<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 333-44467-01
ESSEX PORTFOLIO, L.P.
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(Exact name of registrant as specified in its charter)
Maryland 77-0369575
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
925 East Meadow Drive, Palo Alto, California 94303
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(Address of principal executive offices) (Zip code)
(650) 494-3700
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No.
LOCATION OF EXHIBIT INDEX: The index exhibit is contained in Part IV, Item 14,
on page number 35.
DOCUMENTS INCORPORATED BY REFERENCE:
The following document is incorporated by reference in Part III of the Annual
Report on Form 10-K: Proxy statement for the annual meeting of stockholders of
Essex Property Trust, Inc. to be held April 27, 1999.
<PAGE>
TABLE OF CONTENTS
FORM 10-K
PART I Page No.
Item 1 Business............................................... 3
Item 2 Properties............................................. 19
Item 3 Legal Proceedings...................................... 21
Item 4 Submission of Matters to a Vote of
Security Holders....................................... 21
PART II
Item 5 Market for Registrant's Common Stock
and Related Stockholder Matters........................ 22
Item 6 Summary Financial and Operating Data................... 22
Item 7 Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................................. 25
Item 7A Quantitative and Qualitative Disclosures
About Market Risk...................................... 33
Item 8 Financial Statements and Supplementary
Data................................................... 33
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 33
PART III
Item 10 Directors and Executive Officers of the
Registrant............................................ 34
Item 11 Executive Compensation................................ 34
Item 12 Security Ownership of Certain Beneficial
Owners and Management................................. 34
Item 13 Certain Relationships and Related Transactions........ 34
PART IV
Item 14 Exhibits, Financial Statements Schedules and
Reports on Form 8-K................................... 35
Signatures..................................................... 40
<PAGE>
PART I
As used herein, the terms "Company" and "Essex" mean Essex Property Trust, Inc.,
a Maryland real estate investment trust, those entities controlled by Essex
Property Trust, Inc. and Predecessors of Essex Property Trust, Inc., unless the
context indicates otherwise and the term "Operating Partnership" refers to Essex
Portfolio, L.P., a California limited partnership, formed on March 15, 1994, as
to which the Company owns an approximate 89.9% general partnership interest, as
of December 31, 1998 (except with regard to the section entitled "Other
Matters/Risk Factors," below, wherein all references to the "Company" shall be
deemed to be references to the Company and the Operating Partnership, unless the
context indicates otherwise).
Forward Looking Statements
Certain statements in this Report on Form 10-K which are not historical facts
may be considered forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended, including statements regarding the Operating
Partnership's expectations, hopes, intentions, beliefs and strategies regarding
the future. Forward looking statements include statements regarding the
Operating Partnership's expectations as to the timing of completion of current
development projects, beliefs as to the adequacy of future cash flows to meet
operating requirements and to provide for dividend payments in accordance with
REIT requirements, and expectations as to the amount of future revenues,
expenses, and uses of cash resulting from future activities including non-
revenue generating capital expenditures and capital improvement projects,
acquisitions and developments, the performance of existing properties and the
Operating Partnership's financing activities. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors including, but
not limited to, that the actual completion of development projects will be
subject to delays, that such development projects will not be completed, that
future cash flows will be inadequate to meet operating requirements and/or will
be insufficient to provide for the Company's dividend payments in accordance
with REIT requirements, the actual cost of non-revenue generating capital
expenditures and capital improvement programs will exceed the Operating
Partnership's current expectations, as well as those risks, special
considerations, and other factors discussed under the caption "Other
Matters/Risk Factors" in Item 1 in this Report on Form 10-K, and those other
risk factors and special considerations set forth in the Operating Partnership's
other filings with the Securities and Exchange Commission which may cause the
actual results, performance or achievements of the Operating Partnership to be
materially different from any future results (including Funds From Operations),
performance or achievements expressed or implied by such forward-looking
statements.
Item 1. Business
Description of Business
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Essex Portfolio, L.P. (the "Operating Partnership") was formed in March 1994 and
commenced operations on June 13, 1994, when the Company, the general partner of
the Operating Partnership, completed its initial public offering (the
"Offering") in which it issued 6,275,000 shares of common stock at $19.50 per
share. The net proceeds from the Offering of $112.1 million were used by the
Company to acquire a 77.2% interest in the Operating Partnership. The Company
has elected to be treated as a real estate investment trust ("REIT") under the
Internal Revenue Code of 1986 (the "Code") as amended.
The Company conducts substantially all of its activities through the Operating
Partnership. The Company currently owns an approximate 89.9% general
partnership interest and senior member of the Company's management and certain
outside investors own approximately 10.1% limited partnership interest in the
Operating Partnership. As the sole general partner of the Operating
Partnership, the Company has control over the management of the Operating
Partnership and over each of the Properties.
The Operating Partnership is engaged in the ownership, acquisition, development
and management of multifamily apartment communities. The Operating
Partnership's multifamily portfolio consists of ownership interests in 58
properties (comprising 12,267 apartment units), 22 of which are located in
Southern California (Los Angeles, Ventura, Orange and San Diego counties), 15 of
which are located in Northern California (the San Francisco Bay Area) and 21 of
which are located in the Pacific Northwest (17 in the Seattle metropolitan area
and 4 in the Portland, Oregon metropolitan area). The Operating Partnership
also has ownership interests in two office buildings located in Northern
California (Palo Alto), one of which houses the Operating Partnership's
headquarters, and three retail shopping centers located in the Pacific Northwest
(the "Commercial Properties," together with the Operating Partnership's 58
multifamily residential properties, the "Properties"). The Operating
Partnership also has entered into commitments for the development of 1,578 units
in eight multifamily communities: four in Northern California, two in Southern
California and two in the Pacific Northwest.
Business Objectives
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<PAGE>
The Operating Partnership's primary business objective is to maximize Funds from
Operations and total returns to its general and limited partners through active
property and portfolio management including redevelopment of properties. The
Operating Partnership's strategies include:
. Active Property Marketing and Management. Maximize, on a per share
basis, cash available for distribution and the capital
appreciation of its property portfolio through active property
marketing and management and, if applicable, redevelopment.
. Selected Expansion of Property Portfolio. Increase, on a per share
basis, cash available for distribution through the acquisition and
development of multifamily residential properties in selected
major metropolitan areas located in the west coast region of the
United States.
. Optimal Portfolio Asset Allocations. Produce predictable financial
performance through a portfolio asset allocation program that
seeks to increase or decrease the investments in each market based
on changes in regional economic and local market conditions.
. Management of Capital and Financial Risk. Optimize the Operating
Partnership's capital and financial risk positions by maintaining
a conservative leverage ratio, evaluating financing alternatives
on an on-going basis and minimizing the Operating Partnership's
cost of capital.
Business Principles
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The Operating Partnership was founded on, has followed, and intends to continue
to follow the business principles set forth below:
Property Management. Through its long-standing philosophy of active property
management and a customer satisfaction approach, coupled with a discipline of
internal cost control, the Operating Partnership seeks to retain tenants,
maximize cash flow, enhance property values and compete effectively for new
tenants in the marketplace. The Operating Partnership's regional portfolio
managers are accountable for overall property operations and performance. They
supervise on-site managers, provide training for the on site staff, monitor
fiscal performance against budgeted expectations, monitor property performance
against the performance of competing properties in the area, prepare operating
and capital budgets for executive approval, and implement new strategies focused
on enhancing tenant satisfaction, increasing revenue, controlling expenses, and
creating a more efficient operating environment.
Business Planning and Control. Real estate investment decisions are accompanied
by a multiple year plan, to which executives and other managers responsible for
obtaining future financial performance must agree in writing. Performance
versus plan serves as a significant factor in determining compensation.
Property Type Focus. The Operating Partnership focuses on acquisition and
development of multifamily residential communities, containing between 75 and
600 units. These types of properties offer attractive opportunities because
such properties (i) are often mispriced by real estate sellers and buyers who
lack the Operating Partnership's ability to obtain and use real-time market
information, (ii) provide opportunities for value enhancement since many of
these properties have been owned by parties that are either inadequately
capitalized or lack the professional property management expertise of the
Operating Partnership.
Geographic Focus. The Operating Partnership focuses its property investments in
markets that meet the following criteria:
. Major Metropolitan Areas. The Operating Partnership focuses on
metropolitan areas having a regional population in excess of one
million people. Real estate markets in these areas are typically
characterized by a relatively greater number of buyers and sellers
and are, therefore, more liquid. Liquidity is an important element
for implementing the Operating Partnership's strategy of varying
its portfolio in response to changing market conditions.
. Supply Constraints. The Operating Partnership believes that
properties located in real estate markets with limited development
or redevelopment opportunities are well-suited to produce
increased rental income. When evaluating supply constraints, the
Operating Partnership reviews: (i) availability of developable
land sites on which competing properties could be readily
constructed; (ii) political barriers to growth resulting from a
restrictive local political environment regarding development and
redevelopment (such an environment, in addition to the
restrictions on development itself, is often associated with a
lengthy development process and expensive development fees); and
(iii) physical barriers to growth, resulting from natural
limitations to development, such as mountains or waterways.
<PAGE>
. Rental Demand Created by High Cost of Housing. The Operating
Partnership concentrates on markets in which the cost of renting
is significantly lower than the cost of owning a home. In such
markets, rent levels are higher and operating expenses and capital
expenditures, as a percentage of rent, are lower in comparison
with markets that have a lower cost of owning a home.
. Job Proximity. The Operating Partnership believes that most
renters select housing based on its proximity to their jobs and on
related commuting factors. The Operating Partnership obtains local
area information relating to its residential properties and uses
this information when making multifamily residential property
acquisition decisions. The Operating Partnership also reviews the
location of major employers relative to its portfolio and
potential acquisition properties.
Following the above criteria, the Operating Partnership is currently pursuing
investment opportunities in selected markets of Northern and Southern California
and the Pacific Northwest.
Active Portfolio Management Through Regional Economic Research and Local Market
Knowledge. The Operating Partnership was founded on the belief that the key
elements of successful real estate investment and portfolio growth include
extensive regional economic research and local market knowledge. The Operating
Partnership utilizes its economic research and local market knowledge to make
appropriate portfolio allocation decisions that it believes result in better
overall operating performance and lower portfolio risk. The Operating
Partnership maintains and evaluates:
. Regional Economic Data. The Operating Partnership evaluates and
reviews regional economic factors for the markets in which it owns
properties and where it considers expanding its operations. The
Operating Partnership's research focuses on regional and sub-
market supply and demand, economic diversity, job growth, market
depth and the comparison of rental price to single-family housing
prices.
. Local Market Conditions. Local market knowledge includes (i) local
factors that influence whether a sub-market is desirable to
tenants; (ii) the extent to which the area surrounding a property
is improving or deteriorating; and (iii) local investment market
dynamics, including the relationship between the value of a
property and its yield, the prospects for capital appreciation and
market depth.
Recognizing that all real estate markets are cyclical, the Operating Partnership
regularly evaluates the results of regional economic and local market research
and adjusts asset acquisitions and portfolio allocations accordingly. The
Operating Partnership actively manages the allocation of assets within its
portfolio. The Operating Partnership seeks to increase its portfolio allocation
in markets projected to have economic growth and to decrease such allocations in
markets projected to have declining economic conditions. Likewise, the
Operating Partnership also seeks to increase its portfolio allocation in markets
that have attractive property valuations and to decrease such allocations in
markets that have inflated valuations and low relative yields. Although the
Operating Partnership is generally a long-term investor, it does not establish
defined or preferred holding periods for its Properties.
Current Business Activities
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As of December 31, 1998, the 89.9% general partnership interest in the Operating
Partnership is owned by the Company. The approximate 10.1% limited partnership
interests in the Operating Partnership are owned by directors, officers and
employees of the Company and certain third-party investors. As the sole general
partner of the Operating Partnership, the Company has operating control over the
management of the Operating Partnership and each of the Properties. From time
to time, the Operating Partnership may invest in properties through the
acquisition of an interest in another entity, based upon the criteria described
above. The Operating Partnership does not plan to invest in any securities of
other entities not engaged in real estate activities.
The Company, which includes its share of the Operating Partnership's income and
expenses on its tax returns, has elected to be treated as a real estate
investment trust ("REIT") for federal income tax purposes, commencing with the
year ended December 31, 1994. In order to maintain compliance with REIT tax
rules, the Company provides some of its fee-based asset management and
disposition services as well as third-party property management and leasing
services through Essex Management Corporation ("EMC"). The Company owns 100% of
EMC's 19,000 shares of nonvoting preferred stock. Executives of the Company own
100% of EMC's 1,000 shares of common stock.
The Operating Partnership owns a 1% limited partnership interest in two
partnerships that acquired three retail properties from the Operating
Partnership. These investments were made under arrangements whereby EMC became
the general partner and the other limited partners were granted the right to
require the applicable partnership to redeem their interests for cash. Subject
to certain conditions, the Operating Partnership may, however, elect to deliver
an equivalent number of shares of the Company's common stock in satisfaction of
the applicable partnership's cash redemption obligation.
<PAGE>
In February and April 1998, the Operating Partnership sold 1,200,000 and 400,000
units, respectively of its 7.875% Series B Cumulative Redeemable Preferred Units
to an institutional investor in a private placement, at a price of $50.00 per
unit. The net proceeds from these offerings were $58,275,000 and $19,500,000
respectively. In November 1998, the Operating Partnership sold 500,000 units of
its 9.125% Series C Cumulative Redeemable Preferred Units to an institutional
investor in a private placement, at a price of $50.00 per unit. The net
proceeds from this offering were $24,375,000.
Acquisitions
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During 1998, the Operating Partnership acquired ownership interests in five
multifamily properties consisting of 1,798 units with a total capitalized
acquisition cost (including expected renovation costs and adjusted for closing
costs) of approximately $166,995,000. These investments were primarily funded by
sales of preferred units by the Operating Partnership, cash generated from
operations, dispositions of properties and working capital. Of the five
properties purchased in 1998, three properties (1,122 units) are located in
Southern California and two (676 units) are located in Northern California.
Multifamily property ownership interests acquired in 1998 are as follows:
<TABLE>
<CAPTION>
Name Location Units Purchase Price
(in thousands)
<S> <C> <C> <C>
Southern California
Mirabella Newbury Park, CA 608 $ 50,500
Bunker Hill Los Angeles, CA 456 36,523
Cochran Apartments Los Angeles, CA 58 5,400
Northern California
Wimbledon Woods Hayward, CA 560 44,000
Westwood Cupertino, CA 116 19,850
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Total 1,798 $156,273
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</TABLE>
Dispositions
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In 1998, the Operating Partnership sold one Pacific Northwest multifamily
property and disposed of the three Pacific Northwest retail properties for a net
sales price of $26,354,000. The proceeds were used to fund acquisitions of
multifamily properties.
Development
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The Operating Partnership is currently developing eight development projects
that are expected to have an aggregate of 1,578 multifamily units and an
aggregate estimated development cost, including capitalized interest and
overhead costs, of $204,700,000. Such projects are anticipated to be
substantially completed during 1999.
Park @ Issaquah This development is a 245 unit multifamily community located
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in Issaquah, Washington. This Project will feature spacious units, direct access
garages and specialized interior features. The community will include a pool,
spa, exercise room and video theater. As of December 31, 1998, approximately 40%
of the units were completed. Of the units completed, approximately 50% have been
leased through December 31, 1998. The Operating Partnership expects to achieve
stabilized occupancy (defined as the month in which the multifamily community
has a physical occupancy of 95%) in July 1999. The project is being developed by
Park Hill LLC (the "LLC"). The Operating Partnership has a 45% ownership
interest in the LLC. According to the terms of the partnership agreement, the
Operating Partnership is responsible for the leasing and management of the
operations of the property. The Operating Partnership has the option to purchase
the remaining 55% interest after August 31, 2003. The purchase price will be
calculated based on operating results, as defined in the LLC agreement.
Fountain Court This development is a 320 unit multifamily community located in
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Seattle, Washington. This project offers views of downtown Seattle and Puget
Sound. Unit amenities include microwaves, washer/dryers, European style
cabinetry and ceramic tile entryways. This community will also offer a health
club, spa, indoor lap pool, exercise room and entertainment center. The project
is a six-story building and occupancy is expected to commence in April 1999. The
project is being developed by Fountain Court Apartment Associates, L.P. The
Operating Partnership has a 51% limited partnership interest in this entity. In
accordance with the terms of the agreement, in the year 2000, the Operating
Partnership has the option to purchase the remaining 49% interest for a fixed
purchase price.
<PAGE>
Hillsborough Park This development is a 235 unit multifamily community located
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in La Habra, California. This community will offer a pool, spa, tennis courts
and an exercise room. Individual units will have patios or balconies, vaulted
ceilings, washer/dryers, microwave ovens and individual garages. The project
consists of 15 buildings and is expected to be completed in phases starting in
March 1999 through June 1999. The project is being developed solely by the
Operating Partnership.
Waterford Place This development is a 238 unit multifamily community located in
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San Jose, California. This community will feature a fitness center, pool, spa,
business center and gated security access. Each unit will feature fireplaces,
washer/dryers, and computer workstations with dedicated, high-speed data
transmission lines. In 1997, the Operating Partnership entered into a contract
with an unrelated third party to purchase the development 18 months after
completion, as defined in the contract. Completion is estimated to be November
1999. The unrelated third party is responsible for the development, leasing and
management of the project until the Operating Partnership purchases the
development.
Bel Air This development is a 114 unit multifamily community located in San
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Ramon, California. This project is adjacent to The Shores property that was
acquired by the Operating Partnership in 1995. The units offers direct access
garages, nine-foot ceilings, individual entry and the majority of units have
golf course views. The project consists of 24 buildings and is expected to be
completed in phases starting in March 1999 through May 1999. Occupancy is
scheduled to begin in April 1999. The project is being developed solely by the
Operating Partnership.
The Carlyle This development is a 132 unit multifamily community located in
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San Jose, California. The community features a pool, spa, exercise facility,
clubhouse, business center, as well as gated access and available garages. Each
unit is equipped with state of the art wiring systems for today's high-tech
renter, a washer/dryer and ceiling fans. In May 1998, the Operating Partnership
entered into a contract with an unrelated third party to purchase the
development 18 months after completion, as defined in the contract. Completion
is estimated to be August 1999. The unrelated third party is responsible for the
development, leasing and management of the project until the Operating
Partnership purchases the development.
Marina View This development is a 188 unit multifamily community located in
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Marina del Rey, California. This project will feature controlled access
underground parking, a pool, spa, fitness center, entertainment center and
business center. Units will have tiled fireplaces, microwaves, washer/dryer
hook-ups, ceiling fans and harbor views. The project is a single building and is
expected to be completed with occupancy beginning in August 1999. This project
is being developed solely by the Operating Partnership.
Station Park This development is a 106 unit multifamily community in Walnut
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Creek, California. This project will offer amenities including high-speed data
transmission lines and internet access, attached garages and washer/dryers. The
community will also offer a pool, spa, exercise facility, business center and
community room. The project is four buildings and is expected to be completed in
phases from June 1999 through August 1999. This project is being developed
solely by the Operating Partnership.
The Operating Partnership intends to continue to pursue the development of
multifamily communities to the extent that the market conditions and the
specific project terms are considered favorable.
Offices and Employees
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The Operating Partnership is headquartered in Palo Alto, California, and has
regional offices in Seattle, Washington, Portland, Oregon, West Lake Village,
California and Tustin, California. As of December 31, 1998, the Operating
Partnership had approximately 470 employees.
In February 1999, the Company entered into an agreement with Mr. Marcus, its
Chairman, which replaces and terminates a non-competition agreement that Mr.
Marcus entered into in 1994 in connection with the Company's initial public
offering. Under the February 1999 agreement, Mr. Marcus must generally give the
Company notice of any contract, which he or his affiliates enter into, for the
purchase of a multifamily property in excess of 100 units. If the Company has
submitted a written offer for the same property, then the Company at its option
may require Mr. Marcus to assign his or his affiliate's contracts to the
Company.
Environmental Matters
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Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on, or in such property.
Such laws often impose such liability without regard as to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of such substances, or the failure to properly
remediate such substances, may adversely affect the owner's or operator's
ability to sell or rent such property or to borrow using such property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances or wastes also may be liable for the costs
<PAGE>
of removal or remediation of such substances at the disposal or treatment
facility to which such substances or wastes were sent, whether or not such
facility is owned or operated by such person. In addition, certain environmental
laws impose liability for release of asbestos-containing materials ("ACMs"),
into the air, and third parties may seek recovery from owners or operators of
real properties for personal injury associated with ACMs. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Operating Partnership could be considered an owner or operator
of such properties or as having arranged for the disposal or treatment of
hazardous or toxic substances and, therefore, may be potentially liable for
removal or remediation costs, as well as certain other costs, including
governmental fines and costs related to injuries of persons and property.
All of the Properties have been subjected to preliminary environmental
assessments, including a review of historical and public data ("Phase I
assessments"), by independent environmental consultants. Phase I assessments
generally consist of an investigation of environmental conditions at the
Property, including a preliminary investigation of the site, an identification
of publicly known conditions occurring at properties in the vicinity of the
site, an investigation as to the presence of polychlorinated biphenyl's
("PCBs"), ACMs and above-ground and underground storage tanks presently or
formerly at the sites, and preparation and issuance of written reports. As a
result of information collected in the Phase I assessments, certain of the
Properties were subjected to additional environmental investigations, including,
in a few cases, soil sampling or ground water analysis to further evaluate the
environmental conditions of those Properties.
The environmental studies revealed the presence of groundwater contamination on
certain of the Properties. Certain of these Properties had contamination which
was reported to have migrated on-site from adjacent industrial manufacturing
operations, and one Property was previously occupied by an industrial user that
was identified as the source of contamination. The environmental studies noted
that certain of the Properties are located adjacent to and possibly down
gradient from sites with known groundwater contamination, the lateral limits of
which may extend onto such Properties. The environmental studies also noted that
contamination existed at certain Properties because of the former presence of
underground fuel storage tanks that have been removed. There are asbestos-
containing material in a number of the properties, primarily in the form of
ceiling texture, floor tiles and adhesives, which are generally in good
condition. At properties where radon has been identified as a potential concern,
the Operating Partnership has implemented remediating measures and additional
testing. Based on its current knowledge, the Operating Partnership does not
believe that future liabilities associated with asbestos and radon will be
material. Based on the information contained in the environmental studies, the
Operating Partnership believes that the costs, if any, it might bear as a result
of environmental contamination or other conditions at these Properties would not
have a material adverse effect on the Operating Partnership's financial
condition, result of operations, or liquidity.
Certain Properties that have been sold by the Operating Partnership were
identified as having potential groundwater contamination. While the Operating
Partnership does not anticipate any losses or costs related to groundwater
contamination on Properties that have been sold, it is possible that such losses
or costs may materialize in the future.
Except with respect to one Property, the Operating Partnership has no
indemnification agreements from third parties for potential environmental clean-
up costs at its Properties. The Operating Partnership has no way of determining
at this time the magnitude of any potential liability to which it may be subject
arising out of unknown environmental conditions or violations with respect to
the properties formerly owned by the Operating Partnership. No assurance can be
given that existing environmental studies with respect to any of the Properties
reveal all environmental liabilities, that any prior owner or operator of a
Property did not create any material environmental condition not known to the
Operating Partnership, or that a material environmental condition does not
otherwise exist as to any one or more of the Properties. The Operating
Partnership has no insurance coverage for the types of environmental liabilities
described above.
Insurance
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The Operating Partnership carries comprehensive liability, fire, extended
coverage and rental loss insurance for each of the Properties. There are,
however, certain types of extraordinary losses for which the Operating
Partnership does not have insurance. All of the Properties are located in areas
that are subject to earthquake activity. The Operating Partnership has obtained
earthquake insurance for all the Properties. This earthquake insurance is
subject to an aggregate limit of $40.0 million payable upon a covered loss in
excess of a $7.5 million self-insured retention amount and a 5% deductible. The
Operating Partnership may selectively exclude properties from being covered by
earthquake insurance based on management's evaluation of the following factors:
(i) the availability of coverage on terms acceptable to the Operating
Partnership, (ii) the location of the property and the amount of seismic
activity affecting that region, and, (iii) the age of the property and building
codes in effect at the time of construction. Despite earthquake coverage on all
of its Properties placed in service, should a property sustain damage as a
result of an earthquake, the Operating Partnership may incur losses due to
deductibles, co-payments or losses in excess of applicable insurance, if any.
<PAGE>
Although the Operating Partnership carries certain insurance for non-earthquake
damages to its properties and liability insurance, the Operating Partnership may
still incur losses due to uninsured risks, deductibles, co-payments or losses in
excess of applicable insurance coverage.
Competition
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The Operating Partnership's Properties compete for tenants with similar
properties primarily on the basis of location, rent charged, services provided,
and the design and condition of the improvements. Competition for tenants from
competing properties affects the amount of rent charged as well as rental growth
rates, vacancy rates, deposit amounts, and the services and features provided at
each property. While economic conditions are generally stable in the Operating
Partnership's target markets, a prolonged economic downturn could have a
material adverse effect on the Operating Partnership's financial position,
results of operations or liquidity.
The Operating Partnership also experiences competition when attempting to
acquire properties that meet its investment criteria. Such competing buyers
include domestic and foreign financial institutions, REIT's, life insurance
companies, pension funds, trust funds, partnerships and individual investors.
Working Capital
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The Operating Partnership expects to meet its short-term liquidity requirements
by using working capital, amounts available on lines of credit, and any portion
of net cash flow from operations not required for distribution. The Operating
Partnership believes that its future net cash flows will be adequate to meet
operating requirements and to provide for payment of distributions by the
Company in accordance with REIT requirements. The Operating Partnership has
credit facilities in the committed amount of approximately $110,000,000. At
December 31, 1998 the Operating Partnership had an outstanding balance of
$35,693,000 under these facilities.
Other Matters/Risk Factors
In this risk factors section, all references to the Company shall be deemed to
be references to the Company and the Operating Partnership, unless the context
indicates otherwise.
Debt Financing
At December 31, 1998, the Company had approximately $361,515,000 of indebtedness
(including $94,513,000 of variable rate indebtedness), of which $325,822,000 was
secured by certain properties.
The Company is subject to the risks normally associated with debt financing,
including the following:
. cash flow may not be sufficient to meet required payments of principal and
interest;
. inability to refinance existing indebtedness on encumbered Properties; and
. the terms of any refinancing may not be as favorable as the terms of existing
indebtedness.
Uncertainty of Ability to Refinance Balloon Payments
At December 31, 1998, the Company had an aggregate of approximately $361,515,000
of mortgage debt and lines of credit, some of which are subject to balloon
payments of principal. The Company does not expect to have sufficient cash flows
from operations to make all of such balloon payments when due under these
mortgages and lines of credit. At December 31, 1998, these mortgages and lines
of credit had the following scheduled maturity dates: 1999 - $2.4 million; 2000-
$56.0 million; 2001 - $2.4 million; 2002 - $24.5 million; 2003 - $30.1 million,
2004 and thereafter - $246.1 million. As a result, the Company may not be able
to refinance such mortgage indebtedness. The Properties subject to these
mortgages could be foreclosed upon or otherwise transferred to the mortgagee.
This could mean a loss to the Company of income and asset value. Alternatively,
the Company may be required to re-finance the debt at higher interest rates. If
the Company is unable to make such payments when due, a mortgage lender could
foreclose on the property securing the mortgage, which could have a material
adverse effect on the financial condition and results of operations of the
Company.
Risk Of Rising Interest Payments
At December 31, 1998, the Company had approximately $58,820,000 of long-term
variable rate indebtedness bearing interest at a floating rate tied to the rate
of short-term tax exempt securities (which matures at various dates from
<PAGE>
2014 through 2026) and $35,693,000 of variable rate indebtedness under its line
of credit bearing interest at 1.15% over LIBOR (which matures in 2000). Although
approximately $29,220,000 of the $58,820,000 long-term variable rate
indebtedness is subject to an interest rate protection agreement, which may
reduce the risks associated with fluctuations in interest rates, an increase in
interest rates may have an adverse effect on net income and results of
operations of the Company.
Risk That Interest Rate Hedging Arrangements Cannot Be Refinanced Or Replaced
The Company has, from time to time, entered into agreements to reduce the risks
associated with increases in interest rates, and may continue to do so. Although
these agreements may partially protect against rising interest rates, these
agreements also may reduce the benefits to the Company when interest rates
decline. There can be no assurance that any such hedging arrangements can be
refinanced or that the Company will be able to enter into other hedging
arrangements to replace existing ones if interest rates decline. Furthermore,
interest rate movements during the term of interest rate hedging arrangements
may result in a gain or loss on our investment in the hedging arrangement. In
addition, if a hedging arrangement is not indexed to the same rate as the
indebtedness that is hedged, the Company may be exposed to losses to the extent
that the rate governing the indebtedness and the rate governing the hedging
arrangement change independently of each other. Finally, nonperformance by the
other party to the hedging arrangement may subject the Company to increased
credit risks. In order to minimize counterparty credit risk, the Company policy
is to enter into hedging arrangements only with large financial institutions
that maintain an investment grade credit rating.
Acquisition Activities: Risks That Acquisitions Will Fail To Meet Expectations
The Company intends to continue to acquire multifamily residential properties.
There are risks that acquired properties will fail to perform as expected.
Estimates of the costs of improvements necessary to allow the Company to market
an acquired property as originally intended may prove to be inaccurate. In
addition, the Company expects to finance future acquisitions, in whole or in
part, under various forms of secured or unsecured financing or through the
issuance of partnership units by the Operating Partnership or additional equity
by the Company. The use of equity financing, rather than debt, for future
developments or acquisitions could dilute the interest of the Company's existing
stockholders. If new acquisitions are financed under existing lines of credit,
there is a risk that, unless substitute financing is obtained, further
availability under the lines of credit for new development may not be available
or may be available only on disadvantageous terms. Also, the Company may not be
able to refinance our existing lines of credit upon maturity, or the terms of
such refinancing may not be as favorable as the terms of the existing
indebtedness. Further, acquisitions of properties are subject to the general
risks associated with real estate investments. See "Adverse Effect to Property
Income and Value Due to General Real Estate Investment Risks."
Risks That Development Activities Will Be Delayed Or Not Completed
The Company pursues multifamily residential property development projects from
time to time. Development projects generally require various governmental and
other approvals, the receipt of which cannot be assured. The Company's
development activities generally entail certain risks, including the following:
. funds may be expended and management's time devoted to projects that may not
be completed;
. construction costs of a project may exceed original estimates possibly making
the project economically unfeasible;
. development projects may be delayed due to, among other things, adverse
weather conditions;
. occupancy rates and rents at a completed project may be less than
anticipated; and
. expenses at a completed development may be higher than anticipated.
These risks may reduce the funds available for distribution to the Company's
stockholders. Further, the development of properties is also subject to the
general risks associated with real estate investments. See "--Adverse Effect to
Property Income and Value Due to General Real Estate Investment Risks."
The Geographic Concentration Of The Properties And Fluctuations In Local Market
May Adversely Impact Income
Significant amounts of rental revenues for the year ended December 31, 1998,
were derived from Properties concentrated in the San Francisco Bay Area, the
Seattle metropolitan area, Southern California and the Portland metropolitan
area. As a result of this geographic concentration, if a local property market
performs poorly, the income from the Properties in that market could decrease.
As a result of such a decrease in income, the Company may be unable to pay
expected dividends to the Company's stockholders. The performance of the economy
in each of these areas affects occupancy, market rental rates and expenses and,
consequently impacts the income generated from the Properties and their
underlying values. The financial
<PAGE>
results of major local employers may also impact the cash flow and value of
certain of the Properties. Economic downturns in the local markets in which the
Company owns properties could have a negative impact on the financial condition
and results from operations of the Company.
Competition In The Multifamily Residential Market May Adversely Affect
Operations And The Rental Demand For the Company's Properties
There are numerous housing alternatives that compete with the multifamily
Properties in attracting residents. These include other multifamily rental
apartments and single family homes that are available for rent in the markets in
which the Properties are located. The Properties also compete for residents with
new and existing homes and condominiums that are for sale. In addition, other
competitors for development and acquisitions of properties may have greater
resources than the Company. If the demand for the Company's Properties is
reduced or if competitors develop and/or acquire competing properties on a more
cost-effective basis, rental rates may drop, which may have a material adverse
affect on the financial condition and results of operations of the Company.
The Company also faces competition from other real estate investment trusts,
businesses and other entities in the acquisition, development and operation of
properties. Some of the competitors are larger and have greater financial
resources than the Company. This competition may result in increased costs of
properties the Company acquires and/or develops.
Debt Financing On Properties May Result In Insufficient Cash Flow
Where possible, the Company intends to continue to use leverage to increase the
rate of return on its investments and to provide for additional investments that
the Company could not otherwise make. There is a risk that the cash flow from
the Properties will be insufficient to meet both debt payment obligations and
the distribution requirements of the real estate investment trust provisions of
the Internal Revenue Code of 1986, as amended. The Company may obtain additional
debt financing in the future, through mortgages on some or all of the
Properties. These mortgages may be recourse, non-recourse, or cross-
collateralized. As of December 31, 1998, the Company had 33 properties
encumbered by debt. Of the 33 properties, 18 are secured by deeds of trust
relating solely to those properties, with respect to the remaining 15
properties, three cross-collateralized mortgages are secured by eight
properties, three properties, and three properties, respectively, and the
Company's $10 million line of credit is secured by one property. The holders of
this indebtedness will have a claim against these Properties and to the extent
indebtedness is cross-collateralized, lenders may seek to foreclose upon
properties which are not the primary collateral for their loan. This may, in
turn, accelerate other indebtedness secured by Properties. Foreclosure of
Properties would cause a loss to the Company of income and asset value.
Increase In Dividend Requirements As A Result Of The Convertible Preferred
Stock, Series B Preferred Stock, And Series C Preferred Stock May Lead to a
Possible Inability To Sustain Dividends
In 1996, the Company sold $40.0 million of its 8.75% convertible preferred
stock, Series 1996A (the "Convertible Preferred Stock") at $25.00 per share to
Westbrook Real Estate Fund I, L.P. (formerly known as Tiger/Westbrook Real
Estate Fund, L.P.), and Westbrook Real Estate Co-Investment Partnership I, L.P.
(formerly known as Tiger/Westbrook Real Estate Co-Investment Partnership, L.P.).
Westbrook Real Estate Fund, L.P. and Westbrook Real Estate Co-Investment
Partnership I, L.P. are collectively referred to herein as "Westbrook. On
January 6, 1999, these entities converted 87,500 shares of the Convertible
Preferred Stock into 100,000 shares of Common Stock and they presently own
1,512,500 shares of Convertible Preferred Stock. The Company has filed a
registration statement covering Tiger/Westbrook's resale of all shares of common
stock issuable upon conversion of the Convertible Preferred Stock and the
registration statement was declared effective by the Securities and Exchange
Commission in December 1998.
