purposes.....................................................................10
5.2 Powers.......................................................................10
Article 6. Term..................................................................................10
Article 7. Allocations of Profits and Losses.....................................................10
Article 8. Cash Available for Distribution.......................................................10
8.1 Cash Flow....................................................................10
8.2 Consent to Allocations and Distributions.....................................11
8.3 Right to Limit Distributions.................................................11
Article 9. Management of Partnership.............................................................11
9.1 General Partner..............................................................11
9.2 Limitations on Power and Authority of Partners...............................13
9.3 Limited Partners.............................................................14
9.4 Liability of General Partner.................................................14
9.5 Indemnity....................................................................14
9.6 Other Activities of Partners and Agreements with Related Parties.............15
9.7 Other Matters Concerning the General Partner.................................15
9.8 Partner Exculpation..........................................................16
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
9.9 General Partner Expenses and Liabilities.....................................17
Article 10. Banking...............................................................................17
Article 11. Accounting............................................................................17
11.1 Fiscal Year..................................................................17
11.2 Books of Account.............................................................18
11.3 Method of Accounting.........................................................18
11.4 Tax Matters Partner..........................................................18
Article 12. Transfers of Partnership Interests....................................................18
12.1 General Partner..............................................................18
12.2 Limited Partner..............................................................18
12.3 Admission Adjustments........................................................20
Article 13. Admission of New Partners.............................................................20
Article 14. Termination, Liquidation and Dissolution of Partnership...............................20
14.1 Termination Events...........................................................20
14.2 Method of Liquidation........................................................21
14.3 Date of Termination..........................................................21
14.4 Reconstitution Upon Bankruptcy...............................................21
14.5 Death, Legal Incompetency, Etc. of a Limited Partner.........................22
Article 15. Power of Attorney.....................................................................22
Article 16. Amendment of Agreement................................................................23
Article 17. Miscellaneous.........................................................................24
17.1 Notices......................................................................24
17.2 Modifications................................................................24
17.3 Successors and Assigns.......................................................24
17.4 Duplicate Originals......................................................... 25
17.5 Construction.................................................................25
17.6 Governing Law................................................................25
17.7 Other Instruments............................................................25
17.8 General Partner with Interest as Limited Partner.............................25
17.9 Legal Construction...........................................................25
17.10 Gender...................................................................... 25
17.11 Prior Agreements Superseded..................................................25
17.12 No Third Party Beneficiary...................................................25
17.13 Purchase for Investment......................................................25
17.14 Waiver.......................................................................26
</TABLE>
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<TABLE>
<S> <C> <C>
17.15 Time of Essence..............................................................26
17.16 Counterparts.................................................................26
</TABLE>
Schedule A - Partners, Capital Accounts and Partnership Interests
iii
<PAGE> 5
AGREEMENT OF LIMITED PARTNERSHIP
OF
CHASTAIN INVESTMENTS, L.P.
THIS AGREEMENT OF LIMITED PARTNERSHIP (this "Agreement") made and
entered into effective as of ____ day of _______, 199_, by and among CHASTAIN GP
HOLDINGS, INC. (the "General Partner"), a Georgia corporation, as the General
Partner, and those Persons whose names are set forth in Schedule A as attached
hereto, as the Limited Partners (the "Limited Partners"), including CHASTAIN LP
HOLDINGS, INC. (the "Initial Limited Partner"), a Georgia corporation, together
with any other Persons who become Partners in the Partnership as provided herein
(the General Partner and each Limited Partner being a "Partner" and
collectively, the "Partners"). CHASTAIN CAPITAL CORPORATION ("Chastain" or the
"Company"), a Georgia corporation, owns all of the stock of the General Partner
and the Initial Limited Partner but is not a Partner in the Partnership.
W I T N E S S E T H:
WHEREAS, the parties hereto desire to form a limited partnership (the
"Partnership") under the provisions of the Georgia Revised Limited Partnership
Act (the "Act") for the purposes hereinafter described; and
WHEREAS, the parties hereto desire to set forth herein their respective
rights, duties and responsibilities with respect to such limited partnership;
NOW THEREFORE, in consideration of the premises, and of the mutual
promises, obligations and agreements contained herein, the parties hereto,
intending to be legally bound, do hereby agree as follows:
Article 1. Partnership.
1.1 Formation; Partnership Interest. The General Partner
and the Initial Limited Partner hereby form the Partnership as a Georgia limited
partnership according to all of the terms and provisions of this Agreement and
otherwise in accordance with the Act. The General Partner is the sole general
partner and the Initial Limited Partner is the sole limited partner of the
Partnership; however, it is contemplated that additional Limited Partners shall
become Partners in the Partnership as provided herein in the future. No Partner
has any interest in any Partnership property and the interest of all Partners in
the Partnership are, for all purposes, personal property.
1.2 Name. The Partnership name shall be "Chastain
Investments, L.P.," but the General Partner may from time to time change the
name of the Partnership or may adopt such trade or fictitious names as it may
determine.
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1.3 Number of Partners. Unless the General Partner
determines in good faith that the Partnership will not be classified as a
"publicly traded partnership" for Federal income tax purposes, the Partnership
shall not at any time have more than 100 Partners (including as Partners those
persons indirectly owning an interest in the Partnership through a partnership,
limited liability company, S corporation or grantor trust (a "Flow Through
Entity"), but only if substantially all of the value of such person's interest
in the Flow Through Entity is attributable to the Flow Through Entity's interest
(direct or indirect) in the Partnership).
Article 2. Definitions.
2.1 As used in this Agreement, the following terms shall
have the meanings set forth respectively after each:
"Act" shall mean the Georgia Revised Uniform Limited Partnership Act
(Official Code of Georgia Annotated, Sections 14-9-100 et seq.), as amended from
time to time, and any successor statute. References to specific Sections of the
Act refer to the corresponding Sections of the Official Code of Georgia
Annotated.
"Agreement" shall mean this Agreement of Limited Partnership, as it may
be amended from time to time.
"Articles of Incorporation" shall mean the Articles of Incorporation of
Chastain filed in the State of Georgia on December 16, 1997, as amended or
restated from time to time.
"Bankruptcy" of a Partner shall mean (a) the filing by a Partner of a
voluntary petition seeking liquidation, reorganization, arrangement or
readjustment, in any form, of its debts under Title 11 of the United States Code
(or corresponding provisions of future laws) or any other Federal or state
insolvency law, or a Partner's filing an answer consenting to or acquiescing in
any such petition, (b) the making by a Partner of any assignment for the benefit
of its creditors or the admission by a Partner in writing of its inability to
pay its debts as they mature, or (c) the expiration of sixty (60) days after the
filing of any involuntary petition under Title 11 of the United States Code (or
corresponding provisions of future laws), seeking liquidation, reorganization,
arrangement or readjustment of its debts under any other Federal or state
insolvency law, provided that the same shall not have been vacated, set aside or
stayed within such 60-day period.
"Bylaws" shall mean the Bylaws of Chastain, dated December 16, 1997, as
amended or restated from time to time.
"Capital Account" shall mean the capital account maintained by the
Partnership for each Partner as described in Section 3.4 below. The Capital
Account balance of each Partner who is a Partner as of the effective date of
this Agreement shall be set forth opposite such Partner's name on Schedule A
hereto. The General Partner shall maintain the information set forth in Schedule
A hereto, as such information shall change from time to time, in such form as
the General Partner
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<PAGE> 7
deems appropriate for the conduct of the Partnership's affairs, and Schedule A
shall be deemed amended from time to time to reflect the information so
maintained by the General Partner, whether or not a formal amendment to this
Agreement has been executed amending such Schedule A. Such information shall
reflect (and Schedule A shall be deemed amended from time to time to reflect)
the issuance of any additional Units to the General Partner or any other Person,
the transfer of Units and the redemption of any Units, all as contemplated
herein.
"Capital Contribution" shall mean, when used in respect of a Partner,
if applicable, the initial capital contribution of such Partner as set forth in
Section 3.1 below, and any other amounts of money or the fair market value of
other property contributed by such Partner to the capital of the Partnership
with respect to the Partner's interest in the Partnership, including the Capital
Contribution made by any predecessor holder of the Partnership Interest of such
Partner.
