<PAGE> 1
As filed with the Securities and Exchange Commission on March 12, 1998
File No. 333 -
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
PALACE REIT
(Exact Name of Registrant as Specified in Governing Instruments)
------------------------
3535 LAS VEGAS BOULEVARD SOUTH, LAS VEGAS, NEVADA 89109
(702) 732-7102
(Address and Telephone Number of Registrant's Principal Executive Offices)
------------------------
DAVID R. MERKER, CHIEF EXECUTIVE OFFICER
PALACE REIT
3535 LAS VEGAS BOULEVARD SOUTH
LAS VEGAS, NEVADA 89109
(702) 732-7102
(Name, Address and Telephone Number of Agent for Service)
------------------------
Copies To:
Bryan L. Goolsby David C. Wright
Stephen L. Sapp Hunton & Williams
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Riverfront Plaza, East Tower
2001 Ross Avenue, Suite 3000 951 East Byrd Street
Dallas, Texas 75201 Richmond, Virginia 23219-4074
(214) 849-5500 (804) 788-8200
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] If this form is a post-effective amendment
filed pursuant to Rule 462(d) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Proposed Maximum Proposed Maximum Amount of
Title of Securities Amount Being Offering Price Aggregate Offering Registration
Being Registered Registered(1) Per Share(2) Price(2) Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares of
Beneficial Interest, par
value $0.005 per share 4,933,500 shares(1) $16.00 $78,936,000 $23,286
============================================================================================================
</TABLE>
(1) Includes 643,500 Common Shares of Beneficial Interest which may be
purchased by the Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED MARCH 12, 1998
PROSPECTUS
4,290,000 SHARES
PALACE REIT
COMMON SHARES OF BENEFICIAL INTEREST
------------------------
Palace REIT (the "Company"), a self-managed and self-advised real estate
investment trust, has been formed to acquire office and industrial properties
in selected markets in the United States. The Company intends to continue and
expand the real estate investment strategy pursued by David Merker, the
Company's Chief Executive Officer, in acquiring, redeveloping and managing
office and industrial properties for affiliates of Ralph Englestad, from which
the Company is acquiring the Properties (as defined below). In managing Mr.
Englestad's real estate operations since 1988, Mr. Merker has overseen the
purchase or development of approximately $130 million of office and industrial
properties. The Company's growth strategy is to acquire undervalued office and
industrial properties in mid-sized markets with a growing demand for office and
industrial space and strong economic growth, and to aggressively manage its
properties to maximize returns on investments.
Concurrently with the closing of this offering (the "Offering"), Palace
Operating Partnership, L.P. (the "Operating Partnership"), for which Palace
REIT serves as sole general partner, will acquire from affiliates of Mr.
Englestad four high quality office buildings (the "Office Properties")
comprising approximately 1.0 million square feet of gross leasable area ("GLA")
and four industrial properties (the "Industrial Properties") comprising
approximately 365,115 of GLA (collectively, the "Properties"). The Company has
rights of first refusal to purchase other office and industrial properties
owned or under development by affiliates of Mr. Englestad comprising
approximately 2.1 million square feet of GLA located in Las Vegas, Nevada;
Norfolk, Virginia; Kansas City, Missouri and Midland, Texas.
All of the common shares of beneficial interest, $0.005 par value per
share (the "Common Shares"), of the Company offered hereby are being sold by
the Company. Upon completion of the Offering, certain trust managers, senior
management and affiliated entities will beneficially own approximately 11.4% of
the outstanding Common Shares of the Company on a fully diluted basis. It
currently is anticipated that the initial public offering price per share will
be between $14.00 and $16.00. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
Prior to the Offering, there has been no public market for the Common
Shares. The Company has applied for listing of the Common Shares on the Nasdaq
Stock Market under the symbol "PALR." The Company intends to pay quarterly
cash distributions to its shareholders, initially at an annual rate expected to
be $1.20 per share. See "Distribution Policy."
The Company intends to qualify as a real estate investment trust
("REIT") for federal income tax purposes commencing with the taxable year
ending December 31, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES, INCLUDING:
o Potential adverse effect on the Company's financial condition if the
Company fails to manage growth and integrate operations.
o The Company's limited experience in operating as a REIT.
o Concentration of the Properties in the Midland, Texas and Las Vegas,
Nevada markets.
o Risks associated with the ownership and management of commercial real
property generally and office and industrial properties specifically.
o Risks associated with major tenants, including bankruptcy and
insolvency.
o Taxation as a corporation if the Company fails to qualify as a REIT.
o Potential anti-takeover effect of limiting ownership to 9.8% of the
outstanding Common Shares and certain other provisions contained in the
Company's organizational documents and the Texas REIT Act.
o Ability of the Board of Trust Managers to change the investment,
financing, borrowing and other policies of the Company at any time
without shareholder approval.
o Lack of limits on the amount or type of indebtedness that may be
incurred by the Company.
o Immediate dilution in the net tangible book value of Common Shares
purchased in the Offering of $ per share.
o No prior public market for the Common Shares.
<PAGE> 3
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------------
<TABLE>
<CAPTION>
===========================================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2)
<S> <C> <C> <C>
Per Share $ $ $
Total(3) $ $ $
===========================================================================================================
</TABLE>
(1) The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $593,000.
(3) The Company has granted the Underwriters an option exercisable for 30 days
to purchase up to 643,500 additional Common Shares on the same terms set forth
above solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discount and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
-------------------------
The Common Shares are offered by the several Underwriters named herein,
subject to prior sale when, as and if issued to and accepted by them, and
subject to certain conditions. It is expected that delivery of the Common
Shares will be made through the facilities of The Depository Trust Company on
or about _____, 1998.
-------------------------
MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is __________ __, 1998.
<PAGE> 4
[Pictures]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
SHARES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER REGULATION M.
SEE "UNDERWRITING."
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS UNLAWFUL.
ANY TRADENAMES IN THIS PROSPECTUS ARE USED SOLELY TO IDENTIFY THE
ENTITIES CLAIMING THE MARKS. NONE OF THE COMPANIES IDENTIFIED BY SUCH
TRADENAMES HAVE PARTICIPATED IN OR ENDORSED THIS OFFERING.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
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<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Business Objectives And Strategies . . . . . . . . . . . . . . . . . 3
The Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Formation Transactions . . . . . . . . . . . . . . . . . . . . . 6
Ownership Structure . . . . . . . . . . . . . . . . . . . . . . . . . 6
Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . 7
Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Summary Financial Data . . . . . . . . . . . . . . . . . . . . . . . 8
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Failure to Manage Growth and Integrate Operations; Acquisition of
Additional Properties . . . . . . . . . . . . . . . . . . . . . . . . 12
Lack of Operating History . . . . . . . . . . . . . . . . . . . . . . 12
Limited Geographic Diversification of the Portfolio . . . . . . . . . 12
Inability to Acquire Additional Properties; Properties May Not
Perform As Expected . . . . . . . . . . . . . . . . . . . . . . . . . 12
Adverse Effect of Increase in Market Interest Rate on
Financial Position and Common Share Price . . . . . . . . . . . . . . 12
Possible Inability to Meet Distribution Requirements . . . . . . . . 13
Real Estate Investment Risks . . . . . . . . . . . . . . . . . . . . 13
Real Estate Risk Factors Specific to the Company's Business . . . . . 14
Reliance on Key Personnel . . . . . . . . . . . . . . . . . . . . . . 14
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Adverse Consequences of Failure to Qualify as a REIT . . . . . . . . 14
Ownership Limit; Anti-Takeover Effect . . . . . . . . . . . . . . . . 15
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 15
Changes in Investment and Financing Policies Without Shareholder
Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
No Limitation in Organizational Documents on the Incurrence of
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Immediate and Substantial Dilution . . . . . . . . . . . . . . . . . 16
No Prior Trading Market . . . . . . . . . . . . . . . . . . . . . . . 16
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . 17
Liquidation Value of The Company May Be Less Than Value as a Going
Concern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Uninsured Loss and Condemnation . . . . . . . . . . . . . . . . . . . 17
Investors Subject to ERISA . . . . . . . . . . . . . . . . . . . . . 17
Cost of Compliance with the Americans with Disabilities Act . . . . . 18
Forward Looking Information . . . . . . . . . . . . . . . . . . . . . 18
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Business Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Formation Transactions . . . . . . . . . . . . . . . . . . . . . . . 20
The Operating Partnership . . . . . . . . . . . . . . . . . . . . . . 20
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
DISTRIBUTION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Results of Operations of the Properties . . . . . . . . . . . . . . . 30
Pro Forma Liquidity and Capital Resources of the Company . . . . . . 31
Historical Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . 32
Funds From Operations . . . . . . . . . . . . . . . . . . . . . . . . 32
Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
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<TABLE>
<S> <C>
New Accounting Pronouncement . . . . . . . . . . . . . . . . . . . . 33
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Office Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Industrial Properties . . . . . . . . . . . . . . . . . . . . . . . . 36
Lease Expirations . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Major Tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Current and Prospective Markets . . . . . . . . . . . . . . . . . . . 42
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . 45
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Rental Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . 46
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES . . . . . . . . . . . . . . . . . 48
Acquisition Strategy . . . . . . . . . . . . . . . . . . . . . . . . 48
Internal Growth Strategy . . . . . . . . . . . . . . . . . . . . . . 48
Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . . 48
Sale of Property . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Financing Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Working Capital Reserves . . . . . . . . . . . . . . . . . . . . . . 49
Other Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Trust Managers and Officers . . . . . . . . . . . . . . . . . . . . . 50
Staggered Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Committees of the Trust Managers . . . . . . . . . . . . . . . . . . 51
Compensation of Trust Managers . . . . . . . . . . . . . . . . . . . 51
Trust Managers and Officers Insurance . . . . . . . . . . . . . . . . 51
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 52
Incentive Share Plan . . . . . . . . . . . . . . . . . . . . . . . . 52
Employment Contracts . . . . . . . . . . . . . . . . . . . . . . . . 52
Limitation of Liability and Indemnification . . . . . . . . . . . . . 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . 54
PARTNERSHIP AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Transferability of OP Units . . . . . . . . . . . . . . . . . . . . . 55
Redemption of OP Units . . . . . . . . . . . . . . . . . . . . . . . 55
Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . 55
Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST . . . . . . . . . . . . . . . . 58
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . 58
Preemptive Rights And Cumulative Voting . . . . . . . . . . . . . . . 59
Share Distributions . . . . . . . . . . . . . . . . . . . . . . . . . 59
Redemption of Company Shares . . . . . . . . . . . . . . . . . . . . 59
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF THE COMPANY'S CHARTER
AND BYLAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Board of Trust Managers . . . . . . . . . . . . . . . . . . . . . . . 61
Removal of Trust Managers . . . . . . . . . . . . . . . . . . . . . . 61
Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . 61
Shareholder Liability . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
(ii)
<PAGE> 7
<TABLE>
<S> <C>
Trust Manager Liability . . . . . . . . . . . . . . . . . . . . . . . 63
Special Shareholder Meetings . . . . . . . . . . . . . . . . . . . . 63
Termination of the Company . . . . . . . . . . . . . . . . . . . . . 63
Amendment of Charter and Bylaws . . . . . . . . . . . . . . . . . . . 63
SHARES AVAILABLE FOR FUTURE SALE . . . . . . . . . . . . . . . . . . . . . . 64
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . 65
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Requirements for Qualification as a Real Estate Investment Trust . . 66
Federal Taxation of the Company--Specific Items . . . . . . . . . . . 70
Partnership Anti-Abuse Rule . . . . . . . . . . . . . . . . . . . . . 70
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . 71
Taxation of Shareholders . . . . . . . . . . . . . . . . . . . . . . 71
Taxation of Tax-Exempt Shareholders . . . . . . . . . . . . . . . . . 72
Taxation of Foreign Shareholders . . . . . . . . . . . . . . . . . . 73
Tax Aspects of the Operating Partnership . . . . . . . . . . . . . . 75
Other Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Proposed Tax Legislation . . . . . . . . . . . . . . . . . . . . . . 77
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
INDEX TO COMBINED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . F-1
</TABLE>
(iii)
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
description and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. Capitalized and certain other terms
used herein shall have the meanings assigned to them in the Glossary, which
begins on page ___. Except as otherwise indicated, all information in this
Prospectus assumes: (i) an initial public offering price of $15.00 per Common
Share (the midpoint of the range of the estimated initial offering price range
set forth on the cover page of this Prospectus); and (ii) that the
Underwriters' over-allotment option is not exercised.