On February 6 and April 20, 1998, the Operating Partnership completed the
private placement of a total of 1,600,000 units of 7.875% Series B Cumulative
Redeemable Preferred Units (the "Series B Preferred Units"), representing a
limited partnership interest in the Operating Partnership, to an institutional
investor. The Series B Preferred Units will become exchangeable, on a one for
one basis, in whole or in part at any time on or after February 6, 2008 (or
earlier under certain circumstances) for shares of the Company's 7.875% Series B
Cumulative Redeemable Preferred Stock, par value $.0001 per share (the "Series B
Preferred Stock"). The Operating Partnership may redeem the Series B Preferred
Units on or after February 6, 2003. Also, on November 24, 1998, the Operating
Partnership completed the private placement of 500,000 units of 9.125% Series C
Cumulative Redeemable Preferred Units (the "Series C Preferred Units"),
representing a limited partnership interest in the Operating Partnership, to an
institutional investor. The Series C Preferred Units will become exchangeable,
on a one for one basis, in whole or in part at any time on or after November 24,
2008 (or earlier under certain circumstances) for shares of the Company's 9 1/8%
Series C Cumulative Redeemable Preferred Stock, par value $.0001 per share (the
"Series C Preferred Stock"). The Operating Partnership may redeem the Series C
Preferred Units on or after November 24, 2003.
The cash dividends payable on the Convertible Preferred Stock substantially
increase the cash that must be paid out before dividends may be paid on the
Common Stock. Dividends may be paid on shares of Common Stock in any fiscal
quarter only
<PAGE>
if full, cumulative cash dividends have been paid on all shares of Convertible
Preferred Stock in the annual amount equal to the greater of (i) $2.1875 per
share (8.75% of the $25.00 per share price), or (ii) the dividends (on an as-
converted basis) paid with respect to the Common Stock plus, in both cases, any
accumulated but unpaid dividends on the Convertible Preferred Stock.
Further, if any of the Series B Preferred Units are exchanged for shares of
Series B Preferred Stock, the holders of Series B Preferred Stock will be
entitled to receive cumulative preferential cash distributions equal to $3.9375
(7.875% of the $50.00 liquidation preference) per share of Series B Preferred
Stock. For any period of time that any Series B Preferred Stock is outstanding,
no distribution may be authorized, declared or paid on the Common Stock or any
class or series of other stock of the Corporation ranking junior to the Series B
Preferred Stock unless all distributions accumulated on all Series B Preferred
Stock have been paid in full. Also, if any of the Series C Preferred Units are
exchanged for shares of Series C Preferred Stock, the holders of Series C
Preferred Stock will be entitled to receive cumulative preferential cash
distributions equal to $4.5625 (9.125% of the $50.00 liquidation preference) per
share of Series C Preferred Stock. For any period of time that any Series C
Preferred Stock is outstanding, no distribution may be authorized, declared or
paid on the Common Stock or any class or series of other stock of the
Corporation ranking junior to the Series C Preferred Stock unless all
distributions accumulated on all Series C Preferred Stock have been paid in
full. The dividends payable on the Series B Preferred Stock and Series C
Preferred Stock would further increase the cash that must be paid out before
dividends may be paid on the Common Stock.
The 1,512,500 outstanding shares of Convertible Preferred Stock Series 1996A are
convertible at the option of the holder into shares of Common Stock. If, after
June 20, 2001, the Company requires a mandatory conversion of all of the
Convertible Preferred Stock, each of the holders of the Convertible Preferred
Stock may cause the Company to redeem any or all of their shares of Convertible
Preferred Stock. Such a redemption would decrease the amount of cash available
to pay cash dividends on the Common Stock. When there ceases to be in excess of
40,000 shares of Convertible Preferred Stock outstanding, we may purchase all of
the outstanding shares of Convertible Preferred Stock from the holders.
If the Company wishes to issue any Common Stock in the future (including, upon
exercise of stock options), the funds required to continue to pay cash dividends
at current levels will be increased. The Company's ability to pay dividends will
depend largely upon the performance of the Properties and other properties that
may be acquired in the future.
The Company's ability to pay dividends on the Company's stock is further limited
by the Maryland General Corporation Law. Under the Maryland General Corporation
Law, the Company may not make a distribution on stock if, after giving effect to
such distribution, either
. the Company would not be able to pay its indebtedness as it becomes due in
the usual course of business; or
. the Company's total assets would be less than its total liabilities.
If the Company cannot pay dividends on its stock, it's status as a real estate
investment trust may be jeopardized.
Existing Registration Rights And Preemptive Rights May Have An Adverse Effect On
The Market Price Of The Shares
Registration rights are held by the senior members of the Company's management
and certain outside investors (collectively, the "Founders") who as of December
31, 1998 owned approximately 10.1% limited partnership interests in the
Operating Partnership. These rights include certain "demand" and "piggyback"
registration rights with respect to shares of Common Stock issuable in
connection with the exchange of their limited partnership interests in the
Operating Partnership. The aggregate 10.1% limited partnership interests held by
the Founders in the Operating Partnership is exchangeable for an aggregate of
1,873,473 shares of Common Stock. In addition, the Operating Partnership has
invested in certain real estate partnerships. Certain partners in such limited
partnerships have the right to have their limited partnership interests in such
partnerships redeemed for cash or, at our option, for 779,400 shares of Common
Stock. These partners also have certain "demand" and "piggyback" registration
rights with respect to the shares of Common Stock that may be issued in exchange
for such limited partnership interests. All of the registration rights discussed
above could materially adversely affect the market price for the shares of
Common Stock. In addition, the holders of the Convertible Preferred Stock have
preemptive rights to purchase a pro rata share of shares of Common Stock that
may be offered in the future. These preemptive rights could have a material
adverse effect on the market price for the shares of Common Stock.
Conversion Of The Convertible Preferred Stock May Lead to Substantial Dilution
To The Holders Of Common Stock
The shares of Convertible Preferred Stock are convertible, at the option of the
holders, into the number of shares of Common Stock that is determined based on
the number and price of common shares issued. As of December 31, 1998, the then
conversion price was $21.875 per share and, therefore, each share of Convertible
Preferred Stock was convertible into approximately 1.14 shares of Common Stock.
All the shares issuable upon conversion of all of the Convertible Preferred
<PAGE>
Stock are covered by an existing shelf registration statement, which would allow
such shares to be resold into the public market. In order to protect the holders
of the Convertible Preferred Stock against dilution, the conversion price may be
reduced in certain circumstances, including if Common Stock is issued at a price
below the conversion price. Such reduction in the conversion price could
increase the dilution to holders of shares of Common Stock if and when the
Convertible Preferred Stock is converted into shares of Common Stock. The
proportionate ownership, voting power and earnings per share of the holders of
Common Stock could be substantially diluted in the event that a substantial
number of additional shares of Common Stock and/or Preferred Stock are issued,
either upon conversion of the Convertible Preferred Stock, in connection with
future acquisitions or otherwise.
Concentration Of Voting Power And Consent Requirements Of The Holders Of the
Convertible Preferred Stock May Be Detrimental To Holders of Common Stock
As of December 31, 1998, George M. Marcus, the Chairman of the Company's Board
of Directors, beneficially owned 1,953,187 shares of Common Stock (including
shares issuable upon exchange of limited partnership interests in the Operating
Partnership and assuming exercise of all vested options). This represents
approximately 10.5% of the outstanding shares of Common Stock. Mr. Marcus
currently does not have majority control over the Company. However, he currently
has, and likely will continue to have, significant influence with respect to the
election of directors and approval or disapproval of significant corporate
actions.
The holders of the Convertible Preferred Stock have certain consent rights to
actions the Company may take. The Company may not, among other things, make
certain revisions to its corporate structure and operations, without the
approval of holders of two-thirds of the outstanding shares of Convertible
Preferred Stock, voting as a separate class. This includes (i) revisions that
would affect the rights, priority and preferences of the Convertible Preferred
Stock, (ii) the merger or consolidation of the Company or the Operating
Partnership with another entity, (iii) the sale of all or substantially all of
the Company's assets, (iv) changing the geographic concentration of the
portfolio of Properties, and (v) undergoing a change in control of either the
Company or the Operating Partnership.
The Company's Charter provides that the holders of the Convertible Preferred
Stock, voting as a class, have the right to elect one member of the Board of
Directors. The holders of the Convertible Preferred Stock elected Gregory J.
Hartman to the Board of Directors. Mr. Hartman is a managing principal of
Westbrook Real Estate Partners, L.L.C., the managing member of the sole general
partner of Westbrook.
Under certain circumstances, the holders of the Convertible Preferred Stock will
be entitled to elect up to four additional directors. Such circumstances include
the Company's failure to pay quarterly dividends on the Convertible Preferred
Stock for four quarters and the breach of certain provisions of the Charter and
bylaws affecting the holders of the Convertible Preferred Stock. Moreover, the
Company may not authorize or create any class or series of stock that ranks
equal or senior to the Convertible Preferred Stock with respect to (i) the
payment of dividends or (ii) amounts upon liquidation, dissolution or winding up
without the consent of the holders of two-thirds of the outstanding shares of
Convertible Preferred Stock, voting separately as a single class. The interests
of the holders of the Convertible Preferred Stock, and indirectly the director
or directors elected by the holders of the Convertible Preferred Stock, may
differ from or conflict with the interests of the holders of Common Stock.
In addition, upon conversion of the Convertible Preferred Stock into shares of
Common Stock, the holders of Convertible Preferred Stock would hold
approximately 8.9% of all outstanding shares of Common Stock (assuming exchange
of all partnership interests in the Operating Partnership into shares of Common
Stock), assuming that such conversion took place on December 31, 1998.
Consequently, upon such conversion, the holders of Convertible Preferred Stock
would, as a class, be the second largest stockholder in the Company and could
have considerable influence with respect to the election of directors and the
approval or disapproval of significant corporate actions.
In view of the substantial influence of the holders of the Convertible Preferred
Stock over the Company's affairs, it should be noted that interests of the
holders of the Convertible Preferred Stock do not necessarily coincide with
those of the holders of the Common Stock. Therefore, actions by the holders of
the Convertible Preferred Stock will not necessarily be in the best interests of
the holders of Common Stock.
Certain Voting Rights Of The Series B Preferred Stock And Series C Preferred
Stock
In general, the holders of the Series B Preferred Stock and Series C Preferred
Stock do not have any voting rights. However, if full distributions are not made
on any Series B Preferred Stock or Series C Preferred Stock for six quarterly
distribution periods, the holders of Series B Preferred Stock or Series C
Preferred Stock (as applicable) who have not received distributions, voting
together as a single class, will have the right to elect two additional
directors to serve on the Company's Board of Directors. These voting rights
continue until all distributions in arrears and distributions for the current
quarterly period on the Series B Preferred Stock and/or Series C Preferred Stock
have been paid in full. At that time, the holders of the
<PAGE>
Series B Preferred Stock and/or Series C Preferred Stock are divested of these
voting rights, and the term and office of the directors so elected immediately
terminates.
In addition, the Company may not authorize or create any class or series of
stock that ranks senior to the Series B Preferred Stock or Series C Preferred
Stock with respect to (1) the payment of dividends, (2) rights upon liquidation,
dissolution or winding-up of the Company, or amend, alter or repeal the
provisions of the Company's Charter or Bylaws, that would materially and
adversely affect these rights without the consent of the holders of two-thirds
of the outstanding shares of Series B Preferred Stock or Series C Preferred
Stock (as applicable) each voting separately as a single class. Also, while any
shares of the Series B Preferred Stock or Series C Preferred Stock are
outstanding, the Company may not (1) merge or consolidate with another entity,
or (2) a transfer substantially all of its assets to any corporation or other
entity, without the affirmative vote of the holders of at least two-thirds of
the Series B Preferred Stock and Series C Preferred Stock, each voting
separately as a class, unless the transaction meets certain criteria.
Exemption Of Westbrook and George Marcus From The Maryland Business Combination
Law May Allow Certain Transactions Between The Company And Westbrook And/Or
George Marcus To Proceed Without Compliance With Such Law
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns ten percent or more of the voting power of the
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between the Company
and an interested stockholder unless the Board of Directors approved the
transaction prior to the party becoming an interested stockholder. The five year
period runs from the most recent date on which the interested stockholder became
an interested stockholder. The law also requires a supermajority stockholder
vote for such transactions after the end of the five year period. This means
that the transaction must be approved by at least:
. 80% of the votes entitled to be cast by holders of outstanding voting shares;
and
. 66% of the votes entitled to be cast by holders of outstanding voting shares
other than shares held by the interested stockholder with whom the business
combination is to be effected.
However, as permitted by the statute, the Board of Directors irrevocably has
elected to exempt any business combination by the Company with Westbrook and its
affiliates from the "business combination" provision of the Maryland General
Corporation Law. In addition, the Board of Directors similarly exempted George
M. Marcus, William A. Millichap, who are the chairman and a director of the
Company, respectively, and The Marcus & Millichap Company ("M&M") or any entity
owned or controlled by Messrs Marcus and Millichap and M&M. Consequently, the
five-year prohibition and the super-majority vote requirement described above
will not apply to any business combination between the Company and either
Westbrook (or its affiliates), Mr. Marcus, Mr. Millichap, or M&M. As a result,
the Company may in the future enter into business combinations with Westbrook
(or its affiliates) or Messrs Marcus and Millichap and M&M, without compliance
with the super-majority vote requirements and other provisions of the Maryland
General Corporation Law.
Influence of Executive Officers, Directors And Significant Stockholders
Under the partnership agreement of the Operating Partnership, the consent of the
holders of limited partnership interests is generally required for any amendment
of the agreement and for certain extraordinary actions. Through their ownership
of limited partnership interests and their positions in the Company, the
Company's directors and executive officers, including Messrs. Marcus and
Millichap, have substantial influence on the Company. Consequently, their
influence could result in decisions that do not reflect the interests of all
stockholders of the Company.
Anti-Takeover Provisions Contained In The Operating Partnership Agreement,
Charter, Bylaws, The Convertible Preferred Stock And Certain Provisions Of
Maryland Law Could Delay, Defer Or Prevent A Change In Control Of the Company
While the Company is the sole general partner of the Operating Partnership, and
generally has full and exclusive responsibility and discretion in the management
and control of the Operating Partnership, certain provisions of the Operating
Partnership's Partnership Agreement place limitations on the Company's ability
to act with respect to the Operating Partnership. Such limitations could delay,
defer or prevent a transaction or a change in control of the Company that might
involve a premium price for the stock or otherwise be in the best interest of
the stockholders or that could otherwise adversely affect the interest of the
stockholders. The Partnership Agreement provides that if the limited partners
own at least 5% of the outstanding units of limited partnership interest in the
Operating Partnership, the Company cannot, without first obtaining the consent
of a majority-in-interest of the limited partners in the Operating Partnership,
transfer all or any portion of the Company's general partner interest in the
Operating Partnership to another entity. Such limitations on the Company's
ability to act may result in the Company being precluded from taking action that
the Board of Directors believes is in the best
<PAGE>
interests of the Company's stockholders. In addition, as of December 31, 1998,
two individuals together held more than 50% of the outstanding units of limited
partnership interest in the Operating Partnership, allowing such actions to be
blocked by a small number of limited partners.
The Company's charter authorizes the issuance of additional shares of Common
Stock or preferred stock and to set the preferences, rights and other terms of
such preferred stock without the approval of the holders of the Common Stock.
The Company must obtain the approval of the holders of two-thirds of the
outstanding shares of Convertible Preferred Stock in order to authorize, create
or issue any class or series of stock that ranks equal or senior to the
Convertible Preferred Stock. Although the Company has no intention to issue any
additional shares of Convertible Preferred Stock or other preferred stock at the
present time, the Company may, subject to the consent of the holders of
Convertible Preferred Stock, establish one or more series of preferred stock
that could delay, defer or prevent a transaction or a change in control of the
Company. Such a transaction might involve a premium price for the Company's
stock or otherwise be in the best interests of the holders of Common Stock.
Also, such a class of preferred stock could have dividend, voting or other
rights that could adversely affect the interest of holders of Common Stock.
The Company's charter, as well as its stockholder rights plan, also contains
other provisions that may delay, defer or prevent a transaction or a change in
control of the Company that might be in the best interest of the Company's
stockholders. The Company's stockholder rights plan is designed, among other
things, to prevent a person or group from gaining control of the Company without
offering a fair price to all of the Company's stockholders. Also, the Bylaws may
be amended by the Board of Directors (subject to the consent of the holders of
the Convertible Preferred Stock in certain circumstances) to include provisions
that would have a similar effect, although the Company presently has no such
intention. The Charter provides that the Company must obtain the approval of the
holders of the Convertible Preferred Stock holding two-thirds of the outstanding
shares of Convertible Preferred Stock before the Company or the Operating
Partnership may merge or consolidate with any other entity or sell all or
substantially all of the assets. Also, the terms of the Convertible Preferred
Stock require that the Company must obtain the approval of the holders of more
than 50% of the outstanding shares of Convertible Preferred Stock before
undergoing a change in control (as defined in the Charter). Additionally, the
Charter contains ownership provisions limiting the transferability and ownership
of shares of capital stock, which may have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company. For example,
subject to receiving an exemption from the Board of Directors, potential
acquirers may not purchase more than 6% percent in value of the stock (other
than qualified pension trusts which can acquire 9.9%). This may discourage
tender offers that may be attractive to the holders of Common Stock and limit
the opportunity for stockholders to receive a premium for their shares of Common
Stock.
In addition, the Maryland General Corporations Law restricts the voting rights
of shares deemed to be "control shares." Under the Maryland General Corporations
Law, "control shares" are those which, when aggregated with any other shares
held by the acquirer, entitle the acquirer to exercise voting power within
specified ranges. Although the Bylaws exempt the Company from the control share
provisions of the Maryland General Corporations Law, the provisions of the
Bylaws may be amended or eliminated by the Board of Directors at any time in the
future, provided that it obtains the approval of the holders of two-thirds of
the outstanding shares of the Convertible Preferred Stock. Moreover, any such
amendment or elimination of such provision of the Bylaws may result in the
application of the control share provisions of the Maryland General Corporations
Law not only to control shares which may be acquired in the future, but also to
control shares previously acquired. If the provisions of the Bylaws are amended
or eliminated, the control share provisions of the Maryland General Corporations
Law could delay, defer or prevent a transaction or change in control of the
Company that might involve a premium price for the stock or otherwise be in the
best interests of its stockholders.
Bond Compliance Requirements May Limit Income From Certain Properties
At December 31, 1998, the Company had approximately $58.8 million of tax-exempt
financing relating to the Inglenook Court Apartments, Wandering Creek
Apartments, Treetops Apartments, Meadowood Apartments and Camarillo Oaks
Apartments. The tax-exempt financing subjects these Properties to certain deed
restrictions and restrictive covenants. The Company expects to engage in tax-
exempt financings in the future. In addition, the Internal Revenue Code of 1986,
as amended, and its related regulations impose various restrictions, conditions
and requirements excluding interest on qualified bond obligations from gross
income for federal income tax purposes. The Internal Revenue Code of 1986, as
amended, also requires that at least 20% of apartment units be made available to
residents with gross incomes that do not exceed 50% of the median income for the
applicable family size as determined by the Housing and Urban Development
Department of the federal government. In addition to federal requirements,
certain state and local authorities may impose additional rental restrictions.
These restrictions may limit income from the tax-exempt financed properties if
the Company is required to lower rental rates to attract residents who satisfy
the median income test. If the Company does not reserve the required number of
apartment homes for residents satisfying these income requirements, the tax-
exempt status of the bonds may be terminated, the obligations under the bond
documents may be accelerated and the Company may be subject to additional
contractual liability.
<PAGE>
Adverse Effect To Property Income And Value Due To General Real Estate
Investment Risks
Real property investments are subject to a variety of risks. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Properties do not generate sufficient
income to meet operating expenses, including debt service and capital
expenditures, cash flow and ability to make distributions to stockholders will
be adversely affected. The performance of the economy in each of the areas in
which the Properties are located affects occupancy, market rental rates and
expenses. Consequently, the income from the Properties and their underlying
values may be impacted. The financial results of major local employers may have
an impact on the cash flow and value of certain of the Properties as well.
Income from the Properties may be further adversely affected by, among other
things, the following factors:
. the general economic climate;
. local economic conditions in which the Properties are located, such as
oversupply of space or a reduction in demand for rental space;
. the attractiveness of the Properties to tenants;
. competition from other available space;
. the Company's ability to provide for adequate maintenance and insurance;
. increased operating expenses.
Also, as leases on the Properties expire, tenants may enter into new leases on
terms that are less favorable to the Company. Income and real estate values may
also be adversely affected by such factors as applicable laws (e.g., the
Americans With Disabilities Act of 1990 and tax laws), interest rate levels and
the availability and terms of financing. In addition, real estate investments
are relatively illiquid and, therefore, the Company's ability to vary its
portfolio promptly in response to changes in economic or other conditions may be
adversely affected.
Joint Ventures And Joint Ownership Of Properties And Partial Interests In
Corporations And Limited Partnerships Could Limit the Company's Ability To
Control Such Properties And Partial Interests
Instead of purchasing properties directly, the Company has invested and may
continue to invest as a co-venturer. Joint venturers often have shared control
over the operation of the joint venture assets. Therefore, it is possible that
the co-venturer in an investment might become bankrupt, or have economic or
business interests or goals that are inconsistent with the Company's business
interests or goals, or be in a position to take action contrary to the Company's
instructions or requests, or to Company policies or objectives. Consequently, a
co-venturer's actions might subject property owned by the joint venture to
additional risk. Although the Company seeks to maintain sufficient control of
any joint venture to achieve its objectives, the Company may be unable to take
action without the Company's joint venture partners' approval, or joint venture
partners could take actions binding on the joint venture without consent.
Additionally, should a joint venture partner become bankrupt, the Company could
become liable for such partner's share of joint venture liabilities.
From time to time, the Company, through the Operating Partnership, invests in
corporations, limited partnerships or other entities that have been formed for
the purpose of acquiring, developing or managing real property. In certain
circumstances, the Operating Partnership's interest in a particular entity may
be less than a majority of the outstanding voting interests of that entity.
Therefore, the Operating Partnership's ability to control the daily operations
of such an entity may be limited. Furthermore, the Operating Partnership may not
have the power to remove a majority of the board of directors (in the case of a
corporation) or the general partner or partners (in the case of a limited
partnership) of such an entity in the event that its operations conflict with
the Operating Partnership's objectives. In addition, the Operating Partnership
may not be able to dispose of its interests in such an entity. In the event that
such an entity becomes insolvent, the Operating Partnership may lose up to its
entire investment in and any advances to the entity.
Investments In Mortgages
The Company may invest in mortgages, in part as a strategy for ultimately
acquiring the underlying property. These mortgages may be first, second or third
mortgages that may or may not be insured or otherwise guaranteed. The Company
anticipates that such investment in mortgage receivables will not in the
aggregate be significant. In general, investments in mortgages include the
following risks:
<PAGE>
. that the value of mortgaged property may be less than the amounts owed;
. that interest rates payable on the mortgages may be lower than the Company's
cost of funds; and
. in the case of junior mortgages, that foreclosure of a senior mortgage would
eliminate the junior mortgage.
If any of the above were to occur, cash flows from operations and the Company's
ability to make expected dividends to stockholders could be adversely affected.
Possible Environmental Liabilities
Under various federal, state and local laws, an owner or operator of real estate
is liable for the costs of removal or remediation of certain hazardous or toxic
substances on or in such property. These laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. The presence of these substances, or the failure
to properly clean them up, may adversely affect the owner's or operator's
ability to sell or rent the property. It may also limit the ability to borrow
money using such property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or clean-up of such substances at a disposal or treatment facility,
whether or not such facility is owned or operated by such person. Certain
environmental laws impose liability for release of asbestos-containing materials
into the air, and third parties may seek recovery from owners or operators of
real properties for personal injuries associated with asbestos-containing
materials. Therefore, in connection with the ownership, operation, financing,
management and development of real properties, the Company may be potentially
liable for removal or clean-up costs, as well as certain other costs. The
Company may also be subject to governmental fines and costs related to injuries
to persons and property.
General Uninsured Losses
The Company carries comprehensive liability, fire, extended coverage and rental
loss insurance for each of the Properties. There are, however, certain types of
extraordinary losses for which the Company does not have insurance. Further,
certain of the Properties are located in areas that are subject to earthquake
activity. Although the Company has obtained certain limited earthquake
insurance coverage, should a Property sustain damage as a result of an
earthquake, the Company may sustain losses due to insurance deductibles, co-
payments on insured losses or uninsured losses.
Changes In Real Estate Tax And Other Laws
Generally the Company does not directly pass through costs resulting from
changes in real estate tax laws to residential property tenants. The Company
also does not generally pass through increases in income, service or other
taxes, to tenants under leases. These costs may adversely affect funds from
operations and the ability to make distributions to stockholders. Similarly,
compliance with changes in (i) laws increasing the potential liability for
environmental conditions existing on properties or the restrictions on
discharges or other conditions or (ii) rent control or rent stabilization laws
or other laws regulating housing may result in significant unanticipated
expenditures, which would adversely affect the funds from operations and the
ability to make distributions to stockholders.
Changes In Financing Policy; No Limitation On Debt
The Company has adopted a policy of maintaining a debt-to-total-market-
capitalization ratio of less than 50%. The calculation of debt- to-total-market-
capitalization is as follows:
total property indebtedness
-------------------------------- = debt-to-total-market-capitalization
total property indebtedness +
total equity market capitalization
As used in the above formula, total market capitalization is equal to the
aggregate market value of the outstanding shares of Common Stock (based on the
greater of current market price or the gross proceeds per share from public
offerings of the outstanding shares plus any undistributed net cash flow),
assuming the conversion of all limited partnership interests in the Operating
Partnership into shares of Common Stock and the conversion of all shares of
Convertible Preferred Stock into shares of Common Stock and the gross proceeds
of the preferred units of the Operating Partnership. Based on this calculation
(including the current market price and excluding undistributed net cash flow),
the Company's debt-to-total-market-capitalization ratio was approximately 33.7%
as of December 31, 1998.
The Company's organizational documents and the organizational documents of the
Operating Partnership do not limit the amount or percentage of indebtedness that
may be incurred. Accordingly, the Board of Directors could change current
<PAGE>
policies and the policies of the Operating Partnership regarding indebtedness.
If these policies were changed, the Company and the Operating Partnership could
incur more debt, resulting in an increased risk of default on the Company
obligations and the obligations of the Operating Partnership, and an increase in
debt service requirements that could adversely affect the financial condition
and results of operations of the Company. Such increased debt could exceed the
underlying value of the Properties.
Failure To Qualify As A Real Estate Investment Trust
The Company has operated as a qualified real estate investment trust under the
Internal Revenue Code of 1986, as amended, commencing with the taxable year
ended December 31, 1994. Although the Company believes that it has operated in a
manner which satisfies the real estate investment trust qualification
requirements, no assurance can be given that the Company will continue to do so.
A real estate investment trust is generally not taxed on its net income
distributed to its stockholders. It is required to distribute at least 95% of
its taxable income to maintain qualification as a real estate investment trust.
Qualification as a real estate investment trust involves the satisfaction of
numerous requirements (some on an annual or quarterly basis) established under
the highly technical and complex Internal Revenue Code of 1986, as amended,
provisions for which there are only limited judicial or administrative
interpretations and involves the determination of various factual matters and
circumstances not entirely within the Company's control.
If the Company fails to qualify as a real estate investment trust in any taxable
year, it would generally be subject to federal and state income tax (including
any applicable alternative minimum tax) at corporate rates on its taxable income
for such year. Moreover, unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a real
estate investment trust for the four taxable years following the year of
disqualification. This treatment would reduce net earnings available for
investment or distribution to stockholders because of the additional tax
liability for the years involved. In addition, distributions would no longer be
required to be made.
Other Matters
Certain Policies of the Operating Partnership
- ---------------------------------------------
The Operating Partnership intends to continue to operate in a manner that will
not subject it to regulation under the Investment Company Act of 1940. The
Operating Partnership has in the past four years and may in the future (i) issue
securities senior to the Company's Common Stock, (ii) fund acquisition
activities with borrowings under its line of credit and (iii) offer shares of
the Company's Common Stock and/or units of limited partnership interest in the
Operating Partnership as partial consideration for property acquisitions. The
Operating Partnership from time to time acquires partnership interests in
partnerships, either directly or indirectly through subsidiaries of the
Operating Partnership, when such partnership's underlying assets are real
estate. In general, the Operating Partnership does not (i) underwrite securities
of other issuers or (ii) actively trade in loans or other investments.
The Operating Partnership primarily invests in multifamily properties in the
Southern California area, San Francisco Bay Area, Seattle metropolitan area and
the Portland, Oregon metropolitan area. The Operating Partnership currently
intends to continue to invest in multifamily properties in such regions, but may
change such policy.
The policies discussed above may be reviewed and modified from time to time by
the Board of Directors of the Company.
<PAGE>
Item 2. Properties
Portfolio Overview
- ------------------
The Operating Partnership's property portfolio (including partial ownership
interests) consists of the following 63 Properties: 58 multifamily residential
Properties containing 12,267 apartment units, two office buildings, one of which
houses the Operating Partnership's headquarters, with approximately 62,000
square feet and three retail properties with approximately 236,000 square feet.
The Properties are located in Northern California (the San Francisco bay area),
Southern California and the Pacific Northwest (the Seattle, Washington and
Portland, Oregon metropolitan areas). The Operating Partnership's multifamily
Properties accounted for approximately 97 % of the Operating Partnership's
revenues for the year ended December 31, 1998. The 58 multifamily residential
Properties had an average occupancy rate (based on "Financial Occupancy", which
refers to the percentage resulting from dividing actual rents by total possible
rents as determined by valuing occupied units at contractual rates and vacant
units at market rents) during the year ended December 31, 1998 of approximately
96 %. As of December 31, 1998, the two office buildings had an occupancy rate
(based on leased and occupied square footage) of 100% and the three retail
centers had an occupancy rate of 98%. With respect to stabilized multifamily
properties with sufficient operating history, occupancy figures are based on
Financial Occupancy. With respect to commercial properties or properties which
have not yet stabilized or have insufficient operating history, occupancy
figures are based on " Physical Occupancy " which refers to the percentage
resulting from dividing leased and occupied square footage by rentable square
footage.
For the year ended December 31, 1998, none of the Operating Partnership's
Properties had book values equal to 10% or more of total assets of the Operating
Partnership or gross revenues equal to 10% or more of aggregate gross revenues
of the Operating Partnership.
Multifamily Residential Properties
- ----------------------------------
These Properties are generally suburban garden apartments and townhomes
comprising multiple clusters of two- and three-story buildings situated on three
to fifteen acres of land. The multifamily properties have on average 211 units,
with a mix of studio, one-, two- and some three-bedroom units. A wide variety of
amenities are available at each apartment community, including swimming pools,
clubhouses, covered parking, and cable television. Many Properties offer
additional amenities, such as fitness centers, volleyball and playground areas,
tennis courts and wood-burning fireplaces.
Most of the multifamily Properties are designed for and marketed to people in
white-collar or technical professions. The Operating Partnership selects, trains
and supervises a full team of on-site service and maintenance personnel. The
Operating Partnership believes that its customer-service approach enhances its
ability to retain tenants and that its multifamily Properties were built well
and have been maintained well since acquisition.
Office Buildings
- ----------------
The Operating Partnership's corporate headquarters are located in a two-story
office building with approximately 17,400 square feet located at 925 East Meadow
Drive, Palo Alto, California. The Operating Partnership acquired this property
in 1997 and relocated its corporate headquarters to approximately 15,400 square
feet of this building in March 1998. The remaining 2,000 square feet is leased
to an unrelated third party tenant.
The Operating Partnership also owns a prepaid ground leasehold interest in its
office building at 777 California Avenue in the Stanford Research Park in Palo
Alto, California. This building has approximately 45,000 rentable square feet of
space and is a multi-tenant, one-story office building. The Marcus & Millichap
Company (an affiliate of Mr. Marcus, the Company's chairman) occupies
approximately 23,000 square feet and the remaining two tenants occupy
approximately 22,000 square feet. The ground lease for this building is prepaid
until its expiration in 2054, and, unless the lease is extended, the land,
together with all improvements thereon, will revert to the owner in 2054.
<PAGE>
The following tables describe the Operating Partnership's Properties as of
December 31, 1998. The first table describes Operating Partnership's
multifamily residential Properties and the second table describes Operating
Partnership's Commercial Properties.
<TABLE>
<CAPTION>
Rentable
Square Year Year
Multifamily Residential Location Units Footage Built Acquired Occupancy(2)
Properties (1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Northern California
Bristol Commons (3) Sunnyvale, CA 188 142,668 1989 1995 98%
Eastridge San Ramon, CA 188 174,104 1988 1996 97%
Foothill Gardens San Ramon, CA 132 155,100 1985 1997 96%
Marina Cove(4) Santa Clara, CA 292 250,294 1974 1994 98%
Oak Pointe Sunnyvale, CA 390 294,180 1973 1988 98%
Plumtree Santa Clara, CA 140 113,260 1975 1994 97%
The Shores (3) San Ramon, CA 348 275,888 1988 1995 97%
Stevenson Place Fremont, CA 200 146,296 1971 1982 95%
Summerhill Commons Newark, CA 184 139,012 1987 1987 97%
Summerhill Park Sunnyvale, CA 100 78,584 1988 1988 97%
Treetops (3) Fremont, CA 172 131,270 1978 1996 98%
Twin Creeks San Ramon, CA 44 51,700 1985 1997 96%
Westwood (3) Cupertino, CA 116 135,288 1963 1998 92%
Wimbledon Woods Hayward, CA 560 462,400 1975 1998 97%
Windsor Ridge Sunnyvale, CA 216 161,892 1989 1989 96%
------ ---------- -------
3,270 2,711,936 97%
Pacific Northwest
Seattle, Washington
Metropolitan Area
Anchor Village (5) Mukilteo, WA 301 245,928 1981 1997 94%
Bridle Trails (3) Kirkland, WA 92 73,448 1986 1997 98%
Brighton Ridge Renton, WA 264 201,300 1986 1996 94%
Castle Creek Newcastle, WA 216 191,935 1997 1997 92% (11)
Emerald Ridge Bellevue, WA 180 144,036 1987 1994 98%
Evergreen Heights Kirkland, WA 200 188,340 1990 1997 95%
Foothill Commons (3) Bellevue, WA 360 288,317 1978 1990 95%
Inglenook Court Bothell, WA 224 183,624 1985 1994 96%
Laurels at Mill Creek Mill Creek, WA 164 134,360 1981 1996 96%
Maple Leaf (3) Seattle, WA 48 35,584 1986 1997 96%
The Palisades (3) Bellevue, WA 192 159,792 1977 1990 97%
Sammamish View Bellevue, WA 153 133,590 1986 1994 96%
Spring Lake (3) Seattle, WA 69 42,325 1986 1997 97%
Stonehedge Village (3) Bothell, WA 196 214,872 1986 1997 91%
Wandering Creek Kent, WA 156 124,366 1986 1995 92%
Wharfside Pointe Seattle, WA 142 119,290 1990 1994 97%
Woodland Commons (3) Bellevue, WA 236 172,316 1978 1990 95%
Pacific Northwest
Portland, Oregon Metropolitan
Area
Jackson School Village(8) Hillsboro, OR 200 196,896 1996 1996 84%
Landmark Hillsboro, OR 285 282,934 1990 1996 93%
Meadows at Cascade Park Vancouver, WA 198 199,377 1989 1997 91%
Village at Cascade Park Vancouver, WA 192 178,144 1989 1997 88%
------ ---------- -------
4,068 3,510,774 94%
Southern California
The Bluffs II (6) San Diego, CA 224 126,744 1974 1997 98%
Bunker Hill (3) Los Angeles, CA 456 346,672 1968 1998 97%
Camarillo Oaks (3) Camarillo, CA 564 459,072 1985 1996 97%
Casa del Mar Pasadena, CA 96 61,308 1972 1997 97%
Casa Mango (6) Del Mar, CA 96 88,112 1981 1997 97%
Cochran Apartments Los Angeles, CA 58 51,468 1989 1998 96%
Highridge (5) Rancho Palos, CA 255 290,250 1972 1997 95%
Huntington Breakers (3) Huntington Beach, CA 342 241,763 1984 1997 97%
Kings Road Los Angeles, CA 196 132,112 1979 1997 97%
Meadowood (3) Simi Valley, CA 320 264,568 1986 1996 97%
Mirabella Newbury Park, CA 608 521,968 1973 1998 92%
Park Place Los Angeles, CA 60 48,000 1988 1997 96%
Pathways(7) Long Beach, CA 296 197,720 1975 1991 96%
Riverfront (6) San Diego, CA 229 231,006 1990 1997 97%
Tara Village Tarzana, CA 168 173,600 1972 1997 97%
Trabuco Villas Lake Forest, CA 132 131,032 1985 1997 96%
Villa Rio Vista Anaheim, CA 286 242,410 1968 1985 94%
Villa Scandia Ventura, CA 118 71,160 1971 1997 97%
Village Apartments Oxnard, CA 122 122,120 1974 1997 98%
Wilshire Promenade Fullerton, CA 128 108,470 1992 1997 97%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Windsor Court Los Angeles, CA 58 46,600 1988 1997 96%
Windsor Terrace Pasadena, CA 117 74,475 1972 1997 97%
------ ---------- -------
4,929 4,030,630 96%
------ ----------
Total/Weighted Average 12,267 10,253,340 96%
====== ==========
</TABLE>
<TABLE>
<CAPTION>
Number Rentable Year Year
Property Name(1) Location of Tenants Square Footage Built Acquired Occupancy(2)
- --------------------------------------------------------------------------------------------------------------------
Office Buildings
<S> <C> <C> <C> <C> <C> <C>
777 California Avenue (9) Palo Alto, CA 3 44,827 1988 (10) 1986 100%
925 East Meadow Drive Palo Alto, CA 2 17,404 1984 1997 100%
-- ------- ---
Total Office Buildings 5 62,231 100%
Shopping Centers
Canby Square (5) Canby, OR 17 102,403 1976 1990 96%
Powell Villa Center (5) Portland, OR 14 63,645 1959 1990 98%
Garrison Square (5) Vancouver, WA 8 69,790 1962 1990 100%
-- ------- ---
Total Shopping Centers 39 235,838 98%
-- -------
44 298,069
== =======
</TABLE>
(1) Unless otherwise specified, the Operating Partnership has a 100% ownership
interest in each Property.