"Chastain" shall mean Chastain Capital Corporation, a Georgia
corporation, sometimes referred to in this Agreement as the "Company".
"Chastain Partners" shall mean the General Partner (so long as the
General Partner is Chastain GP Holdings, Inc.) and the Initial Limited Partner.
References to a "Chastain Partner" shall be to either of the Chastain Partners.
"Code" shall mean the Internal Revenue Code of 1986, as the same may be
amended from time to time, and any successor statute. Any reference herein to a
specific Section or Sections of the Code shall be deemed to include a reference
to any corresponding provision of future law.
"Common Share" shall have the meaning provided in Section 3.2(A).
"Company" means Chastain Capital Corporation, a Georgia corporation.
"Exchange Date" shall have the meaning provided in Section 3.2(D).
"Exchange Notice" shall have the meaning provided in Section 3.2(C).
"Exchanging LP" shall have the meaning provided in Section 3.2(D).
"Flow Through Entity" shall have the meaning provided in Section 1.3
above.
"General Partner" means Chastain GP Holdings, Inc., a Georgia
corporation, or its successors as general partner of the Partnership.
"Fiscal Year" shall have the meaning provided in Section 11.1.
"Initial Limited Partner" shall mean Chastain LP Holdings, Inc., a
Georgia corporation.
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"IRS" shall have the meaning provided in Section 11.6.
"Limited Partner" shall mean any Person (i) named as a Limited Partner
in Schedule A attached hereto, as such Schedule may be amended from time to time
or who has become a Limited Partner pursuant to the terms and conditions of this
Agreement, and (ii) who holds a partnership interest, in such Person's capacity
as a Limited Partner in the Partnership. "Limited Partners" means all such
persons.
"Majority-in-Interest of the Limited Partners" shall mean, as of any
given time, Limited Partners who own more than fifty percent (50%) of the
Percentage Interests in the Partnership held by Limited Partners.
"Market Price" shall have the mean the value of a Common Share as
determined by the General Partner in its sole discretion.
"Partners" shall mean, collectively, the General Partner and the
Limited Partners, or any additional or successor partners of the Partnership
admitted to the Partnership in accordance with the terms of this Agreement.
References to a "Partner" shall be to any one of the Partners.
"Partnership" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor thereto.
"Partnership Interest" shall mean the ownership interest of a Partner
in the Partnership at any particular time, including the right of such Partner
to any and all benefits to which such Partner may be entitled as provided in
this Agreement, and to the extent not inconsistent with this Agreement, under
the Act, together with the obligations of such Partner to comply with all of the
terms and provisions of this Agreement and the Act.
"Percentage Interest" shall mean, as to each Partner, the quotient
(expressed as a percentage) arrived at by dividing the number of Units held by
that Partner, by the total number of Units issued and outstanding at the time.
The respective Percentage Interest of the Partners as of the date of this
Agreement are set forth in Schedule A attached to this Agreement.
"Person" means any individual, partnership, corporation, trust,
unincorporated organization, association, limited liability company or other
entity.
"Profits" and "Losses" shall mean for each fiscal year or portion
thereof, an amount equal to the Partnership's items of taxable income or loss
for such year or period, determined in accordance with Section 703(a) of the
Code with the following adjustments:
(i) any income which is exempt from Federal
income tax and not otherwise taken into account in computing
net Profits or net Losses shall be added to taxable income or
loss;
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<PAGE> 9
(ii) any expenditures of the Partnership
described in Code Section 705(a)(2)(B) or treated as Section
705(a)(2)(B) expenditures under Regulations Section
1.704-1(b)(2)(iv)(i) and not otherwise taken into account in
computing Profits or Losses, will be subtracted from taxable
income or loss;
"Record Date" shall have the meaning provided in Section 9.1(K).
"Regulations" shall mean the Income Tax Regulations, including
Temporary Regulations, promulgated under the Code, as such regulations may be
amended from time to time (including corresponding provisions of succeeding
regulations).
"Rights" shall have the meaning provided in Section 3.2(D).
"TMP" shall have the meaning provided in Section 11.4.
"Transfer" shall have the meaning provided in Section 12.2(A).
"Transferee" shall have the meaning provided in Section 12.2(B).
"Transferor" shall have the meaning provided in clause (iii) of Section
12.2(B).
"Units" shall have the meaning provided in Section 3.2(A).
Article 3. Capitalization.
3.1 Initial Capital Contributions. As of the effective
date hereof, the Partners have made contributions of cash to the Partnership,
and the amount of such cash contributions are reflected in the Capital Account
balance of each such Partner as set forth opposite such Partner's name on the
attached Schedule A.
3.2 Issuance and Conversion of Units.
A. The interest of a Partner in the Partnership is
referred to as being evidenced by one or more Units. A "Unit" is a unit
of Partnership Interest that, as more particularly provided for below
in Section 3.2(C), may be converted into either cash or one (1) common
share of beneficial interest in the Company (a "Common Share"). The
aggregate total of all Units outstanding as of the date of this
Agreement is [_________]. As of the date of this Agreement, each
Partner is deemed to hold Units as shown on Schedule A.
B. From time to time hereafter, subject to and in
accordance with the provisions of this Section 3.2(B), the General
Partner may (but shall not be obligated to) cause the Partnership to
issue additional Units in exchange for a Capital Contribution (which
may
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<PAGE> 10
consist of either cash or property). The number of Units to be issued
in such case shall be determined by the General Partner in its sole
discretion.
C. Subject to the further provisions of this Section
3.2(C), the General Partner hereby grants to each Limited Partner
(other than the Initial Limited Partner) holding Units the right to
request an exchange of any or all of its Units for Common Shares, with
one Unit being exchangeable for one Common Share; provided, however,
any such exchange shall only be made with regard to whole Units.
(i) Such right may be exercised by a Limited
Partner at any time after the date specified in writing by the
General Partner as being applicable to the Units which are the
subject of such exchange at the time of issuance if such
Units, upon not less than ten (10) days' prior written notice
to the General Partner (the "Exchange Notice").
(ii) Upon receipt of such Exchange Notice, the
General Partner may, in its discretion, in lieu of exchanging
Units for Common Shares, cause the Partnership to pay to such
Limited Partner cash in an amount equal to the product arrived
at by multiplying (a) the number of Units requested to be
exchanged by such Limited Partner by (b) the Market Price,
with such payment to be made within ten (10) days of the
General Partner's receipt of the Limited Partner's Exchange
Notice as aforesaid.
(iii) In the event that the issuance of Common
Shares to the Exchanging LP would (a) result in any person
(other than Lend Lease Corporation Limited, a corporation
organized and existing under the laws of the State of New
South Wales, Australia and its subsidiaries and affiliates, so
long as Lend Lease Corporation Limited is publicly held)
owning, directly or indirectly, Common Shares in excess of
9.8% of the total number of Common Shares then outstanding;
(b) result in Common Shares being owned by fewer than 100
Persons (determined without reference to any rules of
attribution); (c) result in the Company being "closely held"
within the meaning of Section 856(h) of the Code; or (d) cause
the acquisition of Common Shares by the Exchanging LP to be
"integrated" with any other distribution of Common Shares for
purposes of complying with Federal or state securities laws;
then the General Partner must elect to make a cash payment.
(iv) If the General Partner does not elect to
make a cash payment it shall be obligated to exchange the
surrendered Units for Common Shares as provided above.
(v) The Company shall at all times reserve and
keep available out of its authorized but unissued Common
Shares, solely for the purpose of allowing the
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<PAGE> 11
General Partner to effect the exchange of Units for Common
Shares, such number of Common Shares as shall from time to
time be sufficient to effect the conversion of all outstanding
Units not owned by the Chastain Partners.
(vi) No Limited Partner shall, by virtue of being
the holder of one or more Units be deemed to be a shareholder
of or have any other interest in the Company.