Unless the context requires otherwise, the term "Company" as used herein
includes Palace REIT and the Operating Partnership.
This Prospectus contains forward-looking statements, including, without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import. Such forward-looking statements relate
to future events and the future financial performance of the Company, and
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, there can be no assurance
that these expectations will be realized. Factors that could cause actual
results to differ materially from current expectations include changes in
general economic conditions, changes in local real estate conditions, timely
leasing of unoccupied square footage, timely re-leasing of occupied square
footage upon expiration, the Company's ability to generate sufficient revenues
to meet debt service payments, availability of equity and debt financing and
other risks described in this Prospectus. Prospective investors should
specifically consider the various factors identified in this Prospectus that
could cause actual results to differ, including those discussed in the sections
entitled "Prospectus Summary," "Risk Factors," "The Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company disclaims any obligation to update any such factors
or to publicly announce the result of any revisions to any of the forward-
looking statements contained herein to reflect future events or developments.
THE COMPANY
Palace REIT, a self-managed and self-advised real estate investment
trust, has been formed to acquire office and industrial properties in selected
markets in the United States. The Company intends to continue and expand the
real estate investment strategy pursued by David Merker, the Company's Chief
Executive Officer, in acquiring, redeveloping and managing office and
industrial properties for affiliates of Ralph Englestad. In managing Mr.
Englestad's real estate operations since 1988, Mr. Merker has overseen the
purchase or development of approximately $130 million of office and industrial
properties. The Company's growth strategy is to acquire office and industrial
properties in mid-sized markets with a growing demand for office and industrial
space and strong economic growth, and to aggressively manage its properties to
maximize returns on investments.
Concurrently with the closing of the Offering, the Operating Partnership
will acquire from affiliates of Mr. Englestad four high quality Office
Properties comprising approximately 1.0 million square feet of GLA and four
Industrial Properties comprising approximately 365,115 of GLA. The Company has
rights of first refusal to purchase other office and industrial properties
owned or under development by affiliates of Mr. Englestad comprising
approximately 2.1 million square feet of GLA located in Las Vegas, Nevada;
Norfolk, Virginia; Kansas City, Missouri and Midland, Texas.
In seeking acquisition opportunities, the Company intends to focus on
high quality office properties and industrial properties that it can acquire at
accretive prices. The Company will seek such properties in markets (i) where
the Company believes demand for space in office and industrial properties is
growing, (ii) where the Company believes it will face less competition for
property acquisitions from large, well-capitalized buyers, (iii) where the
Company believes it can add value to properties through aggressive management,
and (iv) where population and employment growth are strong.
The Company believes that its most attractive acquisition opportunities
will be individual properties and mid-sized portfolios. The Company may
consider acquisition opportunities that have operating, legal, tax or financial
complexities that may make such transactions less attractive to other potential
buyers. In implementing its acquisition strategy, the Company plans to utilize
the extensive network of contacts developed by its executive officers among
real estate brokers, financial institutions and investors.
<PAGE> 9
The Company is negotiating with several banks for a secured Line of
Credit that the Company intends to use to finance future property acquisitions.
The Company believes that the absence of any debt immediately after the
Offering, coupled with the Line of Credit and the ability to issue OP Units to
sellers of properties, will provide the Company with significant financial
flexibility in pursuing office and industrial property acquisition
opportunities. The Company intends to maintain a capital structure with a
ratio of indebtedness to Total Market Capitalization of no more than
approximately 50%. See "Policies with Respect to Certain Activities--Financing
Policy."
The Company is a real estate investment trust formed under the Texas
REIT Act. The Company intends to elect to be taxed as a REIT under the Code
commencing with its taxable year ending December 31, 1998. The principal
executive offices of the Company are located at 3535 Las Vegas Boulevard South,
Las Vegas, Nevada 89109, and its telephone number is (702) 732-7102.
RISK FACTORS
An investment in the Common Shares involves various risks, and
prospective investors should carefully consider the matters discussed under
"Risk Factors" beginning on page ____ prior to any investment in the Company.
Such risks include, among others:
o The Company's financial condition could be adversely affected if the
Company fails to manage growth and integrate operations.
o Management has no experience operating a public company or a REIT and
limited experience working together as a management team.
o The concentration of the Company's initial Properties in the Midland,
Texas and Las Vegas, Nevada markets may adversely affect the Company's
operations if either market experiences an economic downturn.
o Acquired properties may not perform as expected.
o Increases in market interest rates may lead prospective purchasers of
the Common Shares to demand a higher annual yield from future
distributions, which may adversely affect the market price of the Common
Shares.
o Cash distributions will be dependent upon a number of factors, and no
assurance can be given that necessary funds will be available to meet
the REIT distribution requirements.
o Certain real estate investment risks exist, such as the effect of
economic and other conditions on commercial property values, including
the dependence of the Properties on the economies of the metropolitan
areas in which they are located, the ability of tenants to make rent
payments, the ability of the Properties to generate revenues sufficient
to meet operating expenses, including future debt service, and the
illiquidity of real estate investments.
o There can be no assurance that the Company will be able to implement its
investment and internal growth strategies successfully, and the Company
may invest jointly with other persons or entities, which may involve
risks not otherwise present.
o Loss of service of certain key personnel could have an adverse effect on
the operations of the Company.
o Many entities, as well as individuals, compete to acquire properties
similar to those proposed to be acquired by the Company, many of whom
have greater resources than the Company.
o The Company will be taxed as a corporation if it fails to qualify as a
REIT.
o The anti-takeover effect of limiting share ownership to 9.8% of the
outstanding Common Shares (with certain exceptions for the Prior Owners)
and certain other provisions contained in the organizational documents
of the Company and the Texas REIT Act, such as the ability to issue
preferred shares, any of which may delay, defer, or discourage a change
in control, may limit the opportunity for the Company's shareholders to
receive a premium price for their Common Shares.
2
<PAGE> 10
o The Company is potentially liable for unknown or future environmental
conditions, including liability for costs of removal or remediation of
hazardous or toxic substances found on a property owned or leased by the
Company.
o The Board of Trust Managers has the ability to change the investment,
financing and other policies of the Company at any time without
shareholder approval.
o No provision exists in the organizational documents of the Company that
limits the amount or type of debt that the Company may incur, which
could permit the Company to incur substantial indebtedness that could
adversely affect the Company's Funds From Operations and its ability to
make distributions to shareholders and result in an increased risk of
default on the Company's obligations.
o Investors in the Offering will experience immediate dilution in the net
tangible book value of Common Shares purchased in the Offering.
o There can be no assurance that an active trading market will develop or
be sustained or that the market price of the Common Shares will not
decline below the initial public offering price.
o Future sales of Common Shares could adversely affect the prevailing
market price of the Common Shares.
o The liquidation value of the Company may be less than the value of the
Company as a going concern.
o The Company may suffer losses in the event of a casualty or other
liabilities that are not insured, are uninsurable or are not
economically insurable.
o An investment in the Common Shares may not be suitable for certain
investors subject to ERISA.
o Certain risks associated with compliance with ADA exist.
o There can be no assurance that any forward-looking statements included
in this Prospectus will prove to be accurate.
BUSINESS OBJECTIVES AND STRATEGIES
The Company's principal business objective is to provide attractive
returns to its shareholders. The Company intends to achieve this objective by
pursuing integrated acquisition, internal growth and financing strategies.
Acquisition Strategy
The Company intends to grow by acquiring additional high quality office
and industrial properties. In pursuing such acquisitions, the Company intends
to:
o Focus on individual properties or mid-sized portfolios of properties
that can be acquired from private groups or individuals.
o Utilize the Line of Credit and offer OP Units to sellers to provide
flexible acquisition terms and facilitate the Company's ability to close
transactions quickly.
o Target selected, growing markets with strong demand for high quality
office and industrial space.
o Utilize Management's experience with transactions that may have legal,
tax, financing or other complexities that may make such transactions
less attractive to other potential buyers.
o Utilize Management's extensive network of contacts among real estate
brokers, owners and investors to acquire individual properties and small
portfolios of high quality office and industrial properties.
o Consider properties that may require repositioning or renovation.
3
<PAGE> 11
Internal Growth Strategy
As part of its business strategy, the Company also intends to generate
internal growth. The Company intends to hold properties for long-term
investment, aggressively manage its properties and achieve internal growth by:
o Providing for contractual rent increases and negotiating periodic rent
increases, whenever possible.
o Retaining and attracting tenants by providing levels of service that
exceed the service provided by competitors in the Company's markets.
o Performing regular maintenance and making capital improvements to
maintain the attractiveness of properties.
o Providing a skilled management team with substantial flexibility in
conducting operations while offering Management performance-based
compensation.
o Offering an incentive share plan to compensate, attract and retain
quality employees.
o Proactively leasing available and soon to be available space.
o Focusing the Company's operational efforts on providing quality service,
active preventive maintenance programs and individualized attention to
tenants while managing operating expenses to achieve competitive
pricing.
Financing Strategy
The Company intends to enhance its growth opportunities by pursuing the
following financing strategy:
o Obtain the Line of Credit to facilitate the Company's ability to close
acquisitions quickly.
o Maintain a capital structure with a ratio of debt to Total Market
Capitalization of no more than approximately 40%. Immediately after the
Offering, the Company will have no debt. See "The Company--Business
Strategy."
o Use debt and equity financing to create a flexible capital structure
that will enable the Company to pursue its acquisition and internal
growth strategies and increase returns to its shareholders.
THE PROPERTIES
The following table sets forth information relating to the Properties
as of December 31, 1997:
4
<PAGE> 12
<TABLE>
<CAPTION>
PERCENTAGE ANNUALIZED
NET RENTABLE LEASED NET RENT
YEAR SQUARE AS OF PER SQUARE
PROPERTY BUILT FEET 12/31/97 FOOT MAJOR TENANTS
-------- ------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Coral Springs, Florida
Sunrise Tower 1985 201,610 79% $14.94 State of Florida,
Ford Motor Credit,
Smith Barney, Inc.,
Unisys Corp.
Midland, Texas
Claydesta Plaza 1985 440,448 77% $10.04 Oxy USA, Inc.,
Norwest Bank Texas,
N.A., Clayton
Williams Energy,
WalMart, Fina Oil &
Chemical Co.,
Heritage Center 1981 213,302 81% $10.07 Smith Barney, Inc.
Ten Conoco 1982 175,007 92% $8.93 Texaco, Inc.
Conoco, Inc.
Weighted Average 82% $10.76
INDUSTRIAL PROPERTIES:
D'Iberville, Mississippi
D'Iberville 1997 96,000 100% $6.00 Imperial Palace of
Mississippi,
Imperial Laundry,
Inc.
Las Vegas, Nevada
Caballo 1994 62,000 100% $5.04 Crown Laboratories,
Inc.