(2) For multifamily residential Properties, occupancy rates are based on
Financial Occupancy for the year ended December 31, 1998; for the
Commercial Properties, occupancy rates are based on Physical Occupancy as
of December 31, 1998.
(3) This Property is owned by a single asset limited partnership in which the
Operating Partnership has a minimum 99.0% limited partnership interest.
(4) A portion of this Property on which 84 units are presently located is
subject to a ground lease, which, unless extended, will expire in 2028.
(5) The Operating Partnership has a 1.0% limited partnership interest in this
property.
(6) The Operating Partnership has an 84.0% limited partnership interest in
this property.
(7) The Operating Partnership has a 69.3% ownership interest in this property
(8) The Operating Partnership has a 49.9% ownership interest in this property.
(9) The Operating Partnership owns a ground leasehold interest in the building
and the land on which the building is located. The ground lease is prepaid
until its expiration in 2054, and, unless the lease is extended, the land,
together with all improvements thereon, will revert to the owner in 2054.
(10) Represents a major renovation completion date.
(11) This property was in lease-up during the first three quarters of 1998.
Occupancy rate represents Financial Occupancy for the property for the
fourth quarter of 1998.
Item 3. Legal Proceedings
Neither the Operating Partnership nor any of the Properties is presently subject
to any material litigation nor, to the Operating Partnership's knowledge, is
there any material litigation threatened against Essex or the Properties. The
Properties are subject to certain routine litigation and administrative
proceedings arising in the ordinary course of business, which, taken together,
are not expected to have a material adverse impact on the Operating
Partnership's financial position results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 1998, no matters were submitted to a vote of
security holders.
<PAGE>
Part II
Item 5. Recent Sales of Unregistered Securities
In January 1998, Essex Management Corporation, a California corporation ("EMC")
and an affiliate of the Company, as general partner, and the Operating
Partnership, as special limited partner, entered into (a) a First Amended and
Restated Agreement of Limited Partnership of Western-Las Hadas Investors, and
(b) a Second Amended and Restated Agreement of Limited Partnership of Western-
Seven Trees Investors (collectively, the "Las Hadas Partnerships") pursuant to
which the existing Las Hadas Partnerships were reorganized for the purpose of
acquiring the properties owned by the Las Hadas Partnerships. In connection with
the reorganization, 268,631 units of limited partnership interest ("Units") in
the Las Hadas Partnerships were issued to the existing partners of the Las Hadas
Partnerships, all of whom the Operating Partnership believes qualify as
accredited investors, pursuant to an exemption from registration provided in
Regulation D under the Securities Act. Under the terms of the agreements of
limited partnership of these Partnerships, holders of Units have the right to
require the applicable partnership to redeem their Units for cash, subject to
certain conditions. Subject to certain conditions, the Operating Partnership
may, however, elect to deliver an equivalent number of unregistered shares of
the Company's Common Stock to the holders of the Units in satisfaction of the
applicable Partnership's obligation to redeem the units for cash, upon which
delivery, the holders will have certain rights to require the Company to
register the shares of Common Stock pursuant to the Securities Act.
In February and April 1998, the Operating Partnership sold 1,200,000 and
400,000, respectively, of its 7.875% Series B Preferred Limited Partnership
Units (the "Series B Preferred Units"), to an institutional investor in return
for a total contribution to the Operating Partnership of $80 million. The Series
B Preferred Units will become exchangeable, on a one for one basis, in whole or
in part at any time for shares of the Company's 7.875% Series B Cumulative
Redeemable Preferred Stock, par value $.0001 per share (the "Series B Preferred
Stock"). Pursuant to the terms of a registration rights agreement, entered into
in connection with this private placement, the holders of Series B Preferred
Stock will have certain rights to cause the Company to register such shares of
Series B Preferred Stock. The Series B Preferred Units were issued by the
Operating Partnership in a privately negotiated transaction to an accredited,
institutional investor in reliance on the exemption provided by Section 4(2) of
the Securities Act. In November 1998, the Operating Partnership sold 500,000
units of its 9.125% Series C Cumulative Redeemable Preferred Units to an
institutional investor in a private placement, at a price of $50.00 per unit for
a contribution of $25 million. The Operating Partnership utilized the net
proceeds from these sales to reduce the Operating Partnership's outstanding
lines of credit balances.
Item 6. Summary Financial and Operating Data
The following tables set forth summary financial and operating information (i)
for the Operating Partnership from June 13, 1994 (completion of the Company's
IPO) through December 31, 1998, and (ii) on a pro forma basis for the Operating
Partnership for the year ended December 31, 1994. The unaudited pro forma
financial and operating information for the year ended December 31, 1994 is
based on the ownership and operation of the 23 properties owned at the time of
the Company's initial public offering (the "IPO") (including the properties
acquired as of the IPO) combined with the financial and operating information of
EPC and is presented as if the following had occurred on January 1, 1994: (i)
the IPO was completed, (ii) the Company qualified as a REIT, (iii) the Operating
Partnership used the net proceeds from the IPO and the debt incurred in
connection with the IPO to fund a series of asset acquisitions and mortgage
repayments in connection with the IPO, and (iv) Essex Management Corporation
(''EMC'') was formed and certain property and asset management contracts were
assigned to EMC (such pro forma adjustments, the IPO Pro Forma Adjustments'').
The pro forma financial and operating information should not be considered
indicative of actual results that would have been achieved had the transactions
occurred on the dates or for the periods indicated and do not purport to
indicate results of operations as of any future date or for any future period.
The following table should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations and with all of
the financial statements and notes thereto.
<PAGE>
<TABLE>
<CAPTION>
Year Year Year Year June 13, Pro forma Jan.1,
ended ended ended ended 1994- Year ended 1994-
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, June 12,
1998 1997 1996 1995 1994 1994(1) 1994
------- -------- ------- ------- ------- ---------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues
Rental................................... $ 119,397 $ 79,936 $ 47,780 $ 41,640 $ 19,499 $ 34,154 $ 12,742
Other property income.................... 2,645 1,464 756 702 376 633 1,794
Interest and other income................ 3,217 3,169 2,157 1,598 538 1,206 275
-------- --------- --------- --------- --------- --------- ---------
Total revenues........................ 125,259 84,569 50,693 43,940 20,413 35,993 14,811
EXPENSES
Property operating expenses.............. 37,933 25,826 15,505 13,604 6,452 11,414 4,267
Depreciation and amortization............ 21,948 13,992 8,855 8,007 4,030 7,047 2,598
Amortization of deferred financing costs. 718 509 639 1,355 773 1,407 96
General and administrative............... 3,765 2,413 1,717 1,527 457 804 306
Property and asset management............ - - - - - - 974
Other expenses........................... 930 138 42 288 - - 314
Interest................................. 19,374 12,659 11,442 10,928 4,304 7,086 5,924
-------- --------- --------- --------- --------- --------- ---------
Total expenses........................ 84,668 55,537 38,200 35,709 16,016 27,758 14,479
-------- --------- --------- --------- --------- --------- ---------
Income before gain on sales, minority
interests, provision for income taxes
and extraordinary item................... 40,591 29,032 12,493 8,231 4,397 8,235 332
Gain on sales of real estate............. 9 5,114 2,477 6,013 - - -
Minority interests....................... (462) (463) (386) (352) (164) (298) (134)
Provision for income taxes............... - - - - - - (267)
Extraordinary item-loss on early
extinguishment of debt................... (4,718) (361) (3,441) (154) - - -
-------- --------- --------- -------- -------- -------- -------
Net Income................................. $ 35,420 $ 33,322 $ 11,143 $ 13,738 $ 4,233 $ 7,937 $ (69)
======== ========= ========= ======== ======== ======== =======
Net income per unit - diluted (2).......... $ 1.41 $ 1.94 $ 1.15 $ 1.69 $ - $ - $ -
======== ========= ========= ======== ======== ======== =======
Weighted average common units
outstanding - diluted (in thousands).... 18,682 17,149 9,203 8,130 8,130 8,130 -
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in real estate (before accumulated depreciation)... $ 889,964 $ 730,987 $ 393,809 $ 284,358 $ 282,344
Net investment in real estate................................. 875,978 702,716 354,715 244,077 248,232
Real estate under development................................. 53,213 20,234 - - -
Total assets.................................................. 931,796 738,835 417,174 273,660 269,065
Total property indebtedness................................... 361,515 276,597 153,205 154,524 150,019
Partners' capital............................................. 517,281 424,402 247,046 109,941 109,904
</TABLE>
<TABLE>
<CAPTION>
Year Year Year Year June 13, Pro Forma
ended ended ended ended 1994- Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1998 1997 1996 1995 1994 1994 (1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Debt service coverage ratio(3)................. 4.3x 4.4x 2.9x 2.6x 3.1x 3.4x
Gross operating margin(4)...................... 68% 68% 68% 67% 67% 67%
Average same-property monthly rental rate
per apartment unit (5) (6).................... $ 944 $ 852 $ 798 $ 749 $ 715 $ -
Average same-property monthly operating
expenses per apartment unit (5) (7)........... $ 256 $ 257 $ 248 $ 241 $ 234 $ -
Total multifamily units (at end of period).... 12,267 10,700 6,624 4,868 4,410 4,410
Multifamily residential property occupancy
rate(8)....................................... 96% 96% 97% 97% 96% 96%
Total properties (at end of period)............ 63 59 36 30 29 29
</TABLE>
<PAGE>
(1) The unaudited pro forma financial and operating information for the year
ended December 31, 1994 is based on the ownership and operations of the 23
properties owned at the time of the Company's initial public offering (the
"IPO") (including the properties acquired as of the IPO) combined with the
financial and operating information of EPC and is presented as if the
following had occurred on January 1, 1994; (i) the IPO was completed (ii)
Essex qualified as a REIT (iii) the Company used the net proceeds from the
IPO and debt incurred in connection with the IPO to fund a series of asset
acquisitions and mortgage repayments in connection with the IPO and (iv) EMC
was formed and certain property and asset management contracts were assigned
to it.
(2) Per share amounts are presented only for the periods subsequent to June 13,
1994 and the pro forma 1994 period and are based upon respective amounts
divided by the weighted average outstanding shares on the applicable dates.
(3) Debt service coverage ratio represents earnings before interest expense,
taxes, depreciation and amortization ("EBITDA") divided by interest expense.
(4) Gross operating margin represents rental revenues less property operating
expenses, exclusive of depreciation and amortization divided by rental
revenues.
(5) Same-property apartment units are those units that the Operating Partnership
has owned for the entire two years ended as of the end of the period set
forth.
(6) Average same-property monthly rental rate per apartment unit represents
total scheduled rent for the same-property apartment units for the period
(actual rental rates on occupied apartment units plus market rental rates on
vacant apartment units) divided by the number of such apartment units and
further divided by the number of months in the period.
(7) Average same-property monthly expenses per apartment unit represents total
monthly operating expenses, exclusive of depreciation and amortization, for
the same-property apartment units for the period divided by the total number
of such apartment units and further divided by the number of months in the
period.
(8) Occupancy rates are based on Financial Occupancy, (which refers to the
percentage resulting from dividing actual rents by total possible rents as
determined by valuing occupied units at contractual rates and vacant units
at market rates for the period in question), during the period presented.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is based primarily on the consolidated financial
statements of the Operating Partnership as of and for the years ended December
31, 1998. 1997 and 1996. The information should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
The Operating Partnership holds, directly or indirectly, substantially all of
the Company's assets and conducts substantially all of the Company's operations.
The Company is the sole general partner of the Operating Partnership and as of
December 31, 1998, 1997 and 1996 owned an 89.9%, 89.9% and 86.2% general
partnership interest in the Operating Partnership, respectively.
General Background
The Operating Partnership's revenues are generated primarily from multifamily
property operations, which accounted for 97%, 96%, and 96% of the Operating
Partnership's revenues for the years ended December 31, 1998, 1997, and 1996,
respectively. The Operating Partnership's properties ("the Properties") are
located in Northern California (the San Francisco Bay Area), Southern California
(Los Angeles, Ventura, Orange and San Diego counties) and the Pacific Northwest
(the Seattle, Washington and Portland, Oregon metropolitan areas). Occupancy
levels of the multifamily properties in these markets have averaged over 95% for
the last five years.
Since the Operating Partnership began operations in 1994, the Operating
Partnership has acquired ownership interests in 48 multifamily residential
properties and its headquarters building, of which 11 are located in Northern
California, 21 are located in Southern California, 16 are located in the Seattle
Metropolitan Area and one is located in the Portland Metropolitan Area. In
total, these acquisitions consist of 9,498 units with total capitalized
acquisition costs of approximately $716.7 million. As part of its active
portfolio management strategy, the Operating Partnership has sold, since its
IPO, six multifamily residential properties (five in Northern California and one
in the Pacific Northwest) consisting of a total of 819 units and six retail
shopping centers in the Portland, Oregon metropolitan area at an aggregate gross
sales price of approximately $71.1 million resulting in a net realized gain of
approximately $13.6 million and a deferred gain of $5.0 million.
The Operating Partnership has committed approximately $204,700,000 relating to
eight development projects which are expected to contain an aggregate of 1,578
multifamily units and to be completed during 1999.
Financial occupancy is defined as the percentage resulting from dividing actual
rental income by total possible rental income. Total possible rental income is
determined by valuing occupied units at contractual rents and vacant units at
market rents. Average financial occupancy rates of the Operating Partnership's
multifamily properties on a same-property basis decreased to 96.2% for the year
ended December 31, 1998 from 96.6% for the year ended December 31, 1997. The
regional breakdown of financial occupancy on a same-property basis for the years
ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Northern California 96.9% 97.1%
Southern California 95.8% 95.2%
Pacific Northwest 95.2% 96.4%
</TABLE>
The commercial properties were 100% occupied (based on square footage) as of
December 31, 1998 and 1997.
<PAGE>
Results of Operations
Comparison of Year Ended December 31, 1998 to Year Ended December 31, 1997.
- ---------------------------------------------------------------------------
Total Revenues increased by $40,690,000 or 48.1% to $125,259,000 in 1998 from
$84,569,000 in 1997. The following table sets forth a breakdown of these revenue
amounts, including the revenues attributable to properties owned by the
Operating Partnership for both 1998 and 1997 ("the Same Store Properties").
<TABLE>
<CAPTION>
Years Ended
December 31,
------------ Dollar Percentage
1998 1997 Change Change
Number of ---- ---- ------ ----------
Property revenues Properties (dollars in thousands)
----------
<S> <C> <C> <C> <C> <C>
Same Store Properties
---------------------
Northern California 11 $ 33,397 $30,627 $ 2,770 9.0%
Pacific Northwest 11 21,035 19,510 1,525 7.8
Southern California 3 8,509 8,085 424 5.2
Commercial 1 2,040 1,666 374 22.4
-- -------- ------- ------- -----
Total Same Store Property
revenues 26 64,981 59,888 5,093 8.5%
==
Properties acquired/disposed of
-------------------------------
subsequent to January 1, 1997 57,061 21,512 35,549 165.3%
----------------------------- -------- ------- ------- -----
Total property revenues 122,042 81,400 40,642 49.9
Interest and other income 3,217 3,169 48 1.5
-------- ------- ------- -----
Total revenues $125,259 $84,569 $40,690 48.1%
======== ======= ======= =====
</TABLE>
As set forth in the above table, $35,549,000 of the $40,690,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1997. During this period, the Operating Partnership acquired
interests in 35 properties, (the "Acquisition Properties"), and disposed of two
multifamily properties and six retail shopping centers, (the "Disposition
Properties").
Of the increase in total revenues, $5,093,000 is attributable to increases in
property revenues from the Same Store Properties. Property revenues from the
Same Store Properties increased by approximately 8.5% to $64,981,000 in 1998
from $59,888,000 in 1997. The majority of this increase was attributable to the
11 multifamily Same Store Properties located in Northern California, the
property revenues of which increased by $2,770,000 or 9.0% to $33,397,000 in
1998 from $30,627,000 in 1997. This $2,770,000 increase is primarily
attributable to rental rate increases which were offset in part by a decrease in
average financial occupancy to 96.9% in 1998 from 97.1% in 1997. The 11
multifamily Same Store Properties located in the Pacific Northwest accounted for
the next largest contribution to this Same Store Properties revenues increase.
The property revenues of these properties increased by $1,525,000 or 7.8% to
$21,035,000 in 1998 from $19,510,000 in 1997. This $1,525,000 increase is
primarily attributable to rental rate increases, which were offset in part by a
decrease in average financial occupancy to 95.2% in 1998 from 96.4% in 1997. The
three multifamily Same Store Properties located in Southern California accounted
for the next largest contribution to this Same Store Properties revenues
increase. The property revenues of these properties increased by $424,000 or
5.2% to $8,509,000 in 1998 from $8,085,000 in 1997. This $424,000 increase is
attributable to rental rate increases, and an increase in financial occupancy to
95.8% in 1998 from 95.2% in 1997.
The increase in total revenue also included an increase of $48,000 attributable
to interest and other income.
Total Expenses increased by $29,131,000 or approximately 52.5% to $84,668,000 in
1998 from $55,537,000 in 1997. The most significant factor contributing to this
increase was the growth in the Operating Partnership's multifamily portfolio
from 29 properties (6,624 units) at January 1, 1997 to 58 properties (12,267
units) at December 31, 1998. Interest expense increased by $6,715,000 or 53.0%
to $19,374,000 in 1998 from $12,659,000 in 1997. Such interest expense increase
was primarily due to the net addition of mortgage debt in connection with
property and investment acquisitions. Property operating expenses, exclusive of
depreciation and amortization, increased by $12,107,000 or 46.9% to $37,933,000
in 1998 from $25,826,000 in 1997. Of such increase, $12,356,000 is attributable
to properties acquired or disposed of subsequent to January 1, 1997 which was
offset by a decrease in operating expenses for the Same Store Properties.
Property operating expenses, exclusive of depreciation and amortization, as a
percentage of property revenues was 31.1% for 1998 and 31.7% for 1997. General
and administrative expenses represent the costs of the Operating Partnership's
various acquisition and administrative departments as well as corporate and
partnership administration and non-operating expenses. Such expenses increased
by $1,352,000 in 1998 from the 1997 amount. This increase is largely due to
additional staffing requirements resulting from the growth of the Operating
Partnership. General and administrative expenses as a percentage of total
revenues was 3.0% for 1998 and 2.9% for 1997.
<PAGE>
Net income increased by $2,098,000 to $35,420,000 in 1998 from $33,322,000 in
1997. Net income included an extraordinary loss on early extinguishment of debt
of $4,718,000 in 1998 compared to $361,000 in 1997. Net income for 1998 also
included a gain on sales of real estate of $9,000 compared with $5,114,000 in
1997. The net effect of these items were offset by the net contribution of the
Acquisition Properties and an increase in net operating income from the Same
Store Properties, as offset by a decrease in net operating income attributable
to the Disposition Properties.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996.
- ---------------------------------------------------------------------------
Total Revenues increased by $33,876,000 or 66.8% to $84,569,000 in 1997 from
$50,693,000 in 1996. The following table sets forth a breakdown of these
revenue amounts, including the revenues attributable to properties owned by the
Operating Partnership for both 1997 and 1996 ("the 1997/1996 Same Store
Properties").
<TABLE>
<CAPTION>
Years Ended
December 31,
------------ Dollar Percentage
1998 1997 Change Change
Number of ---- ---- ------ ----------
Property revenues Properties (dollars in thousands)
----------
<S> <C> <C> <C> <C> <C>
1997/1996 Same Store Properties
-------------------------------
Northern California 7 $19,451 $17,092 $ 2,359 13.8%
Pacific Northwest 9 15,737 14,720 1,017 6.9
Southern California 2 4,929 4,844 85 1.8
Commercial 4 4,048 4,046 2 0.0
---- ------- ------- ------- -----
Total 1997/1996 Same Store
Property revenues 22 44,165 40,702 3,463 8.5%
====
Properties acquired/disposed of
-------------------------------
subsequent to January 1, 1996 37,235 7,834 29,401 375.3%
----------------------------- ------- ------- ------- -----
Total property revenues 81,400 48,536 32,864 67.7
Interest and other income 3,169 2,157 1,012 46.9%
------- ------- ------- -----
Total revenues $84,569 $50,693 $33,876 66.8%
======= ======= ======= =====
</TABLE>
As set forth in the above table, $29,401,000 of the $33,876,000 increase in
total revenues is attributable to properties acquired or disposed of subsequent
to January 1, 1996. During this period, the Operating Partnership acquired
interests in 37 properties, and disposed of three multifamily properties and
three retail shopping centers.
Of the increase in total revenues, $3,463,000 is attributable to the 1997/1996
Same Store Properties. Property revenues from the 1997/1996 Same Store
Properties increased by approximately 8.5% to $44,165,000 in 1997 from
$40,702,000 in 1996. The majority of this increase was attributable to the
seven multifamily1997/1996 Same Store Properties located in Northern California,
the property revenues of which increased by $2,359,000 or 13.8% to $19,451,000
in 1997 from $17,092,000 in 1996. This $2,359,000 increase is primarily
attributable to rental rate increases which were offset by a decrease in average
financial occupancy to 97.3% in 1997 from 98.2% in 1996. The nine multifamily
1997/1996 Same Store Properties located in the Pacific Northwest accounted for
the next largest contribution to this 1997/1996 Same Store Properties revenues
increase. The property revenues of these properties increased by $1,017,000 or
6.9% to $15,737,000 in 1997 from $14,720,000 in 1996. This $1,017,000 increase
is attributable to rental rate increases as well as an increase in average
financial occupancy to 96.6% for 1997 from 95.6% in 1996.
The increase in total revenue also included an increase of $1,012,000
attributable to interest and other income. The most significant component of
this $1,012,000 increase was an increase in interest income earned on notes
receivable balances.
Total Expenses increased by $17,337,000 or approximately 45.4% to $55,537,000 in
1997 from $38,200,000 in 1996. The most significant factor contributing to this
increase was the growth in the Operating Partnership's multifamily portfolio
from 23 properties, (4,868 units) at January 1, 1996 to 54 properties, (10,700
units) at December 31, 1997. Interest expense increased by $1,217,000 or 10.6%
to $12,659,000 in 1997 from $11,442,000 in 1996. Such interest expense increase
was primarily due to the net addition of outstanding mortgage debt in connection
with property and investment acquisitions. Property operating expenses,
exclusive of depreciation and amortization, increased by $10,321,000 or 66.6% to
$25,826,000 in 1997 from $15,505,000 in 1996. Of such increase, $10,046,000 is
attributable to properties acquired or disposed of subsequent to January 1,
1996. Property operating expenses, exclusive of depreciation and amortization
as a percentage of property revenues was 31.7% for 1997 and 31.9% for 1996.
General and administrative expenses represent the costs of the Company's various
acquisition and administrative departments as well as corporate and partnership
administration and non-operating expenses. Such expenses increased by $696,000
in 1997 from the 1996 amount. This increase is largely due to additional
staffing requirements resulting from the growth of the Operating Partnership.
General and administrative expenses as a percentage of total revenues was 2.9%
for 1997 and 3.4% for 1996.
<PAGE>
Net income increased by $22,179,000 to $33,322,000 in 1997 from $11,143,000 in
1996. The increase in net income was primarily a result of the net contribution
of acquisitions and dispositions, the increase in property revenues from the
1997/1996 Same Store Properties, the increase in the gain on sales of real
estate of $2,637,000 to $5,114,000 in 1997 from $2,477,000 in 1996 and a
reduction in extraordinary loss on early extinguishment of debt of $3,080,000 to
$361,000 in 1997 from $3,441,000 in 1996.
Liquidity and Capital Resources
At December 31, 1998, the Operating Partnership had $2,548,000 of unrestricted
cash and cash equivalents. The Operating Partnership expects to meet its short-
term liquidity requirements by using its working capital, cash generated from
operations, and amounts available under lines of credit. The Operating
Partnership believes that its future net cash flows will be adequate to meet
operating requirements and to provide for payment of dividends by the Operating
Partnership in accordance with REIT requirements. The Operating Partnership has
credit facilities in the committed amount of approximately $110,000,000 of which
$10,000,000 will expire in March 1999 if not renewed. At December 31, 1998 the
Operating Partnership had $35,693,000 outstanding on its lines of credit, with
interest rates ranging from 6.4% to 8.5% throughout the year. The Operating
Partnership expects to meet its long-term liquidity requirements relating to
property acquisitions and development (beyond the next 12 months) by using
working capital, amounts available on lines of credit, net proceeds from public
and private debt and equity issuances, and proceeds from the disposition of
properties that may be sold from time to time. There can, however, be no
assurance that the Operating Partnership will have access to the debt and equity
markets in a timely fashion to meet long-term liquidity requirements or that
future working capital and borrowings under the lines of credit will be
available, or if available, will be sufficient to meet the Operating
Partnership's requirements or that the Operating Partnership will be able to
dispose of properties in a timely manner and under terms and conditions that the
Operating Partnership deems acceptable.
The Operating Partnership's total cash balances decreased $1,734,000 from
$4,282,000 as of December 31, 1997 to $2,548,000 as of December 31, 1998. The
Operating Partnership generated $59,034,000 in cash from operations, used
$179,901,000 of cash in investing activities and obtained $119,133,000 of cash
from financing activities. Of the $179,901,000 net cash used in investing
activities, $163,019,000 was used to purchase and upgrade rental properties,
$33,256,000 was used to fund real estate under development and $9,439,000 was
used to fund the Operating Partnership's restricted cash; these expenditures
were offset by $26,354,000 of proceeds received from the disposition of one
multifamily and three retail properties. The $119,133,000 net cash provided by
financing activities was primarily a result of $349,540,000 of proceeds from
mortgages and other notes payable and lines of credit, $102,150,000 net proceeds
from preferred units sales, as offset by $283,065,000 of repayments of mortgages
and other notes payable and lines of credit, and $43,212,000 of
dividends/distributions paid.
As of December 31, 1998, the Operating Partnership's outstanding debt was
$361,515,000. Such indebtedness consisted of $267,002,000 in fixed rate debt,
$35,693,000 of variable rate debt and $58,820,000 of debt represented by tax
exempt variable rate demand bonds, of which $29,220,000 is capped at a maximum
interest rate of 7.2%.
As of December 31, 1998, 33 of the Operating Partnership's 58 majority-owned
properties were encumbered by debt. The agreements underlying these
encumbrances contain customary restrictive covenants which the Operating
Partnership believes do not have a material adverse effect on its operations.
As of December 31, 1998, the Operating Partnership is in compliance with such
covenants. Also, of the Operating Partnership's 33 properties encumbered by
debt, 18 are secured by deeds of trust relating solely to those properties.
With respect to the remaining 15 properties, three cross-collateralized
mortgages are secured by eight properties, three properties, and three
properties, respectively. The Operating Partnership's $10 million line of
credit is secured by one property.
Non-revenue generating capital expenditures are improvements and upgrades that
extend the useful life of the asset and are not related to preparing a
multifamily property unit to be rented to a tenant. For the year ended December
31, 1998, non-revenue generating capital expenditures totaled approximately
$3,498,000 or an annualized $311 per weighted average occupancy unit. The
Operating Partnership expects to incur approximately $315 per weighted average
occupancy unit in non-revenue generating capital expenditures for the year ended
December 31, 1999. These expenditures do not include the improvements required
in connection with the origination of mortgage loans, expenditures for
acquisition properties renovations and improvements which are expected to
generate additional revenues, and renovation expenditures required pursuant to
tax-exempt bond financings. The Operating Partnership expects that cash from
operations and/or its lines of credit will fund such expenditures. However,
there can be no assurance that the actual expenditures incurred during 1999
and/or the funding thereof will not be significantly different than the
Company's current expectations.
The Operating Partnership is developing eight multifamily residential projects,
which are anticipated to combine an aggregate of 1,578 multifamily units. The
Operating Partnership expects that such projects will be substantially completed
during 1999. Such projects involve certain risks inherent in real estate
development. As of December 31, 1998, the Operating Partnership's remaining
commitment is approximately $95,130,000 relating to these projects. The
Operating
<PAGE>
Partnership expects to fund such commitments with a combination of its working
capital, amounts available on its lines of credit, net proceeds from public and
private equity and debt issuances, and proceeds from the disposition of
properties, which may be sold from time to time.
The Company pays quarterly dividends from cash available for distribution.
Until it is distributed, cash available for distribution is invested by the
Company primarily in short-term investment grade securities or is used by the
Company to reduce balances outstanding under its lines of credit.
In February 1998 and April 1998, the Operating Partnership sold 1,200,000 and
400,000 units of its 7.875% Series B Cumulative Redeemable Preferred Units
("Perpetual Preferred Units"), respectively, to an institutional investor in a
private placement at a price of $50.00 per unit. The net proceeds from this
offering were $58,275,000 and $19,500,000, respectively. Such units are
convertible into non-voting preferred stock of the Company after ten years from
the completion of the sale or earlier under certain circumstances. The
Operating Partnership utilized the proceeds of this transaction to fund
acquisition of multifamily properties, to reduce outstanding indebtedness and
for general corporate purposes.
In the second quarter of 1998, the Company and the Operating Partnership filed
a registration statement (the "1998 Shelf Registration Statement") with the
Securities and Exchange Commission (the "SEC") to register $300,000,000 of
equity securities of the Company and $250,000,000 of debt securities of the
Operating Partnership. The 1998 Shelf Registration Statement was declared
effective by the SEC in July 1998. Prior to the filing of the 1998 Shelf
Registration Statement, the Company had approximately $42,000,000 of capacity
remaining on a previously filed registration statement that registered equity
securities of the Company. Thus, combined with the prior Shelf Registration
Statement and the 1998 Shelf Registration Statement, the Company has the
capacity to issue up to $342,000,000 of equity securities and the Operating
Partnership has the capacity to issue up to $250,000,000 of debt securities.
In November 1998, the Operating Partnership sold 500,000 units of its 9.125%
Series C Cumulative Redeemable Preferred Units to an institutional investor in a
private placement, at a price of $50.00 per unit. The net proceeds from this
placement were $24,375,000. The Operating Partnership utilized the net proceeds
from this placement to reduce balances on its' outstanding lines of credit.
At December 31, 1998 the Company has outstanding 1,600,000 shares of 8.75%
Convertible Preferred Stock, Series 1996A (the "Convertible Preferred Stock")
which was sold to Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook
Real Estate Co-Investment Partnership, L.P. (collectively "Tiger/Westbrook").
In January 1999, Tiger/Westbrook exercised its option to convert 87,500 shares
of the Convertible Preferred Stock into 100,000 shares of the Company's common
stock. The Company has filed a registration statement covering
Tiger/Westbrook's resale of such 100,000 shares of the Company's common stock
and the registration statement was declared effective by the Securities and
Exchange Commission in December 1998.
Year 2000 Compliance
The Operating Partnership's State of Readiness. The Operating Partnership
utilizes a number of computer software programs and operating systems across its
entire organization, including applications used in financial business systems
and various administrative functions. To the extent that the Operating
Partnership's software applications contains source code that are unable to
appropriately interpret the upcoming calendar year "2000" and beyond, some level
of modification or replacement of such applications will be necessary. The
Operating Partnership currently believes that its "Year 2000" issues are limited
to information technology ("IT") systems (i.e., software programs and computer
operating systems). There are no significant non-IT systems (i.e., devices used
to control, monitor or assist the operation of equipment and machinery), the
failure of which would have a material effect on the Operating Partnership's
operations. The Operating Partnership has also completed its assessment of the
Year 2000 compliance issues presented by its IT systems.
Employing a team made up of internal personnel, the Operating Partnership has
completed its identification of IT systems that are not yet Year 2000 compliant
and has commenced modification or replacement of such systems as necessary,
which is expected to be completed by the fourth quarter of 1999. The Operating
Partnership has communicated with third parties with whom it does significant
business, such as financial institutions and vendors to determine their
readiness for Year 2000 compliance. Based on position statements received by
the Operating Partnership, it appears that the Year 2000 compliance effort being
made by third parties with which the Operating Partnership does significant
business is sufficient to avoid a material adverse impact on the Operating
Partnership's liquidity or ongoing results of operations. However, no assurance
can be given regarding the cost of their failure to comply. The Operating
Partnership is in the process of developing contingency plans should third
parties with which the Operating Partnership does significant business fail to
be Year 2000 compliant.