(vii) In the event of any change in the
outstanding Common Shares of the Company or its successor by
reason of any share dividend, split, recapitalization, merger,
consolidation, combination, exchange of shares or other
similar corporate change other than the issuance of Rights, as
further described in Section 3.2(D) (a "Recapitalization"),
the number of Units held by each Partner shall be adjusted
upward or downward to equal such number of Common Shares of
the Company (or as applicable, the Common Shares or equivalent
class of securities of the successor thereto) as would have
been held by the Partner immediately following the
Recapitalization if such Partner had converted such Units
immediately prior to such Recapitalization.
(viii) The General Partner may assume the
Partnership's obligation to exchange Units for Common Shares.
In the event the General Partner assumes this obligation and
acquires Units in exchange for Common Shares, the General
Partner shall record the transfer on the books of the
Partnership so that the General Partner is thereupon the owner
and holder of such Units.
(ix) Notwithstanding the foregoing provisions of
this Section 3.2(C), a Limited Partner shall not have the
right to exchange Units for Common Shares if (a) the Company
would, as a result thereof, no longer qualify, or it would be
likely that the Company no longer would qualify, as a "real
estate investment trust" under the Code; or (b) such exchange
would constitute or be likely to constitute a violation of
applicable Federal or state securities laws or would violate
any applicable provisions of the organizational documents of
the General Partner or the Company (including, without
limitation, any restrictions on ownership of securities of the
Company set forth in the Articles of Incorporation or Bylaws
of the Company). In either such event, to the extent the
consequences described in (a) or (b) could be eliminated by
reasonable action of the Company without any material
detriment to the Company and at the expense of such Limited
Partner(s) requesting such exchange, the General Partner shall
take all such reasonable action to effect the exchange of
Units for Common Shares by such Limited Partner(s) as herein
provided.
D. In the event that a Limited Partner (the "Exchanging
LP") exercises its right to exchange any or all of its Units for Common
Shares under Section 3.2(C), and the General Partner does not elect to
make the cash payment to the Exchanging LP referenced in clauses
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<PAGE> 12
(ii) and (iii) of such Section 3.2(C), and in the event that the
Company issues to all of its holders of Common Shares as of a certain
record date rights, options, warrants or convertible or exchangeable
securities entitling such shareholders to subscribe for or purchase
Common Shares or any other securities or property (collectively,
"Rights"), with the record date for such Rights issuance falling within
the period starting on the date that the General Partner receives the
Exchange Notice from the Exchanging LP and ending on the date
immediately preceding the date upon which the General Partner delivers
the Common Shares to the Exchanging LP in exchange for such Exchanging
LP's Units (the date upon which such exchange occurs being referred to
herein as the "Exchange Date"), which Rights shall not be distributed
before the Exchange Date, then the amount payable by the General
Partner to the Exchanging LP in exchange for its Units under Section
3.2(C) shall also include the Rights the Exchanging LP would have
received if it had been the owner of the Common Shares to be delivered
by the General Partner to the Exchanging LP prior to the record date
for the issuance of the Rights (as the same may be expressed for any
purpose hereunder in a number of Units or Common Shares as determined
by the General Partner in good faith).
3.3 Additional Funds.
A. No Partner shall be assessed or, except as otherwise
provided in this Agreement, required to contribute additional funds or
other property to the Partnership. Any additional funds or other
property required by the Partnership, as determined by the General
Partner in its sole discretion, may, at the option of the General
Partner and without an obligation to do so, be contributed by the
General Partner or any other Partner (provided such other Partner is
willing to do so and the General Partner consents thereto, each in its
sole and absolute discretion) as additional Capital Contributions. If,
and as, the General Partner or any other Partner makes additional
Capital Contributions to the Partnership, each such Partner shall
receive additional Units as provided for in Section 3.2(B) above. The
General Partner shall also have the right (but not the obligation) to
raise any additional funds required for the Partnership in accordance
with the provisions of Section 9.7(E) below and/or by causing the
Partnership to borrow the necessary funds from third parties on such
terms and conditions as the General Partner shall deem appropriate in
its sole discretion. If the General Partner elects to cause the
Partnership to borrow the additional funds, or if the Partnership
issues a guaranty, indemnity or similar undertaking in connection with
the indebtedness of the General Partner or Company as aforesaid, in any
such case one or more of the Partnership's assets may be encumbered to
secure the loan or undertaking. No Limited Partner shall have the right
to make additional Capital Contributions to the Partnership without the
prior written consent of the General Partner.
B. The Company shall have the option, but not the
obligation, to transfer, by loan or capital contribution, to one or
both of the Chastain Partners an amount equal to all or a portion of
the net proceeds of any and all funds raised by or through the Company
through the issuance of Common Shares or other securities to, in turn,
be contributed by the Chastain
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<PAGE> 13
Partners to the Partnership as additional Capital Contributions; and,
in such event, the Chastain Partners shall be issued additional Units
pursuant to Section 3.2(B) above.
3.4 Capital Accounts. A separate capital account
("Capital Account") shall be maintained for each Partner.
A. To each Partner's Capital Account there shall be
added such Partner's Capital Contributions and such Partner's
distributive share of Profits.
B. From each Partner's Capital Account there shall be
subtracted the amount of cash and the value (as determined by the
General Partner in its sole discretion) of any Partnership property
distributed to such Partner pursuant to any provision of this
Agreement, and such Partner's distributive share of Losses.
C. In the event all or a portion of a Partnership
Interest is transferred in accordance with the terms of this Agreement
(including a transfer of Units in exchange for Common Shares, pursuant
to Section 3.2(C)), the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred
Partnership Interest.
3.5 Interest on and Return of Capital.
A. No Partner shall be entitled to any interest on its
Capital Account or on its Capital Contributions to the Partnership.
B. Except as expressly provided for in this Agreement,
no Partner shall have the right to demand or to receive the return of
all or any part of its Capital Contributions to the Partnership and
there shall be no priority of one Partner over the other as to the
return of Capital Contributions or withdrawals or distributions of
Profits and Losses. No Partner shall have the right to demand or
receive property other than cash in return for the Capital
Contributions of such Partner to the Partnership.
3.6 Negative Capital Accounts. Subject to the provisions
of any guarantee or other written agreement between a Partner and the
Partnership, no Partner shall be required to pay to the Partnership any deficit
or negative balance which may exist in its Capital Account.
3.7 Limitation on Contributions and Obligations of
Partners. Except as provided in Sections 3.1, 3.2 and 3.3 (or the provisions of
any guarantee or other written agreement between a Partner and the Partnership),
no Partner shall be required to make any additional advances or contributions to
or on behalf of the Partnership or to endorse any obligations of the
Partnership.
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<PAGE> 14
Article 4. Principal Office. The principal office of the
Partnership shall be located at 3424 Peachtree Road, N.E. Suite 800, Atlanta,
Georgia 30326, or at such other place as the General Partner may designate after
giving written notice of such designation to the other Partners.
Article 5. Purpose and Powers of Partnership.
5.1 Purposes. The purposes of the Partnership shall be
any purpose that may be legally conducted by a limited partnership organized
pursuant to the Act, consistent with (a) satisfaction by the Company of the
requirements for being classified as a "real estate investment trust" under the
Code, unless the Company provides notice to the Partnership that it intends to
cease or has ceased to qualify as a "real estate investment trust," (b)
avoidance of any federal income tax or excise tax liability imposed by the Code
or Regulations, and (c) ensuring the Partnership shall not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the Code, unless
the General Partner has determined that avoidance of such classification is no
longer prudent. The purposes of the Partnership include, but are not limited to,
the discharge of the role and function of Partnership as described in that
certain Form S-11 Registration Statement No. 333-42629 under the Securities Act
of 1933, as amended, filed February , 1998 on behalf of Chastain Capital
Corporation.
5.2 Powers. The Partnership is empowered to do any and
all acts and things necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the purposes described
herein and for the protection and benefit of the Partnership; provided, however,
that the Partnership shall not take, or refrain from taking, any action which,
in the judgment of the General Partner, (a) could adversely affect the ability
of the Company to continue to qualify as a "real estate investment trust" under
the Code, unless the Company provides notice to the Partnership that it intends
to cease or has ceased to qualify as a "real estate investment trust," (b) could
subject the Company to any additional taxes under Section 857 or Section 4981 of
the Code, (c) could result in the Partnership classification as a "publicly
traded partnership" for purposes under the Code, unless the General Partner has
determined that avoidance of such classification is no longer prudent, or (d)
could violate any law or regulation of any governmental body or agency having
jurisdiction over the Partnership, the Company or their securities, unless such
action (or inaction) shall have been specifically consented to by the General
Partner in writing.