Escondido 1995 153,120 100% $5.88
Imperial Palace
Hotel & Casino
Polaris 1998 53,995 100% $6.00
Imperial Palace
Hotel & Casino
Weighted Average 100% $5.79
PORTFOLIO WEIGHTED
AVERAGE: 86% $9.27
</TABLE>
5
<PAGE> 13
THE FORMATION TRANSACTIONS
Concurrently with the closing of the Offering, the following Formation
Transactions will occur:
o The Company will contribute substantially all of the net proceeds of the
Offering to the Operating Partnership in exchange for an approximate
90.4% limited partnership interest in the Operating Partnership. The
Company will also hold a 1.0% general partnership interest in the
Operating Partnership.
o The Prior Owners will sell six Properties to the Operating Partnership
in exchange for an amount of cash equal to the net proceeds of the
Offering contributed by the Company to the Operating Partnership.
o The Prior Owners will contribute two Properties (or interests therein)
to the Operating Partnership in exchange for cash and an aggregate of
415,312 OP Units, representing an approximate 8.6% limited partnership
interest in the Operating Partnership. The OP Units issued to the Prior
Owners will be redeemable at the election of the holder for cash or, at
the Company's sole option, Common Shares on a one-for-one basis at any
time after the first anniversary of the completion of the Offering. See
"The Company--The Operating Partnership."
OWNERSHIP STRUCTURE
Following completion of the Offering and the Formation Transactions, the
relationships among the Company, the public shareholders, the Operating
Partnership, the Prior Owners and Management will be as follows:
[CHART]
6
<PAGE> 14
DISTRIBUTION POLICY
The Company intends to make regular quarterly distributions to the
holders of the Common Shares. The Company expects to pay a pro rata
distribution with respect to the period commencing upon consummation of the
Offering and ending on June 30, 1998. Future distributions by the Company will
be determined by and at the discretion of the Board of Trust Managers and will
be dependent upon a number of factors, including the federal income tax
requirement that a REIT must distribute annually at least 95% of its taxable
income.
Based on its estimated Cash Available for Distribution, the Company
initially expects to make distributions of $1.20 per share on an annualized
basis, or an annual distribution rate of approximately 8.0%, based on an
assumed initial public offering price of $15.00 per share. The Company
currently intends to maintain its initial distribution rate for the 12-month
period following consummation of the Offering, unless actual results of
operations, economic conditions or other factors differ materially from the
assumptions used in its estimate. The Company does not intend to reduce the
expected distribution rate if the Underwriters' over-allotment option is
exercised. Approximately ___% of the distributions anticipated to be paid by
the Company for the 12 months following the Offering are expected to represent
a return of capital for federal income tax purposes. OP Units and Common
Shares will receive equal distributions. See "Distribution Policy."
TAX STATUS
The Company will elect to be treated as a REIT under sections 856
through 859 of the Code for the taxable year ending December 31, 1998 and for
each subsequent taxable year. As a REIT, the Company generally will not be
subject to federal income tax provided it makes certain distributions to its
shareholders and meets certain organizational and other requirements. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. See "Risk Factors--Adverse
Consequences of the Failure to Qualify as a REIT" and "Federal Income Tax
Consequences." As a REIT, the Company is subject to certain federal, state and
local taxes. See "Federal Income Tax Consequences."
Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. will deliver prior to the
closing of this Offering its opinion that: (1) the Company was organized in
conformity with the requirements for qualification as a REIT for federal income
tax purposes for the taxable year ending December 31, 1998, and has continued
to meet the requirements for qualification as a REIT through the date of the
opinion; and (2) the Company's anticipated investments and plan of operation as
described in the Prospectus will enable it to continue to meet the requirements
for qualification as a REIT for federal income tax purposes.
THE OFFERING
<TABLE>
<S> <C>
Common Shares Offered by the Company . . . . . . 4,290,000
Common Shares and OP Units to be Outstanding After
the Offering. . . . . . . . . . . . . . . . . . . 4,846,572 (1)
Use of Proceeds . . . . . . . . . . . . . . . . . To purchase certain of the Properties and for
general working capital.
Proposed Nasdaq Stock Market Symbol . . . . . . . PALR
</TABLE>
- -------------------
(1) Includes 141,260 Common Shares issued to certain executive officers and
Trust Managers of the Company prior to the Offering and 415,312 Common
Shares issuable upon redemption of OP Units to be issued in the
Formation Transactions. Excludes 242,328 Common Shares reserved for
issuance under the Company's Employee and Trust Manager Incentive Share
Plan. See "Management--Incentive Share Plan." OP Units to be issued in
the Formation Transactions are redeemable, at the option of the holder,
beginning one year after the closing of the Offering, on a one-for-one
basis for Common Shares or, at the option of the Company, cash, subject
to certain exceptions. See "Partnership Agreement."
7
<PAGE> 15
SUMMARY FINANCIAL DATA
The following table sets forth certain summary financial information for
the Company on a combined pro forma basis and for the Company's predecessor
entities on a combined historical basis, which consists of the combined
financial statements of the Properties that the Prior Owners have agreed to
contribute or sell in exchange for OP Units and cash in connection with the
Formation Transactions. The following financial information should be read in
conjunction with all of the financial statements and notes thereto included
elsewhere in this Prospectus. The historical and pro forma operating data of
the Company may not be indicative of future operating results of the Company.
The pro forma operating data of the Company are presented as if the Offering
had occurred as of the beginning of each period presented. The pro forma
balance sheet data are presented as if the Offering had occurred on December
31, 1997. The following pro forma information is not necessarily indicative of
what the Company's results of operations or financial condition would have been
for the periods or at the date indicated, and are not necessarily indicative of
the results that will be achieved for future periods as a result of the
Offering and the Formation Transactions. These pro forma financial statements
and related notes thereto should be read in conjunction with the Company's and
Properties' combined financial statements included elsewhere in this
Prospectus.
8
<PAGE> 16
THE COMPANY (PRO FORMA) AND THE PROPERTIES (COMBINED HISTORICAL)
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA COMBINED HISTORICAL
--------------- -------------------------------------------------
1997 1997 1996 1995
--------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 9,875,522 $ 9,875,522 $ 9,638,280 $ 4,945,110
Rental - related party 402,720 402,720 158,400 26,400
Other 10,513 10,513 10,125 4,486
--------------- -------------- -------------- --------------
Total revenue 10,288,755 10,288,755 9,806,805 4,975,996
--------------- -------------- -------------- --------------
Expenses:
Property operations 3,385,524 3,385,524 3,404,564 1,821,350
Real estate taxes 712,242 712,242 728,270 289,071
Depreciation and amortization 1,790,913 1,115,261 1,035,291 596,039
Interest-related party 1,778,723 1,119,130 330,124
Property Management Fee 711,026 848,036 370,426
General and administrative 3,857,187 575,182 505,741 344,339
Write-off of tenant improvements 152,063
--------------- -------------- -------------- --------------
Total expenses 9,745,866 8,277,958 7,793,095 3,751,349
--------------- -------------- -------------- --------------
Net income (loss) before minority interest 542,889 $2,010,797 $2,013,710 $1,224,647
============== ============== ==============
Minority interest (1) 46,526
---------------
Net income applicable to common shareholders $ 496,363
===============
Pro forma net income per common share (2) $ 0.11
===============
<CAPTION>
COMBINED HISTORICAL
------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 1,595,342 $ 1,628,704
Rental - related party
Other
-------------- -------------
Total revenue 1,595,342 1,628,704
-------------- -------------
Expenses:
Property operations 942,459 838,784
Real estate taxes 177,801 227,261
Depreciation and amortization 283,034 307,017
Interest-related party 253,208 468,403
Property Management Fee 184,511 136,595
General and administrative 43,491 48,365
Write-off of tenant improvements
-------------- -------------
Total expenses 1,884,504 2,026,425
-------------- -------------
Net income (loss) before minority interest $(289,162) $(397,721)
============== =============
Minority interest (1)
Net income applicable to common shareholders
Pro forma net income per common share (2)
</TABLE>
9
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31,
PRO FORMA COMBINED HISTORICAL
--------------- ----------------------------------------------------------------
1997 1997 1996 1995 1994
--------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Land $ 5,835,260 $ 3,070,875 $ 2,925,875 $ 2,698,516 $ 1,739,996
Buildings, improvements and equipment 55,322,406 28,971,990 26,168,962 21,382,596 10,196,625
Projects under development 299,919 299,919 70,539 27,145 663,069
Less accumulated depreciation and amortization (2,547,695) (2,547,695) (1,688,018) (925,857) (329,818)
--------------- -------------- -------------- -------------- --------------
Real estate - net 58,909,890 29,795,089 27,477,358 23,182,400 12,269,872
=============== ============== ============== ============== ==============
Total assets 61,234,794 32,069,993 29,002,614 24,525,515 12,804,310
=============== ============== ============== ============== ==============
Mortgage notes 19,893,980 20,300,000
============== ==============
Total liabilities 1,055,151 21,263,199 20,988,184 3,612,524 3,320,146
=============== ============== ============== ============== ==============
Minority interest (3) 5,157,395
===============
Owners' equity 55,022,248 10,806,794 8,014,430 20,912,991 9,484,164
=============== ============== ============== ============== ==============
Liabilities and Shareholders' Equity 61,234,794 32,069,993 29,002,614 24,525,515 12,804,310
=============== ============== ============== ============== ==============
<CAPTION>
DECEMBER 31,
COMBINED HISTORICAL
-------------------
1993
-------------------
<S> <C>
BALANCE SHEET DATA:
Land $ 1,739,996
Buildings, improvements and equipment 7,826,059
Projects under development 0
Less accumulated depreciation and amortization (183,247)
-------------
Real estate - net 9,382,808
=============
Total assets 10,320,384
=============
Mortgage notes
Total liabilities 3,158,817
=============
Minority interest (3)
Owners' equity 7,161,567
=============
Liabilities and Shareholders' Equity 10,320,384
=============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
PRO FORMA COMBINED HISTORICAL
--------------- ---------------------------------------------------
1997 1997 1996 1995
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (4) $ 3,847,529 $ 2,521,885 $ 2,815,666 $ 1,785,462
=============== ============== ============== ================
Cash flows from:
Operating activities 2,933,982 2,026,556 1,620,899
============== ============== ================
Investing activities (3,033,377) (1,110,181) (3,173,647)
============== ============== ================
Financing activities 333,959 (1,251,673) 1,869,259
============== ============== ================
Office Properties:
Square footage 1,035,792 1,035,792 1,035,792 822,490
Occupancy 81% 81%
Industrial properties:
Square footage 311,120 311,120 215,120 215,120
Occupancy 100 100
</TABLE>
10
<PAGE> 18
(1) Calculated as 8.57% of the Operating Partnership's net income on a pro
forma basis for the year ended December 31, 1997.
(2) Calculated assuming 4,431,260 Common Shares outstanding for the Company
which represent the shares to be issued in the Offering and the shares to be
issued to Management.
(3) Calculated as 8.57% of the Operating Partnership's equity on a pro forma
basis at December 31, 1997.
(4) Management considers Funds From Operations to be one measure of the
financial performance of an equity REIT that provides a relevant basis for
comparison among REITs and it is presented to assist investors in analyzing the
performance of the Company. "Funds From Operation" is defined as income before
minority interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales of
property, non-cash compensation and real estate related depreciation and
amortization. Funds From Operations does not represent cash from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs. Funds From
Operations should not be considered an alternative to net income as an
indication of the Company's financial performance or as an alternative to cash
flows from operating activities as a measure of liquidity and may be determined
differently from similarly titled measures used by other REITs.
11
<PAGE> 19
RISK FACTORS
An investment in the Company involves various investment risks.
Prospective investors should carefully consider the following factors together
with the information provided elsewhere in this Prospectus in evaluating an
investment in the Company.
FAILURE TO MANAGE GROWTH AND INTEGRATE OPERATIONS; ACQUISITION OF ADDITIONAL
PROPERTIES
Assuming completion of the Offering, the Company expects to experience a
period of rapid growth. There can be no assurance that the Company will be
able to integrate its management, administrative, accounting and operational
systems to effectively manage the Properties on a combined basis, or be able to
adapt such systems to any future acquisitions of additional properties without
certain operating disruptions or unanticipated costs. The failure to
successfully manage the Properties on a combined basis or to successfully
integrate any future acquisitions into the Company's portfolio could have a
material adverse effect on the results of operations and financial condition of
the Company and its ability to pay expected distributions to shareholders. As
it acquires additional properties, the Company will be subject to risks
associated with managing new properties, including tenant retention and
indebted default. A larger portfolio of properties would generate additional
operating expenses that would be payable by the Company. There can be no
assurance that the Company will be able to successfully execute its growth
strategy or negotiate and acquire any acceptable properties in the future.