Costs of Addressing the Operating Partnership's Year 2000 issues. Given the
information known at this time about the Operating Partnership's systems that
are non-compliant, coupled with the Operating Partnership's ongoing, normal
course-
<PAGE>
of-business efforts to upgrade or replace critical systems, as necessary,
management does not expect Year 2000 compliance costs to have any material
adverse impact on the Operating Partnership's liquidity or ongoing results of
operations. As of December 31, 1998, no compliance costs have been incurred by
the Operating Partnership. The costs of any future assessment and remediation
will be paid out of the Operating Partnership's general and administrative
expenses.
Risks of the Operating Partnership's Year 2000 issues. In light of the
Operating Partnership's assessment and remediation efforts to date, and the
planned, normal course-of-business upgrades planned by the Operating Partnership
and its vendors, management believes that any residual Year 2000 risk is limited
to non-critical business applications and support hardware. No assurance can be
given, however, that all of the Operating Partnership systems will be year 2000
compliant or that compliance will not have a material adverse effect on the
Operating Partnership's future financial position, liquidity or results of
operations.
<PAGE>
Funds from Operations
Industry analysts generally consider Funds from Operations ("Funds from
Operations") an appropriate measure of performance of an equity REIT. The
Company, the sole general partner in the Operating Partnership, has elected to
be treated as a REIT under the code. Generally, Funds from Operations adjusts
the net income of equity REITS for non-cash charges such as depreciation and
amortization of rental properties and non-recurring gains or losses. Management
generally considers Funds from Operations to be a useful financial performance
measurement of an equity REIT because, together with net income and cash flows,
Funds from Operations provides investors with an additional basis to evaluate
the performance of a REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from Operations does not represent net income
or cash flows from operations as defined by generally accepted accounting
principles (GAAP) and is not intended to indicate whether cash flows will be
sufficient to fund cash needs. It should not be considered as an alternative to
net income as an indicator of the REIT's operating performance or to cash flows
as a measure of liquidity. Funds from Operations does not measure whether cash
flow is sufficient to fund all cash needs including principal amortization,
capital improvements and distributions to shareholders. Funds from Operations
also does not represent cash flows generated from operating, investing or
financing activities as defined under GAAP. Further, Funds from Operations as
disclosed by other REITs may not be comparable to the Company's calculation of
Funds from Operations. The following table sets forth the Operating
Partnership's calculation of Funds from Operations for 1998, 1997 and 1996.
<PAGE>
<TABLE>
<CAPTION>
For the year For the quarter ended
ended -----------------------------------------------------------
12/31/98 12/31/98 9/30/98 6/30/98 3/31/98
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income before gain on sale of real estate,
minority interests and extraordinary item $ 40,591,000 $ 10,933,000 $ 9,998,000 $ 10,005,000 $ 9,655,000
Adjustments:
Depreciation and amortization 21,948,000 6,072,000 5,575,000 5,632,000 4,669,000
Adjustments for unconsolidated
joint ventures 1,393,000 366,000 365,000 366,000 296,000
Non-recurring items:
Provision for litigations loss 930,000 -- 930,000 -- --
Minority interests (1) (6,367,000) (2,014,000) (1,754,000) (1,692,000) (907,000)
------------ ------------ ----------- ------------ -----------
Funds from Operations $ 58,495,000 $15,357,000 $15,114,000 $ 14,311,000 $13,713,000
============ =========== =========== ============ ===========
Weighted average number
shares outstanding diluted (1) 20,510,988 20,522,910 20,523,466 20,549,875 20,550,845
<CAPTION>
For the year For the quarter ended
ended -----------------------------------------------------------
12/31/97 12/31/97 9/30/97 6/30/97 3/31/97
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income before gain on sale of real estate,
minority interests and extraordinary item $ 29,032,000 $ 8,483,000 $ 7,899,000 $ 6,907,000 $ 5,743,000
Adjustments:
Depreciation and amortization 13,992,000 4,129,000 3,555,000 3,220,000 3,088,000
Adjustments for unconsolidated
joint ventures 941,000 251,000 242,000 448,000 --
Non-recurring items:
Loss from hedge termination 138,000 138,000 -- -- --
Minority interests (1) (603,000) (162,000) (161,000) (142,000) (138,000)
------------ ----------- ----------- ----------- -----------
Funds from Operations $ 43,500,000 $12,839,000 $11,535,000 $10,433,000 $ 8,693,000
============ =========== =========== ============ ===========
Weighted average number
shares outstanding diluted (1) 17,152,990 19,435,950 17,860,753 16,624,396 14,557,019
<CAPTION>
For the year For the quarter ended
ended -----------------------------------------------------------
12/31/96 12/31/96 9/30/96 6/30/96 3/31/96
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income before gain on sale of real estate,
minority interests and extraordinary item $ 12,493,000 $ 4,550,000 $ 3,305,000 $ 2,440,000 $ 2,198,000
Adjustments:
Depreciation and amortization 8,855,000 2,342,000 2,276,000 2,047,000 2,190,000
Adjustments for unconsolidated
joint ventures 508,000 129,000 130,000 130,000 119,000
Non-recurring items:
Loss from hedge termination 42,000 -- 3,000 18,000 21,000
Minority interests (1) (560,000) (144,000) (144,000) (132,000) (140,000)
------------ ----------- ----------- ----------- -----------
Funds from Operations $ 21,338,000 $ 6,877,000 $ 5,570,000 $ 4,503,000 $ 4,388,000
============ =========== =========== ============ ===========
Weighted average number
shares outstanding diluted (1) 9,533,269 11,942,857 9,878,075 8,130,000 8,130,000
</TABLE>
(1) Includes all outstanding shares of the Company's common stock and assumes
conversion of all outstanding operating partnership interests in the
Operating Partnership and Convertible Preferred Stock into shares of the
Company's common stock. Also includes common stock equivalents. Minority
interests have been adjusted to reflect such conversion.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Operating Partnership is exposed to interest rate changes primarily as a
result of its line of credit and long-term debt used to maintain liquidity and
fund capital expenditures and expansion of the Operating Partnership's real
estate investment portfolio and operations. The Operating Partnership's
interest rate risk management objective is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall borrowing costs. To
achieve its objectives the Operating Partnership borrows primarily at fixed
rates and may enter into derivative financial instruments such as interest rate
swaps, caps and treasury locks in order to mitigate its interest rate risk on a
related financial instrument. The Operating Partnership does not enter into
derivative or interest rate transactions for speculative purposes.
The Operating Partnership's interest rate risk is monitored using a variety of
techniques. The table below presents the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes. Management of the Operating
Partnership believes that principal amounts of the Operating Partnership's
mortgage notes payable and line of credit approximate fair value as of December
31, 1998 as interest rates are consistent with yields currently available to the
Operating Partnership for similar instruments.
<TABLE>
<CAPTION>
For the Year Ended December 31
-----------------------------------------
(In thousands) 1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $2,353 20,395 2,429 24,472 30,083 187,270 $267,002
Average interest rate 7.06% 7.06% 6.56% 6.56% 5.71% 5.71%
Variable rate LIBOR debt $ -- 35,693 -- -- -- 58,820(1) $ 94,513
Average interest rate -- 6.20% -- -- -- 5.50%
</TABLE>
(1) $29,220,000 is capped at 7.2%
The Operating Partnership has a LIBOR based swap contract for a notional amount
of $12,298,000 fixing the one month LIBOR at 6.14% which limits interest rate
exposure on borrowings under the LIBOR based line of credits and matures in
2002. The fair value of this contract as of December 31, 1998 is approximately
$392,000. The Operating Partnership also has four forward treasury contracts
for an aggregate notional amount of $60,000,000, locking the 10 year treasury
rate at between 6.14%-6.26% which limit interest rate exposure on certain future
debt financing and will be settled in 2000. The fair value of these contracts
as of December 31, 1998 is approximately $6,016,000. The fair value represents
the estimated payments that would be made to terminate the agreement at December
31, 1998.
As the table incorporates only those exposures that exist as of December 31,
1998, it does not consider those exposures or positions that could arise after
that date. Moreover, because firm commitments are not presented in the table
above, the information presented therein has limited predictive value. As a
result, the Operating Partnership's ultimate realized gain or loss with respect
to interest rate fluctuations will depend on the exposures that arise during the
period, the Operating Partnership's hedging strategies at that time, and
interest rates.
Item 8. Financial Statements and Supplemental Data
The response to this item is submitted as a separate section of this Form 10-K.
See Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 27, 1999.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 27, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
<PAGE>
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 27,1999.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on April 27, 1999.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
<TABLE>
<CAPTION>
(A) Financial Statements and Report of KPMG LLP, independent auditors Page
----
<S> <C>
(1) Independent Auditors' Report F-1
(2) Consolidated Financial Statements
Balance Sheets as of December 31, 1998 and December 31, 1997 F-2
Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F-3
Statements of Partners' Capital for the years ended December 31, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. F-5
Notes to Consolidated Financial Statements F-6
(3) Financial Statement Schedule: Real Estate and Accumulated Depreciation F-23
for the year ended December 31, 1998
</TABLE>
(B) Reports on Form 8-K
None
(C) Exhibits
The Exhibit Index attached hereto is incorporated into this Item 14(c) by
reference.
<PAGE>
(D) Exhibit No. Document Page
- --------------- -------- ----
3.1 Articles of Amendment and Restatement of Essex dated June 22,
1995, attached as Exhibit 3.1 to Essex's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 1995, and
incorporated herein by reference. --
3.2 Articles Supplementary of Essex Property Trust, Inc. for the
8.75% Convertible Preferred Stock, Series 1996A, attached
as Exhibit 3.1 to Essex's Current Report on Form 8-K, filed
August 13, 1996, and incorporated herein by reference. --
3.3 First Amendment to Articles of Amendment and Restatement of
Essex Property Trust, Inc., attached as Exhibit 3.1 to
Essex's 10-Q as of September 30, 1996, and incorporated
herein by reference. --
3.4 Certificate of Correction to Exhibit 3.2 dated December 20,
1996. (2)
3.5 Amended and Restated Bylaws of Essex Property Trust, Inc.,
attached as Exhibit 3.2 to Essex's Current Report on Form
8-K, filed August 13, 1996, and incorporated herein by
reference. --
3.6 Certificate of Amendment of the Bylaws of Essex Property
Trust, Inc., dated December 17, 1996. (2)
3.7 Articles Supplementary reclassifying 2,000,000 shares of
Common Stock as 2,000,000 shares of 7.875% Series B
Cumulative Redeemable Preferred Stock, filed with the
State of Maryland on February 10, 1998, attached as Exhibit
3.1 to Essex's Current Report on Form 8-K, filed March 3,
1998, and incorporated herein by reference. --
3.8 Articles Supplementary reclassifying 500,000 shares of
Common Stock as 500,000 shares of 9-1/8% Series C
Cumulative Redeemable Preferred Stock, filed with the
State of Maryland on November 25, 1998. --
3.9 Certificate of Correction to Exhibit 3.2 dated February 12,
1999. --
4.0 Articles Supplementary reclassifying 6,617,822 shares of
Common Stock as 6,617,822 shares of Series A Junior
Participating Preferred Stock, filed with the State of
Maryland on November 13, 1998. --
4.1 Rights Agreement, dated as of November 11, 1998, between
Essex Property Trust, Inc., and BankBoston, N.A., as
Rights Agent, including all exhibits thereto, attached
as Exhibit 1 to Essex's Registration Statement filed on
Form 8-A dated November 12, 1998, and incorporated
herein by reference. --
10.1 Essex Property Trust, Inc. 1994 Stock Incentive Plan
(amended and restated as of April 3, 1997 and previously
known as the 1994 Employee Stock Incentive Plan), attached
as Exhibit 10.7 to the Essex's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, and incorporated
herein by reference.* --
10.2 First Amended and Restated Agreement of Limited Partnership
of Essex Portfolio, L.P. attached as Exhibit 10.1 to Essex's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997, and incorporated herein by reference. --
10.3 First Amendment to the First Amended and Restated Agreement
of Limited Partnership of Essex Portfolio, L.P. dated
February 6, 1998, attached as Exhibit 10.1 to Essex's
Current Report on Form 8-K , filed March 3, 1998, and
incorporated herein by reference. --
10.4 Second Amendment to the First Amended and Restated
Agreement of Limited Partnership of Essex Portfolio, L.P.
dated April 20, 1998, attached as Exhibit 10.1 to Essex's
Current Report on Form 8-K, filed April 23, 1998, and
incorporated herein by reference. --
10.5 Third Amendment to the First Amended and Restated Agreement
of Limited Partnership of Essex Portfolio, L.P. dated
November 24, 1998. --
10.6 Form of Essex Property Trust, Inc. 1994 Non-Employee and
Director Stock Incentive Plan.* (1)
10.7 Form of the Essex Property Trust, Inc. 1994 Employee
Stock Purchase Plan.* (1)
<PAGE>
10.8 Form of Non-Competition Agreement between Essex and each
of Keith R. Guericke and George M. Marcus.* (1)
10.9 Termination of Non-Compete Agreement between Essex Property --
Trust, Inc. and George M. Marcus.*
10.10 Contribution Agreement by and among Essex, the Operating
Partnership and the Limited Partners in the Operating
Partnership. (1)
10.11 Form of Indemnification Agreement between Essex and its
directors and officers. (1)
10.12 Stock Purchase Agreement dated as of June 20, 1996 by and
between Essex Property Trust, Inc. and Tiger/Westbrook Real
Estate Fund L.P. and Tiger/Westbrook Real Estate
Co-Investment Partnership, L.P., attached as Exhibit 10.1
to Essex's Current Report on Form 8-K, filed August 13, 1996,
and incorporated herein by reference. --
10.13 Amendment No. 1 to Stock Purchase Agreement dated as of
July 1, 1996 by and between Essex Property Trust, Inc.
and Tiger/Westbrook Real Estate Fund, L.P. and
Tiger/Westbrook Real Estate Co-Investment Partnership,
L.P., attached as Exhibit 10.2 to Essex's Current Report
on Form 8-K, filed August 13, 1996, and incorporated
herein by reference. --
10.14 First Amendment to Investor Rights Agreement dated
July 1, 1996 by and between George M. Marcus and The
Marcus & Millichap Company, attached as Exhibit 10.3
to Essex's Current Report on Form 8-K, filed
August 13, 1996, and incorporated herein by reference. --
10.15 Leasehold agreement between Houghton Mifflin Company
and Stanford University dated as of February 1, 1955,
as amended. (1)
10.16 Agreement by and among M&M, M&M REIBC and the Operating
Partnership and Essex regarding Stock Options. (1)
10.17 Co-Brokerage Agreement by and among Essex, the Operating
Partnership, M&M REIBC and Essex Management Corporation. (1)
10.18 General Partnership Agreement of Essex Washington
Interest Partners. (1)
10.19 Form of Office Lease between the Operating Partnership and
the Marcus and Millichap Company. (1)
10.20 Form of Management Agreement between the Operating
Partnership and Essex Management Corporation regarding the
retail Properties. (1)
10.21 Form of Amended and Restated Agreement among Tenants-in-
Common regarding Pathways Property. (1)
10.22 Form of Promissory Note made by Gilroy Associates and
San Pablo Medical Investors in favor of the Operating
Partnership. (1)
10.23 Form of Investor Rights Agreement between Essex and
the Limited Partners of the Operating Partnership. (1)
10.24 Registration Rights Agreement, dated as of June 20,
1996, attached as Exhibit 10.8 to Essex's Current
Report on Form 8-K, filed August 13, 1996, and
incorporated herein by reference. --
10.25 Letter Agreement, dated July 1, 1996, among Essex
Property Trust, Inc., Essex Portfolio, L.P.,
Tiger/Westbrook Real Estate Fund, L.P. and Tiger/Westbrook
Real Estate Co-Investment Partnership, L.P., attached
as Exhibit 10.9 to Essex's Current Report on Form 8-K,
filed August 13, 1996, and incorporated herein by
reference. --
10.26 Letter Agreement with Tiger/Westbrook entities re:
Limitations on Ownership of Stock of the Company, attached
as Exhibit 10.1 to Essex's 10-Q as of September 30, 1996,
and incorporated herein by reference. --
10.27 Phantom Stock Unit Agreement for Mr. Guericke, attached
as Exhibit 10.1 to Essex's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1997,
<PAGE>
and incorporated herein by reference.* --
10.28 Phantom Stock Unit Agreement for Mr. Schall, attached as
Exhibit 10.2 to Essex's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1997, and incorporated herein
by reference.* --
10.29 Replacement Promissory Note (April 15, 1996) and Pledge
Agreement for Mr. Guericke, attached as Exhibit 10.3 to
Essex's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, and incorporated herein by reference. --
10.30 Promissory Note (December 31, 1996) and Pledge Agreement
for Mr. Guericke, attached as Exhibit 10.4 to Essex's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and incorporated herein by reference. --
10.31 Replacement Promissory Note (April 30, 1996) and Pledge
Agreement for Mr. Schall, attached as Exhibit 10.5 to
Essex's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997, and incorporated herein by reference. --
10.32 Promissory Note (December 31, 1996) and Pledge Agreement
for Mr. Schall, attached as Exhibit 10.6 to Essex's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997, and incorporated herein by reference. --
10.33 First Amended and Restated Agreement of Limited
Partnership of Western-Highridge I Investors, effective as
of May 13, 1997, attached as Exhibit 10.1 to Essex's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, and incorporated herein by reference. --
10.34 First Amended and Restated Agreement of Limited Partnership
of Irvington Square Associates, effective as of May 13,
1997, attached as Exhibit 10.2 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997, and
incorporated herein by reference. --
10.35 Fourth Amended and Restated Agreement of Limited
Partnership of Western-Palo Alto II Investors, effective
as of May 13, 1997, attached as Exhibit 10.3 to Essex's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997, and incorporated herein by reference. --
10.36 Fourth Amended and Restated Agreement of Limited
Partnership of Western Riviera Investor, effective as
of May 13, 1997, attached as Exhibit 10.4 to Essex's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference. --
10.37 Fourth Amended and Restated Agreement of Limited
Partnership of Western-San Jose III Investors, effective
as of May 13, 1997, attached as Exhibit 10.5 to Essex's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997, and incorporated herein by reference. --
10.38 Registration Rights Agreement, effective as of May 13,
1997, by and between the Company and the limited partners
of Western-Highridge I Investors, Irvington Square
Associates, Western-Palo Alto II Investors, Western Riviera
Investors, and Western-San Jose III Investors, attached
as Exhibit 10.6 to Essex's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, and incorporated herein
by reference. --
10.39 Ninth Modification Agreement to the Amended and Restated
Revolving Loan Agreement, attached as Exhibit 10.2 to
Essex's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, and incorporated herein by
reference. --
<PAGE>
10.40 Revolving Loan Agreement between Essex Portfolio, L.P.,
a California limited partnership and Bank of America
National Trust and Savings Association dated as of May 11,
1998, attached as Exhibit 10.1 to Essex's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998, and
incorporated herein by reference. --
10.41 $100,000,000 Promissory Note between Essex Portfolio, L.P.,
and Essex Morgan Funding Corporation,. attached as Exhibit
10.1 to Essex's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998, and incorporated herein by
reference. --
12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends. --
21.1 List of Subsidiaries of Essex Property Trust, Inc. --
23.1 Consent of Independent Public Accountants. --
27.1 Article 5 Financial Data Schedule (Edgar Filing Only) --
(1) Incorporated by reference to the identically numbered exhibit to the
Company's Registration Statement on Form S-11 (Registration No. 33-76578),
which became effective on June 6, 1994.
(2) Incorporated by reference to the identically numbered exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
* Management contract or compensatory plan or agreement.
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Essex Portfolio, L.P.
(Registrant)
By: Essex Property Trust, Inc.
Its: General Partner
Dated: March 31, 1999 By: /s/ MICHAEL J. SCHALL
----------------------------------------
Michael J. Schall
Executive Vice President and
Chief Financial Officer and Director
(Principal Financial Officer)
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the date indicated.
Dated March 31, 1999 /s/ GEORGE M. MARCUS
------------------------------------------
George M. Marcus
Chairman of the Board
Dated March 31, 1999 /s/ KEITH R. GUERICKE
------------------------------------------
Keith R. Guericke
President and Chief Executive Officer and
Vice Chairman
Dated March 31, 1999 /s/ MICHAEL J. SCHALL
------------------------------------------
Michael J. Schall
Chief Financial Officer Executive, Vice
President and Director
Dated March 31, 1999 /s/ MARK J. MIKL
------------------------------------------
Mark J. Mikl
Controller (Principal Accounting Officer)
Dated March 31, 1999 /s/ WILLIAM A. MILLICHAP
------------------------------------------
William A. Millichap
Director
Dated March 31, 1999 /s/ GARY P. MARTIN
------------------------------------------
Gary P. Martin
Director
Dated March 31, 1999 /s/ ROBERT E. LARSON
------------------------------------------
Robert E. Larson
Director
<PAGE>
Dated March 31, 1999 /s/ THOMAS E. RANDLETT
-------------------------------------------
Thomas E. Randlett
Director
Dated March 31, 1999 /s/ ANTHONY DOWNS
-------------------------------------------
Anthony Downs
Director
Dated March 31, 1999 /s/ DAVID BRADY
-------------------------------------------
David Brady
Director
Dated March 31, 1999 /s/ ISSIE N. RABINOVITCH
-------------------------------------------
Issie N. Rabinovitch
Director
Dated March 31, 1999 /s/ WILLARD H. SMITH
-------------------------------------------
Willard H. Smith
Director
Dated March 31, 1999 /s/ GREGORY J. HARTMAN
-------------------------------------------
Gregory J. Hartman
Director
<PAGE>
Independent Auditors' Report
The General Partner
Essex Portfolio, L.P.:
We have audited the accompanying consolidated balance sheets of Essex Portfolio,
L.P. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, partners' capital and cash flows for each
of the years in the three-year period ended December 31, 1998. In connection
with our audits of the consolidated financial statements, we have also audited
the related financial statement schedule of Real Estate and Accumulated
Depreciation as of December 31, 1998. These consolidated financial statements
and the financial statement schedule are the responsibility of the management of
Essex Portfolio, L.P. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Essex Portfolio,
L.P. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
San Francisco, California
January 30, 1999
<PAGE>
ESSEX PORTFOLIO, L.P.
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
--------- --------
<S> <C> <C>
Real estate:
Rental properties:
Land and land improvements $219,115 $182,416
Buildings and improvements 670,849 548,571
-------- --------
889,964 730,987
Less accumulated depreciation (77,789) (58,040)
-------- --------
812,175 672,947
Investments 10,590 9,535
Real estate under development 53,213 20,234
-------- --------
875,978 702,716
Cash and cash equivalents 2,548 4,282
Restricted cash 15,532 6,093
Notes and other related party receivables 10,450 9,264
Notes and other receivables 18,809 8,602
Prepaid expenses and other assets 3,444 3,838
Deferred charges, net 5,035 4,040
-------- --------
$931,796 $738,835
======== ========
Liabilities and Partners' Capital
Mortgage notes payable $325,822 $248,997
Lines of credit 35,693 27,600
Accounts payable and accrued liabilities 28,601 21,337
Deferred gain 5,002 --
Distributions payable 11,145 9,189
Other liabilities 5,301 4,208
-------- --------
Total liabilities 411,564 311,331
Minority interests 2,951 3,102
Partners' capital:
General partner:
Common equity 352,295 361,410
Preferred equity 37,505 37,505
-------- --------
389,800 398,915
-------- --------
Limited partners:
Common equity 25,331 25,487
Preferred equity 102,150 --
-------- --------
127,481 25,487
-------- --------
Total partners' capital 517,281 424,402
-------- --------
Commitments and contingencies
$931,796 $738,835
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per unit amounts)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Revenues:
Rental $ 119,397 $ 79,936 $ 47,780
Other property income 2,645 1,464 756
-------------- --------------- --------------
Total property revenues 122,042 81,400 48,536
Interest and other income 3,217 3,169 2,157
-------------- --------------- --------------
Total revenues 125,259 84,569 50,693
-------------- --------------- --------------
Expenses:
Property operating expenses:
Maintenance and repairs 8,972 6,814 4,341
Real estate taxes 9,109 6,340 3,790
Utilities 7,809 5,074 3,175
Administrative 9,228 5,514 2,911
Advertising 1,742 1,225 653
Insurance 1,073 859 635
Depreciation and amortization 21,948 13,992 8,855
-------------- --------------- --------------
59,881 39,818 24,360
Interest 19,374 12,659 11,442
Amortization of deferred financing costs 718 509 639
General and administrative 3,765 2,413 1,717
Loss from hedge termination -- 138 42
Provision for litigation loss 930 -- --
-------------- --------------- --------------
Total expenses 84,668 55,537 38,200
-------------- --------------- --------------
Income before gain on sales of real estate,
minority interests and extraordinary item 40,591 29,032 12,493
Gain on sales of real estate 9 5,114 2,477
Minority interests (462) (463) (386)
-------------- --------------- --------------
Income before extraordinary item 40,138 33,683 14,584
Extraordinary item - loss on early extinguishment of debt (4,718) (361) (3,441)
-------------- --------------- --------------
Net income 35,420 33,322 11,143
Distributions on preferred units - general partner (3,500) (2,681) (635)
Distributions on preferred units - limited partner (5,595) -- --
-------------- --------------- --------------
Net income available to common units $ 26,325 $ 30,641 $ 10,508
============== =============== ==============
Per Operating Partnership Common Unit data:
Basic:
Income before extraordinary item available to
common units $ 1.68 $ 2.00 $ 1.53
Extraordinary item - debt extinguishment (0.25) (0.02) (0.38)
-------------- --------------- --------------
Net income $ 1.43 $ 1.98 $ 1.15
============== =============== ==============
Weighted average number of partnership units
outstanding during the period 18,504,427 15,509,218 9,138,124
============== =============== ==============
Diluted:
Income before extraordinary item available to
common units $ 1.66 $ 1.96 $ 1.52
Extraordinary item - debt extinguishment (0.25) (0.02) (0.37)
-------------- --------------- --------------
Net income $ 1.41 $ 1.94 $ 1.15
============== =============== ==============
Weighted average number of partnership units
outstanding during the period 18,682,416 17,149,600 9,202,527
============== =============== ==============
Distributions per Operating Partnership common unit $ 1.95 $ 1.77 1.72
============== =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Partners' Capital
Years ended December 31, 1998, 1997 and 1996
(Dollars and units in thousands)
<TABLE>
<CAPTION>
General Partner Limited Partner
---------------------------------------- --------------------------------------
Preferred Preferred
Common Equity Equity Common Equity Equity
------------------------- ------------- ----------------------- -------------
Units Amounts Amount Units Amounts Amount Total
---------- ------------ ------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995 6,275 $ 84,729 $ -- 1,855 $ 25,212 $ -- $ 109,941
Contribution - net proceeds
from preferred stock
offering -- -- 17,505 -- -- -- 17,505
Contribution - net proceeds
from common stock
offerings 5,313 126,464 -- -- -- -- 126,464
Contribution - net proceeds
from options exercised 4 68 -- -- -- -- 68
Net income -- 8,246 635 -- 2,262 -- 11,143
Partners' distributions -- (14,205) (635) -- (3,235) -- (18,075)
---------- ------------ ------------- ---------- ---------- ------------- -------------
Balances at December 31,
1996 11,592 205,302 17,505 1,855 24,239 -- 247,046
Contribution - net proceeds
from preferred stock -- -- 20,000 -- -- -- 20,000
Contribution - net proceeds
from common stock 4,995 154,012 -- -- -- -- 154,012
Contribution - net proceeds
from options exercised 28 686 -- -- -- -- 686
Contributions - net proceeds
from partners -- -- -- 18 543 -- 543
Net income -- 26,636 2,681 -- 4,005 -- 33,322
Partners' distributions -- (25,226) (2,681) -- (3,300) -- (31,207)
---------- ------------ ------------- ---------- ---------- ------------- -------------
Balances at December 31,
1997 16,615 361,410 37,505 1,873 25,487 -- 424,402
Contribution - net proceeds
from preferred units -- -- -- -- -- 102,150 102,150
Contribution - net proceeds
from options exercised 24 464 -- -- -- -- 464
Contribution - net proceeds
from dividend
reinvestment plan 2 10 -- -- -- -- 10
Contributions - net proceeds
from partners -- -- -- -- -- -- --
Net income -- 22,829 3,500 -- 3,496 5,595 35,420
Partners' distributions -- (32,418) (3,500) -- (3,652) (5,595) (45,165)
---------- ------------ ------------- ---------- ---------- ------------- -------------
Balances at December 31,
1998 16,641 $ 352,295 37,505 1,873 $ 25,331 $ 102,150 $ 517,281
========== ============ ============= ========== ========== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ESSEX PORTFOLIO, L.P.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ----------------- ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,420 $ 33,322 $ 11,143
Minority interests 462 463 (215)
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sales of real estate (9) (5,114) (2,477)
Equity in (income) loss of limited partnerships (276) 209 (546)
Loss on early extinguishment of debt 4,718 361 3,441
Loss from hedge termination -- 138 42
Depreciation and amortization 21,948 13,992 8,855
Amortization of deferred financing costs 718 509 639
Changes in operating assets and liabilities:
Other receivables (10,207) (1,377) (163)
Prepaid expenses and other assets 336 (158) (2,110)
Accounts payable and accrued liabilities 4,831 2,738 842
Other liabilities 1,093 1,815 684
---------------- ----------------- ------------------
Net cash provided by operating activities 59,034 46,898 20,135
---------------- ----------------- ------------------
Cash flows from investing activities:
Additions to rental properties (163,019) (247,886) (101,429)
Increase in restricted cash (9,439) (1,899) (4,194)
Issuance of notes receivable (610) (1,932) (3,909)
Repayments of notes receivable -- -- 6,327
Additions to related party notes and other receivables (5,616) (28,761) --
Repayments of related party notes and other receivables 4,430 21,859 --
Distributions from investments in corporations and
limited partnerships 1,255 620 665
Dispositions of real estate 26,354 15,470 13,350
Additions to real estate under development (33,256) (27,422) --
---------------- ----------------- ------------------
Net cash used in investing activities (179,901) (269,951) (89,190)
---------------- ----------------- ------------------
Cash flows from financing activities:
Proceeds from mortgage and other notes payable and
lines of credit 349,540 204,931 91,253
Repayment of mortgage and other notes payable and
lines of credit (283,065) (164,580) (110,305)
Additions to deferred charges (2,345) (752) (2,530)
Net proceeds from preferred unit sales 102,150 -- --
Contributions from stock offerings - general partner -- 174,012 143,969
Payment of offering related costs (323) (711) 1,140
Contributions from stock options exercised and shares
issued through dividend reinvestment plan - general partner 474 686 68
Net payments made in connection with costs related to the
early extinguishment of debt (4,086) -- (620)
Distributions to limited partners and minority interest (8,138) (3,910) (3,189)
Distributions to general partner (35,074) (25,046) (12,009)
---------------- ----------------- ------------------
Net cash provided by financing activities 119,133 184,630 107,777
---------------- ----------------- ------------------
Net (decrease) increase in cash and cash equivalents $ (1,734) $ (38,423) $ 38,722
Cash and cash equivalents at beginning of period 4,282 42,705 3,983
---------------- ----------------- ------------------
Cash and cash equivalents at end of period $ 2,548 $ 4,282 $ 42,705
================ ================= ==================
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized $ 18,947 $ 12,384 $ 11,575
================ ================= ==================
Supplemental disclosure of non-cash investing and
financing activities:
Mortgage note payable assumed in connection with purchase of
real estate $ 18,443 $ 83,041 $ 17,733
================ ================= ==================
Distributions payable $ 11,145 $ 9,189 $ 6,286
================ ================= ==================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(1) Organization and Basis of Presentation
Essex Portfolio, L.P. (the Operating Partnership) was formed in March 1994
and commenced operations on June 13, 1994, when Essex Property Trust, Inc.
(the Company), the general partner in the Operating Partnership (the
General Partner), completed its initial public offering (the Offering) in
which it issued 6,275,000 shares of common stock at $19.50 per share. The
net proceeds of the Offering of $112,071 were used by the General Partner
to acquire a 77.2% interest in the Operating Partnership. The Operating
Partnership holds the assets and liabilities and conducts the operating
activities of the Company. The Company has elected to be treated as a real
estate investment trust (REIT) under the Internal Revenue Code of 1986 (the
"Code"), as amended.
Since the Offering, the General Partner has continued to increase its
ownership in the Operating Partnership to 89.9% at December 31, 1998 by
contributing proceeds from subsequent stock offerings and proceeds from
exercise of stock options. The limited partners own an aggregate 10.1%
interest in the Operating Partnership at December 31, 1998. The limited
partners may convert their interests into shares of common stock of the
Company or cash (based upon the trading price of the common stock at the
conversion date). The Company has reserved 1,873,473 shares of common stock
for such conversions. These conversion rights may be exercised by the
limited partners at any time through 2024.
The consolidated financial statements include the financial statements of
Essex Portfolio, L.P. and the financial statements of certain limited
partnerships which own multifamily properties in which the Operating
Partnership has a controlling financial interest. Such limited partnerships
are managed by the Operating Partnership and are controlled by the
Operating Partnership as the majority limited partner pursuant to the terms
of the respective partnership agreement. All significant intercompany
balances and transactions have been eliminated in the consolidated
financial statements.
The Operating Partnership operates and has ownership interests in 58
multifamily properties (containing 12,267 units) and five commercial
properties (with approximately 290,000 square feet) (collectively, "the
Properties"). The Properties are located in Northern California (San
Francisco Bay Area), Southern California (Los Angeles, Ventura, Orange and
San Diego counties), and the Pacific Northwest (Seattle, Washington and
Portland, Oregon metropolitan areas).
(2) Summary of Significant Accounting Policies
(a) Real Estate Rental Properties
Rental properties are recorded at cost less accumulated depreciation.
Depreciation on rental properties has been provided over estimated
useful lives ranging from 3 to 40 years using the straight-line
method.
Maintenance and repair expenses are charged to operations as incurred.
Asset replacements and improvements are capitalized and depreciated
over their estimated useful lives.
Certain rental properties are pledged as collateral for the related
mortgage notes payable.
(Continued)
F-6
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
When the Operating Partnership determines that a property is held for
sale, it discontinues the periodic depreciation of that property in
accordance with the provisions of SFAS 121. Assets held for sale are
reported at the lower of the carrying amount or fair value less costs
to sell. In addition, whenever events or changes in circumstances
indicate that the carrying amount of a property held for investment
may not be fully recoverable, the carrying amount will be evaluated.
If the sum of the property's expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
property, then the Operating Partnership will recognize an impairment
loss equal to the excess of the carrying amount over the fair value of
the property. No impairment has been recorded through December 31,
1998. No properties are classified as held for sale as of December 31,
1998.
(b) Real Estate Investments
The Operating Partnership consolidates or accounts for its investments
in joint ventures and corporations under the equity method of
accounting based on its ownership interests in those entities.
(c) Revenues
For multifamily properties, rental revenue is reported on the accrual
basis of accounting. For commercial properties, rental income is
recognized on the straight-line basis over the terms of the leases.
Accrued rent receivable relating to such leases has been included in
other assets in the accompanying consolidated balance sheets.
(d) Income Taxes
No provision for income taxes has been made as the Operating
Partnership's taxable income or loss is reportable on the tax returns
of the individual partners based on their proportionate interest in
the Operating Partnership.