Article 6. Term. The term of the Partnership shall continue
until the Partnership is terminated upon the occurrence of an event described in
Section 14.1 below.
Article 7. Allocation of Profits and Losses. Profits and Losses
for any fiscal year shall be allocated among the Partners in proportion to their
respective Percentage Interests.
Article 8. Cash Available for Distribution.
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<PAGE> 15
8.1 Cash Flow. As used in this Agreement, "Cash Flow"
shall mean and be defined as all cash receipts of the Partnership from whatever
source (but excluding the proceeds of any Capital Contributions to the
Partnership) during the period in question in excess of all items of Partnership
expense (other than non-cash expenses such as depreciation) and other cash needs
of the Partnership, including, without limitation, amounts paid by the
Partnership as principal on debts and advances, during such period, capital
expenditures and any reserves (as determined by the General Partner) established
or increased during such period. In the discretion of the General Partner,
reserves may include cash held for future acquisitions. Cash Flow shall be
distributed to or for the benefit of the Partners of record as of the applicable
Record Date not less frequently than quarterly and shall be distributed pro rata
in proportion to their respective Percentage Interests.
8.2 Consent to Allocations and Distributions. Each of the
Partners hereby consents to the allocations and distributions provided for in
this Agreement.
8.3 Right to Limit Distributions. The right of any
Partner to receive distributions of any nature pursuant to the terms of this
Agreement shall be subject to the terms of any agreement between such Partner
and the Partnership limiting, restricting or providing rights of set-off with
respect to such distributions.
Article 9. Management of Partnership.
9.1 General Partner. The General Partner shall be the
sole manager of the Partnership business, and shall have the right and power to
make all decisions and take any and every action with respect to the property,
business and affairs of the Partnership and shall have all the rights, power and
authority generally conferred by law, or necessary, advisable or consistent with
accomplishing the purposes of the Partnership. The General Partner shall have
full, exclusive and complete responsibility and discretion in the management and
control of the Partnership. All decisions or actions made or taken by the
General Partner hereunder shall be binding upon all of the Partners and the
Partnership. The powers of the General Partner to manage the Partnership
business shall include, without limitation, the power and authority to, directly
or indirectly:
A. Effect any of the purposes of the Partnership.
B. Perform any and all acts necessary or appropriate to
the operation of the Partnership's assets, including, but not limited
to, preparing, negotiating, executing and delivering leases and rental
agreements with regard to real and personal property owned by the
Partnership, preparing applications for rezoning, preparing objections
to rezoning of other property and establishing bank accounts in the
name of the Partnership.
C. Improve, renovate and/or perform construction
activities with regard to the properties owned by the Partnership and
to retain such contractors, subcontractors and other persons or
entities as may be required in connection with such activities.
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D. Procure and maintain such insurance as may be
available in such amounts and covering such risks as are deemed
appropriate by the General Partner.
E. Take and hold all real, personal and mixed property
of the Partnership in the name of the Partnership or in the name of a
nominee.
F. Negotiate, execute and deliver agreements on behalf
of and in the name of the Partnership.
G. Borrow money (whether on a secured or unsecured
basis), finance and refinance the assets of the Partnership or any part
thereof or interest therein, and in connection therewith, issue notes,
bonds, securities and other undertakings and evidences of indebtedness
and documents related thereto (including, without limitation, guaranty,
indemnities and similar undertakings to support loans obtained or debt
securities issued by the Company).
H. Coordinate all legal, accounting and clerical
functions of the Partnership and of the Company as such functions of
the Company relate to the Partnership and employ such accountants,
lawyers, property managers, leasing agents and other management or
service personnel as may from time to time be required to carry on the
business of the Partnership and the business of the Company as such
business relates to the Partnership.
I. Acquire or commit to acquire any assets; encumber,
sell, assign, transfer, ground lease or otherwise dispose of any or all
of the assets of the Partnership, or any part thereof or interest
therein and maintain and administer the portfolio of assets.
J. Organize one or more partnerships, corporations,
limited liability companies or other business entities which are
controlled, directly or indirectly, by the Partnership and make any
capital contributions (in cash or in kind) required pursuant to the
organizational documents or subscription agreements relating to any
such partnerships, corporations, limited liability companies or other
business entities.
K. Establish the date (the "Record Date") for the
purpose of making any proper determination in connection with, but not
limited to, the following matters: (i) which Partners are entitled to
receive distributions, (ii) consent to any matter for which the consent
of Partners is permitted or required under any provision hereof, or
(iii) otherwise when Partners are allocated rights hereunder.
L. Serve as consultant with respect to formulation of
investment criteria and preparation of policy guidelines by the Board
of Directors of the Company as such criteria and guidelines relate to
the Partnership.
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M. To the extent not otherwise subject to an agreement
executed by the Company, monitor and provide, on an ongoing basis,
price information and other data obtained from certain nationally
recognized dealers that maintain markets in assets identified by the
Board of Directors of the Company from time to time, and provide data
and advice to the Board of Directors of the Company in connection with
the identification of such dealers.
N. Provide executive and administrative personnel with
office space and office services required in rendering services to the
Company as such services relate to the Partnership.
O. Communicate on behalf of the Company with the holders
of any equity or debt securities of the Company as required to satisfy
the reporting and other requirements of any governmental bodies or
agencies or trading markets and to maintain effective relations with
such holders.
P. Prepare on behalf of the Company all reports that are
required to be filed with the Securities and Exchange Commission as
such reports relate to the Partnership.
Q. Counsel the Company in connection with policy
decisions to be made by the Board of Directors as such decisions relate
to the Partnership.
R. Cooperate in the timely preparation and filing of all
federal, state and local income tax, real estate tax and information
returns for the Company and payment of any taxes thereunder due on
behalf of Company to the extent such taxes relate to the existence and
operation of the Partnership and, to the extent the Company deems to be
appropriate, liaison with tax consultants and legal counsel regarding
all tax planning and structuring matters for the Company as such
matters relate to the Partnership and perform all administrative work
in paying taxes owed, and, where appropriate, seeking refunds of taxes
paid, as applicable.
S. Operate any business normal or customary for the
owner or investor of assets of the type held by the Partnership.
9.2 Limitations on Power and Authority of Partners.
Notwithstanding the powers of the General Partner set forth in Section 9.1
above, the General Partner shall not have the right or power to do any of the
following unless any such action is approved by the minimum percentage of the
Limited Partners required under the Act:
(a) Any act in contravention of this Agreement,
or any amendment hereto.
(b) Dissolve the Partnership, except that an
action which may lead to dissolution of the Partnership shall be
permitted without the consent of the minimum
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percentage of Limited Partners required under the Act, if it is
otherwise permitted to be taken hereunder without such consent of the
Limited Partners.
(c) Cause the Partnership to merge into another
entity if the Partnership is not the surviving entity.
(d) Excluding transactions permitted hereunder,
sell, exchange, transfer, or otherwise dispose of all or substantially
all of the assets of the Partnership in a single transaction or a
series of related transactions (including by way of merger,
consolidation, or other combination with any other Person); being
understood, however, that a sale of any or all of the assets of the
Partnership, including, without limitation, sales resulting in the
liquidation of the partnership, may be an ordinary part of the
Partnership's business and affairs as specifically permitted herein.
9.3 Limited Partners. The Limited Partners shall have no
right or authority in their capacity as Limited Partners to act for or to bind
the Partnership and no Limited Partner shall participate in, transact, conduct
or control the Partnership's management activities, decisions, affairs or
business except as required by applicable law.