LACK OF OPERATING HISTORY
The Company has been recently organized and has no operating history.
The Company will be subject to the risks generally associated with the
formation of any new business. In addition, Management has no experience
operating a public company or a REIT and limited experience working together as
a management team.
LIMITED GEOGRAPHIC DIVERSIFICATION OF THE PORTFOLIO
A significant portion of the Company's assets and revenues will be
derived from Properties located in the Midland, Texas and Las Vegas, Nevada
metropolitan areas. The concentration of the portfolio in these metropolitan
areas creates the risk that should these regions or other geographic markets in
which the Company in the future may acquire substantial assets experience an
economic downturn, the Company's operations may be adversely affected.
INABILITY TO ACQUIRE ADDITIONAL PROPERTIES; PROPERTIES MAY NOT PERFORM AS
EXPECTED
The fact that the Company must distribute 95% of its taxable income in
order to qualify and to maintain its qualification as a REIT will limit the
ability of the Company to rely upon income from operations or cash flow from
operations to finance new acquisitions. As a result, if permanent debt or
equity financing was not available on acceptable terms to finance acquisitions,
then further acquisitions might be limited or Cash Available for Distribution
might be adversely affected. Acquisitions entail risks that investments will
fail to perform in accordance with expectations and that judgments with respect
to the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property will prove
inaccurate, as well as general investment risks associated with any new real
estate investment.
ADVERSE EFFECT OF INCREASE IN MARKET INTEREST RATE ON FINANCIAL POSITION AND
COMMON SHARE PRICE
One of the factors that may influence the price of the Company's Common
Shares in public markets is the annual distribution rate on the Common Shares.
Thus, an increase in market interest rates may lead purchasers of Common Shares
to demand a higher annual distribution rate, which could adversely affect the
market price of the Common Shares. In addition, an increase in the market rate
of interest may increase interest expenses under any variable rate indebtedness
of the Company. After the Offering, the Company expects to obtain a revolving
credit line with a variable interest rate. Although the Company intends to
purchase an interest rate collar or similar hedging instrument against
fluctuating interest rates, there can be no assurance that such collar or
similar arrangement will be available, or if available, at economically
feasible rates.
12
<PAGE> 20
POSSIBLE INABILITY TO MEET DISTRIBUTION REQUIREMENTS
Distributions will be determined by the Company's Trust Managers and
will be dependent on a number of factors, including the amount of Funds From
Operations available for distribution, the Company's financial condition, any
decision by the Trust Managers to reinvest funds rather than to distribute such
funds, the Company's capital expenditures, the annual distribution requirements
under the REIT provisions of the Code (see "Federal Income Tax Consequences--
Requirements for Qualification as a Real Estate Investment Trust") and such
other factors as the Trust Managers deem relevant. No assurance can be given
that necessary funds will be available to allow the Company to meet the REIT
requirements or the Company's other obligations.
REAL ESTATE INVESTMENT RISKS
Economic Performance and Value of Properties Dependent on Many Factors.
Real property investments are subject to varying degrees of risk. The yields
available from equity investments in real estate depend on the amount of income
generated and expenses incurred. If the Company's properties do not generate
income sufficient to meet operating expenses, including debt service, the
Company's income and ability to make distributions to its shareholders will be
adversely affected.
The income from and market value of a leased property may be adversely
affected by such factors as changes in the general economic climate, local
conditions such as an oversupply of space or a reduction in demand for real
estate in the area, the attractiveness of the properties to tenants and
competition from other available space. Real estate values and income are also
affected by such factors as government regulations and changes in real estate,
zoning or tax laws, interest rate levels, the availability of financing and
potential liability under environmental and other laws.
Adverse economic conditions could adversely affect the ability of a
tenant to make its lease payments to the Company, resulting in a reduction in
the cash flow of the Company and a decrease in the value of the property leased
to such tenant in the event the lease is terminated and the Company is unable
to lease the property to another tenant on similar or better terms, or at all.
In addition, the Company may experience delays in enforcing its rights as
lessor and may incur substantial costs in protecting its investment. The
Company not only could lose the cash flow from such defaulting tenant, but in
order to prevent a foreclosure, also might divert cash flow generated by other
properties to meet mortgage payments, if any, and pay other expenses associated
with owning the property with respect to which the default occurred.
Dependence on Rental Income from Real Property to Meet Debt Obligations
and Make Distributions. As substantially all of the Company's income will be
derived from rental income from real property, the Company's income and Funds
From Operations could be adversely affected if a single major tenant or a
number of smaller tenants were unable to meet their obligations to the Company
or if the Company were unable to lease on economically favorable terms a
significant amount of space in its properties. Although such adverse effect
may be limited by the fact that the Company will not rely on any single major
tenant, such risk is not eliminated. In addition, the Company's tenants may
have the right to terminate their leases upon the occurrence of certain
customary events of default, or, in some cases, if the lease held by an anchor
tenant or other principal tenant of the property expires, is terminated or the
property subject to the lease is vacated, even if rent continues to be paid
under the lease. No assurance can be given that leases that expire or are
terminated can be renewed or replaced, or that the properties covered by leases
that expire or are terminated can be leased to comparable tenants or on
comparable terms, or at all.
Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major
tenant or a number of small tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Generally,
under bankruptcy law, a tenant has the option of continuing or terminating any
unexpired lease. If the tenant continues its lease with the Company, the
tenant must cure all defaults under the lease and provide the Company with
adequate assurance of its future performance under the lease. If the tenant
terminates the lease, the Company's claim for breach of the lease would (absent
collateral securing the claim) be treated as a general unsecured claim.
General unsecured claims are the last claims to be paid in a bankruptcy and
therefore funds may not be available to pay such claims. As of March 1, 1998,
none of the Properties' major tenants was in bankruptcy or had defaulted on a
lease that caused a material adverse effect.
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<PAGE> 21
Illiquidity of Real Estate Investments. Equity real estate investments
are relatively illiquid and therefore tend to limit the ability of the Company
to vary its portfolio in response to changes in economic or other conditions.
In addition, mortgage payments and, to the extent a property is not subject to
Triple Net Leases, certain significant expenditures such as real estate taxes
and maintenance costs generally are not reduced when circumstances cause a
reduction in income from the investment, and should such events occur, the
Company's income and Cash Available for Distribution would be adversely
affected. See "Risk Factors--Increased Leverage May Result in Loss of
Properties in the Event of a Foreclosure."
Changes in Laws. Costs resulting from changes in real estate taxes
generally may be passed through to tenants and, to such extent, will not affect
the Company. Increases in income, service or transfer taxes, however,
generally are not passed through to tenants under the leases and may adversely
affect the Company's operating cash flow and its ability to make distributions
to shareholders. Similarly, changes in laws increasing the potential liability
for environmental conditions existing on properties or increasing the
restrictions on discharges or other conditions may result in significant
unanticipated expenditures, which would adversely affect the Company's
operating cash flow and its distributions to shareholders.
REAL ESTATE RISK FACTORS SPECIFIC TO THE COMPANY'S BUSINESS
Lease Expirations and Renewals. The Company is subject to the risks
that, upon expiration, leases for space in its properties may not be renewed or
the space may not be re-leased, or that the terms of any renewal or re-lease
(including the cost of required renovations or concessions to tenants) would
not be as favorable as current leases. As of March 12, 1998, approximately
35.4% of the GLA of the Properties is subject to leases that expire in either
1998 or 1999. There can be no assurance that such leases can be renewed or
that the space subject to such leases can be re-leased, or that the terms of
any renewal or re-lease would be as favorable as current leases.
Risks of Joint Ownership of Assets. The Company has the right to invest
in properties and assets jointly with other persons or entities. Joint
ownership of properties, under certain circumstances, may involve risks not
otherwise present, including the possibility that the Company's partners or co-
investors might become bankrupt, that such partners or co-investors might at
any time have economic or other business interests or goals that are
inconsistent with the business interests or goals of the Company, and that such
partners or co-investors may be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives, including the Company's policy with respect to
maintaining its qualification as a REIT.
RELIANCE ON KEY PERSONNEL
The Company is dependent on the efforts of Mr. David R. Merker, Chairman
of the Board of Trust Managers and Chief Executive Officer, and Mr. Arthur F.
Lorentzen, Jr., President and Chief Operating Officer. While the Company
believes that it could find replacements for these key executives, the loss of
their services could have an adverse effect on the operations of the Company.
Mr. Merker and Mr. Lorentzen have employment agreements with the Company and
are not obligated to devote their full-time to the Company. The Company will
obtain key-man insurance for all of its executive management personnel.
COMPETITION
Numerous real estate companies that operate in the Company's target
metropolitan and suburban markets compete with the Company in developing and
acquiring office and industrial properties and seeking tenants to occupy such
properties. Such competition could adversely affect the Company's business.
There are numerous commercial developers, real estate companies, REITs and
major retailers that compete with the Company in seeking properties for
acquisition and tenants for properties, many of which may have greater
financial and other resources than the Company and may have substantially more
operating experience than that of the Company, its officers and agents.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
The Company must meet a number of highly technical and complex
requirements to qualify and continue to qualify as a REIT under the Code.
Failure to qualify as a REIT would result in the taxation of the Company at
corporate
14
<PAGE> 22
rates and loss of the REIT deduction for dividends paid, which would have a
significant adverse effect on the return to shareholders. Failure to qualify as
a REIT under the Code during a taxable year would generally render the Company
ineligible to elect REIT status again until the fifth subsequent taxable year.
The Company will not be required to make distributions to shareholders in the
event that it fails to qualify as a REIT under the Code and there can be no
assurance that the Company will continue to make distributions in such event.
Transfers of the Common Shares are subject to certain restrictions to protect
the Company's REIT status under the Code. In addition, the Company may be
subject to state or local taxes. No assurance can be given that legislation,
new regulations, administrative interpretations or court decisions will not
change the tax laws with respect to qualification as a REIT, the federal income
tax consequences of such qualification or the application of state or local
taxes to the Company. See "Federal Income Tax Consequences."
For any taxable year that the Company fails to qualify as a REIT, the
Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates with no
deduction for dividends paid to its shareholders. This treatment would reduce
the net earnings of the Company available for investment or distribution to
shareholders because of the additional tax liability to the Company for the
year or years involved. To the extent that distributions to shareholders would
have been made in anticipation of the Company qualifying as a REIT, the Company
might be required to borrow funds or liquidate certain of its investments to
pay the applicable tax.
The Operating Partnership has been structured to be classified as a
partnership for federal income tax purposes. If the Service were to challenge
successfully the tax status of the Operating Partnership as a partnership for
federal income tax purposes, the Operating Partnership would be treated as an
association taxable as a corporation. In such event, the character of the
Company's assets and items of gross income would change and preclude the
Company from satisfying certain requirements of the Code, which, in turn, would
prevent the Company from qualifying as a REIT. See "Federal Income Tax
Consequences--Requirements for Qualification as a Real Estate Investment
Trust." In addition, the imposition of a corporate tax on the Operating
Partnership would reduce the amount of Cash Available for Distribution. See
"Federal Income Tax Consequences."