(e) Interest Rate Protection, Swap, and Forward Contracts
The Operating Partnership will from time to time use interest rate
protection, swap and forward contracts to reduce its interest rate
exposure on current or identified future debt transactions. Amounts
paid in connection with such contracts are capitalized and amortized
over the term of the contract or related debt. If the original
contract is terminated, the gain or loss on termination is deferred
and amortized over the remaining term of the contract. If the related
debt is repaid, the unamortized portion of the deferred amount is
charged to income or the contract is marked to market, as appropriate.
The Operating Partnership's policy is to manage interest rate risk for
existing or anticipated borrowings.
(f) Deferred Charges
Deferred charges are principally comprised of mortgage loan fees and
costs which are amortized over the terms of the related mortgage notes
in a manner which approximates the effective interest method.
(Continued)
F-7
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(g) Interest
The Operating Partnership capitalized $3,494, $1,276 and $281 of
interest related to the development of real estate during 1998, 1997
and 1996, respectively.
(h) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ
from those estimates.
(i) Cash Equivalents and Restricted Cash
Highly liquid investments with maturities of three months or less when
purchased are classified as cash equivalents. Restricted cash relates
to reserve requirements in connection with the Operating Partnership's
tax exempt variable rate bond financings and a guarantee the Operating
Partnership has made on a first mortgage loan held by one of its joint
venture partnerships.
(j) Per Common Unit Data
Net income per common unit for the Operating Partnership is computed
using the weighted average number of common units outstanding during
the period.
(k) Income Allocation
Income is allocated to the Partners based upon the terms set forth in
the partnership agreement.
(l) Minority Interest
Minority interest represents a 30.7% interest in the Pathways property
and a 15% interest in three San Diego area multifamily properties.
(m) Reclassifications
Certain reclassifications have been made to the 1997 and 1996 balances
to conform with the 1998 presentation.
(n) New Accounting Pronouncements
In June 1998, the FASB issued Financial Accounting Statement No. 133
(SFAS 133), Accounting for Derivative Instruments and Hedging
Activities. The Operating Partnership will adopt SFAS 133 for interim
periods beginning in 2000, the effective date of SFAS 133. Management
believes that the adoption of these statements will not have a
material impact on the Operating Partnership's financial position or
results of operations.
(Continued)
F-8
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(3) Equity Transactions
In February and April 1998, the Operating Partnership sold 1,200,000 and
400,000 units, respectively, of its 7.875% Series B Cumulative Redeemable
Preferred Units to an institutional investor in a private placement, at a
price of $50.00 per unit. The net proceeds from these offerings were
$58,275 and $19,500, respectively. In November 1998, the Operating
Partnership sold 500,000 units of its 9.125% Series C Cumulative Redeemable
Preferred Units to an institutional investor in a private placement, at a
price of $50.00 per unit. The net proceeds from this offering were $24,375.
During 1997, the Company sold additional shares of Common Stock on March
31, 1997, September 10, 1997 and December 8, 1997. In connection with these
offerings, the Company sold 2,000,000, 1,495,000 and 1,500,000 shares at
$29.13, $31.00 and $35.50 per share, respectively. The net proceeds
received from these transactions were $58,119, $46,080 and $49,814,
respectively.
On June 20, 1996, the Company entered into an agreement to sell up to
$40,000 of the 8.75% Convertible Preferred Stock, Series 1996A (the
Convertible Preferred Stock) at $25.00 per share to Tiger/Westbrook Real
Estate Fund, L.P. and Tiger/Westbrook Real Estate Co-Investment
Partnership, L.P. (collectively, Tiger/Westbrook). In accordance with the
agreement, on July 1, 1996 and September 27, 1996, Tiger/Westbrook
purchased 340,000 and 460,000 shares, respectively, of Convertible
Preferred Stock for an aggregate purchase price of $8,500 and $11,500,
respectively. Tiger/Westbrook purchased an additional $20,000 of
Convertible Preferred Stock, in accordance with the agreement on June 20,
1997. The outstanding Convertible Preferred Stock is entitled to receive
annual cumulative cash dividends paid quarterly in an amount equal to the
greater of (i) 8.75% of the per share price or (ii) the dividends (on an
as-converted basis) paid with respect to the Common Stock plus, in both
cases, any accumulated but unpaid dividends on the Convertible Preferred
Stock. As of December 31, 1998, all of the 1.6 million authorized shares of
Convertible Preferred Stock is convertible into Common Stock at the option
of the holder. The conversion price per share is $21.875, subject to
certain adjustments as defined in the agreement. Under certain
circumstances, if, after June 20, 2001, the Company requires a mandatory
conversion of all of the Convertible Preferred Stock, but under no other
circumstances, each of the holders of the Convertible Preferred Stock may
cause the Company to redeem any or all of such holder's shares of
Convertible Preferred Stock.
The net proceeds of the Company's common and preferred stock offerings were
invested in or advanced to the Operating Partnership.
(Continued)
F-9
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(4) Per Unit Data
Basic income per unit before extraordinary item and diluted income per unit
before extraordinary item were calculated as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ----------------------------------------
Weighted Per-share Weighted Per-
average units amount average share
Income Income units amount
------------------------- ------------ ------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $ 40,138 $ 33,683
Less: dividends on preferred units (9,095) (2,681)
-------- --------
Basic:
Income before extraordinary item
available to common units 31,043 18,504 $ 1.68 31,002 15,509 $ 2.00
============ ============
Effect of Dilutive Securities:
Convertible preferred units -- -- (1) 2,681 1,400
Options -- 178 -- 240
------------------------- -------- ------
Diluted:
Income before extraordinary item
available to common units
plus assumed conversions $ 31,043 18,682 $ 1.66 $ 33,683 17,149 $ 1.96
========= ====== =========== ========= ====== =============
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------
Weighted Per-
average share
Income units amount
----------------------------------------
<S> <C> <C> <C>
Income before extraordinary item $ 14,584
Less: dividends on preferred units (635)
--------
Basic:
Income before extraordinary item
available to common units 13,949 9,139 $ 1.53
=========
Effect of Dilutive Securities:
Convertible preferred units -- --(1)
Options -- 64
-------- -----
Diluted:
Income before extraordinary item
available to common units
plus assumed conversions $ 13,949 9,203 $ 1.52
========= ===== =========
</TABLE>
(1) Conversion not considered as effect would be anti-dilutive.
(Continued)
F-10
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(5) Real Estate
(a) Rental Properties
Rental properties consists of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
Land and land Building and Accumulated
improvements improvements Total depreciation
------------------ ------------------ --------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998:
Apartment properties $ 217,337 651,818 869,155 73,638
Commercial properties 1,778 19,031 20,809 4,151
------------------ ------------------ ----------------- -----------------
$ 219,115 670,849 889,964 77,789
================== ================== ================= =================
December 31, 1997:
Apartment properties $ 178,326 520,649 698,975 53,021
Commercial and retail properties
4,090 27,922 32,012 5,019
------------------ ------------------ ----------------- -----------------
$ 182,416 548,571 730,987 58,040
================== ================== ================= =================
</TABLE>
The properties are located in California, Washington and Oregon. The
operations of the Properties could be adversely affected by a
recession, general economic downturn or a natural disaster in the
areas where the properties are located.
During the year ended December 31, 1998, the Operating Partnership
sold four properties to third parties for $26,354 resulting in a gain
of $9 and a deferred gain of $5,002. During the year ended December
31, 1997, the Operating Partnership sold four properties to third
parties for $15,470 resulting in a gain of $5,114. During the year
ended December 31, 1996, the Operating Partnership sold two properties
to third parties for $13,350, resulting in a gain of $2,477. The
Operating Partnership utilized Internal Revenue Code Section 1031 to
defer the majority of the taxable gains resulting from these sales.
For the years ended December 31, 1998, 1997, and 1996, depreciation
expense on real estate was $21,890, $13,913 and $8,820, respectively.
(b) Investments
The Operating Partnership owns all of the 19,000 shares of the non-
voting preferred stock of Essex Management Corporation (EMC).
Management of the Operating Partnership owns 100 percent of the common
stock of EMC. EMC was formed to provide property and asset management
services to various partnerships not controlled by the Operating
Partnership.
The Operating Partnership owns 31,800 shares of the non-voting
preferred stock of Essex Fidelity I Corporation (Fidelity I).
Currently, Fidelity I holds interests in various real estate
investments.
(Continued)
F-11
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
The shares of non-voting preferred stock in EMC and Fidelity I are
entitled to a preferential dividend of $0.80 per share per annum.
Through these preferred stock investments, the Operating Partnership
will be eligible to receive a preferential liquidation value of $10.00
per share plus all cumulative and unpaid dividends.
The Operating Partnership holds a 49.9% limited partnership interest
in Jackson School Village, L.P. (JSV) which operates a 200-unit garden
style apartment community in Hillsboro, Oregon.
The Operating Partnership holds limited partnership interests in seven
partnerships which collectively own two multifamily properties: Anchor
Village Apartments ("Anchor Village"), a 301-unit apartment community
located in Mukilteo, Washington and Highridge Apartments
("Highridge"), a 255-unit apartment community located in Ranchos Palos
Verdes, California. In February 1998 the Operating Partnership
purchased a limited partnership interest in two partnerships which
acquired three retail properties from the Company ("Portland Shopping
Centers"), which have approximately 236,000 square feet of leasable
space located in the Portland, Oregon metropolitan area. These
investments were made under arrangements whereby EMC became the
general partner and the other limited partners were granted rights of
redemption for their interests. Such partners can request to be
redeemed and the Operating Partnership can elect to redeem their
rights for cash or by issuing shares of the Company's common stock.
Conversion values will be based on 98 percent of the market value of
the Company's common stock at the time of redemption multiplied by the
number of shares stipulated under the above arrangements.
In September 1997 the Operating Partnership acquired a 49% limited
partnership interest in Fountain Court Apartment Associates, L.P.
which is developing a 320-unit multifamily community, Fountain Court,
located in Seattle, Washington. In October 1998, the Operating
Partnership purchased an additional 2% limited partnership interest.
Additionally, the Operating Partnership paid $2,000 for the option to
purchase the remaining 49% interest 18 months subsequent to the
occupancy date, as defined in the agreement.
In August 1997 the Operating Partnership acquired a 45% Class A Member
interest in Park Hill LLC, whose purpose is the development and
operations of a 245-unit multifamily community, Park Hill Apartments,
located in Issaquah, Washington. Generally, all capital contributions
earn a cumulative preferred return of 12%. Profit and loss are
allocated to the Members in accordance with their ownership interests.
According to the terms of the Agreement, the Operating Partnership has
the option to purchase the remaining 55% interest after August 31,
2003. The purchase price will be calculated based on operating
results, as defined in the Agreement.
The Operating Partnership accounts for its investments in the above
entities under the equity method of accounting.
(Continued)
F-12
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
Investments consists of the following as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Investments in joint ventures:
Limited partnership interest of 49.9% in Jackson School Village, L.P. $ 2,473 $ 2,259
Limited partnership interest of 1% in Highridge Apartments (1) (987) (409)
Limited partnership interest of 1% in Anchor Village Apartments (1) (691) (270)
Limited partnership interest of 1% in Portland Shopping Centers (1) (183) --
Limited partnership interest of 51% in Fountain Court Apartment
Associates, L.P. 5,352 4,137
Class A Member interest of 45% in Park Hill LLC 3,978 3,051
---------------- ----------------
9,942 8,768
---------------- ----------------
Investments in corporations:
Essex Management Corporation--19,000 shares of preferred stock 190 190
Essex Fidelity I Corporation--31,800 shares of preferred stock 331 331
Essex Sacramento Corporation--62,500 shares of preferred stock -- 122
---------------- ----------------
521 643
---------------- ----------------
Other investments 127 124
---------------- ----------------
$ 10,590 $ 9,535
================ ================
</TABLE>
(1) Balance represents the excess of distributions and
allocations over cost basis.
(Continued)
F-13
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(6) Notes and Other Related Party Receivables
Notes receivable from joint venture investees and other related party
receivables consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Notes receivable from joint venture investees:
Note receivable from Highridge Apartments, secured, bearing interest
at 9%, due March 2008 $ 1,047 $ 2,750
Note receivable from Fidelity I, secured, bearing interest at 12%,
repaid in 1998 -- 1,580
Note receivable from Fidelity I, secured, bearing interest at 8%, due
on demand 1,358 --
Notes receivable from Fidelity I and JSV, secured, bearing interest
at 9.5 10%, due 2015 800 726
Receivable from Highridge Apartments, non-interest bearing, due on
demand 2,928 1,699
Receivable from Las Hadas, non-interest bearing, due on demand 1,209 --
Receivable from Anchor Village, non-interest bearing, due on demand 933 --
Other related party receivables:
Loans to officers, bearing interest at 8%, due April 2006 500 375
Other related party receivables, substantially due on demand 1,675 2,134
---------------- ----------------
$ 10,450 $ 9,264
================ ================
</TABLE>
Other related party receivables consist primarily of accrued interest income on
related party notes receivable and loans to officers, advances and accrued
management fees from joint venture partnerships, and unreimbursed expenses due
from EMC.
The Operating Partnership's officers and directors do not have a substantial
economic interest in these related party entities.
(Continued)
F-14
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(7) Notes and Other Receivables
Notes and other receivables consist of the following at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Note receivable from the co-tenants in the Pathways property, secured,
interest payable monthly at 9%, principal due June 2001 $ 4,452 $ 4,596
Note receivable from R&V Management, secured, bearing interest at 12.04%,
principal due March 1999 7,879 --
Note receivable from R&V Management, secured, bearing interest at 10.0%,
principal due June 2000 2,814 --
Other receivables 3,664 4,006
----------------- -----------------
$ 18,809 $ 8,602
================= =================
</TABLE>
(8) Related Party Transactions
All general and administrative expenses of the Company, the Operating
Partnership and EMC are initially borne by the Operating Partnership, with a
portion subsequently allocated to EMC based on a business unit allocation
methodology, formalized and approved by management and the board of
directors. Expenses allocated to EMC for the years ended December 31, 1998,
1997 and 1996 totaled $545, $987 and $1,752, respectively, and are reflected
as a reduction in general and administrative expenses in the accompanying
consolidated statements of operations.
Included in rental revenue in the accompanying consolidated statements of
operations are rents earned from space leased to Marcus & Millichap (M&M)
including operating expense reimbursements of $833, $709 and $681 for the
years ended December 31, 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996, the Operating
Partnership paid brokerage commissions totaling $0, $590 and $312 to M&M on
the purchase and sales of real estate. The commissions are either
capitalized as a cost of acquisition or are reflected as a reduction of the
gain on sales of real estate in the accompanying consolidated statements of
operations. EMC is entitled to receive a percentage of M&M brokerage
commissions on certain transactions in which the Operating Partnership is a
party.
Other income includes $623, $139 and $820 for the years ended December 31,
1998, 1997 and 1996, respectively, representing dividends from EMC and
management fees and equity income (loss) from Jackson School Village,
Highridge Apartments, Anchor Village Apartments, and the Portland Shopping
Centers. Also included in 1996 are management fees and equity income (loss)
from Essex Bristol Partners (Bristol) and Essex San Ramon Partners (San
Ramon). In January 1997, the Operating Partnership acquired the joint
venture partners' ownership interest in Bristol and San Ramon.
(Continued)
F-15
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
Interest income includes $1,027, $1,286 and $214 for the years ended
December 31, 1998, 1997 and 1996, respectively, which was earned principally
on the notes receivable from Essex Fidelity I, the partnerships which
collectively own Highridge, the partnerships which collectively own Anchor
Village and the partnerships which collectively own a 30.7% minority
interest in Pathways Apartments.
(9) Mortgage Notes Payable
Mortgage notes payable consist of the following at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Mortgage note payable to a pension fund, secured by deeds of trust, bearing interest at 6.62%, interest only
payments due monthly through October 2001, principal and interest payments due monthly thereafter, final
principal payment of $90,596 due in October 2008. Under certain conditions this loan can be converted to an
unsecured note payable $ 100,000 $ --
Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 6.885% to 8.055%,
principal and interest payments due monthly, and maturity dates ranging from December 2000 through March 2008 96,214 69,554
Multifamily housing mortgage revenue bonds secured by deeds of trust on rental properties and guaranteed by
collateral pledge agreements, payable monthly at a variable rate as defined in the Loan Agreement
(approximately 3.5% for December 1998), plus credit enhancement and underwriting fees of approximately 1.9%.
The bonds are convertible to a fixed rate. Among the terms imposed on the properties, which are security for
the bonds, is that twenty percent of the units are subject to tenant income qualification criteria.
Principal balances are due in full at various maturity dates from July 2014 through October 2026. Bonds in
the aggregate of $29,220 are subject to interest rate protection agreements through August 2003, limiting
the interest rate with respect to such bonds to a maximum interest rate of 7.2% 58,820 58,820
Mortgage notes payable, secured by deeds of trust, bearing interest at rates ranging from 7.0% to 8.78%,
principal and interest payments due monthly, and maturity dates ranging from December 2002 through April
2005. Under certain conditions this loan can be converted to an unsecured note payable 44,788 38,120
Multifamily housing mortgage revenue bonds secured by deed of trust on a rental property and guaranteed by a
collateral pledge agreement, bearing interest at 6.455%, principal and interest payments due monthly, final
principal payment of $14,800 due January 2026. Among the terms imposed on the property, which is security
for the bonds, is that twenty percent of the units are subject to tenant income qualification criteria. The
interest rate will be repriced in February 2008 at the then current tax-exempt bond rate 17,273 17,483
Multifamily housing mortgage revenue bonds secured by deed of trust on rental property, bearing interest at
7.69%, principal and interest installments due monthly through June 2018. Among the terms imposed on the
property, which is security for the bonds, is that twenty percent of the units are subject to tenant income
qualifications criteria 8,727 8,915
Mortgage notes payable to a mutual life insurance company, secured by deeds of trust, bearing interest at
7.45%, interest only payments due through June 1996, monthly principal and interest installments due
thereafter -- 48,078
Mortgage notes payable to a life insurance company, secured by deed of trust, bearing interest at 8.93%,
interest only payments due through March 1997, monthly principal and interest installments due thereafter
-- 8,027
--------- --------
$ 325,822 $ 248,997
========= =======
</TABLE>
(Continued)
F-16
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
The aggregate scheduled maturities of mortgage notes payable are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 2,353
2000 20,395
2001 2,429
2002 24,472
2003 30,083
Thereafter 246,090
-------------------
$ 325,822
===================
</TABLE>
In October 1997, the Operating Partnership entered into four forward treasury
contracts for an aggregate notional amount of $60,000, locking the 10 year
treasury rate at between 6.14%-6.26%. These contracts are to limit the
interest rate exposure on identified future debt financing requirements
relating to real estate under development and the refinancing of a $18,327
fixed rate loan. These contracts will be settled no later than June 2000. If
these contracts were settled as of December 31, 1998, the Operating
Partnership would be obligated to pay approximately $6,016. Any costs that
are incurred when these contracts are settled are expected to be deferred and
recognized over the life of the related financing.
These forward treasury contracts are not currently required to be reflected
in the accompanying consolidated financial statements. Under FAS 133, which
becomes effective in 2000, the Operating Partnership expects to recognize the
fair value of these contracts as either assets or liabilities in the
financial statements with another comprehensive income charge directly to
partners' capital.
In addition, the Operating Partnership has entered into various other
contracts to limit its interest rate exposure on debt related transactions.
During 1998, 1997 and 1996, the Operating Partnership charged $0, $0 and $42
to income representing amortization of deferred costs. During 1998, 1997 and
1996, the Operating Partnership charged $0, $138 and $0 of costs relating to
the termination of unmatched positions taken.
During the years ended December 31, 1998, 1997 and 1996, the Operating
Partnership refinanced various mortgages and incurred a loss on the early
extinguishment of debt of $4,718, $361 and $3,441 related to the write off of
the unamortized mortgage loan fees and prepayment penalties.
(Continued)
F-17
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(10) Lines of Credit
As of December 31, 1998 and 1997, the Operating Partnership had the
following balances outstanding under lines of credit with commercial banks:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Unsecured $100,000 line of credit, interest payable monthly at the
bank's reference rate or at the Operating Partnership's option,
1.15% over the LIBOR rate, expiring June 2000 $ 35,693 $ 25,000
Secured $10,000 line of credit, interest payable monthly at the
bank's reference rate or at the Operating Partnership's option,
1.5% over the LIBOR rate, expiring March 1999 -- 2,600
------------------- -------------------
$ 35,693 $ 27,600
=================== ===================
</TABLE>
The Company has a LIBOR based swap contract for a notional amount of
$12,298, fixing the one month LIBOR rate at 6.14%. This contract limits the
Operating Partnership's interest rate exposure on borrowings under its
LIBOR based lines of credit. This contract expires in June 2002. If this
contract were settled as of December 31, 1998, the Operating Partnership
would be obligated to pay approximately $392.
As of December 31, 1998, the thirty-day LIBOR rate was approximately 5.06%,
and the prime rate was 7.75%.
(11) Leasing Activity
The rental operations of the Operating Partnership include apartment
properties, which are rented under short term leases (generally, lease
terms of three to twelve months), and commercial properties, which are
rented under cancelable and noncancelable operating leases, certain of
which contain renewal options. Future minimum rental activity for the
apartment properties is not included in the following schedule due to the
short-term nature of the leases.
(Continued)
F-18
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
Future minimum rentals due under noncancelable operating leases with
tenants of the commercial properties are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1999 $ 1,144
2000 703
2001 707
2002 678
2003 558
Thereafter 618
-------------------
$ 4,408
===================
</TABLE>
Included in this schedule is $347 due from M&M through May 1999. The
Operating Partnership expects M&M to exercise their option to renew their
lease agreement upon expiration in May 1999.
In addition to minimum rental payments, retail (prior to the disposition of
these properties in February 1998) and commercial property tenants pay
reimbursements for their pro rata share of specified operating expenses.
Such amounts totaled $839, $905 and $964 for the years ended December 31,
1998, 1997 and 1996, respectively, and are included as rental revenue and
operating expenses in the accompanying consolidated statements of
operations.
(12) Fair Value of Financial Instruments
Management believes that the carrying amounts of mortgage notes payable,
lines of credit, notes and other related party receivables approximate fair
value as of December 31, 1998 and 1997, because interest rates and yields
for these instruments are consistent with yields currently available to the
Operating Partnership for similar instruments. Management believes that the
carrying amounts of cash and cash equivalents, restricted cash, accounts
payable and distributions payable approximate fair value as of December 31,
1998 and 1997 due to the short-term maturity of these instruments. See Note
8 for fair value disclosure of interest rate risk management contracts.
(13) Segment Information
In accordance with Financial Accounting Standards Board No. 131,
Disclosures about Segments of an Enterprise and Related Information (FAS
131), the Operating Partnership defines its reportable operating segments
as the three geographical regions in which its multifamily residential
properties are located, Northern California, Southern California, and the
Pacific Northwest.
Non-segment revenues and net operating income included in the following
schedule consists of revenue generated from the two commercial properties.
Also excluded from segment revenues is interest and other corporate income.
Other non-segment assets include investments, real estate under
development, cash, receivables and other assets.
(Continued)
F-19
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
The accounting policies of the segments are the same as those described in
Note 1. The Operating Partnership evaluates performance based upon net
operating income from the combined properties in each segment.
The revenues, net operating income, and assets for each of the reportable
operating segments are summarized as follows for the years ended and as of
December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Year ended
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Northern California $ 42,078 $ 33,481 $ 21,359
Southern California 45,252 20,026 6,836
Pacific Northwest 32,137 23,356 15,483
--------- --------- ---------
Total segment revenues 119,467 76,863 43,678
Non-segment property revenues 2,575 4,537 4,858
Interest and other income 3,217 3,169 2,157
--------- --------- ---------
Total revenues $ 125,259 $ 84,569 $ 50,693
========= ========= =========
Net operating income:
Northern California $ 31,681 $ 24,664 $ 15,476
Southern California 29,758 12,955 4,372
Pacific Northwest 21,138 14,916 9,676
--------- --------- ---------
Total segment net operating income 82,577 52,535 29,524
Non-segment net operating income 1,532 3,039 3,507
Interest and other income 3,217 3,169 2,157
Depreciation and amortization (21,948) (13,992) (8,855)
Interest (19,374) (12,659) (11,442)
Amortization of deferred financing costs (718) (509) (639)
General and administrative (3,765) (2,413) (1,717)
Loss from hedge termination -- (138) (42)
Provision for litigation loss (930) -- --
--------- --------- ---------
Income before gain on sales of real estate, minority interests,
and extraordinary item $ 40,591 $ 29,032 $ 12,493
========= ========= =========
Assets:
Northern California $ 241,676 $ 175,116 $ 118,696
Southern California 355,077 257,714 76,055
Pacific Northwest 198,761 213,125 124,348
--------- --------- ---------
Total segment net real estate assets 795,514 645,955 319,099
Non-segment net real estate assets 16,661 26,992 27,079
--------- --------- ---------
Net real estate assets 812,175 672,947 346,178
Non-segment assets 119,621 65,888 70,996
--------- --------- ---------
Total assets $ 931,796 $ 738,835 $ 417,174
========= ========= =========
</TABLE>
(Continued)
F-20
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(14) Quarterly Results of Operations (Unaudited)
The following is a summary of quarterly results of operations for 1998 and
1997:
<TABLE>
<CAPTION>
Quarter ended Quarter ended Quarter ended Quarter ended
December 31 September 30 June 30 March 31
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
1998:
Total revenues before gain on sale of real
estate $ 33,088 $ 32,651 $ 31,684 $ 27,836
Gain on sale of real estate -- 9 -- --
-------------- -------------- -------------- --------------
Total revenues $ 33,088 $ 32,660 $ 31,684 $ 27,836
============== ============== ============== ==============
Extraordinary item $ (3,912) $ (806) $ -- $ --
============== ============== ============== ==============
Net income $ 6,894 $ 9,096 $ 9,884 $ 9,546
============== ============== ============== ==============
Per unit data:
Net income:
Basic $ 0.23 $ 0.36 $ 0.41 $ 0.43
============== ============== ============== ==============
Diluted $ 0.23 $ 0.36 $ 0.40 $ 0.42
============== ============== ============== ==============
1997:
Total revenues before gain on sale of real
estate $ 24,463 $ 21,975 $ 19,580 $ 18,551
Gain (loss) on sale of real estate
(13) 4,713 414 --
-------------- -------------- -------------- --------------
Total revenues $ 24,450 $ 26,688 $ 19,994 $ 18,551
============== ============== ============== ==============
Extraordinary item $ (257) $ -- $ (104) $ --
============== ============== ============== ==============
Net income $ 8,000 $ 11,828 $ 7,772 $ 5,716
============== ============== ============== ==============
Per unit data:
Net income:
Basic $ 0.42 $ 0.74 $ 0.43 $ 0.39
============== ============== ============== ==============
$ 0.44 $ 0.70 $ 0.42 $ 0.38
============== ============== ============== ==============
</TABLE>
(Continued)
F-21
<PAGE>
ESSEX PORTFOLIO, L.P.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(Dollars in thousands, except for per unit and per share amounts)
(15) 401(k) Plan
The Operating Partnership has a 401(k) pension plan (the Plan) for all full
time employees who have completed one year of service. Employees may
contribute up to 23% of their compensation, to the maximum allowed under
Section 401(k) of the Internal Revenue Code. The Operating Partnership
matches the employee contributions for non-highly compensated personnel, up
to 50% of their compensation to a maximum of five hundred dollars (per
individual) per year. Operating Partnership contributions to the Plan were
approximately $46, $41 and $27 for the years ended December 31, 1998, 1997
and 1996.
(16) Commitments and Contingencies
A commercial bank has issued on behalf of the Operating Partnership various
letters of credit relating to financing and development transactions for an
aggregate amount of $2,604 which expire between July 1999 and May 2005.
The Operating Partnership is developing eight multifamily residential
projects, which are anticipated to have an aggregate of approximately 1,578
multifamily units. The Operating Partnership expects that such projects
will be completed during the next two years. In connection with these
projects, the Operating Partnership has directly, or in some cases through
its joint venture partners, entered into contractual construction related
commitments with unrelated third parties. As of December 31, 1998, the
Operating Partnership is committed to fund approximately $95,130 relating
to these projects.
Investments in real property create a potential for environmental
liabilities on the part of the owner of such real property. The Operating
Partnership carries no express insurance coverage for this type of
environmental risk. The Operating Partnership has conducted environmental
studies which revealed the presence of groundwater contamination at certain
properties; such contamination at certain of these properties was reported
to have migrated on-site from adjacent industrial manufacturing operations.
The former industrial users of the properties were identified as the source
of contamination. The environmental studies noted that certain properties
are located adjacent to and possibly down gradient from sites with known
groundwater contamination, the lateral limits of which may extend onto such
properties. The environmental studies also noted that at certain of these
properties, contamination existed because of the presence of underground
fuel storage tanks, which have been removed. Based on the information
contained in the environmental studies, the Operating Partnership believes
that the costs, if any, it might bear as a result of environmental
contamination or other conditions at these properties would not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or liquidity.
The Operating Partnership is involved in various lawsuits arising out of
the ordinary course of business and certain other legal matters. In the
opinion of management, the resolution of these matters will not have a
material adverse effect on the Operating Partnership's financial position,
results of operations or liquidity.
(17) Subsequent Event
In accordance with the terms of the Convertible Preferred Stock Agreement,
Tiger/Westbrook exercised the option to convert 87,500 shares of the total
1,600,000 outstanding shares of the Company's Convertible Preferred Stock
into 100,000 shares of common stock on January 6, 1999.
(Continued)
F-22
<PAGE>
Schedule 1
ESSEX PORTFOLIO, L.P.
Real Estate and Accumulated Depreciation
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Initial cost Costs
----------------------- capitalized
Buildings and subsequent to
Property Units Location Encumbrance Land improvements acquisition
- ------------------ ------- ----------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Encumbered multifamily
properties
Summerhill Park 100 Sunnyvale, CA $ 2,654 $ 4,918 $ 378
Oak Pointe 390 Sunnyvale, CA 4,842 19,776 4,023
Summerhill Commons 184 Newark, CA 1,608 7,582 623
Pathways 296 Long Beach, CA 4,083 16,757 559
Villa Rio Vista 286 Anaheim, CA 3,013 12,661 1,653
Foothill Commons 360 Bellevue, WA 2,435 9,821 1,894
Woodland Commons 236 Bellevue, WA 2,040 8,727 986
Palisades 192 Bellevue, WA 1,560 6,242 1,314
-------- -------- -------- -------
100,000 22,235 86,484 11,430
-------- -------- -------- -------
Wharfside Pointe 142 Seattle, WA 2,245 7,020 520
Emerald Ridge 180 Bellevue, WA 3,449 7,801 410
Sammamish View 153 Bellevue, WA 3,324 7,501 330
-------- -------- -------- -------
19,520 9,018 22,322 1,260
-------- -------- -------- -------
Brighton Ridge 264 Renton, WA 2,623 10,800 471
Landmark Apartments 285 Hillsboro, OR 3,655 14,200 404
Eastridge Apartments 188 San Ramon, CA 6,068 13,628 286
-------- -------- -------- -------
27,733 12,346 38,628 1,161
-------- -------- -------- -------
Bridle Trails 92 Kirkland, WA 4,232 1,500 5,930 95
Bunker Hill Towers 456 Los Angeles, CA 18,311 11,498 27,871 349
Camarillo Oaks 564 Camarillo, CA 19,420 10,953 25,254 2,656
Evergreen Heights 200 Kirkland, WA 9,143 3,566 13,395 231
Huntington Breakers 342 Huntington
Beach, CA 16,000 9,306 22,720 174
Inglenook Court 224 Bothell, WA 8,300 3,467 7,881 1,139
Maple Leaf 48 Seattle, WA 2,068 805 3,283 46
Meadowood 320 Simi Valley, CA 17,273 7,852 18,592 480
Spring Lake 69 Seattle, WA 2,265 838 3,399 54
Stonehedge Village 196 Bothell, WA 9,156 3,167 12,603 142
The Bluffs 224 San Diego, CA 8,464 3,405 7,743 125
The Shores (7) 348 San Ramon, CA 18,327 8,789 18,252 (916)
Treetops 172 Fremont, CA 9,800 3,520 8,182 783
Villa Scandia 118 Ventura, CA 8,727 1,570 3,912 107
Wandering Creek 156 Kent, WA 5,300 1,285 4,980 717
Wilshire Promenade 128 Fullerton, CA 7,912 3,118 7,385 173
Windsor Ridge 216 Sunnyvale, CA 13,871 4,017 10,315 433
-------- -------- -------- -------
325,822 122,255 349,131 20,639
-------- -------- -------- -------
Unencumbered multifamily
properties
Bristol Commons 188 Sunnyvale, CA 5,278 11,853 604
Casa Del Mar 96 Pasadena, CA 1,857 4,713 64
Casa Mango 96 San Diego, CA 3,011 7,006 183
Castle Creek 216 Newcastle, WA 4,149 16,028 695
Foothill/Twincreeks 176 San Ramon, CA 5,875 13,992 478
Kings Road 196 Los Angeles, CA 4,023 9,527 116
Marina Cove (3) 292 Santa Clara, CA 5,320 16,431 858
Meadows @ Cascade 198 Vancouver, WA 2,261 9,070 230
Mirabella 608 Newbury Park, CA 15,318 40,601 516
Park Place/Windsor
Court/Cochran (6) 176 Los Angeles, CA 4,965 11,806 157
Plumtree 140 Santa Clara, CA 3,090 7,421 392
Riverfront 229 San Diego, CA 8,637 20,119 165
Stevenson Place 200 Fremont, CA 996 5,582 5,019
Tara Village 168 Tarzana, CA 3,178 7,535 319
The Laurels 164 Mill Creek, WA 1,559 6,430 278
The Village Apartments 122 Oxnard, CA 2,349 5,579 114
Trabucco Villas 132 Lake Forest, CA 3,638 8,640 338
Village @ Cascade 192 Vancouver, WA 2,103 8,753 99
Wimbledon Woods 560 Hayward, CA 9,883 37,670 521
Windsor Terrace 117 Pasadena, CA 2,188 5,263 1,028
Westwood 116 Cupertino, CA 3,989 17,185 85
------ -------- -------- -------- -------
11,511 $325,822 $215,922 $620,335 $32,898
====== ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Gross amount
carried at close of period
----------------------------------------- Depreciable
Land and Buildings and Accumulated Date of Date lives
Property improvements improvements Total(1) depreciation construction acquired (years)
- ------------------ ------------ ------------- --------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Encumbered multifamily
properties
Summerhill Park $ 2,654 $ 5,296 $ 7,950 $ 1,609 1988 9/88 3-40
Oak Pointe 4,844 23,797 28,641 9,184 1973 12/88 3-30
Summerhill Commons 1,518 8,295 9,813 2,546 1987 7/87 3-40
Pathways 4,085 17,314 21,399 4,819 1975 2/91 3-30
Villa Rio Vista 2,985 14,342 17,327 7,019 1968 7/85 3-30
Foothill Commons 2,437 11,713 14,150 4,227 1978 3/90 3-30
Woodland Commons 2,042 9,711 11,753 3,397 1978 3/90 3-30
Palisades 1,561 7,555 9,116 2,844 1969/1977 (2) 5/90 3-30
-------- -------- -------- -------
22,126 98,023 120,149 35,645
-------- -------- -------- -------
Wharfside Pointe 2,252 7,533 9,785 1,250 1990 6/94 3-30
Emerald Ridge 3,446 8,214 11,660 1,276 1987 11/94 3-30
Sammamish View 3,328 7,827 11,155 1,135 1986 11/94 3-30
-------- -------- -------- -------
9,026 23,574 32,600 3,661
-------- -------- -------- -------
Brighton Ridge 2,653 11,241 13,894 732 1986 12/96 3-30
Landmark Apartments 3,697 14,562 18,259 1,133 1990 08/96 3-30
Eastridge Apartments 6,088 13,894 19,982 1,086 1988 08/96 3-30
-------- -------- -------- -------
12,438 39,697 52,135 2,951
-------- -------- -------- -------
Bridle Trails 1,528 5,997 7,525 233 1986 10/97 3-30
Bunker Hill Towers 11,660 28,058 39,718 623 1968 3/98 3-30
Camarillo Oaks 11,016 27,847 38,863 1,493 1985 07/96 3-30
Evergreen Heights 3,644 13,548 17,192 676 1990 06/97 3-30
Huntington Breakers 9,312 22,888 32,200 890 1984 10/97 3-30
Inglenook Court 3,473 9,014 12,487 1,866 1985 10/94 3-30
Maple Leaf 825 3,309 4,134 126 1986 10/97 3-30
Meadowood 7,894 19,030 26,924 1,388 1986 11/96 3-30
Spring Lake 857 3,434 4,291 125 1986 10/97 3-30
Stonehedge Village 3,196 12,716 15,912 301 1986 10/97 3-30
The Bluffs 3,439 7,834 11,273 390 1974 06/97 3-30
The Shores (7) 7,098 19,027 26,125 1,225 1988 01/97 3-30
Treetops 3,576 8,909 12,485 878 1978 01/96 3-30
Villa Scandia 1,592 3,997 5,589 198 1971 06/97 3-30
Wandering Creek 1,295 5,687 6,982 671 1986 11/95 3-30
Wilshire Promenade 3,137 7,539 10,676 479 1992 01/97 3-30
Windsor Ridge 4,018 10,747 14,765 2,744 1989 03/89 3-40
-------- -------- -------- -------
121,150 370,875 492,025 56,563
-------- -------- -------- -------
Unencumbered multifamily
properties
Bristol Commons 5,284 12,451 17,735 794 1989 01/97 3-30
Casa Del Mar 1,873 4,761 6,634 238 1972 06/97 3-30
Casa Mango 3,038 7,162 10,200 240 1981 12/97 3-30
Castle Creek 4,817 16,055 20,872 134 1997 12/97 3-30
Foothill/Twincreeks 5,940 14,405 20,345 865 1985 02/97 3-30
Kings Road 4,029 9,637 13,666 456 1979 06/97 3-30
Marina Cove (3) 5,322 17,287 22,609 2,887 1974 6/94 3-30
Meadows @ Cascade 2,333 9,228 11,561 337 1988 11/97 3-30
Mirabella 15,729 40,706 56,435 1,131 1973 3/98 3-30
Park Place/Windsor
Court/Cochran (6) 5,013 11,915 16,928 444 1988 08/97 3-30
Plumtree 3,091 7,812 10,903 1,319 1975 2/94 3-30
Riverfront 8,658 20,263 28,921 682 1990 12/97 3-30
Stevenson Place 997 10,600 11,597 4,337 1971 4/82 3-30
Tara Village 3,203 7,829 11,032 489 1972 01/97 3-30
The Laurels 1,594 6,673 8,267 431 1981 12/96 3-30
The Village Apartments 2,393 5,649 8,042 266 1974 07/97 3-30
Trabucco Villas 3,841 8,775 12,616 370 1985 10/97 3-30
Village @ Cascade 2,151 8,804 10,955 295 1995 12/97 3-30
Wimbledon Woods 10,334 37,740 48,074 944 1975 3/98 3-30
Windsor Terrace 2,497 5,982 8,479 226 1972 09/97 3-30
Westwood 4,050 17,209 21,259 190 1963 3/98 3-30
-------- -------- -------- -------
$217,337 $651,818 $869,155 $73,638
======== ======== ======== =======
</TABLE>
F-23
<PAGE>
Schedule 1
ESSEX PORTFOLIO, L.P.