9.4 Liability of General Partner. The General Partner
shall not be liable or accountable, in damages or otherwise, to the Partnership
or to any other Partner for any error of judgment or for any mistakes of fact or
law or for anything which it may do or refrain from doing hereafter in
connection with the business and affairs of the Partnership except (i) in the
case of fraud, willful misconduct (such as an intentional breach of fiduciary
duty or an intentional breach of this Agreement) or gross negligence, and (ii)
for other breaches of this Agreement, but the liability of the General Partner
under this clause (ii) shall be limited to its interest in the Partnership as
more particularly provided for in Section 9.8. The General Partner shall not
have any personal liability for the return of any Limited Partner's Capital
Contributions.
9.5 Indemnity. The Partnership shall indemnify and shall
hold the General Partner (and the officers and directors thereof) harmless from
any liability, loss, cost or damage, including, without limitation, reasonable
legal fees and court costs incurred by it by reason of anything it may do or
refrain from doing hereafter for and on behalf of the Partnership or in
connection with its business or affairs; provided, however, that the Partnership
shall not be required to indemnify the General Partner (or any officer or
director thereof) for any liability, loss, cost or damage which it might incur
as a result of its fraud, willful misconduct or gross negligence in the
performance of its duties hereunder. In addition, the Company shall be entitled
to reimbursement from the Partnership for any amounts paid by it in satisfaction
of indemnification obligations owed by the Company to present or former
officers, managers or directors of the Company or its predecessors, as provided
for in or pursuant to the Articles of Incorporation and Bylaws of the Company.
The right of indemnification set forth in this Section 9.5 shall be in addition
to any rights to which the person or entity seeking indemnification may
otherwise be entitled and shall inure to the benefit of the successors and
assigns of any such person or entity. No Partner shall be personally
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liable with respect to any claim for indemnification pursuant to this Section
9.5, but such claim shall be satisfied solely out of assets of the Partnership.
9.6 Other Activities of Partners and Agreements with
Related Parties. Nothing contained in this Agreement shall prevent or prohibit
the General Partner or any employee, officer, director, agent, shareholder or
affiliate of the General Partner from entering into, engaging in or conducting
any other activity or performing for a fee any service including (without
limiting the generality of the foregoing) engaging in any business dealing with
real property of any type or location, including, without limitation, property
of a type similar to those properties owned by the Partnership, its subsidiaries
or any other Person in which the Partnership has equity investment; acting as a
director, officer or employee of any corporation, as a trustee of any trust, as
a general partner of any partnership, or as an administrative official of any
other business entity; or receiving compensation for services to, or
participating in profits derived from, the investments of any such corporation,
trust, partnership or other entity, regardless of whether such activities are
competitive, directly or indirectly, with the Partnership. Nothing herein shall
require the General Partner or any employee, agent, shareholder or affiliate
thereof to offer any interest in such activities or any particular opportunity
to the Partnership or any Partner, and the partnership relationship established
hereby in or to such other activities or to the income or proceeds derived
therefrom. The pursuit of such activities, even if competitive with the business
of the Partnership (including, without limitation, causing tenants to transfer
from one of the Partnership's properties to other properties in which the
General Partner has an interest, directly or indirectly, without compensation to
the Partnership, or taking other actions for the benefit of the General Partner
or affiliates of the General Partner that are detrimental to the Partnership),
shall not be deemed wrongful or improper. Except as may otherwise be agreed to
in writing, the Company, each Limited Partner and all of their respective
affiliates, shall be free to engage in, to conduct or to participate in any
business or activity whatsoever, including, without limitation, the acquisition,
development, management and exploitation of real and personal property (other
than property of the Partnership), without any accountability, liability or
obligation whatsoever to the Partnership or to any other Partner, even if such
business or activity competes with or is enhanced by the business of the
Partnership. The General Partner, in the exercise of its power and authority
under this Agreement, may contract and otherwise deal with or otherwise obligate
the Partnership to entities in which the General Partner or the Company or any
one or more of the managers, officers, directors or shareholders of the General
Partner or the Company, as applicable, may have an ownership or other financial
interest, whether direct or indirect.
9.7 Other Matters Concerning the General Partner.
A. The General Partner shall be protected in relying,
acting or refraining from acting on any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture or other paper or document believed by it to be
genuine and to have been executed or presented by the proper party or
parties.
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B. The General Partner may exercise any of the powers
granted or perform any of the duties imposed by this Agreement either
directly or through agents. The General Partner may consult with
counsel, accountants, appraisers, management consultants, investment
bankers and other consultants selected by it, each of whom may serve as
consultants for the Partnership. An opinion by any consultant on a
matter which the General Partner believes to be within its professional
or expert competence shall be full and complete protection as to any
action taken or omitted by the General Partner based on the opinion and
actions taken or omitted in good faith. The General Partner shall not
be responsible for the misconduct, negligence, acts or omissions of any
consultant or contractor of the Partnership or of the General Partner,
and shall assume no obligation other than to use due care in the
selection of all consultants and contractors.
C. No mortgagee, grantee, creditor or any other person
dealing with the Partnership shall be required to investigate the
authority of the General Partner or secure the approval of or
confirmation by any Limited Partner of any act of the General Partner
in connection with the conduct of the Partnership business.
D. The General Partner may retain such persons or
entities as it shall determine (including the General Partner or any
entity in which the General Partner shall have an interest or with
which it is affiliated) to provide services to or on behalf of the
Partnership. The General Partner shall be entitled to reimbursement
from the Partnership for its out-of-pocket expenses (including, without
limitation, amounts paid or payable to the General Partner or any
entity in which the General Partner shall have an interest or with
which it is affiliated) incurred in connection with Partnership
business. Such expenses shall be deemed to include without limitation
those expenses required in connection with the administration of the
Partnership such as the maintenance of Partnership books and records,
management of the Partnership property and assets and preparation of
information respecting the Partnership needed by the Partners in the
preparation of their individual tax returns.
E. The General Partner may loan to the Partnership the
net proceeds of loans obtained or debt securities issued by the Company
so long as the terms of such loan to the Partnership are substantially
equivalent to the corresponding loan obtained or debt securities issued
by the Company. The General Partner may also loan to the Partnership
the net proceeds of loans obtained by the General Partner so long as
the terms of such loan to the Partnership are substantially equivalent
to the corresponding loan obtained by the General Partner.
9.8 Partner Exculpation. Except for fraud, willful
misconduct and gross negligence, no Partner shall have any personal liability
whatever, whether to the Partnership or to any other Partner, for the debts or
liabilities of the Partnership or its obligations hereunder, and the full
recourse of any Partner shall be limited to the interest of that Partner in the
Partnership. To the fullest extent permitted by law, no manager, officer,
director or shareholder of the General Partner shall be liable to the
Partnership for money damages except for (i) active and deliberate dishonesty
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established by a final judgment; or (ii) actual receipt of an improper benefit
or profit in money, property or services. Without limitation of the foregoing,
and except for fraud, willful misconduct and gross negligence, no property or
assets of any Partner, other than its interest in the Partnership, shall be
subject to levy, execution or other enforcement procedures for the satisfaction
of any judgment (or other judicial process) in favor of any other Partners and
arising out of or in connection with this Agreement. This Agreement is executed
by the managers, members, officers or partners of each Partner solely as
managers, members, officers or partners of the same and not in their own
individual capacities. No advisor, manager, member, director, officer, partner,
employee, beneficiary, shareholder, participant or agent of any Partner (or of
any partner of a Partner) shall be personally liable in any matter or to any
extent under or in connection with this Agreement, and the Partnership, each
Partner and their respective successors and assigns shall look solely to the
interest of the other Partners in the Partnership for the payment of any claim
or for any performance hereunder.