OWNERSHIP LIMIT; ANTI-TAKEOVER EFFECT
In order to qualify and to continue to qualify as a REIT, not more than
50% in value of the outstanding Common Shares of the Company may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of any taxable year (other than
its 1998 taxable year). To ensure that the Company will not fail to qualify as
a REIT under this test, the Charter provides that no holder of capital shares,
other than any person approved by the Trust Managers, may directly or
indirectly own more than 9.8% of the number or value of the outstanding capital
shares (the "Ownership Limit"). There can be no assurance that there will not
be five or fewer individuals who will own more than 50% in value of the Common
Shares, thereby causing the Company to fail to qualify as a REIT. The Ownership
Limit may discourage a change of control of the Company and may also (i) deter
tender offers for the Common Shares, which offers may be attractive to the
shareholders or (ii) limit the opportunity for shareholders to receive a
premium for their Common Shares that might otherwise exist if an investor
attempted to assemble a block of Common Shares in excess of 9.8% in number or
value of the outstanding capital shares or otherwise to effect a change of
control of the Company. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer."
The Trust Managers may waive the Ownership Limit with respect to a
particular shareholder if it is satisfied, based upon the advice of tax
counsel, that such ownership in excess of such limit will not jeopardize the
Company's status as a REIT. See "Description of Shares of Beneficial Interest
- -- Restrictions on Transfer." A transfer of shares to a person who, as a
result of such transfer, violates the Ownership Limit may be void under some
circumstances or may be exchanged for Excess Securities which are held in trust
for the benefit of a charitable beneficiary. See "Description of Shares of
Beneficial Interest--Restrictions on Transfer" for additional information
regarding the Ownership Limit.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations,
an owner 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 to whether the owner knew of, or was
responsible for, the presence of such hazardous or toxic substances. The costs
of any required remediation or removal of such substances may be substantial
and the owner's liability therefor as to any property is generally not limited
under such laws, ordinances and regulations and
15
<PAGE> 23
could exceed the value of the property. The presence of such substances, or
the failure to properly remediate such substances, may adversely affect the
owner's ability to sell the property or to borrow using real estate as
collateral. All of the Properties, except those currently under development,
have been subject to Phase I environmental audits (which involves inspection
without soil sampling or ground water analysis) by independent environmental
consultants. The existing Phase I audit reports have not revealed any
environmental liability, nor is the Company aware of any environmental
liability that the Company's Management believes would have a material adverse
effect on the Company's business, assets or results of operations, taken as a
whole. No assurance, however, can be given that a material environmental
condition not known to the Company does not exist on the Properties.
The Company believes that each of the Properties is in compliance in all
material respects with all federal, state and local ordinances and regulations
regarding hazardous or toxic substances.
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT SHAREHOLDER APPROVAL
The Company's operating and financial policies, including its policies
with respect to acquisitions, growth, operations, indebtedness, capitalization
and distributions, will be determined by the Board of Trust Managers. The
Board of Trust Managers generally may revise these policies, from time to time,
without shareholder approval. Changes in the Company's policies could
adversely affect the Company's financial condition and results of operations.
In addition, the Company has the right and intends to acquire additional real
estate assets pursuant to and consistent with its investment strategies and
policies without shareholder approval.
NO LIMITATION IN ORGANIZATIONAL DOCUMENTS ON THE INCURRENCE OF DEBT
The Company intends to have a general policy of limiting its borrowings
to a ratio of approximately 50% or less of debt to Total Market Capitalization.
The organizational documents of the Company contain no limitation on the amount
or percentage of indebtedness that the Company may incur. Therefore, the Board
of Trust Managers, without a vote of the shareholders, could alter or eliminate
at any time the current policy of limiting borrowings. If the Company's debt
to capitalization policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service that could adversely affect
the Company's operating cash flow and its ability to make expected
distributions to shareholders and could result in an increased risk of default
on its obligations. There can be no assurance that the ratio of indebtedness
to market capitalization (or any other measure of asset value) or the
incurrence of debt at any particular level would not adversely affect the
financial condition and results of operations of the Company.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of properties upon refinancing, and the ability of
particular properties and the Company, as a whole, to generate cash flow to
cover expected debt service), there can be no assurance that the ratio of debt
to Total Market Capitalization will be consistent with the maintenance of the
expected level of distributions to shareholders.
IMMEDIATE AND SUBSTANTIAL DILUTION
The anticipated price per Common Share in the Offering substantially
exceeds the pro forma net tangible book value per share immediately subsequent
to the Offering. Accordingly, the shareholders acquiring shares in the Offering
will experience immediate and substantial dilution of $2.58 per share in the
net tangible book value of the Common Shares. See "Dilution."
NO PRIOR TRADING MARKET
Prior to the completion of this Offering, there has been no public
market for the Common Shares. The initial public offering price was determined
through negotiations between the Company and the Representative of the
Underwriters. See "Underwriting" for a discussion of factors considered in the
determination of the initial public offering price. There can be no assurance
that an active trading market will develop or be sustained or that the market
price of the Common Shares will not decline below the initial public offering
price.
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<PAGE> 24
SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have a total of
4,431,260 Common Shares outstanding, of which 141,260 Common Shares will
constitute "restricted" securities as that term is defined in Rule 144 as
promulgated under the Securities Act. The 141,260 restricted Common Shares are
subject to 180 day lock-up agreements with the Underwriters. Such Common
Shares will become eligible for sale in the public market upon registration or
from time to time upon the expiration of the applicable holding period under
Rule 144. Affiliates of Ralph Engelstad will be issued 415,312 OP Units in
connection with the Formation Transactions. Such Common Shares may be redeemed
for cash or Common Shares, at the option of the Company, on a one-for-one basis
beginning one year after the Offering. Common Shares issued upon the
redemption of OP Units will become eligible for sale in the public market upon
registration or from time to time upon the expiration of the applicable holding
period under Rule 144.
Following this Offering, sales of substantial amounts of the Common
Shares in the public market pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, could adversely affect the prevailing
market price of the Common Shares and impair the Company's ability to raise
additional capital through the sale of equity securities. See "Shares
Available for Future Sale." No prediction can be made of the effect that
future sales of Common Shares will have on the market price of Common Shares.
LIQUIDATION VALUE OF THE COMPANY MAY BE LESS THAN VALUE AS A GOING CONCERN
No independent third-party appraisals of the Properties were obtained.
The valuation of the Company has been determined based primarily upon a
capitalization of estimated cash flow of the Company available for distribution
and the factors discussed under "Underwriting" rather than by valuing
individual properties based on current market value or historical cost. The
Company believes this methodology to be appropriate because it values the
Company as a going concern rather than as the sum of values that could be
obtained for the Properties in liquidation. Accordingly, it is possible that
the cash consideration received by the Prior Owners in exchange for the
Properties and the value of the Common Shares that may be received by the Prior
Owners upon redemption of the OP Units received in exchange for the Properties
(based upon the initial public offering price set forth on the cover page of
this Prospectus) may exceed the fair market value of the Properties. Investors
should be aware that the liquidation value of the Company may be less than the
value of the Company as a going concern.
UNINSURED LOSS AND CONDEMNATION
The Company will carry comprehensive liability, fire, flood, extended
coverage and rental loss insurance with respect to its properties with policy
specifications and insured limits customarily carried for similar properties.
There are, however, certain types of losses (such as from wars or earthquakes)
that may be either uninsurable or not economically insurable. Should an
uninsured loss occur, the Company could lose both its invested capital in and
anticipated profits from the property.
Tenant leases may permit the tenant to terminate its lease in the event
of a substantial casualty or a taking by eminent domain of a substantial
portion of a property. Should any such event occur, the Company generally will
be compensated by insurance proceeds or a condemnation award. There can be no
assurance, however, that insurance proceeds, if available, or a condemnation
award, if given, will equal the value of such property or the Company's
investment in such property.
INVESTORS SUBJECT TO ERISA
Fiduciaries of a pension, profit-sharing or other employee benefit plan
subject to ERISA should consider whether the investment of plan assets in the
Common Shares satisfies the diversification requirements of ERISA, whether the
investment is prudent in light of possible limitations on the marketability of
the Common Shares, and whether such fiduciaries have authority to acquire such
Common Shares under their appropriate governing instruments and Title I of
ERISA. See "ERISA Considerations."
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<PAGE> 25
COST OF COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT
ADA requires public accommodations to meet certain federal requirements
related to access and use by disabled persons. Compliance with the ADA could
require removal of structural barriers to handicapped access in certain public
areas of the Company's properties where such removal is readily achievable.
Failure to comply with the ADA could result in an imposition of fines or the
award of damages to private litigants, and also could result in an order to
correct any non-complying feature. The applicable lessee will be responsible
for correcting any such non-complying feature. If the lessee fails or is
unable to correct a non-complying feature, however, the Company likely will be
required to do so. If required changes involve greater expenditures than the
Company currently anticipates, or if the changes must be made on a more
accelerated basis than it anticipates, there could be a material adverse effect
on the Company and its ability to make distributions to shareholders.
Additional and future legislation may impose other burdens or
restrictions on owners with respect to access by disabled persons. The
ultimate costs of complying with the ADA and other similar legislation are not
currently ascertainable and, while such costs are not expected to have a
material adverse effect on either the Company or its ability to make
distributions to shareholders, such costs could be substantial. See "Business
and Properties--Regulations."
FORWARD LOOKING INFORMATION
This Prospectus contains certain forward-looking information regarding
the plans and objectives of Management for future operations, including plans
and objectives relating to future growth of the property portfolio and
availability of funds. The forward-looking statements included herein are
based on current expectations that involve numerous risks and uncertainties.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this Prospectus will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, including, without limitation, the risks set forth in "Risk Factors,"
the inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
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<PAGE> 26
THE COMPANY
GENERAL
Palace REIT, a self-managed and self-advised real estate investment
trust, has been formed to acquire office and industrial properties in selected
markets in the United States. The Company intends to continue and expand the
real estate investment strategy pursued by David Merker, the Company's Chief
Executive Officer, in acquiring, redeveloping and managing office and
industrial properties for affiliates of Ralph Englestad, from which the Company
is acquiring the Properties. In managing Mr. Englestad's real estate
operations since 1988, Mr. Merker has overseen the purchase or development of
approximately $130 million of office and industrial properties. The Company's
growth strategy is to acquire office and industrial properties in mid-sized
markets with a growing demand for office and industrial space and strong
economic growth, and to aggressively manage its properties to maximize returns
on investments.
Concurrently with the closing of the Offering, the Operating
Partnership, for which Palace REIT serves as sole general partner, will acquire
from affiliates of Mr. Englestad four high quality Office Properties comprising
approximately 1.0 million square feet of GLA and four Industrial Properties
comprising approximately 365,115 of GLA. The Company has rights of first
refusal to purchase other office and industrial properties owned or under
development by affiliates of Mr. Englestad comprising approximately 2.1 million
square feet of GLA located in Las Vegas, Nevada; Norfolk, Virginia; Kansas
City, Missouri and Midland, Texas.
The Company is a REIT formed under the Texas REIT Act. The Company
intends to elect to be taxed as a REIT under the Code for its taxable year
ending December 31, 1998. The principal executive offices of the Company are
located at 3535 Las Vegas Boulevard South, Las Vegas, Nevada 89109, and its
telephone number is (702) 732-7102.
BUSINESS STRATEGY
The Company's business objective is to provide attractive returns to
shareholders, including growth of cash distributions and Common Share price
appreciation. The Company intends to achieve this objective by pursuing
integrated acquisition, internal growth and financing strategies.
Acquisition Strategy
In seeking acquisition opportunities, the Company intends to focus on
high quality office properties and industrial properties that it can acquire at
accretive prices. The Company will seek such properties in markets (i) where
the Company believes demand for space in office and industrial properties is
growing, (ii) where the Company believes it will face less competition for
property acquisitions from large, well-capitalized buyers, (iii) where the
Company believes it can add value to properties through aggressive management,
and (iv) where population and employment growth are strong.