Real Estate and Accumulated Depreciation
December 31, 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Total Initial cost
rentable ---------------------------
square Buildings and
Property footage Location Encumbrance Land improvements
- ------------------------ ----------- -------------- ------------ ---- ------------------
<S> <C> <C> <C> <C> <C>
Commercial properties
925 East Meadow 17,404 Palo Alto, CA -- 1,401 3,172
777 California (4)(5) 44,827 Palo Alto, CA -- -- 6,700
------ -------- -------- -------
62,231 -- 1,401 9,872
====== -------- -------- -------
Total multifamily and
commercial properties $325,822 $217,323 630,207
======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Gross amount
Costs carried at close of period
capitalized -------------------------------------------
subsequent to Land and Buildings and Accumulated
Property acquisition improvements improvements Total(1) depreciation
- ----------------------- ------------- -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Commercial properties
925 East Meadow 805 1,762 3,616 5,378 145
777 California (4)(5) 8,731 16 15,415 15,431 4,006
------- --------- -------- -------- -------
9,536 1,778 19,031 20,809 4,151
------- --------- -------- -------- -------
Total multifamily and
commercial properties $42,434 $219,115 $670,849 $889,964 $77,789
======= ======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
Depreciable
Date of Date lives
Property construction acquired (years)
- ----------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Commercial properties
925 East Meadow 1984 11/97 3-30
777 California (4)(5) 1987 7/86 3-30
Total multifamily and
commercial properties
</TABLE>
(1) The aggregate cost for federal income tax purposes is $749,718.
(2) Phase I was built in 1969 and Phase II was built in 1977.
(3) A portion of land is leased pursuant toground lease expiring in 2028.
(4) Land is leased pursuant toground lease expiring in 2054.
(5) These properties secure the Operating PartnershipAEs $10,000 line of
credit.
(6) Cochran Apartments,58 unit multifamily community, was purchased in
April 1998 and is adjacent to Park Place/Windsor Court.
Initial capitalized cost was $5,547.
(7) A portion of The Shores land value was allocated to real estate under
development for the Canyon Point project in the amount of $1,757.
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year $730,987 393,809 284,358
Improvements 12,200 4,533 3,406
Acquisition of real estate 169,934 345,750 118,107
Disposition of real estate (23,157) (13,105) (12,062)
-------- --------- --------
Balance at end of year $889,964 $730,987 $393,809
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------- ----------- -----------
<S> <C> <C> <C>
Accumulated depreciation:
Balance at beginning of year $58,040 $ 47,631 $40,281
Dispositions (2,183) (3,504) (1,470)
Depreciation expense - Acquisitions 2,888 2,086 905
Depreciation expense 19,044 11,827 7,915
------- ------- -------
Balance at end of year $77,789 $58,040 $47,631
======= ======= =======
</TABLE>
F-24
<PAGE>
EXHIBIT 3.8
ESSEX PROPERTY TRUST, INC.
--------------------------
ARTICLES SUPPLEMENTARY
Reclassifying 500,000 shares of Common Stock
as 500,000 shares of
9 1/8% SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK
Essex Property Trust, Inc., a corporation organized and existing under
the laws of Maryland (the "Corporation"), does hereby certify to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority conferred upon the Board of Directors of
-----
the Corporation by Article FIFTH of its Charter (the "Charter") in accordance
with Section 2-105 of the Maryland General Corporation Law (the "MGCL"), the
Board of Directors of the Corporation, at a teleconference meeting held on
November 24, 1998, duly adopted a resolution reclassifying 500,000 authorized
but unissued shares of Common Stock (par value $.0001 per share) as Preferred
Stock (par value $.0001 per share), designating such newly reclassified
Preferred Stock as 9-1/8% Series C Cumulative Redeemable Preferred Stock, the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications and terms
and conditions of redemption as set forth below and authorizing the issuance of
such series of Preferred Stock as set forth below. Upon any restatement of the
Charter, Sections 1 through 9 of Article THIRD shall become subsection (g) of
Article FIFTH of the Charter.
SECOND: The reclassification increases the number of shares
------
classified as 9 1/8% Series C Cumulative Redeemable Preferred Stock from no
shares immediately prior to the reclassification to 500,000 shares immediately
after the reclassification. The reclassification decreases the number of shares
classified as Common Stock (par value $.0001 per share) from 659,782,178 shares
immediately prior to the reclassification to 659,282,178 shares immediately
after the reclassification.
THIRD: Subject in all cases to the provisions of Article EIGHTH of
-----
the Charter of the Corporation with respect to Excess Stock, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of 9 1/8% Series C Cumulative Redeemable Preferred
Stock of the Corporation:
9 1/8% Series C Cumulative Redeemable Preferred Stock
-----------------------------------------------------
Section 1. Designation and Amount.
----------------------
Of the 659,782,178 authorized shares of Common Stock, 500,000 shares
are reclassified and designated "9 1/8% Series C Cumulative Redeemable Preferred
Stock (par value $.0001 per share)" (the "Series C Preferred Stock").
Section 2. Rank. The Series C Preferred Stock will, with respect to
----
distributions and rights upon voluntary or involuntary liquidation, winding-up
or dissolution of the Corporation, rank senior to all classes or series of
Common Stock (as defined in the Charter) and
1
<PAGE>
to all classes or series of equity securities of the Corporation now or
hereafter authorized, issued or outstanding, other than the 8.75% Convertible
Preferred Stock, Series 1996A (the "Series A Preferred Stock") and the 7.875%
Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock")
with which it shall be on a parity and any other class or series of equity
securities of the Corporation expressly designated as ranking on a parity with
or senior to the Series C Preferred Stock as to distributions and rights upon
voluntary or involuntary liquidation, winding-up or dissolution of the
Corporation. For purposes of these terms of the Series C Preferred Stock, the
term "Parity Preferred Stock" shall be used to refer to the Series A Preferred
Stock, the Series B Preferred Stock and any other class or series of equity
securities of the Corporation now or hereafter authorized, issued or outstanding
expressly designated by the Corporation to rank on a parity with Series C
Preferred Stock with respect to distributions and rights upon voluntary or
involuntary liquidation, winding-up or dissolution of the Corporation.
Section 3. Distributions.
-------------
(a) Payment of Distributions. Subject to the rights of holders of
------------------------
Parity Preferred Stock as to the payment of distributions, holders of Series C
Preferred Stock will be entitled to receive, when, as and if declared by the
Corporation, out of funds legally available for the payment of distributions,
cumulative preferential cash distributions at the rate per annum of 9 1/8% of
the $50.00 liquidation preference per share of Series C Preferred Stock. Such
distributions shall be cumulative, shall accrue from the original date of
issuance and will be payable quarterly in arrears (such quarterly periods, for
purposes of payment and accrual shall be the quarterly periods ending on the
dates specified in this sentence and not calendar quarters), on or before the
15th of February, May, August and November of each year (each a "Preferred Stock
Distribution Payment Date"), commencing in each case on the first Preferred
Stock Distribution Payment Date after the original date of issuance. The amount
of the distribution payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and for any period shorter than a full
quarterly period for which distributions are computed, the amount of the
distribution payable will be computed on the basis of the actual number of days
elapsed in such a 30-day month. If any date on which distributions are to be
made on the Series C Preferred Stock is not a Business Day (as defined herein),
then payment of the distribution to be made on such date will be made on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. Distributions on the Series C Preferred Stock will be made to the
holders of record of the Series C Preferred Stock on the relevant record dates,
which, unless otherwise provided by the Corporation with respect to any
distribution, will be 15 Business Days prior to the relevant Preferred Stock
Distribution Payment Date (each a "Distribution Record Date"). Notwithstanding
anything to the contrary set forth herein, each share of Series C Preferred
Stock shall also continue to accrue all accrued and unpaid distributions to the
exchange date on any Series C Preferred Unit (as defined in the Third Amendment
to First Amended and Restated Agreement of Limited Partnership of Essex
Portfolio, L.P., dated as of November 24, 1998 (the "Third Amendment")) validly
exchanged into such share of Series C Preferred Stock in accordance with the
provisions of such Third Amendment.
2
<PAGE>
The term "Business Day" shall mean each day, other than a Saturday or
a Sunday, which is not a day on which banking institutions in New York, New York
are authorized or required by law, regulation or executive order to close.
(b) Limitations on Distributions. No distributions on the Series C
----------------------------
Preferred Stock shall be declared or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement of the
Corporation, including any agreement relating to its indebtedness, prohibits
such declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration, payment or setting
apart for payment shall be restricted or prohibited by law.
(c) Distributions Cumulative. Notwithstanding the foregoing,
------------------------
distributions on the Series C Preferred Stock will accrue whether or not the
terms and provisions set forth in Section 3(b) hereof at any time prohibit the
current payment of distributions, whether or not the Corporation has earnings,
whether or not there are funds legally available for the payment of such
distributions and whether or not such distributions are authorized. Accrued but
unpaid distributions on the Series C Preferred Stock will accumulate as of the
Preferred Stock Distribution Payment Date on which they first become payable.
Accumulated and unpaid distributions will not bear interest.
(d) Priority as to Distributions.
----------------------------
(i) So long as any Series C Preferred Stock is outstanding,
no distribution of cash or other property shall be authorized, declared, paid or
set apart for payment on or with respect to any class or series of Common Stock
or any class or series of other stock of the Corporation ranking junior to the
Series C Preferred Stock as provided in this Section 3 (such Common Stock or
other junior stock, collectively, "Junior Stock"), nor shall any cash or other
property be set aside for or applied to the purchase, redemption or other
acquisition for consideration of any Series C Preferred Stock, any Parity
Preferred Stock with respect to distributions or any Junior Stock, unless, in
each case, all distributions accumulated on all Series C Preferred Stock and all
classes and series of outstanding Parity Preferred Stock as to payment of
distributions have been paid in full. The foregoing sentence will not prohibit
(i) distributions payable solely in Junior Stock, (ii) the conversion of Junior
Stock or Parity Preferred Stock into Junior Stock of the Corporation, (iii) the
redemption, purchase or other acquisition of Junior Stock made for purposes of
and in compliance with requirements of an employee incentive or benefit plan of
the Corporation or any subsidiary of the Corporation, and (iv) purchase by the
Corporation of such Series C Preferred Stock, Parity Preferred Stock with
respect to distributions or Junior Stock pursuant to Article EIGHTH of the
Charter to the extent required to preserve the Corporation's status as a real
estate investment trust.
(ii) So long as distributions have not been paid in full (or a
sum sufficient for such full payment is not irrevocably so set apart) upon the
Series C Preferred Stock, all distributions authorized and declared on the
Series C Preferred Stock and all classes or series of outstanding Parity
Preferred Stock with respect to distributions shall be authorized and declared
so that the amount of distributions authorized and declared per share of Series
C Preferred Stock and such other classes or series of Parity Preferred Stock
shall in all cases bear to
3
<PAGE>
each other the same ratio that accrued distributions per share on the Series C
Preferred Stock and such other classes or series of Parity Preferred Stock
(which shall not include any accumulation in respect of unpaid distributions for
prior distribution periods if such class or series of Parity Preferred Stock do
not have cumulative distribution rights) bear to each other.
(e) No Further Rights. Holders of Series C Preferred Stock shall not
-----------------
be entitled to any distributions, whether payable in cash, other property or
otherwise, in excess of the full cumulative distributions described herein.
Section 4. Liquidation Preference.
----------------------
(a) Payment of Liquidating Distributions. Subject to the rights of
------------------------------------
holders of Parity Preferred Stock with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, the
holders of Series C Preferred Stock shall be entitled to receive out of the
assets of the Corporation legally available for distribution or the proceeds
thereof, after payment or provision for debts and other liabilities of the
Corporation, but before any payment or distributions of the assets shall be made
to holders of Common Stock or any other class or series of shares of the
Corporation that ranks junior to the Series C Preferred Stock as to rights upon
liquidation, dissolution or winding-up of the Corporation, an amount equal to
the sum of (i) a liquidation preference of $50 per share of Series C Preferred
Stock, and (ii) an amount equal to any accumulated and unpaid distributions
thereon to the date of payment. In the event that, upon such voluntary or
involuntary liquidation, dissolution or winding-up, there are insufficient
assets to permit full payment of liquidating distributions to the holders of
Series C Preferred Stock and any Parity Preferred Stock as to rights upon
liquidation, dissolution or winding-up of the Corporation, all payments of
liquidating distributions on the Series C Preferred Stock and such Parity
Preferred Stock shall be made so that the payments on the Series C Preferred
Stock and such Parity Preferred Stock shall in all cases bear to each other the
same ratio that the respective rights of the Series C Preferred Stock and such
other Parity Preferred Stock (which shall not include any accumulation in
respect of unpaid distributions for prior distribution periods if such Parity
Preferred Stock do not have cumulative distribution rights) upon liquidation,
dissolution or winding-up of the Corporation bear to each other.
(b) Notice. Written notice of any such voluntary or involuntary
------
liquidation, dissolution or winding-up of the Corporation, stating the payment
date or dates when, and the place or places where, the amounts distributable in
such circumstances shall be payable, shall be given by (i) fax and (ii) by first
class mail, postage pre-paid, not less than 30 and not more than 60 days prior
to the payment date stated therein, to each record holder of the Series C
Preferred Stock at the respective addresses of such holders as the same shall
appear on the share transfer records of the Corporation.
(c) No Further Rights. After payment of the full amount of the
-----------------
liquidating distributions to which they are entitled, the holders of Series C
Preferred Stock will have no right or claim to any of the remaining assets of
the Corporation.
(d) Consolidation, Merger or Certain Other Transactions. The
---------------------------------------------------
consolidation or merger or other business combination of the Corporation with or
into any corporation, trust or other entity (or of any corporation, trust or
other entity with or into the Corporation), or the
4
<PAGE>
effectuation by the Corporation of a transaction or series of related
transactions in which more than 50% of the voting power of the Corporation is
disposed of shall not be deemed to constitute a liquidation, dissolution or
winding-up of the Corporation.
Section 5. Optional Redemption.
-------------------
(a) Right of Optional Redemption. The Series C Preferred Stock may
----------------------------
not be redeemed prior to November 24, 2003. On or after such date, subject to
the terms and conditions of any Parity Preferred Stock, the Corporation shall
have the right to redeem the Series C Preferred Stock, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
written notice, at a redemption price, payable in cash, equal to $50 per share
of Series C Preferred Stock plus accumulated and unpaid distributions to the
date of redemption. If fewer than all of the outstanding shares of Series C
Preferred Stock are to be redeemed, the shares of Series C Preferred Stock to be
redeemed shall be selected pro rata (as nearly as practicable without creating
fractional units). Further, in order to ensure that the Corporation remains a
qualified real estate investment trust for federal income tax purposes, the
Series C Preferred Stock will also be subject to the provisions of Article
EIGHTH of the Charter pursuant to which Series C Preferred Stock owned by a
stockholder in excess of the Ownership Limit (as defined in the Charter) will be
automatically transferred to a Trust (as defined in the Charter) and the
Corporation shall have the right to purchase such shares, as provided in Article
EIGHTH of the Charter.
(b) Limitation on Redemption.
------------------------
(i) The redemption price of the Series C Preferred Stock
(other than the portion thereof consisting of accumulated but unpaid
distributions) will be payable solely out of the sale proceeds of capital stock
of the Corporation and from no other source. For purposes of the preceding
sentence, "capital stock" means any equity securities (including Common Stock
and Preferred Stock of the Corporation and units of partnership interest of
Essex Portfolio, L.P., as to which the Corporation is the general partner),
shares, participation or other ownership interests (however designated) and any
rights (other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing.
(ii) The Corporation may not redeem fewer than all of the
outstanding shares of Series C Preferred Stock unless all accumulated and unpaid
distributions have been paid on all Series C Preferred Stock for all quarterly
distribution periods terminating on or prior to the date of redemption;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of shares of Series C Preferred Stock or Parity Preferred Stock
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding shares of Series C Preferred Stock or Parity Preferred Stock, as
the case may be.
(c) Rights to Distributions on Stock Called for Redemption.
------------------------------------------------------
Immediately prior to any redemption of Series C Preferred Stock, the Corporation
shall pay, in cash, any accumulated and unpaid distributions through the
redemption date, unless a redemption date falls after a Distribution Record Date
and prior to the corresponding Preferred Stock Distribution Payment Date, in
which case each holder of Series C Preferred Stock at the close of business on
such Distribution Record Date shall be entitled to the
distributions payable on such shares on the
5
<PAGE>
corresponding Distribution Payment Date notwithstanding the redemption of such
shares before the Distribution Payment Date.
(d) Procedures for Redemption.
-------------------------
(i) Notice of redemption will be (i) faxed, and (ii) mailed
by the Corporation, postage prepaid, not less than 30 nor more than 60 days
prior to the redemption date, addressed to the respective holders of record of
the Series C Preferred Stock to be redeemed at their respective addresses as
they appear on the transfer records of the Corporation. No failure to give or
defect in such notice shall affect the validity of the proceedings for the
redemption of any Series C Preferred Stock except as to the holder to whom such
notice was defective or not given. In addition to any information required by
law or by the applicable rules of any exchange upon which the Series C Preferred
Stock may be listed or admitted to trading, each such notice shall state: (i)
the redemption date, (ii) the redemption price, (iii) the number of shares of
Series C Preferred Stock to be redeemed, (iv) the place or places where such
shares of Series C Preferred Stock are to be surrendered for payment of the
redemption price, (v) that distributions on the Series C Preferred Stock to be
redeemed will cease to accumulate on such redemption date and (vi) that payment
of the redemption price and any accumulated and unpaid distributions will be
made upon presentation and surrender of such Series C Preferred Stock. If fewer
than all of the shares of Series C Preferred Stock held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares of Series C Preferred Stock held by such holder to be redeemed.
(ii) If the Corporation gives a notice of redemption in
respect of Series C Preferred Stock (which notice will be irrevocable) then, by
12:00 noon, New York City time, on the redemption date, the Corporation will
deposit irrevocably in trust for the benefit of the Series C Preferred Stock
being redeemed funds sufficient to pay the applicable redemption price, plus any
accumulated and unpaid distributions, if any, on such shares to the date fixed
for redemption, without interest, and will give irrevocable instructions and
authority to pay such redemption price and any accumulated and unpaid
distributions, if any, on such shares to the holders of the Series C Preferred
Stock upon surrender of the Series C Preferred Stock by such holders at the
place designated in the notice of redemption. On and after the date of
redemption, distributions will cease to accumulate on the Series C Preferred
Stock or portions thereof called for redemption, unless the Corporation defaults
in the payment thereof. If any date fixed for redemption of Series C Preferred
Stock is not a Business Day, then payment of the redemption price payable on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other payment in respect of any such delay) except that,
if such Business Day falls in the next calendar year, such payment will be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date fixed for redemption. If payment of the
redemption price or any accumulated or unpaid distributions in respect of the
Series C Preferred Stock is improperly withheld or refused and not paid by the
Corporation, distributions on such Series C Preferred Stock will continue to
accumulate from the original redemption date to the date of payment, in which
case the actual payment date will be considered the date fixed for redemption
for purposes of calculating the applicable redemption price and any accumulated
and unpaid distributions.
6
<PAGE>
(e) Status of Redeemed Stock. Any Series C Preferred Stock that shall
------------------------
at any time have been redeemed shall after such redemption have the status of
authorized but unissued Preferred Stock, without designation as to class or
series, until such shares are once more designated as part of a particular class
or series by the Board.
Section 6. Voting Rights.
-------------
(a) General. Holders of the Series C Preferred Stock will not have any
-------
voting rights, except as set forth below.
(b) Right to Elect Directors. If at any time full distributions shall
------------------------
not have been made on any Series C Preferred Stock with respect to any six (6)
prior quarterly distribution periods, whether or not consecutive, (a "Preferred
Distribution Default"), such that distributions for such six (6) distribution
periods have not been fully paid and are outstanding in whole or in part at the
same time, the holders of such Series C Preferred Stock, voting together as a
single class with the holders of each class or series of Parity Preferred Stock
upon which like voting rights have been conferred and are exercisable (other
than holders of Parity Preferred Stock who are deemed to be "affiliates" of the
Corporation as such term is defined in Rule 144 of the General Rules and
Regulations Under the Securities Act of 1933), will have the right to elect two
additional directors to serve on the Corporation's Board (the "Preferred Stock
Directors"), which shall be in addition to the rights of holders of Series A
Preferred Stock to elect directors pursuant to the articles supplementary
pertaining to the Series A Preferred Stock, at a special meeting called by the
holders of record of at least 10% of the outstanding shares of Series C
Preferred Stock or any such class or series of Parity Preferred Stock or at the
next annual meeting of stockholders, and at each subsequent annual meeting of
stockholders or special meeting held in place thereof, until all such
distributions in arrears and distributions for the current quarterly period on
the Series C Preferred Stock and each such class or series of Parity Preferred
Stock have been paid in full. At any such annual or special meeting, the holders
of the Series B Preferred Stock, the Series C Preferred Stock and any
subsequently issued series of Parity Preferred Stock upon which like voting
rights have been conferred and are exercisable, will be entitled to cast votes
for such Preferred Stock Directors on the basis of one vote per $50.00 of
liquidation preference to which such class of Parity Preferred Stock is entitled
by its terms (excluding amounts in respect of accumulated and unpaid dividends)
and not cumulatively. If and when all accumulated distributions and the
distribution for the current distribution period on the Series C Preferred Stock
shall have been paid in full or irrevocably set aside for payment in full, the
holders of the Series C Preferred Stock shall be divested of the voting rights
set forth in Section 6(b) herein (subject to revesting in the event of each and
every Preferred Distribution Default) and, if all distributions in arrears and
the distributions for the current distribution period have been paid in full or
irrevocably set aside for payment in full on all other classes or series of
Parity Preferred Stock upon which like voting rights have been conferred and are
exercisable, the term and office of each Preferred Stock Director so elected
shall immediately terminate. Any Preferred Stock Director may be removed at any
time with or without cause by the vote of, and shall not be removed otherwise
than by the vote of, the holders of record of a majority of the outstanding
Series C Preferred Stock when they have the voting rights set forth in Section
6(b) (voting separately as a single class with all other classes or series of
Parity Preferred Stock upon which like voting rights have been conferred and are
exercisable). So long as a Preferred Distribution Default shall continue, any
vacancy in the office of a Preferred Stock Director may
7
<PAGE>
be filled by written consent of the Preferred Stock Director remaining in
office, or if none remains in office, by a vote of the holders of record of a
majority of the outstanding Series C Preferred Stock when they have the voting
rights set forth in Section 6(b) (voting separately as a single class with all
other classes or series of Parity Preferred Stock upon which like voting rights
have been conferred and are exercisable). The Preferred Stock Directors shall
each be entitled to one vote per director on any matter.
(c) Certain Voting Rights. (i) While any shares of the Series C
---------------------
Preferred Stock are outstanding, the Corporation shall not, without the
affirmative of the holders of at least two-thirds (2/3) of the Series C
Preferred Stock outstanding at the time (i) authorize or create, or increase the
authorized or issued amount of, any class or series of shares ranking prior to
the Series C Preferred Stock with respect to payment of distributions and rights
upon liquidation, dissolution or winding-up or reclassify any authorized shares
of the Corporation into any such shares, or create, authorize or issue any
obligations or security convertible into or evidencing the right to purchase any
such shares, (ii) either amend, alter or repeal the provisions of the
Corporation's Charter (including these Articles Supplementary) or Bylaws, that
would materially and adversely affect the preferences, other rights, voting
powers, restrictions, limitations as to dividends and other distributions,
qualifications, or terms and conditions of redemption, of any outstanding shares
of the Series C Preferred Stock; provided that any increase in the amount of
authorized Preferred Stock or the creation or issuance of any other class or
series of Preferred Stock, or any increase in an amount of authorized shares of
each class or series, in each case ranking junior or on a parity to the Series C
Preferred Stock with respect to payment of distributions or the distribution of
assets upon liquidation, dissolution or winding-up, shall not be deemed to
materially and adversely affect such rights, preferences, privileges or voting
powers. While any shares of the Series C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least
two-thirds (2/3) of the Series C Preferred Stock outstanding at the time
consolidate, amalgamate, merge with or into, or convey, transfer or lease its
assets substantially as an entirety to, any corporation or other entity, unless
(a) the Corporation is the surviving entity and the shares of the Series C
Preferred Stock remain outstanding with the terms thereof unchanged, (b) the
resulting, surviving or transferee entity is a corporation or other entity
organized under the laws of any state and substitutes for the Series C Preferred
Stock other preferred stock having substantially the same terms and same rights
as the Series C Preferred Stock, including with respect to distributions, voting
rights and rights upon liquidation, dissolution or winding-up, or (c) such
merger, consolidation, amalgamation or asset transfer does not adversely affect
the powers, special rights, preferences and privileges of the holders of the
Series C Preferred Stock in any material respect. However, the Corporation may
create additional classes of Parity Preferred Stock and Junior Stock, increase
the authorized number of shares of Parity Preferred Stock and Junior Stock and
issue additional series of Parity Preferred Stock and Junior Stock without the
consent of any holder of Series C Preferred Stock.
Section 7. Transfer Restrictions. The Series C Preferred Stock shall
---------------------
be subject to the provisions of Article EIGHTH of the Charter.
Section 8. No Conversion Rights. The holders of the Series C Preferred
--------------------
Stock shall not have any rights to convert such shares into shares of any other
class or series of stock, or into any other securities of, or interest in, the
Corporation,
8
<PAGE>
Section 9. No Sinking Fund. No sinking fund shall be established for
---------------
the retirement or redemption of Series C Preferred Stock.
FOURTH: The Series C Preferred Stock have been classified and
------
designated by the Board under the authority contained in the Charter.
FIFTH: These Articles Supplementary have been approved by the Board
-----
in the manner and by the vote required by law.
SIXTH: The undersigned President of the Corporation acknowledges
-----
these Articles Supplementary to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
9
<PAGE>
IN WITNESS WHEREOF, these Articles Supplementary are executed on
behalf of the Corporation by its President and attested by its Assistant
Secretary this ____ day of November, 1998.
ESSEX PROPERTY TRUST, INC.
By:
---------------------------
Keith R. Guericke
President
[SEAL]
Attest:
______________________________
Michael J. Schall
Executive Vice President,
Chief Financial Officer and
Assistant Secretary
THE UNDERSIGNED, President of ESSEX PROPERTY TRUST, INC., who executed on
behalf of the Corporation, the Articles Supplementary of which this certificate
is made a part, hereby acknowledges in the name and on behalf of said
Corporation the foregoing Articles Supplementary to be the corporate act of said
Corporation and hereby certifies that the matters and facts set forth herein
with respect to the authorization and approval thereof are true in all material
respects under the penalties of perjury.
By:
---------------------------------
Keith R. Guericke
President
10
<PAGE>
EXHIBIT 4.0
ESSEX PROPERTY TRUST, INC.
--------------------------
ARTICLES SUPPLEMENTARY
Reclassifying 6,617,822 shares of Common Stock
as 6,617,822 shares of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
Essex Property Trust, Inc., a corporation organized and existing under the
laws of Maryland (the "Corporation"), does hereby certify to the State
Department of Assessments and Taxation of Maryland that:
FIRST: Pursuant to authority conferred upon the Board of Directors of the
-----
corporation by Article FIFTH of its Charter (the "Charter") in accordance with
Section 2-208 of the Maryland General Corporation Law (the "MGCL"), the Board of
Directors of the Corporation, at a meeting held on October 13, 1998, duly
adopted a resolution reclassifying 6,617,822 authorized but unissued shares of
Common Stock (par value $.0001 per share) as Preferred Stock (par value $.0001
per share), designating such newly reclassified Preferred Stock as Series A
Junior Participating Preferred Stock, with the preferences, conversion and other
rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption as set
forth below and authorizing the issuance of such series of Preferred Stock as
set forth below. Upon any restatement of the Charter, Sections ___ through 11
of this Article FIRST shall become subsection (g) of Article FIFTH of the
Charter.
Section 1. Designation and Amount. The shares of such series shall be
----------------------
designated as "Series A Junior Participating Preferred Stock" and the number of
shares constituting such series shall be 6,617,822.
Section 2. Dividends and Distributions.
---------------------------
a. Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock shall be
entitled to receive, when, as and if authorized by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the 15th day of January, April, July and October in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Junior Participating Preferred Stock, in an
amount per share (rounded to the nearest cent) equal to the greater of (a) 60.01
or (b) subject to the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100 times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, par
1
<PAGE>
value $.0001 per share, of the Corporation (the "Common Stock") since the
immediately preceding Quarterly Dividend Payment Date, or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance of any share or
fraction of a share of Series A Junior Participating Preferred Stock. In the
event the Corporation shall at any time after November 11, 1998 (the "Rights
Declaration Date") (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of shares of Series A Junior Participating Preferred
Stock were entitled immediately prior to such event under clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
b. The Corporation shall declare a dividend or distribution on the Series
A Junior Participating Preferred Stock as provided in Paragraph (A) above
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock), provided that, in the
event no dividend or distribution shall have been declared on the Common Stock
during the period between any Quarterly Dividend Payment Date and the next
subsequent Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, dividend of $0.01 per share on the Series A Junior
Participating Preferred Stock shall nevertheless be payable on such subsequent
Quarterly Dividend Payment Date.
c. Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Junior Participating Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A Junior
Participating Preferred Stock, unless the date of issue of such shares is prior
to the record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a
date after the record date for the determination of holders of shares of Series
A Junior Participating Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Junior Participating Preferred Stock in an amount
less than the total amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Junior Participating
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
-------------
Participating Preferred Stock shall have the following voting rights:
2
<PAGE>
a. Subject to the provision for adjustment hereinafter set forth, each
share of Series A Junior Participating Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Junior
Participating Preferred Stock were entitled immediately prior to such event
shall be adjusted by multiplying such number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
b. Except as otherwise provided herein or by law, the holders of shares of
Series A Junior Participating Preferred Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
c. (i) If at any time dividend on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six (6) quarterly
dividends thereon, the occurrence of such contingency shall mark the
beginning of a period (herein called a "default period") which shall extend
until such time when all accrued and unpaid dividends for all previous
quarterly dividend periods and for the current quarterly dividend period on
all shares of Series A Junior Participating Preferred Stock then
outstanding shall have been declared and paid or set apart for payment.
During each default period, all holders of Preferred Stock (including
holders of the Series A Junior Participating Preferred Stock) with
dividends in arrears in an amount equal to six (6) quarterly dividends
thereon, voting as a class, irrespective of series, shall have the right to
elect two (2) directors.