9.9 Responsibility for Ownership, Operation,
Organizational and Unit Issuance Expense. The Partnership shall be responsible
for expenses relating to the Partnership's ownership and operation of its assets
or for the benefit of the Partnership and shall reimburse the General Partner or
the Company, as applicable, on a monthly basis, or such other basis as the
General Partner may determine in its sole and absolute discretion, for all
expenses incurred relating to the Partnership's ownership and operation of its
assets or for the benefit of the Partnership; provided, that the amount of any
such reimbursement shall be reduced by any interest earned by it as required by
Article 10. Such reimbursements shall be in addition to any reimbursement to the
General Partner as a result of indemnification pursuant to Section 9.5. The
General Partner shall determine in good faith the amount of expenses incurred by
it relating to the operation of, or that inure to the benefit of, the
Partnership. In the event that certain expenses are incurred for the benefit of
the Partnership and other Persons (including the General Partner or the
Company), such expenses will be allocated to the Partnership and such other
Persons in such a manner as the General Partner deems fair and reasonable. The
Partnership shall be responsible for and shall pay all expenses incurred
relating to the organization of the Partnership. In the event that certain
expenses relating to the organization of the General Partner and the Company are
incurred for the benefit of the Partnership, such expenses will be allocated to
the Partnership in such a manner as the General Partner deems fair and
reasonable. The General Partner and the Company shall be reimbursed for all
expenses either incurs relating to any issuance of Units pursuant to Section
3.2.
Article 10. Banking. The funds of the Partnership shall be kept
in accounts designated by the General Partner and all withdrawals therefrom
shall be made on such signature or signatures as shall be designated by the
General Partner.
Article 11. Accounting.
11.1 Fiscal Year. The fiscal year and taxable year of the
Partnership (the "Fiscal Year") shall end on the last day of December of each
year, unless another fiscal year end in selected by the General Partner.
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11.2 Books of Account. The Partnership books of account
shall be maintained at the principal office designated in Article 4 or at such
other locations and by such person or persons as may be designated by the
General Partner. The Partnership shall pay the expense of maintaining its books
of account. Each Partner shall have, during reasonable business hours and upon
reasonable prior notice, access to the books of the Partnership and in addition,
at its expense, shall have the right to copy such books. The General Partner, at
the expense of the Partnership, shall cause to be prepared and distributed to
the Partners annual financial data sufficient to reflect the status and
operations of the Partnership and its assets and to enable each Partner to file
its federal income tax return.
11.3 Method of Accounting. The Partnership books of
account shall be maintained and kept, and its income, gains, losses and
deductions shall be accounted for, in accordance with sound principles of
accounting consistently applied, or such other method of accounting as may be
adopted hereafter by the General Partner. All elections and options available to
the Partnership for Federal or state income tax purposes shall be taken or
rejected by the Partnership in the sole discretion of the General Partner.
11.4 Tax Matters Partner. The General Partner is hereby
designated the Tax Matters Partner (hereinafter referred to as the "TMP") of the
Partnership and shall have all rights and obligations of the TMP under the Code.
As TMP, the General Partner shall have the authority to handle tax audits and to
make tax elections under the Code on behalf of the Partnership.
Article 12. Transfers of Partnership Interests.
12.1 General Partner. The General Partner may not
voluntarily withdraw from the Partnership or transfer its interest in the
Partnership unless the transaction pursuant to which such withdrawal or transfer
occurs results in the receipt by the Limited Partners of Common Shares or cash
in an amount equal to the amount such Partners would have received had they
exercised the right to request an exchange of their Units for Common Shares
pursuant to Section 3.2(C) hereto immediately prior to such transaction.
12.2 Limited Partner.
A. Any Limited Partner or substituted Limited Partner
may not, without the prior written consent of the General Partner
(which consent may be given or withheld in the sole discretion of the
General Partner), sell, assign, distribute or otherwise transfer (a
"Transfer") all or any part of his interest in the Partnership, except
by (i) operation of law, testamentary disposition, gift (outright or in
trust) or by sale, in each case to or for the benefit of his parent(s),
spouse or descendants; (ii) pledges or other collateral transfers
effected by a Limited Partner to secure the repayment of a loan or
other obligation, provided however, that each such pledgee shall agree
in writing, concurrent with such pledge or other collateral transfer,
to (a) subordinate its rights with respect to the pledged interest to
any and all rights granted by the pledging Limited Partner to the
Partnership, whether or not such rights
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constitute perfected security interests in favor of the Partnership,
including, without limitation, any rights to withhold, restrict or
offset distributions in respect of such pledged interest under the
terms of any agreement between the Partnership and the pledging Limited
Partner, and (b) to defer the exercise of its rights as a secured
creditor to realize upon the collateral in the case of an event of
default until the expiration of any applicable "lock-up" period under
the terms of any agreement between the Partnership and the pledging
Limited Partner; (iii) the exchange of Units for shares of beneficial
interest of the Company, pursuant to Section 3.2(C) above; and (iv) the
distribution of Units by a Limited Partner to any of its direct or
indirect constituent partners or owners. Notwithstanding the foregoing,
each such transfer shall be subject to compliance with restrictions on
transferability contained in the Articles of Incorporation and Bylaws
of the Company and/or any applicable agreement executed by the
transferor as well as compliance with applicable Federal and state
securities laws. The General Partner reserves the right to require an
opinion of counsel regarding such matters in form and substance
reasonably acceptable to the General Partner as a condition to any such
Transfer. The conversion of a Unit into a Common Share shall not
constitute a Transfer. A Limited Partner shall notify the General
Partner of any Transfer of beneficial interest or other interest which
occurs without a transfer of record ownership, as well as any pledge or
other collateral transfer. No part of the interest of a Limited Partner
shall be subject to the claims of any creditor, any spouse for alimony
or support or legal process, and may not be voluntarily or
involuntarily alienated or encumbered except as may be specifically
provided for in this Agreement. A Limited Partner shall not be
permitted to retire or withdraw from the Partnership except as
expressly permitted by this Agreement.
B. An assignee, legatee, distributee or other transferee
(whether by conveyance, operation of law or otherwise), including any
pledgee upon realization of its rights as a secured creditor, (a
"Transferee") of all or any portion of a Limited Partner's interest in
the Partnership shall be entitled to receive Profits, Losses and
distributions hereunder attributable to such interest acquired by
reason of such Transfer, from and after the effective date of the
Transfer of such interest; provided, however, anything in this
Agreement to the contrary notwithstanding, (i) no Transfer by a Limited
Partner shall be effective until such Transfer has been consented to by
the General Partner; (ii) without the prior written consent of the
General Partner, no Transferee shall be considered a substituted
Limited Partner except as provided in Section 12.2(A)(i) and (iv) and,
in any event, until such Transferee shall have agreed to be bound by
the terms of this Agreement and shall have executed a counterpart
hereof; (iii) the Partnership and the General Partner shall be entitled
to treat the Limited Partner making such a Transfer (the "Transferor")
of such interest as the absolute owner thereof in all respects, and
shall incur no liability for the allocation of Profits and Losses or
distributions which are made to such Transferor until such time as the
written instrument of transfer has been received by the General Partner
and the "effective date" of the Transfer has passed; and (iv) the
General Partner shall have the right to require any such Transferor to
exchange the Units to which such interest relates for Common Shares or
cash, pursuant to Section 3.2(C) above. The "effective date" of any
transfer shall be the last day of the month
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set forth on the written instrument of transfer or such other date
consented to in writing by the General Partner as the "effective date."
C. Notwithstanding anything to the contrary contained in
this Section 12.2, (i) in the event that a Limited Partner pursuant to
the dissolution and liquidation of such Limited Partner distributes all
or any portion of its interest in the Partnership, the partners,
shareholders or members (as the case may be) in such Limited Partner
receiving such interest shall become substituted Limited Partners, and
shall (upon agreeing to be bound by the terms of this Agreement)
succeed to the rights, interests and obligations of such Limited
Partner in the Partnership, in proportion to their respective interests
in such Limited Partner; and (ii) no Transfer shall be effective to the
extent that such Transfer would, in the opinion of the General Partner
(a) by treating the interest in the Partnership so transferred as if it
had been exchanged for Common Shares in accordance with Section 3.2(C)
above, violate the limitations on ownership of Common Shares contained
in the Articles of Incorporation and/or Bylaws of the Company, or (b)
violate any Federal or state securities laws.
12.3 Admission Adjustments. The General Partner shall,
when necessary, cause this Agreement to be amended from time to time (and shall
cause Schedule A to be revised), to reflect the admission or withdrawal of
Partners, and the issuance, conversion and redemption of any Units (including
the corresponding adjustment to Percentage Interests).