The Company believes that its most attractive acquisition opportunities
will be individual properties and mid-sized portfolios. The Company may
consider acquisition opportunities that have operating, legal, tax or financial
complexities that may make such transactions less attractive to other potential
buyers. In implementing its acquisition strategy, the Company plans to utilize
the extensive network of contacts developed by its executive officers among
real estate brokers, financial institutions and investors.
The Company believes that its ability to make acquisitions will be
enhanced by (i) Management's ability to identify favorable acquisition
opportunities through its extensive network of contacts among real estate
professionals, (ii) Management's experience in identifying and acquiring
underperforming assets at favorable prices, (iii) the Company's ability to
provide flexible acquisition terms and close transactions quickly with the Line
of Credit and by offering OP Units to sellers, (iv) Management's experience in
acquiring properties that may have legal, tax, financing or other complexities
that may make such transactions less attractive to other potential buyers, and
(v) Management's experience in repositioning properties.
The Company intends to focus on its target markets. The Company may,
however, acquire properties in other markets when potential returns justify
such acquisitions. The Company may also develop its own properties when
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<PAGE> 27
potential returns justify development. The Company intends to acquire
properties that are currently accretive as well as accretive in the long-term.
Internal Growth Strategy
The Company's internal growth strategy is to increase cash flow at its
properties by (i) contracting for periodic rent increases and renewing or
replacing existing leases with new leases at higher rental rates, (ii) making
regular capital improvements and conducting preventive maintenance, (iii)
providing quality service, and (iv) aggressively managing its operating
expenses. The Company believes that providing quality service, performing
regular capital improvements and conducting preventive maintenance will enable
it to secure higher rental rates. The Company believes that providing a level
of service that exceeds that of its competitors and maintaining the aesthetic
attractiveness and functional efficiency of its properties with capital
improvements and active preventive maintenance will enhance its ability to
attract and retain tenants. The Company believes that capital improvements and
preventive maintenance will also enhance the market value of its properties.
The Company will aggressively manage operating expenses by, among other things,
expanding the management functions conducted in-house by the Company.
The Company intends to implement its internal growth strategy by
providing operating autonomy and performance-based incentives to operating
personnel. The Company will adopt an incentive share plan to compensate,
attract and retain quality personnel.
Financing Strategy
The Company intends to pursue a conservative financing strategy to
provide a flexible capital structure with efficient access to the capital
markets and thereby enhance growth opportunities. The Company believes that
such a strategy will enable it to offer flexible terms to sellers, enhancing
the Company's ability to acquire properties. The Company intends to maintain a
capital structure with a ratio of debt to Total Market Capitalization of no
more than approximately 50%. Immediately following the Offering, the Company
will have no debt.
The Company is negotiating for a Line of Credit to facilitate future
property acquisitions.
FORMATION TRANSACTIONS
The Company will contribute substantially all of the net proceeds of the
Offering to the Operating Partnership in exchange for an approximate 90.4%
limited partnership interest in the Operating Partnership. The Company will
also hold a 1.0% general partnership interest in the Operating Partnership.
Concurrently with the closing of the Offering, the Prior Owners will
sell six Properties to the Operating Partnership in exchange for an amount of
cash equal to the net proceeds of the Offering contributed by the Company to
the Operating Partnership. The Prior Owners will also contribute two
Properties (or interests therein) to the Operating Partnership in exchange for
cash and an aggregate of 415,312 OP Units, representing an approximate 8.6%
limited partnership interest in the Operating Partnership. The OP Units issued
to the Prior Owners will be redeemable at the election of the holder for cash
or, at the Company's sole option, Common Shares on a one-for-one basis at any
time after the first anniversary of the completion of the Offering. See
"Partnership Agreement."
THE OPERATING PARTNERSHIP
The Company will conduct all of its operations through the Operating
Partnership. The Operating Partnership will own the Properties and will
provide management, leasing and development services. The Operating
Partnership structure will enable persons contributing properties (or interests
therein) to the Operating Partnership to defer some or all of the tax liability
that they otherwise might incur in certain circumstances. The Company believes
the flexible terms it can offer through the issuance of OP Units may facilitate
its acquisition of additional properties in the future.
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USE OF PROCEEDS
The net cash proceeds to the Company from the sale of Common Shares in
the Offering, after payment of expenses, are estimated to be approximately
$59.2 million (based on an estimated Offering price per share of $15.00). The
Company will contribute substantially all of the net proceeds of the Offering
to the Operating Partnership in exchange for an approximate 90.4% limited
partnership interest in the Operating Partnership. The Operating Partnership
will use all but approximately $50,000 of the net proceeds to acquire the
Properties. The Operating Partnership will retain approximately $50,000 of the
net proceeds for working capital.
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<PAGE> 29
DISTRIBUTION POLICY
GENERAL
After completion of the Offering, the Company intends to pay regular
quarterly distributions to its shareholders of $0.30 per share or $1.20 per
share on an annualized basis. This would represent an initial annualized yield
of 8.0%, based on the assumed public offering price of $15.00 per share. The
Company does not expect to change its estimated distribution rate if the
Underwriters' over-allotment option is exercised.
The Company's intended initial distribution is based upon an estimate of
Cash Available for Distribution after the Offering under present conditions.
This estimate is based upon pro forma 1998 Cash Available for Distribution with
certain adjustments based on the assumptions described below. The first cash
distribution after completion of the Offering is expected to be paid on or
about September 30, 1998, to Common Share record holders of August 15, 1998.
The payment will represent a pro-rata distribution for the period from the
closing of the Offering to September 30, 1998.
The Company believes that its estimate of cash flow that will be
available for distributions constitutes a reasonable basis for setting the
initial distribution, and the Company expects to maintain its initial
distribution rate for the balance of the calendar year in which the Offering is
completed, unless actual results of operations, economic conditions or other
factors differ materially from the assumptions used in the estimate. The
actual return that the Company will realize will be affected by a number of
factors, including the revenues received from rental properties, the operating
expenses of the Company, the interest expense incurred in its borrowings, the
ability of tenants to meet their obligations to the Company and unanticipated
capital expenditures. No assurance can be given that the Company's estimate
will prove accurate. Distributions in subsequent years will be impacted by the
Company's investing and financing strategies. In particular, the Company
expects to initially finance certain acquisitions and redevelopments through
borrowings. As a result, the Company's need to repay and/or refinance such
indebtedness may adversely affect its ability to make future distributions.
The following table illustrates the adjustments made by the Company to
its pro forma Funds From Operations for the year ended December 31, 1997 to
calculate estimated Cash Available for Distribution:
<TABLE>
<CAPTION>
AMOUNTS
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
--------------
<S> <C>
Pro forma net income before minority interests for the year ended December 31, 1997 . . . $ 542,889
Add (deduct) non-cash items: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma depreciation and amortization for the year ended December 31, 1997 . . . . 1,790,913
Non-cash compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,117,900
Net effect of straight-line rents (1) . . . . . . . . . . . . . . . . . . . . . . . . (604,173)
--------------
Pro forma Funds from Operations for the year ended December 31, 1997 . . . . . . . . . . 3,847,529
Adjustments:
Net increases in contractual rental income (2) . . . . . . . . . . . . . . . . . . . 1,734,904
Increases from new leases (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332,881
Reduction in operating expenses due to changes in management structure . . . . . . . 330,206
Other income - management fees and interest income . . . . . . . . . . . . . . . . . 454,116
--------------
Estimated adjusted pro forma Funds from Operations(4) . . . . . . . . . . . . . . . . . . 6,699,636
Estimated capitalized tenant improvements and leasing commissions . . . . . . . . . . 140,655
Estimated capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,895
--------------
Estimated cash available for distribution . . . . . . . . . . . . . . . . . . . . . . . . 6,463,086
Total estimated initial annual distribution . . . . . . . . . . . . . . . . . . . . . . . $ 5,815,866
Estimated initial annual distribution per share . . . . . . . . . . . . . . . . . . . . . $ 1.20
Ratio of payout on estimated cash available for distribution (5) . . . . . . . . . . . . 90.0%
</TABLE>
(1) Represents the effect of adjusting straight-line rental income and
accrued tenant improvement in lieu of rent included in the year ended
December 31, 1997 from an accrual basis under GAAP to a cash basis.
22
<PAGE> 30
(2) Represents the incremental increase in Funds from Operations
attributable to contractual rent increases for the year ending December
31, 1998 over actual rental revenue included in pro forma Funds from
Operations for the number of months in which the increased rental rate
will be in effect for each lease.
(3) Represents the incremental increase in pro forma Funds from Operations
attributable to rental revenue from new executed leases commencing after
December 31, 1997.
(4) Management and industry analysts generally consider Funds From
Operations to be one measure of the financial performance of an equity
REIT that provides a relevant basis for comparison among REITs and it is
presented to assist investors in analyzing the performance of the
Company. "Funds From Operation" is defined as income before minority
interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales
of property, non-cash compensation and real estate related depreciation
and amortization. Funds From Operations does not represent cash
generally from operating activities in accordance with generally
accepted account principles and is not necessarily indicative of cash
available to fund cash needs. Funds From Operations should not be
considered an alternative to net income as an indication of the
Company's financial performance or as an alternative to cash flows from
operating activities as a measure of liquidity and may be determined
differently from similarly titled measures used by other REITs.
(5) Calculated as the estimated initial annual distribution divided by the
estimated cash available for distribution.
Future distributions by the Company will be at the discretion of the
Board of Trust Managers and will depend on the actual cash flow of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Consequences--Federal Taxation of the Company") and such other factors as the
Board of Trust Managers deems relevant. The Company anticipates that
distributions will be paid from Cash Available for Distribution, which will be
affected by a number of factors, including: (i) changes in rent attributable to
the renewal of existing leases or replacement leases; (ii) operating expenses
and capital expenditure requirements; and (iii) debt service requirements. For
a discussion of the tax treatment of distributions to shareholders, see
"Federal Income Tax Consequences--Taxation of Shareholders" and "--Taxation of
Foreign Shareholders."
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its shareholders of at least 95% of its annual taxable
income (excluding net capital gains). Under certain circumstances, the Company
may be required to make distributions in excess of Cash Available for
Distribution in order to meet such distribution requirements. In such event,
the Company would seek to borrow the amount of the deficiency or sell assets to
obtain the cash necessary to make distributions to retain its qualification as
a REIT for federal income tax purposes. Based on the Company's pro forma
results of operations for the year ended December 31, 1997, the Company would
have been required to distribute approximately $5.8 million, or approximately
$1.20 per share, in order to maintain its status as a REIT. The Company
expects to maintain its initial distribution rate through the end of 1998
unless actual results of operations, economic conditions or other factors
differ from the pro forma results.
The Company anticipates that Cash Available for Distribution will not
exceed earnings and profits because the Company's non-cash expenses, primarily
depreciation, are not expected to be significant due to the long depreciation
life assigned to the Properties for earnings and profits purposes by the
Company. Distributions by the Company to the extent of its current and
accumulated earnings and profits for federal income tax purposes, other than
capital gain dividends, will be taxable to shareholders as ordinary dividend
income. Any distributions designated by the Company as capital gain dividends
generally will give rise to capital gain for shareholders. Distributions in
excess of the Company's current and accumulated earnings and profits generally
will be treated as a non-taxable reduction of a shareholder's basis in the
Common Shares to the extent thereof, and thereafter as capital gain.
Distributions treated as non-taxable reduction in basis will have the effect of
deferring taxation until the sale of a shareholder's Common Shares or future
distributions in excess of the shareholder's basis in the Common Shares. Based
upon the total estimated Cash Available for Distribution set forth in the table
above, the Company believes that none of its expected annual distributions
would represent a return of capital for federal income tax purposes. See
"Federal Income Tax Considerations--Requirements for Qualification as a Real
Estate Investment Trust--Distribution Requirements." If actual Cash Available
for Distribution or taxable income varies from these amounts, the percentage of
distributions that represents a return of capital may be materially different.