(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at
a special meeting called pursuant to subparagraph (iii) of this Section
3(C) or at any annual meeting of stockholders, and thereafter at annual
meetings of stockholders, provided that neither such voting right nor the
right of the holders of any other series of Preferred Stock, if any, to
increase, in certain cases, the authorized number of directors shall be
exercised unless the holders of ten percent (10%) in number of shares of
Preferred Stock outstanding shall be present in person or by proxy. The
absence of a quorum of the holders of Common Stock shall not affect the
exercise by the holders of Preferred Stock of such voting right. At any
meeting at which the holders of Preferred Stock shall exercise such voting
right initially during an existing default period, they shall have the
right, voting as a class, to elect directors to fill such vacancies, if
any, in the Board of Directors as may then exist up to two (2) directors
or, if such right is exercised at an annual meeting, to elect two (2)
directors. If the number which may be so elected at any special meeting
does not amount to the required number, the holders of the
3
<PAGE>
Preferred Stock shall have the right to make such increase in the number of
directors as shall be necessary to permit the election by them of the
required number. After the holders of the Preferred Stock shall have
exercised their right to elect directors in any default period and during
the continuance of such period, the number of directors shall not be
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Junior Participating Preferred
---- -----
Stock.
(iii) Unless the holders of Preferred Stock shall, during an existing
default period, have previously exercised their right to elect directors,
the Board of Directors may order, or any stockholder or stockholders owning
in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series, may request,
the calling of a special meeting of the holders of Preferred Stock, which
meeting shall thereupon be called by the President, a Vice-President or the
Secretary of the Corporation. Notice of such meeting and of any annual
meeting at which holders of Preferred Stock are entitled to vote pursuant
to this Paragraph (C)(iii) shall be given to each holder of record of
Preferred Stock by mailing a copy of such notice to him at his last address
as the same appears on the books of the Corporation. Such meeting shall be
called for a time not earlier than 20 days and not later than 60 days after
such order or request or in default of the calling of such meeting within
60 days after such order or request, such meeting may be called on similar
notice by any stockholder or stockholders owning in the aggregate not less
than ten percent (10%) of the total number of shares of Preferred Stock
outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no
such special meeting shall be called during the period within 60 days
immediately preceding the date fixed for the next annual meeting of the
stockholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be
entitled to elect the whole number of directors until the holders of
Preferred Stock shall have exercised their right to elect two (2) directors
voting as a class, after the exercise of which right (x) the directors so
elected by the holders of Preferred Stock shall continue in office until
their successors shall have been elected by such holders or until the
expiration of the default period, and (y) any vacancy in the Board of
Directors may (except as provided in Paragraph (C)(ii) of this Section 3)
be filled by vote of a majority of the remaining directors theretofore
elected by the holders of the class of stock which elected the director
whose office shall have become vacant. References in this Paragraph (C) to
directors elected by the holders of a particular class of stock shall
include directors elected by such directors to fill vacancies as provided
in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect directors shall
cease, (y) the term of any directors elected by the holders of Preferred
Stock as a class shall terminate, and (z) the number of directors shall be
such number as may be
4
<PAGE>
provided for in the Charter or by-laws irrespective of any increase made
pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such
number being subject, however, to change thereafter in any manner provided
by law or in the Charter or by-laws). Any vacancies on the Board of
Directors affected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining directors.
d. Except as set forth herein, holders of Series A Junior Participating
Preferred Stock shall have no special voting rights and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
a. Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not
(i) declare or pay dividends on, make any other distributions on, or
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Participating Preferred
Stock,
(ii) declare or pay dividends on or make any other distributions on any
shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, except dividends paid ratably on the Series
A Junior Participating Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled,
(iii) redeem or purchase or otherwise acquire for consideration shares
of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Junior
Participating Preferred Stock, provided that the Corporation may at any
time redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or winding up) to
the Series A Junior Participating Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Junior Participating Preferred Stock, or any shares of stock
ranking on a parity with the Series A Junior Participating Preferred Stock,
except in accordance with a purchase offer made in writing or by
publication (as determined by the Board of Directors) to all holders of
such shares upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other
5
<PAGE>
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
b. The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under Paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Participatin
-----------------
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be treated by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
a. Upon any liquidation (voluntary or otherwise), dissolution or winding
up of the Corporation, no distribution shall be made to the holders of shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Participating Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Participating Preferred Stock
shall have received an amount equal to $100 per share of Series A Participating
Preferred Stock, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount of
the Series A Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Common Stock shall have received
an amount per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately
adjusted as set forth in subparagraph (3) below to reflect such events as stock
splits, stock dividends and recapitalizations with respect to the Common Stock)
(such number in clause (ii), the "Adjustment Number"). Following the payment of
the full amount of the Series A Liquidation Preference and the Common Adjustment
in respect of all outstanding shares of Series A Junior Participating Preferred
Stock and Common Stock, respectively, holders of Series A Junior Participating
Preferred Stock and holders of shares of Common Stock shall receive their
ratable and proportionate share of the remaining assets to be distributed in the
ratio of the Adjustment Number to 1 with respect to such Preferred Stock and
Common Stock, on a per share basis, respectively.
b. In the event, however, that there are not sufficient assets available
to permit payment in full of the Series A Liquidation Preference and the
liquidation preferences of all other series of preferred stock, if any, which
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
6
<PAGE>
In the event, however, that there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock.
c. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the Adjustment Number in effect immediately prior to such event shall be
adjusted by multiplying such Adjustment Number by a fraction the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation shall enter
--------------------------
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share (subject to the provision
for adjustment hereinafter set forth) equal to 100 times the aggregate number of
stock, securities, cash and/or any other property (payable in kind), as the case
may be, into which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Junior Participating Preferred Stock shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 8. No Redemption. The shares of Series A Junior Participating
-------------
Preferred Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Participating Preferred Stock
-------
shall rank senior to the Common Stock and junior to all other series of the
Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets, unless the terms of any such series shall provide
otherwise.
Section 10. Amendment. At any time when any shares of Series A Junior
---------
Participating Preferred Stock are outstanding, neither the Charter of the
Corporation nor these Articles Supplementary shall be amended in any manner
which would materially alter or change the powers, preferences or special rights
of the Series A Junior Participating Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of a majority or more of
the outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
7
<PAGE>
Section 11. Fractional Shares. Series A Junior Participating Preferred
-----------------
Stock may be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
SECOND: The Series A Junior Participating Preferred Stock has been
------
reclassified by the Board of Directors under a power contained in the Charter.
THIRD: These Articles Supplementary have been approved by the Board of
-----
Directors in the manner and by the vote required by law.
FOURTH: The undersigned acknowledges these Articles Supplementary to be
------
the act of the Corporation and states as to all matters and facts required to be
verified under oath that, to the best of his knowledge, information and belief,
these matters and facts are true in all material respects and such statement is
made under the penalties for perjury.
IN WITNESS WHEREOF, these Articles Supplementary are executed on behalf of
the Corporation by its Vice Chairman of the Board, Chief Executive Officer and
President and attested by its Vice President, General Counsel and Secretary this
11th day of November, 1998.
ESSEX PROPERTY TRUST, INC.
By: /s/ Keith R. Guericke
--------------------------
Name: Keith R. Guericke
Title: Vice Chairman of the Board,
Chief Executive Officer and President
(SEAL)
Attest:
By: /s/ Jordan E. Ritter
-------------------------
Name: Jordan E. Ritter
Title: Vice President,
General Counsel and
Secretary
8
<PAGE>
EXHIBIT 10.5
THIRD AMENDMENT TO
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
ESSEX PORTFOLIO, L.P.
Dated as of November 24, 1998
This Third Amendment to the First Amended and Restated Agreement of Limited
Partnership of Essex Portolio, L.P., as amended (the "Partnership Agreement"),
dated as of the date shown above (the "Amendment"), is executed by Essex
Property Trust, Inc. a Maryland Corporation (the "Company"), as the General
Partner and on behalf of the existing Limited Partners of Essex Portfolio, L.P.
(the "Partnership") and Belcrest Realty Corporation, a Delaware corporation
("Belcrest") and Belair Real Estate Corporation, a Delaware corporation
("Belair," and together with Belcrest, the "Contributors").
RECITALS
WHEREAS, the Partnership was formed pursuant to the Partnership Agreement,
which has been amended and restated as of September 30, 1997;
WHEREAS, on the date hereof, Contributors have made a Capital Contribution
of an aggregate of $25,000,000.00, in cash, to the Partnership in exchange for
which Contributors are entitled to receive an aggregate of 500,000 9 1/8%
Series C Cumulative Redeemable Preferred Units (the "Series C Preferred Units")
of limited partnership interests in the Partnership with rights, preferences,
exchange and other rights, voting powers and restrictions, limitations as to
distributions, qualifications and terms and conditions as set forth herein;
WHEREAS, pursuant to the authority granted to the General Partner under the
Partnership Agreement, the General Partner desires to amend the Partnership
Agreement to reflect (i) the issuance of the Series C Preferred Units, (ii) the
admission of the Contributors as Additional Limited Partners and holders of a
certain number of Series C Preferred Units and (iii) certain other matters
described herein;
WHEREAS, Contributors desire to become a party to the Partnership Agreement
as Limited Partners and to be bound by all terms, conditions and other
provisions of this Amendment and the Partnership Agreement.
NOW THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the General Partner hereby amends the Partnership Agreement as
follows:
1
<PAGE>
1. Definitions. Capitalized terms used herein, unless otherwise defined
-----------
herein, shall have the same meanings as set forth in the Partnership Agreement.
2. Admission of Contributors. Contributors are hereby admitted as
-------------------------
Additional Limited Partners in accordance with Section 4.6 of the Partnership
Agreement holding such number of Series C Preferred Units as is set forth on
Exhibit A, as amended. Contributors each hereby agree to become a party to the
Partnership Agreement as a Limited Partner and to be bound by all the terms,
conditions and other provisions of the Partnership Agreement, as amended by this
Amendment. Pursuant to Section 4.6(b) of the Partnership Agreement, the General
Partner hereby consents to the admission of each Contributor as an Additional
Limited Partner of the Partnership. The admission of Contributors shall become
effective as of the date of this Amendment, which shall also be the date on
which the name of each Contributor is recorded on the books and records of the
Partnership.
3. Percentage Interest. Section 1.1 of the Partnership Agreement is
-------------------
hereby amended to delete the definition of "Percentage Interest" in its entirety
and the following definition of "Percentage Interest" is hereby substituted in
its place:
"Percentage Interest" shall mean, with respect to any Partner other
than holders of Series B Preferred Units or Series C Preferred Units, the
undivided percentage ownership interest of such Partner in the Partnership,
as determined by dividing the number of Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding
(excluding the Series A Preferred Interest, the Series B Preferred
Interest, the Series B Partnership Units, Series C Preferred Interest and
Series C Preferred Units).
4. Restatement of Exhibit A and Exhibit M. Exhibit A to the Partnership
--------------------------------------
Agreement is amended and restated by replacing such Exhibit A with Exhibit A
attached to this Amendment. Exhibit M to the Partnership Agreement is amended
and restated by replacing such Exhibit M with Exhibit M attached to this
Amendment.
5. Preferred Interest. Section 1.1 of the Partnership Agreement is
------------------
hereby amended to include the following definition of "Series C Preferred
Interest" after the definition of "Series B Preferred Interest" and before the
definition of "Series A Preferred Stock."
"Series C Preferred Interest" shall mean the interest in the
Partnership received by the General Partner in connection with the issuance
of shares of Series C Preferred Stock, as and when issued, which Series C
Preferred Interest includes and shall include the right to receive
preferential distributions and certain other rights as set forth in this
Agreement.
6. Series C Preferred Stock. Section 1.1 of the Partnership Agreement is
------------------------
hereby amended to include the following definitions of "Series C Preferred
Stock" and "Series C Preferred Units" which are hereby inserted after the
definition of "Series B Preferred Units" and before the definition of "Stock
Incentive Plans":
"Series C Preferred Stock" shall mean the preferred stock of the
General Partner described in Article FIRST of the Articles Supplementary
reclassifying
2
<PAGE>
500,000 shares of Common Stock as 500,000 shares of 9 1/8% Series C
Cumulative Redeemable Preferred Stock to be filed with the Department on or
about November 24, 1998.
"Series C Preferred Units" shall mean the 9 1/8% Series C Cumulative
Redeemable Preferred Units of limited partnership interests in the
Partnership with rights, preferences, exchange and other rights, voting
powers and restrictions, limitations as to distributions, qualifications
and terms and conditions as set forth in Exhibit O hereto.
7. Distributions. Section 6.2(a) of the Partnership Agreement is hereby
-------------
deleted in its entirety, and the following is hereby substituted in the place
thereof:
"(a) Distributions shall be made in accordance with the following
order of priority:
(i) First, on a pro rata basis, (based upon the same ratio that
--------
accrued distributions per share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and per unit of Series B
Preferred Units and Series C Preferred Units (which shall not include any
accumulation in respect of unpaid distributions for prior distribution
periods if such stock or units do not have cumulative distribution rights)
bear to each other) (x) to the General Partner, on account of the Series A
Preferred Interest, Series B Preferred Interest and Series C Preferred
Interest until the total amount of distributions made pursuant to this
Section 6.2(a)(i)(x) equals the total amount of accrued but unpaid
dividends (if any) payable with respect to the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock as of the
date of such distribution; (y) to the Limited Partners holding Series B
Preferred Units, on account of the Series B Preferred Units until the total
amount of distributions made pursuant to this Section 6.2(a)(i)(y) equals
the total amount of accrued but unpaid dividends (if any) payable with
respect to the Series B Preferred Units, in accordance with Exhibit N of
the Partnership Agreement, as of the date of such distribution; and (z) to
the Limited Partners holding Series C Preferred Units, on account of the
Series C Preferred Units until the total amount of distributions made
pursuant to this Section 6.2(a)(i)(z) equals the total amount of accrued
but unpaid dividends (if any) payable with respect to the Series C
Preferred Units, in accordance with Exhibit O of the Partnership Agreement,
as of the date of such distribution.
(ii) Next, to the Partners, pro rata in accordance with the
--------
Partners' then Percentage Interests.
Neither the Partnership nor the Limited Partners shall have any
obligation to see that any funds distributed to the General Partner
pursuant to subparagraph (a)(i) of this Section 6.2 are in turn used by the
General Partner to pay dividends on the Series A Preferred Stock, the
Series B Preferred Stock or the Series C Preferred Stock (or any other
Preferred Stock) or that funds distributed to the General Partner
3
<PAGE>
pursuant to subparagraph (a)(ii) of this Section 6.2 are in turn used by
the General Partner to pay dividends on the Common Stock or for any other
purpose."
8. Distributions in Kind. Section 8.5 of the Partnership Agreement is
---------------------
hereby amended by adding the following sentence to the end of such section:
"Notwithstanding the foregoing, the Liquidating Trustee shall not
distribute to the holders of Series B Partnership Units, Series C
Partnership Units, Series A Preferred Interest, Series B Preferred Interest
and Series C Preferred Interest Partnership assets other than cash."
9. Exhibit E. Exhibit E to the Partnership Agreement is hereby deleted
--------- ---------
in its entirety, and the attached Exhibit E is hereby inserted in the place
---------
thereof.
10. Exhibit N. Exhibit N is hereby amended by (i) deleting the word
---------
"Stock" in the ninth (9th) line of Section 2G(i) thereof and inserting the word
"Units" in lieu thereof; and (ii) inserting the following sentence at the end of
said Section 2G(i):
"The Series B Preferred Units will become exchangeable at any time in
whole or in part at the option of the holders of the Series B
Preferred Units if, at any time (i) the Partnership takes the position
that the assets and income of the Partnership are such as would not
permit the Partnership to satisfy the income and assets tests of
Section 856 of the Code if the Partnership were a real estate
investment trust within the meaning of the Code; or (ii) any holder of
the Series B Preferred Units shall deliver to the Partnership and the
Company an opinion of independent counsel reasonably acceptable to the
Company to the effect that the assets and income of the Partnership
are such as would not permit the Partnership to satisfy the income and
assets tests of Section 856 of the Code if the Partnership were a real
estate investment trust within the meaning of the Code."
11. Exhibit O. The Partnership Agreement is hereby amended by adding a
---------
new exhibit, Exhibit O, a copy of which is attached hereto. Exhibit O is hereby
---------
inserted into the Partnership Agreement following Exhibit N.
---------
12. Continuing Effect of Partnership Agreement. Except as modified
------------------------------------------
herein, the Partnership Agreement is hereby ratified and confirmed in its
entirety and shall remain and continue in full force and effect, provided,
however, that to the extent there shall be a conflict between the provisions of
the Partnership Agreement and this Amendment the provisions in this Amendment
will prevail. All references in any document to the Partnership Agreement shall
mean the Partnership Agreement, as amended hereby.
13. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same agreement. Facsimile signatures shall be
deemed effective execution of this Agreement and may be relied upon as such by
the other party. In the event facsimile signatures are delivered, originals of
such signatures shall be delivered to the other party within three (3) business
days after execution.
4
<PAGE>
IN WITNESS WHEREOF, the General Partner and the Contributor have executed
this Amendment as of the date indicated above.
GENERAL PARTNER
ESSEX PROPERTY TRUST, INC.,
a Maryland corporation as General Partner of Essex
Portfolio, L.P. and on behalf of the existing
Limited Partners
By:
------------------------------------------
Name: Keith R. Guericke
Title: Chief Executive Officer & President
CONTRIBUTOR:
BELCREST REALTY CORPORATION,
a Delaware corporation
By:
-------------------------------------------
Name:
-----------------------------------------
Title:
-----------------------------------------
5
<PAGE>
BELAIR REAL ESTATE CORPORATION
a Delaware Corporation
By:
------------------------------------------
Name:
------------------------------------------
Title:
----------------------------------------
6
<PAGE>
EXHIBIT A
PARTNERSHIP UNITS
(As of November 24, 1998)
PARTNERSHIP UNITS
-----------------
<TABLE>
<CAPTION>
General Partner: Units
- ----------------------------- ----------
<S> <C>
Essex Property Trust, Inc. 16,615,924
</TABLE>
Limited Partners:
- ----------------
<TABLE>
<S> <C>
1. Essex Portfolio Management Company 15,941
2. Essex Property Corporation 9,909
3. GMMS Partners 43,414
4. M & M Projects, Inc. 128,138
5. SummerHill Homes 163,447
6. Paula Amanda 1,785
7. Robert and Margaret Arnold 2,242
8. Randall I. Barkan 2,564
9. David Bernstein Revocable Trust 5,771
10. John D. and Robbin Eudy 7,457
11. Kenneth and Angeliki Frangadakis 2,675
12. George and Katherine Frangadakis, 4,697
Trustees
Frangadakis Family Revocable Trust
13. Kenneth and Angeliki Frangadakis, 24,334
Trustees
Frangadakis Family Revocable Trust
14. Harvey Friedman 4,042
15. Harvey and Margaret Green 16,735
16. Keith R. and Thelma Guericke 48,116
<PAGE>
17. George P. Katsoulis 5,000
18. Gerald E. and Annette Kelly 5,643
19. Nancy Kukkola 11,637
20. George M. Marcus 1,136,227
21. Meistrich Family Trust UTA 12/6/90 4,042
22. Charles E. Martin 1,785
23. William A. and Sherrie Millichap 73,099
24. J. Peter and Cherie Otten 9,447
25. Milton Pagonis 10,267
26. Gary Pagonis Family Trust 10,267
27. G. Michael Roark 54,740
28. Michael and Ann Schall 26,388
29. J. Lawrence Schnadig 1,729
30. J.A. Shafran 2,889
31. Swanson Survivors Trust 7,687
32. Marcus & Millichap 2,564
33. The Way 1994 Living Trust Dtd. 2,226
11/2/94
34. Gay A. Yamagiwa 10,720
35. Craig K. Zimmerman 15,849
7.875% SERIES B PREFERRED UNITS
-------------------------------
Limited Partner:
- ----------------
Belair Real Estate Corporation 1,600,000
2
<PAGE>
9 1/8% SERIES C PREFERRED UNITS
-------------------------------
Limited Partner:
- ----------------
Belcrest Realty Corporation 420,000
Belair Real Estate Corporation 80,000
________
TOTAL PARTNERSHIP UNITS: 2,100,000
</TABLE>
3
<PAGE>
EXHIBIT M
ADDRESSES OF PARTNERS
PARTNERSHIP UNIT HOLDERS
------------------------
Essex Portfolio Management Company Essex Property Corporation
777 California Avenue 777 California Avenue
Palo Alto, CA 94304 Palo Alto, CA 94304
GMMS Partners M & M Projects, Inc.
777 California Avenue 777 California Avenue
Palo Alto, CA 94304 Palo Alto, CA 94304
SummerHill Homes Paula Amanda
777 California Avenue 1001 Bridgeway #460
Palo Alto, CA 94304 Sausalito, CA 94965
Robert and Margaret Arnold Randall I. Barkan
460 Marlowe 777 California Avenue
Palo Alto, CA 94301 Palo Alto, CA 94304
Belair Capital Fund LLC David Bernstein, Trustee
c/o Eaton Vance Management David Bernstein Revocable Trust
24 Federal Street 8773 Midnight Pass Road #406
Boston, Massachusetts 02110 Sarasota, FL 34242
Attention: Mr. Alan Dynner
Fax: 617-338-8054
Kenneth and Angeliki Frangadakis John D. and Robbin Eudy
10383 Torre Avenue 777 California Avenue
Cupertino, CA 95014 Palo Alto, CA 94304
Kenneth and Angeliki Frangadakis, George and Katherine Frangadakis,
Trustees Trustees
Frangadakis Family Revocable Trust Frangadakis Family Revocable Trust
10383 Torre Avenue 7408 Fallenleaf Lane
Cupertino, CA 95014 Cupertino, CA 95014
Keith R. and Thelma Guericke Harvey Friedman
14341 Lutheria Way 720 Rochedale Way
Saratoga, CA 95070 Los Angeles, CA 90049
Gerald E. and Annette Kelly Harvey and Margaret Green
1517 Kalmia Street 12243 Huston Street
San Mateo, CA 94402 N. Hollywood, CA 91607
4
<PAGE>
Charles E. Martin George P. Katsoulis
1001 Bridgeway #134 3300 Webster Street #612
Sausalito, CA 94965 Oakland, CA 94609
J. Peter and Cherie Otten Nancy Kukkola
250 El Bonito Way 123 Greenmeadow Way
Millbrae, CA 94030 Palo Alto, CA 94306
Gary and Elisa Pagonis, Trustees George M. Marcus
Gary Pagonis Family Trust 777 California Avenue
10383 Torre Avenue, Suite 1 Palo Alto, CA 94304
Cupertino, CA 95014
Michael and Ann Schall Herbert Meistrich
1544 Sioux Court 1320 W. Muirlands Drive
Fremont, CA 94539 La Jolla, CA 92037
William A. and Sherrie Millichap G. Michael Roark
2626 Hanover P.O. Box 2767
Palo Alto, CA 94304 Sausalito, CA 94966
Milton Pagonis Roger and Anita Swanson, Trustees
10383 Torre Avenue, Suite 1 Swanson Survivors Trust
Cupertino, CA 95014 889 Norfolk Pine Avenue
Sunnyvale, CA 94087
J.A. Shafran J. Lawrence Schnadig
30360 Morning View Drive 833 MOraga Drive #6
Malibu, CA 90265 Los Angeles, CA 90049
Linwood C. Thompson J.A. Shafran
Marcus & Millichap 30360 Morning View Drive
8750 W. Bryn Mawr #750 Malibu, CA 90265
Chicago, IL 60631
Gay A. Yamagiwa Stephen and Patricia Way, Trustees
341 Seville The Way 1994 Living Trust Dtd.
San Mateo, CA 94402 11/2/94
338 Georgetown Avenue
San Mateo, CA 94402
5
<PAGE>
Belcrest Realty Corporation Craig K. Zimmerman
c/o Eaton Vance Management 409 Georgetown Avenue
24 Federal Street San Mateo, CA 94402
Boston, MA 02110
Attn: Mr. Alan Dynner
Belair Real Estate Corporation
c/o Eaton Vance Management
24 Federal Street
Boston, MA 02110
Attn: Mr. Alan Dynner
6
<PAGE>
EXHIBIT E
ALLOCATIONS
1. Allocation of Net Income and Net Loss.
-------------------------------------
(a) Net Income. Except as otherwise provided herein, Net Income for
----------
any fiscal year or other applicable period shall be allocated in the following
order and priority:
(1) First, to the Partners, until the cumulative Net Income
allocated pursuant to this subparagraph (a)(1) for the current and all prior
periods equals the cumulative Net Loss allocated pursuant to subparagraph (b)(2)
hereof for all prior periods, among the Partners in the reverse order that such
Net Loss was allocated to the Partners pursuant to subparagraph (b)(2) hereof
(and, in the event of a shift of a Partner's interest in the Partnership, to the
Partners in a manner that most equitably reflects the successors in interest to
the Partners).
(2) Thereafter, the balance of the Net Income, if any, shall be
allocated to the Partners in accordance with their respective Percentage
Interests.
(b) Net Loss. Except as otherwise provided herein, Net Loss of the
--------
Partnership for each fiscal year or other applicable period shall be allocated
as follows:
(1) To the Partners in accordance with their respective
Percentage Interests.
(2) Notwithstanding subparagraph (b)(1) hereof, to the extent any
Net Loss allocated to a Partner under subparagraph (b)(1) hereof or this
subparagraph (b)(2) would cause such Partner (hereinafter, a "Restricted
Partner") to have an Adjusted Capital Account Deficit as of the end of the
fiscal year to which such Net Loss relates, such Net Loss shall not be allocated
to such Restricted Partner and instead shall be allocated to the other
Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance with
their relative Percentage Interests.
(c) Notwithstanding Sections 1(a) and (b) above, on any date on which
any Series A Preferred Stock, any Series B Preferred Stock, any Series C
Preferred Stock or any Series B Preferred Unit or any Series C Preferred Unit
(or other Preferred Stock or other preferred units) is outstanding, Net Income
and Net Loss shall be allocated as follows:
(1) Net Income for any fiscal year or other applicable period
shall be allocated in the following order and priority:
(i) First, to the Partners, until the cumulative Net
Income allocated pursuant to this subparagraph (c)(1)(i) for the current and all
prior periods equals the cumulative Net Loss allocated pursuant to subparagraphs
(c)(2)(iii) and (iv)
1
<PAGE>
hereof for all prior periods, among the Partners in the reverse order that such
Net Loss was allocated (and, in the event of a shift of a Partner's interest in
the Partnership, to the Partners in a manner that most equitably reflects the
successors in interest to such Partners);
(ii) Second, to the General Partner, until the cumulative
Net Income allocated pursuant to this subparagraph (c)(1)(ii) for the current
and all prior periods equals the cumulative Net Loss allocated pursuant to
subparagraph (c)(2)(ii) hereof for all prior periods;
(iii) Third, on a pari passu basis, to (A) the General
---- -----
Partner until the cumulative amount of Net Income allocated pursuant to this
subparagraph (c)(1)(iii) equals the total amount of dividends paid on the Series
A Preferred Stock, the Series B Preferred Stock and the Series C Preferred Stock
(and other Preferred Stock) as of or prior to the date of such allocation plus
the total amount of accrued but unpaid dividends on the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock (and other
Preferred Stock) as of such date; (B) to the holders of Series B Preferred Units
until the cumulative amount of Net Income allocated pursuant to this
subparagraph (c)(i)(iii) equals the total amount of Priority Return paid on the
Series B Preferred Units as of or prior to the date of such allocation plus the
total amount of accrued but unpaid Priority Return on the Series B Preferred
Units; and (C) to the holders of Series C Preferred Units until the cumulative
amount of Net Income allocated pursuant to this subparagraph (c)(i)(iii) equals
the total amount of Priority Return paid on the Series C Preferred Units as of
or prior to the date of such allocation plus the total amount of accrued but
unpaid Priority Return on the Series C Preferred Units;
(iv) Thereafter, the balance of the Net Income, if any,
shall be allocated to the Partners in accordance with their respective
Percentage Interests.
(2) Net Loss of the Partnership for each fiscal year or other
applicable period shall be allocated as follows:
(i) First, to the Partners in accordance with their
respective Percentage Interests until the Capital Account balances of the
Limited Partners (not including the holders of the Series B Preferred Units and
the Series C Preferred Units) are reduced to zero (for purpose of this
calculation, such Partners' share of Partnership Minimum Gain shall be added
back to their Capital Accounts);
(ii) Second, on a pari passu basis, to (A) the General
---- -----
Partner until its Capital Account balance has been reduced to zero (for purpose
of this calculation, such Partner's share of Partnership Minimum Gain shall be
added back to its Capital Account); (B) to the holders of Series B Preferred
Units until their Capital Account balances have been reduced to zero (for
purpose of this calculation, such Partners' share of Partnership Minimum Gain
shall be added back to their Capital Accounts); and (C) to the holders of Series
C Preferred Units until their Capital Account Balances have been reduced to zero
(for purposes of this calculation, such Partners' share of Partnership Minimum
Gain shall be added back to their Capital Accounts);
2
<PAGE>
(iii) Thereafter, to the Partners in accordance with
their then Percentage Interests;
(iv) Notwithstanding subparagraph (c)(2)(iii) hereof, to
the extent any Net Loss allocated to a Partner under subparagraph (c)(2) would
cause such Partner (hereinafter, a "Restricted Partner") to have an Adjusted
Capital Account Deficit as of the end of the fiscal year to which such Net Loss
relates, such Net Loss shall not be allocated to such Restricted Partner and
instead shall be allocated to the other Partner(s) (hereinafter, the "Permitted
Partners") pro rata in accordance with their relative Percentage Interests.
(d) Book-Up and Capital Account Adjustments. On any day on which
---------------------------------------
Series A Preferred Stock (or other Preferred Stock) is redeemed or converted
into Common Stock, the Partnership shall adjust the Gross Asset Values of all
Partnership assets to equal their respective gross fair market values and shall
allocate the amount of such adjustment as Net Income or Net Loss pursuant to
Section 1(c) hereof, provided, however, that if no Series A Preferred Stock (or
other Preferred Stock) is outstanding after such redemption or conversion, such
Net Income or Net Loss shall be allocated in such a manner that after such
allocation the Capital Accounts of the Partners are in proportion to their
Percentage Interests.
(e) Adjustment of Percentage Interests Upon Conversion of Convertible
-----------------------------------------------------------------
Preferred Stock to Common Stock. Upon the conversion of any Series A Preferred
- -------------------------------
Stock to Common Stock of the General Partner , the Percentage Interests of the
Partners shall be adjusted in accordance with the provisions of Article 4 of the
Partnership Agreement as if, on the date of such conversion, the General Partner
had made an additional Capital Contribution to the Partnership in an amount
equal to the number of shares of Common Stock issued as a result of such
conversion multiplied by the fair market value of such shares on the date of
conversion, and provided that in calculating such adjustments, the General
Partner shall be deemed not to have incurred any expenses in connection with
raising the funds used to make such additional Capital Contribution.
2. Special Allocations.
-------------------
Notwithstanding any provisions of paragraph 1 of this Exhibit E, the
following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback (Nonrecourse Liabilities). If there is a
-------------------------------------------------
net decrease in Partnership Minimum Gain for any Partnership fiscal year (except
as a result of conversion or refinancing of Partnership indebtedness, certain
capital contributions or revaluation of the Partnership property as further
outlined in Regulation Sections 1.704-2(d)(4), (f)(2) or (f)(3)), each Partner
shall be specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to that Partner's share
of the net decrease in Partnership Minimum Gain. The items to be so allocated
shall be determined in accordance with Regulation Section 1.704-2(f). This
paragraph (a) is intended to comply with the minimum gain chargeback requirement
in said section of the Regulations and shall be interpreted consistently
3
<PAGE>
therewith. Allocations pursuant to this paragraph (a) shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant hereto.
(b) Minimum Gain Attributable to Partner Nonrecourse Debt. If there
-----------------------------------------------------
is a net decrease in Minimum Gain Attributable to Partner Nonrecourse Debt
during any fiscal year (other than due to the conversion, refinancing or other
change in the debt instrument causing it to become partially or wholly
nonrecourse, certain capital contributions, or certain revaluations of
Partnership property as further outlined in Regulation Section 1.704-2(i)(4)),
each Partner shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to that
Partner's share of the net decrease in the Minimum Gain Attributable to Partner
Nonrecourse Debt. The items to be so allocated shall be determined in
accordance with Regulation Section 1.704-2(i)(4) and (j)(2). This paragraph (b)
is intended to comply with the minimum gain chargeback requirement with respect
to Partner Nonrecourse Debt contained in said section of the Regulations and
shall be interpreted consistently therewith. Allocations pursuant to this
paragraph (b) shall be made in proportion to the respective amounts required to
be allocated to each Partner pursuant hereto.
(c) Qualified Income Offset. In the event a Limited Partner
-----------------------
unexpectedly receives any adjustments, allocations or distributions described in
Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), and such Limited
Partner has an Adjusted Capital Account Deficit, items of Partnership income and
gain shall be specially allocated to such Partner in an amount and manner
sufficient to eliminate the Adjusted Capital Account Deficit as quickly as
possible. This paragraph (c) is intended to constitute a "qualified income
offset" under Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
-
consistently therewith.
(d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal
----------------------
year or other applicable period shall be allocated to the Partners in accordance
with their respective Percentage Interests.
(e) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions
------------------------------
for any fiscal year or other applicable period shall be specially allocated to
the Partner that bears the economic risk of loss for the debt (i.e., the Partner
Nonrecourse Debt) in respect of which such Partner Nonrecourse Deductions are
attributable (as determined under Regulation Section 1.704-2(b)(4) and (i)(1)).
(f) Curative Allocations. It is the intent of the Partnership that,
--------------------
to the extent possible, the Capital Account balances of the Partners be in
proportion to the Partners' Percentage Interests. Thus, items of "book" income,
gain, loss, and deduction shall be allocated among the Partners so that, to the
extent possible, the resulting Partners' Capital Account balances bear this
relationship. This subparagraph (f) is intended to minimize to the extent
possible and to the extent necessary any economic distortions which may result
from application of the Regulatory Allocations and shall be interpreted in a
manner consistent therewith. For purposes hereof, "Regulatory Allocations"
shall mean the
4
<PAGE>
allocations provided under paragraph 1(b)(2) and this paragraph 2 (save
subparagraphs (d) and (f) hereof).
3. Tax Allocations.
---------------
(a) Generally. Subject to paragraphs (b) and (c) hereof, items of
---------
income, gain, loss, deduction and credit to be allocated for income tax purposes
(collectively, "Tax Items") shall be allocated among the Partners on the same
basis as their respective book items.
(b) Sections 1245/1250 Recapture. If any portion of gain from the
----------------------------
sale of property is treated as gain which is ordinary income by virtue of the
application of Code Section 1245 or 1250 ("Affected Gain"), then (A) such
Affected Gain shall be allocated among the Partners in the same proportion that
the depreciation and amortization deductions giving rise to the Affected Gain
were allocated and (B) other Tax Items of gain of the same character that would
have been recognized, but for the application of Code Sections 1245 and/or 1250,
shall be allocated away from those Partners who are allocated Affected Gain
pursuant to Clause (A) so that, to the extent possible, the other Partners are
allocated the same amount, and type, of capital gain that would have been
allocated to them had Code Sections 1245 and/or 1250 not applied; provided,
however, that the net amount of Tax Items allocated to each Partner shall be the
same as if this paragraph 3(a) did not exist. For purposes hereof, in order to
determine the proportionate allocations of depreciation and amortization
deductions for each fiscal year or other applicable period, such deductions
shall be deemed allocated on the same basis as Net Income and Net Loss for such
respective period.