Article 13. Admission of New Partners. The General Partner shall
admit to the Partnership as Limited Partners those Persons who are not already
Partners and who receive Units in accordance with the provisions of this
Agreement.
Article 14. Termination, Liquidation and Dissolution of
Partnership.
14.1 Termination Events. The Partnership shall be
dissolved and its affairs wound up in the manner hereinafter provided upon the
earliest to occur of the following events:
A. December 31, 2098, unless the General Partner, in its
sole and absolute discretion, extends such date by written notice to
the Limited Partners given prior to such date;
B. the sale of all or substantially all of the assets of
the Partnership;
C. the agreement of those Partners holding at least
[_______] percent [(___%)] of the Percentage Interests of all of the
Partners, determining that the Partnership should be dissolved;
D. subject to Section 14.4 below, the entry of a final
judgment, order or decree of a court of competent jurisdiction
adjudicating as bankrupt either the Partnership or the
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General Partner, and the expiration without appeal of the period, if
any, allowed by applicable by law to appeal therefrom; or
E. the dissolution of the Partnership by operation of
law.
14.2 Method of Liquidation. Upon the happening of any of
the events specified in Section 14.1 above, the General Partner (or if there be
no General Partner, a liquidating trustee selected by a Majority-in-Interest of
the Limited Partners) shall immediately commence to wind up the Partnership's
affairs and shall liquidate the assets of the Partnership as promptly as
possible, unless the General Partner, or the liquidating trustee, shall
determine that an immediate sale of Partnership assets would cause undue loss to
the Partnership, in which event the liquidation may be deferred for a reasonable
time. The Partners shall continue to share Cash Flow, Profits and Losses during
the period of liquidation in the same proportions as before dissolution. The
proceeds from liquidation of the Partnership, including repayment of any debts
of Partners to the Partnership, shall be applied in the following order:
A. Debts of the Partnership, including repayments of
principal and interest on loans and advances made by the General
Partner pursuant to Sections 3.3 and/or 9.7 above; then
B. to the establishment of any reserves deemed necessary
or appropriate by the General Partner, or by the person(s) winding up
the affairs of the Partnership in the event there is no remaining
General Partner of the Partnership, for any contingent or unforeseen
liabilities or obligations of the Partnership. Such reserves
established hereunder shall be held for the purpose of paying any such
contingent or unforeseen liabilities or obligations and, at the
expiration of such period as the General Partner, or such person(s)
deems advisable, the balance of such reserves shall be distributed in
the manner provided hereinafter in this Section 14.2 as though such
reserves had been distributed contemporaneously with the other funds
distributed hereunder; and then
C. to the Partners in accordance with their respective
Capital Account balances.
14.3 Date of Termination. The Partnership shall be
terminated when all notes received in connection with such disposition have been
paid and all of the cash or property available for application and distribution
under Section 14.2 above (including reserves) shall have been applied and
distributed in accordance therewith.
14.4 Reconstitution Upon Bankruptcy.
A. Notwithstanding any dissolution of the Partnership
under Section 14.1(D) above, if the Partnership is reconstituted as set forth in
this Section 14.4, then the business of the Partnership shall be continued with
the Partnership's property and the Partnership's assets shall not be liquidated.
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B. If the Partnership is dissolved by reason of the
bankruptcy of the General Partner, a successor general partner may be
admitted within 90 days after the dissolution, effective as of the date
of dissolution, as the General Partner hereunder, with the written
consent of a Majority-in-Interest of the Limited Partners. Upon the
admission of such successor general partner, without any further
consent or approval of any other Partner, the Partnership shall be
reconstituted as a successor limited partnership.
C. If the Partnership is dissolved by reason of the
bankruptcy of the Partnership in a proceeding for the reorganization
(and not the liquidation) of the Partnership, then, with the consent of
the General Partner and a Majority-in-Interest of Limited Partners, the
Partnership may be reconstituted within 90 days after dissolution,
effective as of the date of dissolution, whereupon the Partnership
shall be reconstituted as a successor limited partnership.
D. The successor limited partnership reconstituted in
accordance with the foregoing provisions of this Section 14.4 shall
continue the business of the Partnership with the Partnership's
property. The Percentage Interests of the Partners in the successor
limited partnership shall be in proportion to their respective
Percentage Interests in the dissolved Partnership. Such successor
limited partnership shall be governed by the terms and provisions of
this Agreement and references in this Agreement to the Partnership or
to the Partners or their rights and obligations shall be understood to
comprehend such successor limited partnership and the Partners thereof
and their rights and obligations.
14.5 Death, Legal Incompetency, Etc. of a Limited Partner.
The death, legal incompetency, insolvency, dissolution or bankruptcy of a
Limited Partner shall not dissolve or terminate the Partnership. Upon the death
or incapacity of an individual Limited Partner, such individual Limited
Partner's interest in the Partnership shall be transferred either by will, the
laws of intestacy or otherwise to the legal representative or successor of such
individual Limited Partner.
Article 15. Power of Attorney. Each Limited Partner hereby
irrevocably constitutes and appoints the General Partner, with full power of
substitution, its true and lawful attorney, for him and in his name, place and
stead and for his use and benefit, to sign, swear to, acknowledge, file and
record:
(i) this Agreement, and subject to Article 16
below, amendments to this Agreement;
(ii) any certificates, instruments and documents
(including assumed and fictitious name certificates) as may be
required by, or may be appropriate under, the laws of the
State of Georgia or any other State or jurisdiction in which
the Partnership is doing or intends to do business, in order
to discharge the purposes of
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the Partnership or otherwise in connection with the use of the
name or names used by the Partnership;
(iii) any other instrument which may be required
to be filed or recorded by the Partnership on behalf of the
Partners under the laws of any State by any governmental
agency in order for the Partnership to conduct its business;
(iv) any documents which may be required to
effect the continuation of the Partnership, the admission of a
substitute or additional Partner, the dissolution and
termination of the Partnership or the amendment and
restatement of Schedule A, provided such continuation,
admission, dissolution and termination or amendment and
restatement of Schedule A, is not in violation of any
provision of this Agreement; and
(v) any documents which may be required or
desirable to have the General Partner appointed, and act as,
the "Tax Matters Partner" as described in the Code.
The foregoing grant of authority is a special power of attorney coupled with an
interest, is irrevocable and shall survive the death or incapacity of any
individual Limited Partner, and shall survive the delivery of any assignment by
a Limited Partner of the whole or any portion of his interest in the
Partnership.
Article 16. Amendment of Agreement.
A. Each Limited Partner, by his execution of or joinder
of this Agreement, hereby irrevocably appoints the General Partner with
power of substitution, as his true and lawful attorney coupled with an
interest, in his name, place and stead to amend this Agreement in any
respect other than:
(i) to enlarge the obligation of any Partner to
make contributions to the capital of the Partnership; or
(ii) except as otherwise provided for in this
Agreement or as required by law, to modify the allocation of
Profits or Losses or distributions among the Partners as
provided for in Articles 7 and 8 above, respectively; or
(iii) to amend Article 1 or Sections 3.2, 3.7,
9.2, or 12; or
(iv) to amend this Article 16.
B. With respect to amendments regarding Sections
16(A)(ii) or 16(A)(iii), this Agreement may be amended with the written
consent of the General Partner and those
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Limited Partners holding not less than 67% of the aggregate of
Percentage Interests held by all Limited Partners.
C. With respect to amendments regarding Section
16(A)(i), this Agreement may be amended only with the written consent
of the General Partner and any other Partner adversely affected by such
amendment. With respect to amendments regarding Section 16(A)(iv), this
Agreement may be amended only with the written consent of all Partners.
Article 17. Miscellaneous.
17.1 Notices. Any notice, election or other communication
provided for or required by this Agreement shall be in writing and shall be
deemed to have been given when delivered by hand or by telecopy or other
facsimile transmission, the first business day after sent by overnight courier
(such as Federal Express), or on the second business day after deposit in the
Untied States Mail, certified or registered, return receipt requested, postage
prepaid, properly addressed to the Partner to whom such notice is intended to be
given at the address for the Partner set forth on Schedule A of this Agreement,
or at such other address as such person may have previously furnished in writing
to the Partnership and each Partner with copies to:
Chastain Investments, L.P.
c/o ERE Yarmouth, Inc.