23
<PAGE> 31
CAPITALIZATION
The following table sets forth, as of December 31, 1997, the combined
capitalization of the Properties and on a pro forma basis for the Company after
giving effect to the Offering, the consummation of the Formation Transactions
and the use of the estimated net proceeds from the Offering as described under
"Use of Proceeds." The information set forth in the following table should be
read in conjunction with the combined financial statements and notes thereto
included elsewhere in the Prospectus, as well as "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------
Historical Pro Forma
(Properties) (Company)
-------------- --------------
(in thousands) (in thousands)
<S> <C> <C>
Long Term Debt . . . . . . . . . . . . . . . . . . . . $ 20,208 $ --
--------- ----------
Minority Interest . . . . . . . . . . . . . . . . . . . --- 5,158
----------
Shareholders' Equity:
Owners' Equity 10,807 --
Preferred shares, $0.005 par value, 10,000,000
shares authorized, 0 shares issued and outstanding . -- --
Common shares of beneficial interest, $0.005 par
value, 100,000,000 shares authorized, 4,431,260
shares issued and outstanding . . . . . . . . . . . . -- 22(1)
Additional paid in Capital . . . . . . . . . . . . . . -- 55,000
--------- ----------
Total Owners' Equity . . . . . . . . . . . . . . . . . 10,807 55,022
--------- ----------
Total Capitalization . . . . . . . . . . . . . . . . . $ 31,015 $ 60,180
========= ==========
</TABLE>
- --------------------
(1) Includes the Offering of 4,290,000 Common Shares at the assumed offering
price per share of $15.00 less Offering expenses and underwriting discounts and
commissions. Assumes the Underwriters' over-allotment option to purchase up to
643,500 Common Shares is not exercised. Includes 141,260 Common Shares issued
to certain Trust Managers and executive officers of the Company prior to the
Offering.
24
<PAGE> 32
DILUTION
At February 28, 1998, the pro forma net tangible book value of the
Company immediately prior to the Offering would have been $1,000 or $0.01
(after rounding) per Common Share. After giving effect to the sale by the
Company of the Common Shares offered hereby, the pro forma net tangible book
value (including minority interest) of the Company at December 31, 1997 would
have been $60,179,643 or $12.42 per Common Share. This represents an immediate
decrease in the net tangible book value per Common Share to purchasers of
Common Shares in the Offering. Net tangible book value per Common Share
represents the amount of total tangible assets of the Company less total
liabilities, divided by the number of Common Shares outstanding. The following
table illustrates the foregoing dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per Common Share (1) . . . . . . . . . . . . $ 15.00
Pro forma net tangible book value per share prior to the Offering
attributable to Common Shares issued to certain executive officers and
trust managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.01
Pro forma net tangible book value per share prior to the Offering
attributable to OP Units issued to the Prior Owners . . . . . . . . . . . . 2.23
Increase in net tangible book value per share attributable to the Offering. 10.18
------
Pro Forma net tangible book value after the Offering . . . . . . . . . . . 12.42
------
Dilution per share purchased in the Offering . . . . . . . . . . . . . . . $ 2.58
======
</TABLE>
- --------------------
(1) Before deduction of underwriting discounts and estimated expenses of the
Offering.
The following table sets forth on a pro forma basis the number of Common
Shares to be sold by the Company in the Offering, the total contributions to be
paid to the Company by purchasers of the Common Shares sold in the Offering,
the number of Common Shares previously outstanding or to be issued to or for
the benefit of certain of the Prior Owners and members of Management, the net
book value as of December 31, 1997 of the assets transferred or amount of cash
contributed to the Company and the net book value of the average contribution
or amount of cash contribution per Common Share based on total contributions.
<TABLE>
<CAPTION>
SHARES ISSUED BOOK VALUE OR BOOK VALUE
BY CASH CONTRIBUTIONS TO OR CASH
THE COMPANY THE COMPANY CONTRIBUTION
------------------------------ ----------------------------- PER
SHARES PERCENT AMOUNT PERCENT SHARE
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shares sold to new public investors 4,290,000 88.52% $64,350,000 98.58% $ 15.00
Shares issued in connection with the
transfer of assets of the Properties 415,312 8.57 926,142 1.42 2.23
Shares issued in connection with the
formation of the Company 141,260 2.91 1,000 -- 0.01
------------ ----------- ----------- -----------
Total 4,846,572 100.00% $65,277,142 100.00%
============ =========== =========== ===========
</TABLE>
25
<PAGE> 33
SELECTED FINANCIAL DATA
The following table sets forth (i) selected combined pro forma financial
information for the Company and (ii) selected combined historical financial
information for the Properties. Such information should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
Prospectus.
The pro forma information for the year ended December 31, 1997 assumes
(i) completion of the Offering and the use of the net proceeds therefrom to
purchase the Properties, and (ii) the Company qualified as a REIT and was not
subject to income tax liabilities during 1997. The pro forma balance sheet
data is presented as if the events assumed in the preceding sentence occurred
at December 31, 1997. The pro forma financial information is not necessarily
indicative of what the actual financial position and results of operations of
the Company would have been as of and for the periods indicated, nor does it
purport to represent the financial position and results of operations for
future periods.
26
<PAGE> 34
THE COMPANY (PRO FORMA) AND THE PROPERTIES (COMBINED HISTORICAL)
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PRO FORMA COMBINED HISTORICAL
--------------- -------------------------------------------------
1997 1997 1996 1995
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 9,875,522 $ 9,875,522 $ 9,638,280 $ 4,945,110
Rental - related party 402,720 402,720 158,400 26,400
Other 10,513 10,513 10,125 4,486
--------------- -------------- -------------- --------------
Total revenue 10,288,755 10,288,755 9,806,805 4,975,996
--------------- -------------- -------------- --------------
Expenses:
Property operations 3,385,524 3,385,524 3,404,564 1,821,350
Real estate taxes 712,242 712,242 728,270 289,071
Depreciation and amortization 1,790,913 1,115,261 1,035,291 596,039
Interest-related party 1,778,723 1,119,130 330,124
Property Management Fee 711,026 848,036 370,426
General and administrative 3,857,187 575,182 505,741 344,339
Write-off of tenant improvements 152,063
--------------- -------------- -------------- --------------
Total expenses 9,745,866 8,277,958 7,793,095 3,751,349
--------------- -------------- -------------- --------------
Net income (loss) before minority interest 542,889 $2,010,797 $2,013,710 $1,224,647
============== ============== ==============
Minority interest (1) 46,526
---------------
Net income applicable to common shareholders $ 496,363
===============
Pro forma net income per common share (2) $ 0.11
===============
<CAPTION>
COMBINED HISTORICAL
------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Rental $ 1,595,342 $ 1,628,704
Rental - related party
Other
-------------- -------------
Total revenue 1,595,342 1,628,704
-------------- -------------
Expenses:
Property operations 942,459 838,784
Real estate taxes 177,801 227,261
Depreciation and amortization 283,034 307,017
Interest-related party 253,208 468,403
Property Management Fee 184,511 136,595
General and administrative 43,491 48,365
Write-off of tenant improvements
-------------- -------------
Total expenses 1,884,504 2,026,425
-------------- -------------
Net income (loss) before minority interest $(289,162) $(397,721)
============== =============
Minority interest (1)
Net income applicable to common shareholders
Pro forma net income per common share (2)
</TABLE>
27
<PAGE> 35
<TABLE>
<CAPTION>
DECEMBER 31,
PRO FORMA COMBINED HISTORICAL
--------------- -------------------------------------------------
1997 1997 1996 1995
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Land $ 5,835,260 $ 3,070,875 $ 2,925,875 $ 2,698,516
Buildings, improvements and equipment 55,322,406 28,971,990 26,168,962 21,382,596
Projects under development 299,919 299,919 70,539 27,145
Less accumulated depreciation and amortization (2,547,695) (2,547,695) (1,688,018) (925,857)
--------------- -------------- -------------- --------------
Real estate - net 58,909,890 29,795,089 27,477,358 23,182,400
=============== ============== ============== ==============
Total assets 61,234,794 32,069,993 29,002,614 24,525,515
=============== ============== ============== ==============
Mortgage notes 19,893,980 20,300,000
============== ==============
Total liabilities 1,055,151 21,263,199 20,988,184 3,612,524
=============== ============== ============== ==============
Minority interest (3) 5,157,395
===============
Owners' equity 55,022,248 10,806,794 8,014,430 20,912,991
=============== ============== ============== ==============
Liabilities and Shareholders' Equity 61,234,794 32,069,993 29,002,614 24,525,515
=============== ============== ============== ==============
<CAPTION>
DECEMBER 31,
COMBINED HISTORICAL
------------------------------
1994 1993
-------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Land $ 1,739,996 $ 1,739,996
Buildings, improvements and equipment 10,196,625 7,826,059
Projects under development 663,069 0
Less accumulated depreciation and amortization (329,818) (183,247)
-------------- -------------
Real estate - net 12,269,872 9,382,808
============== =============
Total assets 12,804,310 10,320,384
============== =============
Mortgage notes
Total liabilities 3,320,146 3,158,817
============== =============
Minority interest (3)
Owners' equity 9,484,164 7,161,567
============== =============
Liabilities and Shareholders' Equity 12,804,310 10,320,384
============== =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
PRO FORMA COMBINED HISTORICAL
--------------- ---------------------------------------------------
1997 1997 1996 1995
--------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
OTHER DATA:
Funds from Operations (4) $ 3,847,529 $ 2,521,885 $ 2,815,666 $ 1,785,462
=============== ============== ============== ================
Cash flows from:
Operating activities 2,933,982 2,026,556 1,620,899
============== ============== ================
Investing activities (3,033,377) (1,110,181) (3,173,647)
============== ============== ================
Financing activities 333,959 (1,251,673) 1,869,259
============== ============== ================
Office Properties:
Square footage 1,035,792 1,035,792 1,035,792 822,490
Occupancy 81% 81%
Industrial properties:
Square footage 311,120 311,120 215,120 215,120
Occupancy 100 100
</TABLE>
28
<PAGE> 36
(1) Calculated as 8.57% of the Operating Partnership's net income on a pro
forma basis for the year ended December 31, 1997.
(2) Calculated assuming 4,431,260 Common Shares outstanding for the Company
which represent the shares to be issued in the Offering and the shares to be
issued to Management.
(3) Calculated as 8.57% of the Operating Partnership's equity on a pro forma
basis at December 31, 1997.
(4) Management considers Funds From Operations to be one measure of the
financial performance of an equity REIT that provides a relevant basis for
comparison among REITs and it is presented to assist investors in analyzing the
performance of the Company. "Funds From Operation" is defined as income before
minority interest (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from debt restructuring and sales of
property, non-cash compensation and real estate related depreciation and
amortization. Funds From Operations does not represent cash from operating
activities in accordance with generally accepted accounting principles and is
not necessarily indicative of cash available to fund cash needs. Funds From
Operations should not be considered an alternative to net income as an
indication of the Company's financial performance or as an alternative to cash
flows from operating activities as a measure of liquidity and may be determined
differently from similarly titled measures used by other REITs.
29
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Combined Financial Data and the pro forma and historical Combined Financial
Statements and the related notes included elsewhere in this Prospectus.
OVERVIEW
Upon completion of this Offering and the Formation Transactions, the
Operating Partnership will own all of the Properties, and the Company will own
an approximate 1.0% general partnership interest and an approximate 90.4%
limited partnership interest in the Operating Partnership. The Company is the
sole general partner of the Operating Partnership.
The Company intends to acquire additional high quality office and
industrial properties. See "The Company--Business Strategy." The Company
expects to have access to a variety of debt and equity financing sources to
fund acquisitions, including the Line of Credit and the ability to issue OP
Units. See "Financial Condition and Results of Operations--Pro Forma Liquidity
and Capital Resources of the Company." OP Units represent limited partnership
interests in the Operating Partnership.