(c) Allocations Respecting Section 704(c) and Revaluations. If any
------------------------------------------------------
Partnership property is subject to Code Section 704(c) or is reflected in the
Capital Accounts of the Partners and on the books of the Partnership at a book
value that differs from the adjusted tax basis of such property, then the tax
items with respect to such property shall, in accordance with the requirements
of Regulations Section 1.704-1(b)(4)(i), be shared among the Partners in a
manner that takes account of the variation between the adjusted tax basis of the
applicable property and its book value in the same manner as variations between
the adjusted tax basis and fair market value of property contributed to the
Partnership are taken into account in determining the Partners' share of tax
items under Code Section 704(c). The General Partner is authorized to choose
any reasonable method permitted by the Regulations pursuant to Code Section
704(c), including the "remedial allocation" method, the "curative allocation"
method and the traditional method; provided that the General Partner agrees to
use reasonable efforts to minimize the amount of taxable income in excess of
book income allocated to the holders of the Series B Preferred Units and the
Series C Preferred Units.
(d) Code Section 752 Specification. Pursuant to Regulations Section
------------------------------
1.752-3, the Partners' interest in Partnership profits for purposes of
determining the Partners' shares of excess nonrecourse liabilities shall be
their Percentage Interests.
5
<PAGE>
EXHIBIT O
DESCRIPTION OF PREFERENCES, OTHER RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO DISTRIBUTIONS, QUALIFICATIONS AND
TERMS AND CONDITIONS OF REDEMPTION
OF THE
SERIES C PREFERRED UNITS
1. Definitions.
In addition to those terms defined in the Agreement, the following
definitions shall be for all purposes, unless otherwise clearly indicated to the
contrary, applied to the terms used in the Agreement and this Exhibit O:
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which state or federally chartered banking institutions in New York, New
York are not required to be open.
"Distribution Payment Date" shall have the meaning set forth in
Section 2(c) hereof.
"Parity Units" means (i) the Series A Preferred Interest, (ii) the
Series B Preferred Interest, (iii) the Series C Preferred Interest, and (iv) any
class or series of Partnership Interests of the Partnership now or hereafter
authorized, issued or outstanding expressly designated by the Partnership to
rank on a parity with Series C Preferred Units with respect to distributions or
rights upon voluntary or involuntary liquidation, winding-up or dissolution of
the Partnership, or both, as the context may require.
"Priority Return" means, an amount equal to 91/8% per annum,
determined on the basis of a 360 day year of twelve 30 day months (or actual
days for any month which is shorter than a full monthly period), cumulative to
the extent not distributed for any given distribution period pursuant to Section
6.2(a) of the Partnership Agreement, of the stated value of $50 per Series C
Preferred Unit, commencing on the date of issuance of the Series C Preferred
Units.
"Series C Preferred Stock" means the 91/8% Series C Cumulative
Redeemable Preferred Stock (liquidation preference $50.00 per share), $.0001 par
value, issued by the General Partner.
"Series C Preferred Unit" means a Partnership Unit issued by the
Partnership to certain Persons. The Series C Partnership Units shall constitute
a series of Partnership Units. The Series C Preferred Units shall have the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and conditions of
redemption as are set forth in this Exhibit O.
"set apart for payment" shall mean placing such funds in a separate
account or delivering such funds to a disbursing, paying or other similar agent.
1
<PAGE>
2. Terms of Series C Preferred Units.
A. Number. The number of authorized Series C Preferred Units shall be
------
500,000.
B. Ranking. The Series C Preferred Units will, with respect to distributions
-------
and rights upon voluntary or involuntary liquidation, winding-up or dissolution
of the Partnership, rank senior to all classes or series of Partnership
Interests (as defined in the Partnership Agreement) of the Partnership now or
hereafter authorized, issued or outstanding, other than (i) the Series A
Preferred Interest, the Series B Preferred Interest and the Series C Preferred
Interest, with which it shall rank on a parity, and (ii) any class or series of
Partnership Interests or Partnership Units expressly designated as ranking on a
parity with or senior to the Series A Preferred Units, Series B Preferred Units
and Series C Preferred Units as to distributions and rights upon voluntary or
involuntary liquidation, winding-up or dissolution of the Partnership.
C. Distributions.
-------------
(i) Subject to the rights of the holders of the Parity Units as to the
payments of distributions, holders of Series C Preferred Units will be entitled
to receive, when, as and if declared by the Partnership, acting through the
Company as the sole general partner of the Partnership, cumulative preferential
cash distributions at the rate per annum of 9 1/8% of the original Capital
Contribution per Series C Preferred Unit. Distributions shall be cumulative,
shall accrue from the original date of issuance (the "Issue Date") and shall be
payable (A) quarterly in arrears (such quarterly periods, for purposes of
payment and accrual shall be the quarterly periods ending on the dates specified
in this sentence and not calendar quarters), on the 15th day of February, May,
August and November of each year and (B) in the event of (i) an exchange of
Series C Preferred Units into shares of Series C Preferred Stock, or (ii) upon a
redemption of Series C Preferred Units, on the exchange date or redemption date
(each a "Distribution Payment Date"), commencing on February 15, 1999. The
amount of distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months and for any period shorter than a full
quarterly period for which distributions are computed, the amount of the
distribution payable will be computed on the basis of the actual number of days
elapsed in such a 30-day month. If any date on which distributions are to be
made on the Series C Preferred Units is not a Business Day, then payment of the
distribution to be made on such date will be made on the next succeeding day
that is a Business Day (and without any interest or other payment in respect of
any such delay) except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
Distributions on the Series C Preferred Units will be made to the holders of
record of the Series C Preferred Units on the relevant record dates, which,
unless otherwise provided by the Company with respect to any distribution, will
be 15 Business Days prior to the relevant Distribution Payment Date.
(ii) No distributions on the Series C Preferred Units shall be declared
or paid or set apart for payment by the Partnership at such time as the terms
and provisions of any agreement of the Partnership, including any agreement
relating to its indebtedness, prohibits such declaration, payment or
2
<PAGE>
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, of
if such declaration, payment or setting apart for payment shall be restricted or
prohibited by law.
(iii) Notwithstanding the foregoing, distributions on the Series C
Preferred Units will accrue whether or not the terms and provisions set forth in
Section 2.C.(ii) hereof at any time prohibit the current payment of
distributions, whether or not the Corporation has earnings, whether or not there
are funds legally available for the payment of such distributions and whether or
not such distributions are authorized. Accrued but unpaid distributions on the
Series C Preferred Units will accumulate as of the Distribution Payment Date on
which they first become payable. Accumulated and unpaid distributions will not
bear interest.
(iv) So long as any Series C Preferred Unit is outstanding, no
distribution of cash or other property shall be authorized, declared, paid or
set apart for payment on or with respect to any class or series of Partnership
Interests ranking junior to the Series C Preferred Units as provided in this
Section 2 (such Partnership Interests, collectively, "Junior Units"), nor shall
any cash or other property be set aside for or applied to the purchase,
redemption or other acquisition for consideration of any Series C Preferred
Units, any Parity Units with respect to distributions or any Junior Units,
unless, in each case, all distributions accumulated on all Series C Preferred
Units and all classes and series of outstanding Parity Units as to payment of
distributions have been paid in full. The foregoing sentence will not prohibit
(i) distributions payable solely in Junior Units, (ii) the conversion of Junior
Units or Parity Units into common stock or preferred stock of the Company in
accordance with the exchange rights of such Junior Units or Parity Units, or
(iii) the redemption, purchase or other acquisition of Junior Units made for
purposes of and in compliance with requirements of an employee incentive or
benefit plan of the Corporation or any subsidiary of the Partnership or the
Corporation.
(v) So long as distributions have not been paid in full (or a sum
sufficient for such full payment is not so set apart) upon the Series C
Preferred Units, all distributions authorized and declared on the Series C
Preferred Units and all classes or series of outstanding Parity Units with
respect to distributions shall be authorized and declared so that the amount of
distributions authorized and declared per share of Series C Preferred Units and
such other classes or series of Parity Units shall in all cases bear to each
other the same ratio that accrued distributions per share on the Series C
Preferred Units and such other classes or series of Parity Units (which shall
not include any accumulation in respect of unpaid distributions for prior
distribution periods if such class or series of Parity Units do not have
cumulative distribution rights) bear to each other.
(vi) Holders of Series C Preferred Units shall not be entitled to any
distributions, whether payable in cash, other property or otherwise, in
excess of the full cumulative distributions described herein.
D. Allocation of Net Income.
------------------------
With respect to the Series C Preferred Units, the net income of the
Partnership will be allocated as provided in Exhibit E to the Partnership
Agreement.
3
<PAGE>
E. Liquidation.
-----------
Subject to the rights of holders of any series of Parity Units with
respect to rights upon any voluntary or involuntary liquidation dissolution or
winding-up of the Partnership, upon any voluntary or involuntary liquidation,
dissolution or winding up of the Partnership, the holders of the Series C
Preferred Units will be entitled to receive out of the assets of the Partnership
legally available for distribution or the proceeds thereof, after payment or
provision for debts and other liabilities of the Partnership, an amount equal to
their respective Capital Account balances. Written notice of any such voluntary
or involuntary liquidation, dissolution or winding-up of the Partnership,
stating the payment date or dates when, and the place or places where, the
amounts distributable in such circumstances shall be payable, shall be given by
(i) fax and (ii) by first class mail, postage pre-paid, not less than 30 and not
more than 60 days prior to the payment date stated therein, to each record
holder of the Series C Preferred Units at the respective addresses of such
holders as the same shall appear on the transfer records of the Partnership.
The consolidation or merger of the Partnership with or into any corporation,
trust or other entity (or of any corporation, trust or other entity with or into
the Partnership) shall not be deemed to constitute a liquidation, dissolution,
winding-up or termination of the Partnership.
F. Optional Redemption.
-------------------
(i) The Series C Preferred Units may not be redeemed prior to
November 24, 2003. On or after such date, subject to the terms and conditions of
any Parity Preferred Stock or any Parity Units, the Partnership shall have the
right to redeem the Series C Preferred Units, in whole or in part, from time to
time, upon not less than 30 nor more than 60 days' notice, at a redemption
price, payable in cash, equal to the Capital Account balance of such holders of
Series C Preferred Units (the "Redemption Price"); provided; however that such
redemption shall not be permitted if such Redemption Price shall be less than
the original Capital Contribution of such Partner and the cumulative Priority
Return to the redemption date to the extent not previously distributed.
(ii) Except in connection with a liquidation, dissolution,
winding-up or termination of the Partnership as described under "Liquidation"
above, the Redemption Price of the Series C Preferred Units (other than the
portion thereof consisting of accumulated but unpaid distributions) will be
payable solely out of the sale proceeds of capital stock of the Company, which
will be contributed by the Company to the Partnership as an additional capital
contribution, or out of the sale proceeds of limited partner interests of the
Partnership and from no other source. Unless previously redeemed, the Series C
Preferred Units will be redeemed for cash upon termination of the Partnership.
Unless sooner dissolved, the Partnership will terminate on December 31, 2054.
The Series C Preferred Units will not be subject to any sinking fund.
(iii) If the Partnership gives a notice of redemption in respect
of Series C Preferred Units (which notice will be irrevocable) then, by 12:00
noon, New York City time, on the redemption date, the Partnership will deposit
irrevocably in trust for the benefit of the Series C Preferred Units being
redeemed funds sufficient to pay the applicable Redemption Price and will give
irrevocable instructions and authority to pay such Redemption Price to the
holders of the Series C Preferred Units. On and after the date of redemption,
distributions will cease to accumulate on the Series C Preferred Units or
portions thereof called for redemption, unless the
4
<PAGE>
Partnership defaults in the payment thereof. If any date fixed for redemption of
Series C Preferred Units is not a Business Day, then payment of the Redemption
Price payable on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any such
delay) except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day, in each case
with the same force and effect as if made on such date fixed for redemption. If
payment of the Redemption Price in respect of the Series C Preferred Units is
improperly withheld or refused and not paid by the Partnership, distributions on
such Series C Preferred Units will continue to accumulate from the original
redemption date to the date of payment, in which case the actual payment date
will be considered the date fixed for redemption for purposes of calculating the
applicable Redemption Price. If fewer than all the Series C Preferred Units are
to be redeemed, the Series C Preferred Units to be redeemed shall be selected
pro rata (as nearly as practicable without creating fractional units).
(iv) The Partnership may not redeem fewer than all the outstanding
Series C Preferred Units unless all accumulated and unpaid distributions have
been paid on all Series C Preferred Units for all quarterly distribution periods
terminating on or prior to the date of redemption.
(v) Notice of redemption will be (i) faxed, and (ii) mailed by the
Partnership, postage prepaid, not less than 30 nor more than 60 days prior to
the redemption date, addressed to the respective holders of record of the Series
C Preferred Units to be redeemed at their respective addresses as they appear on
the transfer records of the Partnership. No failure to give or defect in such
notice shall affect the validity of the proceedings for the redemption of any
Series C Preferred Units except as to the holders to whom notice was defective
or not given. Each notice shall state: (i) the redemption date, (ii) the
Redemption Price, (iii) the number of Series C Preferred Units to be redeemed;
(iv) the place or places where the Series C Preferred Units are to be
surrendered for payment of the Redemption Price; (v) that distributions on the
Series C Preferred Units to be redeemed will cease to accumulate on such
redemption date and (vi) that payment of the Redemption Price will be made upon
presentation and surrender of such Series C Preferred Units. If fewer than all
of the Series C Preferred Units held by any holder are to be redeemed, the
notice mailed to such holder shall also specify then number of Series C
Preferred Units to be redeemed from such holder.
G. Exchange Rights.
---------------
(i) Unless called for redemption as described above under
"Optional Redemption," Series C Preferred Units will be exchangeable in whole or
in part at anytime on or after the tenth anniversary of the Issue Date, at the
option of the holders thereof, for authorized but previously unissued shares of
the Company's Series C Preferred Stock at an exchange price of $50.00 per share
of Series C Preferred Stock (equivalent to an exchange rate of one share of
Series C Preferred Stock for each Series C Preferred Unit), subject to
adjustment as described below (the "Exchange Price"), provided that the Series C
Preferred Units will become immediately exchangeable at any time in whole or in
part at the option of the holders for Series C Preferred Units (y) if at any
time full distributions shall not have made on any outstanding Series C
Preferred Units with respect to any six (6) prior quarterly distribution
periods, whether or not consecutive, such that distributions for such six (6)
distribution periods have not been fully
5
<PAGE>
paid and are outstanding in whole or in part at the same time or (z) upon
receipt by holders of Series C Preferred Units of (A) notice from the General
Partner that the General Partner or a subsidiary of the General Partner has
taken the position that the Partnership is, or upon the occurrence of a defined
event in the immediate future will be a "publicly traded partnership" (a "PTP")
within the meaning of Section 7704 of the Internal Revenue Code of 1986, as
amended, and (B) an opinion rendered by independent counsel to the General
Partner familiar with such matter (or, in the event of a conflict, other
reputable independent counsel designated by such General Partner counsel),
addressed to a holder or holders of Series C Preferred Units, that the
Partnership is, or likely is, or upon the occurrence of a defined event in the
immediate future will be or likely will be, a PTP. Series C Preferred Units may
be exchanged for Series C Preferred Stock in whole or in part at the option of
any holder prior to the tenth anniversary of the Issue Date and after the third
anniversary thereof if such holder delivers to the Partnership and the Company
either (i) a private letter ruling addressed to a holder of Series C Preferred
Units or (ii) an opinion of independent counsel reasonably acceptable to the
Company based on the enactment of temporary or final Treasury Regulations or the
publication of a Revenue Ruling, in either case to the effect that an exchange
of the Series C Preferred Units at such earlier time would not cause the Series
C Preferred Units to be considered "stock and securities" within the meaning of
section 351(e) of the Code for purposes of determining whether the holder of
such Series C Preferred Units is an "investment company" under section 721(b) of
the Code if an exchange is permitted at such earlier date. The Series C
Preferred Units will become exchangeable in whole or in part at the option of
the holders of the Series C Preferred Units if (i) the Partnership is advised by
independent counsel that, based on the assets and income of the Partnership for
a taxable year after 1998, the Partnership would not satisfy the income and
assets tests of Section 856 of the Code for such taxable year if the Partnership
were a real estate investment trust within the meaning of the Code; or (ii) any
holder of the Series C Preferred Units shall deliver to the Partnership and the
Company an opinion of independent counsel reasonably acceptable to the Company
to the effect that, based on the assets and income of the Partnership for a
taxable year after 1998, the Partnership would not satisfy the income and assets
tests of Section 856 of the Code for such taxable year if the Partnership were a
real estate investment trust within the meaning of the Code and that such
failure would create a meaningful risk that a holder of the Series C Preferred
Units would fail to maintain its qualification as a real estate investment
trust.
(ii) Notwithstanding anything to the contrary set forth in
2.G.(i), if an Exchange Notice (as defined herein) has been delivered to the
General Partner, then the General Partner may, at its option, elect to redeem or
cause the Partnership to redeem all or a portion of the outstanding Series C
Preferred Units for cash in an amount equal to the original Capital Contribution
per Series C Preferred Unit and all accrued and unpaid distributions thereon to
the date of redemption. The General Partner may exercise its option to redeem
the Series C Preferred Units for cash pursuant to this 2.G.(ii) by giving each
holder of record of Series C Preferred Units notice of its election to redeem
for cash, within fifteen (15) Business Days after receipt of the Exchange
Notice, by (i) fax, and (ii) registered mail, postage paid, at the address of
each holder as it may appear on the records of the Partnership stating (i) the
redemption date, which shall be no later than sixty (60) days following the
receipt of the Exchange Notice, (ii) the Redemption Price, (iii) the place or
places where the Series C Preferred Units are to be surrendered for payment of
the Redemption Price, (iv) that distributions on the Series C Preferred
6
<PAGE>
Units will cease to accrue on such redemption date; (v) that payment of the
Redemption Price will be made upon presentation and surrender of the Series C
Preferred Units and (vi) the aggregate number of Series C Preferred Units to be
redeemed, and if fewer than all of the outstanding Series C Preferred Units are
to be redeemed, the number of Series C Preferred Units to be redeemed held by
such holder, which number shall equal such holder's prorata share (based on the
percentage of the aggregate number of outstanding Series C Preferred Units the
total number of Series C Preferred Units held by such holder represents) of the
aggregate number of Series C Preferred Units being redeemed. The redemption of
Series C Preferred Units described in this Section 2.G.(iii) shall be subject to
the provisions of Section 2.F.(ii) and (iii); provided, however, that the term
"Redemption Price" in such Sections shall be read to mean the original Capital
Contribution per Series C Preferred Unit being redeemed plus all accrued and
unpaid distributions to the redemption date.
(iii) In the event an exchange of all or a portion of the Series C
Preferred Units pursuant to Section 2.G.(i) would violate the Ownership Limit of
the General Partner set forth in Article EIGHTH of the Charter, the General
Partner will give written notice thereof to each holder of record of Series C
Preferred Units exercising such exchange right, within fifteen (15) Business
Days following receipt of the Exchange Notice, by (i) fax, and (ii) mail,
postage prepaid, at the address of each such holder set forth in the records of
the Partnership. In such event, each holder of Series C Preferred Units
exercising its exchange right, shall be entitled to exchange a number of Series
C Preferred Units which would comply with the Ownership Limit of the General
Partner set forth in Article EIGHTH of the Charter and any Series C Preferred
Units not so exchanged (the "Excess Units") shall be redeemed by the Partnership
for cash in an amount equal to the original Capital Contribution per Excess
Unit, plus any accrued and unpaid distributions thereon to the date of
redemption. The written notice of the General Partner shall state (i) the number
of Excess Units held by such holder, (ii) the Redemption Price of the Excess
Units, (iii) the date on which such Excess Units shall be redeemed, which date
shall be no later than ninety (90) days following the receipt of the Exchange
Notice, except as provided below, (iv) the place or places where such Excess
Units are to be surrendered for payment of the Redemption Price, (iv) that
distributions on the Excess Units will cease to accrue on such redemption date,
and (v) that payment of the Redemption Price will be made upon presentation and
surrender of such Excess Units. The redemption of Series C Preferred Units
described in this Section 2.G.(iii) shall be subject to the provisions of
Section 2.F.(ii) and (iii); provided, however, that the term "Redemption Price"
in such Sections shall be read to mean the original Capital Contribution per
Series C Preferred Unit being redeemed plus all accrued and unpaid distributions
to the redemption date. The Partnership may at its option delay the payment of
cash to effect redemption of Series C Preferred Units pursuant to this Section
2.G.(iii) for up to two hundred seventy (270) days following the end of the 90
day period set forth in clause (iii) above of this Section 2.G.(iii), provided
that during such two hundred seventy (270) day period, the Corporation shall
pay, in addition to the Redemption Price of the Excess Units and any accrued and
unpaid distribution with respect to the Excess Units, to the holder of such
Excess Units an amount equal to 1 1/4% per annum of the original Capital
Contribution per such Excess Unit from the end of such 90 day period through the
date of redemption.
(iv) Any exchange shall be exercised pursuant to a notice of
exchange (the "Exchange Notice") delivered to the General Partner by the holder
who is exercising such
7
<PAGE>
exchange right, by (i) fax, and (ii) by mail, postage prepaid. The exchange of
Series C Preferred Units, or a specified portion thereof, may be effected after
the fifteenth (15th) Business Day following receipt by the General Partner of
the Exchange Notice by delivering certificates, if any, representing such Series
C Preferred Units to be exchanged together with written notice of exchange and a
proper assignment of such Series C Preferred Units to the office of the Company
maintained for such purpose. Currently, such office is Essex Property Trust,
Inc., 925 E. Meadow Drive, Palo Alto, California 94303.
(v) Each exchange will be deemed to have been effected immediately
prior to the close of business on the date on which such Series C Preferred
Units to be exchanged (together with all required documentation) shall have been
surrendered and notice shall have been received by the Company as aforesaid and
the exchange shall be at the Exchange Price in effect at such time and on such
date. The right to exchange Series C Preferred Units called for redemption will
terminate upon receipt by the holder of such Series C Preferred Units of a
notice of redemption from the Partnership that pertains to such Series C
Preferred Units.
(vi) In the event of an exchange of Series C Preferred Units into
shares of Series C Preferred Stock, an amount equal to the accrued and unpaid
distributions to the date of exchange on any Series C Preferred Units tendered
for exchange shall accrue on the shares of the Series C Preferred Stock into
which such Series C Preferred Units are exchanged and the Series C Preferred
Units so exchanged shall no longer be outstanding.
(vii) Fractional shares of Series C Preferred Stock are not to be
issued upon exchange but, in lieu thereof, the Company will pay a cash
adjustment based upon the fair market value of the Series C Preferred Stock on
the day prior to the exchange date as determined in good faith by the Board of
Directors of the Company.
H. Exchange Price Adjustments.
--------------------------
(i) The Exchange Price is subject to adjustment upon certain
events, including (i) subdivisions, combinations and reclassification of the
Series C Preferred Stock, and (ii) distributions to all holders of Series C
Preferred Stock of evidences of indebtedness of the Company or assets (including
securities, but excluding dividends and distributions paid in cash out of equity
applicable to the Series C Preferred Stock). In addition to the foregoing
adjustments, the Company will be permitted to make such reduction in the
Exchange Price as it considers to be advisable in order that any event treated
for Federal income tax purposes as a dividend of stock or stock rights will not
be taxable to the holders of the Common Stock.
(ii) In case the Company shall be a party to any transaction
(including, without limitation, a merger, consolidation, statutory share
exchange, tender offer for all or substantially all of the Company's capital
stock or sale of all or substantially all of the Company's assets), in each case
as a result of which the Series C Preferred Stock will be converted into the
right to receive shares of capital stock, other securities or other property
(including cash or any combination thereof), each Series C Preferred Unit, will
thereafter be exchangeable into the kind and amount of shares of capital stock
and other securities and property receivable (including cash or any combination
thereof) upon the consummation of such transaction by a holder of that number of
shares of Series C Preferred Stock or fraction thereof into which one Series C
8
<PAGE>
Preferred Unit was exchangeable immediately prior to such transaction. The
Company may not become a party to any such transaction unless the terms thereof
are consistent with the foregoing.
(iii) No adjustment of the Exchange Price is required to be made in
any case until cumulative adjustments amount to 1% or more of the Exchange
Price. Any adjustments not so required to be made will be carried forward and
taken into subsequent adjustments.
I. Voting Rights.
--------------
(i) Holders of the Series C Preferred Units will not have any
voting rights or rights to consent to any matters, except as set forth below.
(ii) So long as any Series C Preferred Units remains outstanding,
the Partnership shall not, without the affirmative vote of the holders of at
least two-thirds (2/3) of the Series C Preferred Units outstanding at the time
(i) authorize or create, or increase the authorized or issued amount of, any
class or series of Partnership Interests ranking prior to the Series C Preferred
Units with respect to payment of distributions or rights upon liquidation,
dissolution or winding-up or reclassify any Partnership Interests of the
Partnership into any such Partnership Interest, or create, authorize or issue
any obligations or security convertible into or evidencing the right to purchase
any such Partnership Interest, (ii) amend, alter or repeal the provisions of the
Partnership Agreement, whether by merger, consolidation or otherwise, that would
materially and adversely affect the powers, special rights, preferences,
privileges or voting power of the Series C Preferred Units or the holders
thereof; provided that any increase in the amount of Partnership Interests or
the creation or issuance of any other class or series of Partnership Interests
ranking junior to or on a parity with the Series C Preferred Units with respect
to payment of distributions and the distribution of assets upon liquidation,
dissolution or winding-up shall not be deemed to materially and adversely affect
such rights, preferences, privileges or voting powers, or (iii) consolidate,
amalgamate, merge into or with, or convey, transfer or lease its assets
substantially as an entirety to, any corporation or other entity, unless (a) the
Partnership is the surviving entity and the Series C Preferred Units remain
outstanding with the terms thereof unchanged, (b) the resulting, surviving or
transferee entity is a partnership, limited liability company or other pass-
through entity organized under the laws of any state and substitutes the Series
C Preferred Units for other interests in such entity having substantially the
same terms and rights as the Series C Preferred Units, including with respect to
distributions, voting rights and rights upon liquidation, dissolution or
winding-up, or (c) such merger, consolidation, amalgamation or asset transfer
does not adversely affect the powers, special rights, preferences and privileges
of the holders of the Series C Preferred Units in any material respect. However,
the Partnership may create additional classes and series of Parity Units and
Junior Units, increase the authorized number of Parity Units and Junior Units
and issue additional classes and series of Parity Units and Junior Units without
the consent of any holders of Series C Preferred Units.
J. Restrictions on Ownership and Transfer.
--------------------------------------
Each holder of the Series C Preferred Units shall be permitted to
transfer its units if such transfer is in accordance with the provisions and
restrictions on Transfers of Limited Partnership Interests set forth in Sections
9.2 and 9.3(b) of the Partnership Agreement; provided, however, that upon any
Transfer by a holder of Series C Preferred Units to any Controlled Entity,
9
<PAGE>
such transferee shall, subject to compliance with Section 9.3 and clauses (A),
(B) and (D) of Section 9.2 of the Partnership Agreement, be admitted as a
Substituted Limited Partner.
10
<PAGE>
EXHIBIT 10.9
TERMINATION OF NON-COMPETE AGREEMENT
THIS TERMINATION OF NON-COMPETE AGREEMENT (this "Agreement") is hereby made
and entered into as of this day ____ day of February, 1999, by and between
George M. Marcus, for both himself and his Affiliated Companies (as defined
below) (collectively, "Marcus"), and Essex Property Trust, Inc., a Maryland
corporation, and its Affiliated Companies (collectively, "Essex").
RECITALS
WHEREAS, Marcus previously entered into a certain Non-Compete Agreement
dated June 13, 1994, for the benefit of Essex (the "Non-Compete Agreement").
WHEREAS, Marcus and Essex, subject to the terms and conditions provided for
herein, wish to terminate the Non-Compete Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. The Recitals set forth above are true and correct.
2. Subject to the terms and conditions provided for in this Agreement, the
Non-Compete Agreement is hereby terminated in its entirety.
3. Marcus hereby agrees, on behalf of both himself and all of his
Affiliated Companies, that if Marcus and/or any of his Affiliated Companies
enters into, whether directly or indirectly, a contract or agreement ("Subject
Contract") providing for the acquisition or development of any residential
rental properties containing, in the aggregate, more than one hundred (100)
residential rental units, then within ten (10) business days thereafter Marcus
shall give (or shall cause the respective Affiliated Company to give) written
notice to Essex of such Subject Contract and the essential terms thereof
("Notice of Contract"). If Essex, within forty eight (48) hours following
receipt of the Notice of Contract, delivers to Marcus (i) reasonable evidence
that prior to the date of the Subject Contract Essex had submitted to the other
party to the Subject Contract a bona fide good faith written offer respecting
the property that is the subject of the Subject Contract, and (ii) written
notice of the election by Essex to take an assignment of the Subject Contract,
then, within ten (10) business days following receipt by Marcus of the items
described in clauses (i) and (ii) of this sentence, Marcus shall assign (or
shall cause the respective Affiliated Company to assign) to Essex or its
designee, the Subject Contract. Such assignment shall be without compensation
of any kind or nature being paid to either Marcus, any such Affiliated Company
or to any other person or entity for or in connection with such assignment.
Each Notice of Contract shall be in writing, and delivered to Essex at 925 East
Meadow Drive, Palo Alto, California 94303-4233, Attention: Keith R. Guericke,
via telecopy at (650) 858-0139, with a copy
<PAGE>
to be sent via regular mail. Each notice to Marcus shall be in writing, and
delivered to Marcus at 777 California Avenue, Palo Alto, California 94304, via
telecopy at (650) 424-9136, with a copy sent via regular mail. The term
"Affiliated Company" is hereby defined to mean (i) any person or entity as to
which Essex (and/or Essex Portfolio, L.P., a California limited partnership
("EPLP") or Marcus, as the case may be, owns, whether directly or indirectly, a
twenty percent (20%) or greater interest in, (ii) any person or entity which
owns, whether directly or indirectly, a twenty percent (20%) or greater interest
in Essex (and/or EPLP) or Marcus, as the case may be, (iii) any person or entity
which as the ability to control the decision making process of Essex (and/or
EPLP) or Marcus, as the case may be, (iv) any person or entity over which Essex
(and/or EPLP) or Marcus, as the case may be, has the ability to control the
decision making process of, or (v) for Essex, EPLP.
4. This Agreement shall be governed by and construed under the laws of the
State of California.
5. This Agreement may be executed in two of more counterparts, each such
counterpart being deemed to be an original, but all of which counterparts taken
together being deemed to be one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
ESSEX:
ESSEX PROPERTY TRUST, INC.
a Maryland corporation
By: /s/ Keith R. Guericke
--------------------------
Its: President
--------------------------
MARCUS:
-------------------------------
George M. Marcus
<PAGE>
Exhibit 12.1
ESSEX PORTFOLIO, L.P.
Schedule of computation of Ratio of Earnings to Fixed Charges and Preferred
Unit Distributions
(Dollars in thousands, except ratios)
<TABLE>
<CAPTION>
Years ended December 31
--------------------------------------------------------
1998 1997 1996
---------- ------------ --------------
<S> <C> <C> <C>
Earnings:
Income before minority interests
and extraordinary item $ 40,600 $ 34,146 $ 14,970
Interest expense 19,374 12,659 11,442
Amortization of deferred financing costs 718 509 639
--------------- --------------- --------------
Total earnings $ 60,692 $ 47,314 $ 27,051
=============== ================ ==============
Fixed charges:
Interest expense $ 19,374 $ 12,659 $ 11,442
Convertible preferred unit distributions 3,500 2,681 635
Perpetual preferred unit distributions 5,595 -- --
Amortization of deferred financing costs 718 509 639
Capitalized interest 3,494 1,276 281
--------------- --------------- --------------
Total fixed charges and preferred
stock dividends $ 32,681 $ 17,125 $ 12,997
=============== ================ ==============
Ratio of earnings to fixed charges
(excluding preferred unit distributions) 2.57 X 3.28 X 2.19 X
=============== ================ ==============
Ratio of earnings to combined fixed
charges and preferred unit distributions 1.86 X 2.76 X 2.08 X
=============== ================ ==============
</TABLE>
<PAGE>
Exhibit 21.1
List of Subsidiaries
1. Essex Portfolio, L.P., a California limited partnership
2. Essex Management Corporation, a California corporation
3. Essex-Palisades Facilitator, a California limited partnership
4. Essex Sunpointe Limited, a California limited partnership
5. Essex Washington Interest Partners, a California general partnership
6. Essex San Ramon Partners L.P., a California limited partnership
7. Essex Bristol Partners, L.P., a California limited partnership
8. Essex Fidelity I Corporation, a California corporation
9. Essex Camarillo Corporation, a California corporation
10. Essex Camarillo L.P., a California limited partnership
11. Essex Meadowood Corporation, a California corporation
12. Essex Bunker Hill Corporation, a California corporation
13. Essex Meadowood, L.P., a California limited partnership
14. Essex Treetops Corporation, a California corporation
15. Essex Treetops, L.P., a California limited partnership
16. Essex Bluffs, L.P., a California limited partnership
17. Essex Huntington Breakers, L.P., a California limited partnership
18. Essex Stonehedge, L.P., a California limited partnership
19. Essex Bridle Trails, L.P., a California limited partnership
20. Essex Spring Lake, L.P., a California limited partnership
21. Essex Maple Leaf, L.P., a California limited partnership
22. Essex Riverfront, L.P., a California limited partnership
23. Essex Casa Mango, L.P., a California limited partnership
24. Essex Bunker Hill, L.P., a California limited partnership
25. Essex Westwood, L.P. a California limited partnership
<PAGE>
Exhibit 23.1
Consent of Independent Certified Public Accountants
General Partner
Essex Portfolio, L.P.:
We consent to incorporation by reference in the registration statement (No. 333-
44467) on Form S-3 of Essex Portfolio, L.P. of our report dated January 30,
1999, relating to the consolidated balance sheets of Essex Portfolio, L.P. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, partners' capital and cash flows of Essex Portfolio,
L.P. and subsidiaries for each of the years in the three-year period ended
December 31, 1998. and the related financial statement schedule, which report
appears in the December 31, 1998 annual report on Form 10-K of Essex Portfolio,
L.P.
KPMG LLP
San Francisco, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Essex
Portfolio, L.P. report for the year ended December 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 18,080
<SECURITIES> 0
<RECEIVABLES> 29,259
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 42,217
<PP&E> 943,177
<DEPRECIATION> 77,789
<TOTAL-ASSETS> 931,796
<CURRENT-LIABILITIES> 45,047
<BONDS> 361,515
2
0
<COMMON> 1
<OTHER-SE> 389,797
<TOTAL-LIABILITY-AND-EQUITY> 931,796
<SALES> 0
<TOTAL-REVENUES> 125,268
<CGS> 0
<TOTAL-COSTS> 59,881
<OTHER-EXPENSES> 4,227
<LOSS-PROVISION> 930
<INTEREST-EXPENSE> 20,092
<INCOME-PRETAX> 40,138
<INCOME-TAX> 0
<INCOME-CONTINUING> 40,138
<DISCONTINUED> 0
<EXTRAORDINARY> 4,718
<CHANGES> 0
<NET-INCOME> 35,420
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.41
</TABLE>