3424 Peachtree Road, N.E.
Suite 800
Atlanta, Georgia 30326
Attention: General Counsel
17.2 Modifications. Except as otherwise provided in this
Agreement, no change or modification of this Agreement, nor any waiver of any
term or condition in the future, shall be valid or binding upon a Partner unless
such change or modification shall be in writing and signed by such Partner.
17.3 Successors and Assigns. Any person acquiring or
claiming an interest in the Partnership, in any manner whatsoever, shall be
subject to and bound by all of the terms, conditions and obligations of this
Agreement to which his predecessor-in-interest was subject or bound, without
regard to whether such a person has executed a counterpart hereof or any other
document contemplated hereby. No person, including the legal representative,
heir or legatee of a deceased Partner, shall have any rights or obligations
greater than those set forth in this Agreement, and no person shall acquire an
interest in the Partnership or become a Partner thereof except as expressly
permitted by and pursuant to the terms of this Agreement. Subject to the
foregoing, and the provisions of Article 12 above, this Agreement shall be
binding upon and inure to the benefit of the Partners and their respective
successors, assigns, heirs, legal representatives, executors and administrators.
24
<PAGE> 29
17.4 Duplicate Originals. For the convenience of the
Partners, any number of counterparts hereof may be executed, and each such
counterpart shall be deemed to be an original instrument, and all of which taken
together shall constitute one agreement.
17.5 Construction. The titles of the Articles, Sections
and subsections herein have been inserted as a matter of convenience of
reference only and shall not control or affect the meaning or construction of
any of the terms or provisions herein.
17.6 Governing Law. This Agreement shall be governed by
the laws of the State of Georgia. Except to the extent the Act is inconsistent
with the provisions of this Agreement, the provisions of such Act shall apply to
the Partnership.
17.7 Other Instruments. The parties hereto covenant and
agree that they will execute such other and further instruments and documents
as, in opinion of the General Partner, are or may become necessary or desirable
to effectuate and carry out the Partnership as provided for by this Agreement.
17.8 General Partner with Interest as Limited Partner. If
the General Partner ever has an interest as a Limited Partner in the
Partnership, the General Partner shall, with respect to such interest, enjoy all
of the rights and be subject to all of the obligations and duties of a Limited
Partner.
17.9 Legal Construction. In case any one or more of the
provisions contained in this Agreement shall for any reason be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision hereof and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
17.10 Gender. Whenever the context shall so require, all
words herein in any gender shall be deemed to include the masculine, feminine or
neuter gender, all singular words shall include the plural, and all plural words
shall include the singular.
17.11 Prior Agreements Superseded. This Agreement
supersedes any prior understandings or written or oral agreements amongst the
Partners, or any of them, respecting the within subject matter and contains the
entire understanding amongst the Partners with respect thereto; provided,
however, that the following joinders and/or addendums shall be deemed to be
incorporated herein and shall be deemed to be part of this Agreement: Schedule
A.
17.12 No Third Party Beneficiary. The terms and provisions
of this Agreement are for the exclusive use and benefit of the General Partner
and the Limited Partners and shall not inure to the benefit of any other person
or entity.
17.13 Purchase for Investment. Each Partner represents,
warrants and agrees that it has acquired and continues to hold its interest in
the Partnership for its own account for investment
25
<PAGE> 30
only and not for the purpose of, or with a view toward, the resale or
distribution of all or any part thereof, nor with a view toward selling or
otherwise distributing such interest or any part thereof at any particular time
or under any predetermined circumstances. Each Partner further represents and
warrants that it is a sophisticated investor, able and accustomed to handling
sophisticated financial matters for itself, particularly real estate
investments, and that it has a sufficiently high net worth that it does not
anticipate a need for the funds it has invested in the Partnership in what it
understands to be a highly speculative and illiquid investment.
17.14 Waiver. No consent or waiver, express or implied, by
any Partner to or of any breach of default by any other Partner in the
performance by such other Partner of its obligations hereunder shall be deemed
or construed to be a consent to or waiver of any other breach or default in the
performance by such other Partner of the same or any other obligations of such
Partner hereunder. Failure on the part of any Partner to complain of any act or
failure to act on the part of any other Partner or to declare any other Partner
in default, irrespective of how long such failure continues, shall not
constitute a waiver by such Partner or its rights hereunder.
17.15 Time of Essence. Time is hereby expressly made of the
essence with respect to the performance by the parties of their respective
obligations under this Agreement.
17.16 Counterparts. This Agreement may be executed in one
or more counterparts which, when taken together, shall constitute but one
original.
26
<PAGE> 31
IN WITNESS WHEREOF, this Agreement has been executed under seal as of
the day and year first above written by the General Partner and the undersigned
Limited Partners and has been consented to by Chastain Capital Corporation.
GENERAL PARTNER:
Chastain GP Holdings, Inc.,
a Georgia corporation
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
INITIAL LIMITED PARTNER:
Chastain LP Holdings, Inc.,
a Georgia corporation
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
CHASTAIN CAPITAL
CORPORATION:
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
27
<PAGE> 32
SCHEDULE A
Partners, Capital Accounts and Partnership Interests
<TABLE>
<CAPTION>
Agreed
Capital Percentage
Name and Address of Partners Units Account Interest
---------------------------- ----- ------- --------
<S> <C> <C> <C>
</TABLE>
General Partner:
Chastain GP Holdings, Inc.
- ---------------------------------
- ---------------------------------
- ---------------------------------
Limited Partners:
Chastain LP Holdings, Inc.
- ---------------------------------
- ---------------------------------
- ---------------------------------
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-42629 of Chastain Capital Corporation of our report dated February 26,
1998, appearing in the Prospectus, which is a part of such Registration
Statement, and to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
February 26, 1998
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned hereby constitutes
and appoints Kurt L. Wright, Rufus A. Chambers, Jr. and Samuel F. Hatcher, and
each of them, his true and lawful attorney-in-fact and agents, with full power
of substitution and resubstitution, from such person and in each person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement on Form S-11
for Chastain Capital Corporation (File No. 333-42629) and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and to sign and file any other registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, 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 as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has duly executed this Power of
Attorney this 20th day of February, 1998.
/s/ W.J. Smith
----------------------------------------
W.J. Smith
Sworn to and subscribed
before me this 20th day
of February, 1998
/s/
- ----------------------
Notary Public
My Commission expires:
- -----------------------------
[Notarial Seal]
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned hereby constitutes
and appoints Kurt L. Wright, Rufus A. Chambers, Jr. and Samuel F. Hatcher, and
each of them, his true and lawful attorney-in-fact and agents, with full power
of substitution and resubstitution, from such person and in each person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement on Form S-11
for Chastain Capital Corporation (File No. 333-42629) and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and to sign and file any other registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, 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 as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has duly executed this Power of
Attorney this 20th day of February, 1998.
/s/ Harald R. Hansen
----------------------------------------
Harald R. Hansen
Sworn to and subscribed
before me this 20th day
of February, 1998
/s/
- ----------------------
Notary Public
My Commission expires:
- -----------------------------
[Notarial Seal]
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned hereby constitutes
and appoints Kurt L. Wright, Rufus A. Chambers, Jr. and Samuel F. Hatcher, and
each of them, his true and lawful attorney-in-fact and agents, with full power
of substitution and resubstitution, from such person and in each person's name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to the Registration Statement on Form S-11
for Chastain Capital Corporation (File No. 333-42629) and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and to sign and file any other registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, 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 as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue thereof.
IN WITNESS WHEREOF, the undersigned has duly executed this Power of
Attorney this 20th day of February, 1998.
/s/ Elizabeth Kennan
----------------------------------------
Elizabeth Kennan
Sworn to and subscribed
before me this 20th day
of February, 1998
/s/
- ----------------------
Notary Public
My Commission expires:
- -----------------------------
[Notarial Seal]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY>US DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 1,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
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<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
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</TABLE>