The following discussion and analysis of financial condition and results
of operations of the Properties is based upon the historical financial
statements of the Properties and the pro forma consolidated financial
statements of the Company. The historical results of operations of the
Properties are not necessarily indicative of what the Company's results of
operations would have been had the Company actually consummated the Formation
Transactions on the dates indicated, nor do they purport to project future
results of operations. Any significant transactions in future periods could
impact future revenues and expenses.
RESULTS OF OPERATIONS OF THE PROPERTIES
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Rental revenues increased by $482,000, or 4.9%, to $10.3 million for the
year ended December 31, 1997 compared to $9.8 million for the year ended
December 31, 1996. The increase in rental revenues resulted primarily from new
leases and scheduled rent increases from the Office Properties. Rental
revenues from the Industrial Properties remained constant at approximately 100%
occupancy, with tenants paying annual rent increases. Tenant reimbursements
were nominal and remained unchanged at $10,100. Industrial Property tenants
pay the majority of their own expenses directly.
Operation and maintenance expenses decreased by $45,200, or 2.8%, to
$1.59 million for the year ended December 31, 1997, compared to $1.64 million
for the year ended December 31, 1996.
Electricity, water and gas utility expenses increased by $26,100, or
1.5%, to $1.79 million for the year ended December 31, 1997, compared to $1.77
million for the year ended December 31, 1996.
Management fees decreased by $137,000, or 16.2%, to $711,000 for the
year ended December 31, 1997, compared to $848,000 for the year ended December
31, 1996. Of this decrease, $122,000 resulted primarily from the Florida
Sunrise Tower becoming self-managed, replacing third-party management.
General and administrative expenses increased by $69,400, or 13.7%, to
$575,000 for the year ended December 31, 1997, compared to $506,000 for the
year ended December 31, 1996. This increase resulted from the Florida Sunrise
Tower becoming self-managed.
Depreciation and amortization increased by $80,000, or 7.7%, to $1.1
million for the year ended December 31, 1997, compared to $1.04 million for the
year ended December 31, 1996. This increase resulted from the development of
new properties.
30
<PAGE> 38
Interest expense increased by $659,600, or 58.9%, to $1.8 million for
the year ended December 31, 1997, compared to $1.1 million for the year ended
December 31, 1996. This increase results from having outstanding debt for a
full year in 1997 verses part of a year in 1996. The Company will have no
outstanding debt upon completion of the Offering.
As a result of the foregoing, net income decreased by $2,900 to $2.11
million for the year ended December 31, 1997, compared to $2.14 million for the
year ended December 31, 1996. Adjusting net income to eliminate the increase
in interest expense of $659,600 for the year ended December 31, 1997, would
result in an increase in net income of $656,700, or 32.6%.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Rental revenues increased by $4.83 million, or 97.1%, to $9.8 million
for the year ended December 31, 1996 compared to $4.98 million for year ended
December 31, 1995. The increase in rental revenues resulted primarily from the
Claydesta and Escondido properties being in operation for a full year and the
acquisition of the Heritage Center for part of the year ended December 31,
1996. Tenant reimbursements increased to $10,000 for the year ended December
31, 1996, compared to $4,500 for the year ended December 31, 1995. Industrial
Property tenants pay the majority of their own expenses directly.
Operation and maintenance expenses increased by $749,000, or 84.2%, to
$1.64 million for the year ended December 31, 1996, compared to $888,800 for
the year ended December 31, 1995. This increase resulted primarily from the
Claydesta and Escondido properties being in operation for a full year and the
acquisition of the Heritage Center for part of the year.
Electricity, water and gas utility expenses increased by $834,500, or
89.5%, to $1.77 million for the year ended December 31, 1996, compared to
$932,500 for the year ended December 31, 1995. This increase resulted
primarily from the Claydesta and Escondido properties being in operation for a
full year and the acquisition of the Heritage Center for part of the year.
Management fees increased by $477,600, or 128.9%, to $848,000 for the
year ended December 31, 1996, compared to $370,400 for the year ended December
31, 1995. This increase resulted primarily from the outside management of
Claydesta, which was operational for a full year, and the acquisition of the
Heritage Center for part of the year.
General and administrative expenses increased by $161,400, or 46.9%, to
$505,700 for the year ended December 31, 1996, compared to $344,300 for the
year ended December 31, 1995.
Depreciation and amortization increased by $439,300, or 73.7%, to $1.04
million for the year ended December 31, 1996, compared to $596,000 for the year
ended December 31, 1995. This increase resulted primarily from the Claydesta
and Escondido properties being in operation for a full year and the acquisition
of the Heritage Center for part of the year.
Interest expense increased by $0.79 million, or 239%, to $1.12 million
for the year ended December 31, 1996, compared to $0.33 for the year ended
December 31, 1995. The Company will have no outstanding debt upon completion
of the Offering.
As a result of the foregoing, net income increased by $0.79 million, or
64.4%, to $2.01 million for the year ended December 31, 1996, compared to $1.22
million for the year ended December 31, 1995. Adjusting net income to
eliminate the increase in interest expense of $.79 million for the year ended
December 31, 1996, would result in an increase in net income of $1.6 million,
or 128.9%.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY
On a pro forma basis, cash flow from operating activities for the year
ended December 31, 1997, excluding changes in working capital, would have been
$4.45 million. This reflects net income before non-cash charges to income
31
<PAGE> 39
for depreciation and amortization and non-cash executive compensation. Cash
flows used in financing activities would have totaled $5.8 million,
representing distributions (based upon an initial estimated per share and OP
Unit distribution rate of $1.20) to holders of the Common Shares and OP Units.
The Company's principal source of cash to meet its cash requirements,
including distributions to its shareholders, will be its share of the Operating
Partnership's cash flow. The Operating Partnership's sources of revenue will
be cash flow from the Properties. The Company's liquidity, including the
ability to make distributions to its shareholders, will depend upon its, and
the Operating Partnership's, ability to generate sufficient cash flow from
operation of the Properties. See "Risk Factors--Possible Inability to Meet
Distribution Requirements."
Upon completion of the Formation Transactions, it is anticipated that
the Company will have approximately $50,000 in initial working capital ($9.48
million if the Underwriters' over-allotment option, after deducting for
Underwriting discounts and commissions, is exercised). Shortly after
completion of the Formation Transactions, the Company expects to have a Line of
Credit, which will be used primarily for the acquisition of additional
properties. The Company has not, however, finalized negotiations on the Line
of Credit and there can be no assurance that the Company will obtain the Line
of Credit or otherwise have access to sufficient debt and equity financing to
allow it successfully to pursue its acquisition strategy. The Company will have
zero outstanding indebtedness upon completion of the Offering. The Company
believes its initial zero debt, coupled with the Line of Credit and the ability
to issue OP Units, will provide the Company with significant financial
flexibility in pursuing office and industrial property acquisition
opportunities. The Company intends to maintain a capital structure that limits
consolidated indebtedness to no more than 40% of its total market
capitalization.
HISTORICAL CASH FLOW
Historically, the Properties' principal source of Funds From Operations
and capital expenditures has been cash flows from operating activities and
secured debt financing. The Properties had net income for the years ended
December 31, 1997, 1996 and 1995.
Net cash provided by operating activities increased by $907,000, or
44.8%, to $2.9 million for the year ended December 31, 1997, compared to $2.03
million for the year ended December 31, 1996. The increase in net cash
resulted primarily from changes in the working Capital Accounts (accounts
payable of $672,000 and other liabilities of $350,000 offset by receivables of
$379,000) and deferred costs of $330,000. Net cash provided by operating
activities decreased by $53,800 to $1.72 million for the year ended December
31, 1996, compared to $1.78 million for the year ended December 31, 1995. The
decrease in net cash from operating activities resulted primarily from an
increase in Depreciation and Amortization, offset in part by increases in
Deferred Costs, Accounts Payable and Accrued Expenses.
Net cash used in investing activities increased by $1.96 million to
$3.03 million for 1997 compared to net cash used in investing activities of
$1.11 million in 1996. The increase resulted from additions to real estate.
Net cash used in investing activities decreased by $2.32 million to $806,000
for 1997 compared to net cash used in investing activities of $3.17 million in
1996. The decrease resulted from less additions to real estate.
Net cash provided by financing activities increased by $1.59 million to
$334,000 for the year ended December 31, 1997, compared to $1.25 million in net
cash used in financing activities for the year ended December 31, 1996. The
increase resulted primarily from issuance of Notes Payable in the prior year of
$16.4 million, offset by Distribution to owners of $15.7 million and Repayment
of Notes Payable of $2.4 million. Net cash provided by financing activities
decreased by $3.12 million to a $1.25 million deficit for the year ended
December 31, 1996, compared to net cash provided by financing activities of
$1.87 million for the year ended December 31, 1995. The decrease resulted
primarily from a combination of offsetting activities in Distributions to
Owners, Capital Contributions, Payments Received on Notes Receivable-Related
Parties, Proceeds From Issuance of Notes Payable, and Repayment of Notes
Payable.
FUNDS FROM OPERATIONS
The Company believes Funds from Operations, as defined by NAREIT, is an
alternative measure of performance of an equity REIT. Funds from Operations is
defined by NAREIT to mean net income (loss) determined in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation
32
<PAGE> 40
and amortization (other than amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustment for unconsolidated
partnerships and joint ventures. The Company believes that in order to
facilitate a clear understanding of the combined historical operating results
of the Company, Funds from Operations should be examined in conjunction with
net income (loss) as presented in the Combined Financial Statements and
selected financial data included elsewhere in this Prospectus. The Company
computes Funds from Operations in accordance with standards established by the
Board of Governors of NAREIT in its March 1995 White Paper (with the exception
that the Company reports rental revenues on a cash basis for purposes of
computing Funds from Operations, rather than a straight-line GAAP basis, which
the Company believes will result in a more accurate presentation of its actual
operating activities and the Company adjusts for significant non-cash
compensation), which may differ from the methodology for calculating Funds from
Operations used by other certain office and/or industrial REITs, and,
accordingly, may not be comparable to such other REITs. As a result of the
Company's reporting rental revenues on a cash basis, contractual rent increases
will cause reported Funds from Operations to increase. Further, Funds from
Operations does not represent amounts available for Management's discretionary
use because of needed capital replacement or expansion, debt repayment
obligations, or other commitments and uncertainties. Funds from Operations
should not be considered as an alternative to net income (loss), as an
indication of the Company's performance or to cash flows as a measure of
liquidity or the ability to pay dividends or make distributions.
INFLATION
The Company's leases with the majority of the tenants in the Office
Properties require the tenant to pay annual rent increases, obtain their own
personal property and liability insurance, and pay increases in common area
maintenance expenses, which reduce the Company's exposure to increased costs
and operating expenses resulting from inflation.
The Company's leases with the majority of the tenants in the Industrial
Properties require the tenant to pay annual rent increases, operating expenses
excluding real estate taxes (except for one tenant who pays one-half of the
real estate taxes) and property insurance, obtain their own personal property
and liability insurance, and pay increases in common area maintenance expenses,
which reduce the Company's exposure to increased costs and operating expenses
resulting from inflation.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which simplifies the standards for computing and presenting EPS and makes them
comparable to international EPS standards. This statement was effective for
the year ended December 31, 1997. The Company has stated its earnings per share
in accordance with SFAS No. 128.
33
<PAGE> 41
PROPERTIES
GENERAL
Concurrently with the closing of the Offering, the Operating Partnership
will acquire from affiliates of Ralph Englestad four high quality Office
Properties comprising approximately 1.0 million square feet of GLA and four
Industrial Properties comprising approximately 365,115 of GLA. The Office
Properties are located in Coral Springs, Florida and Midland, Texas, and the
Industrial Properties are located in Las Vegas, Nevada and D'Iberville,
Mississippi. The Company has rights of first refusal to purchase other office
and industrial properties owned or under development by affiliates of Mr.
Englestad comprising approximately 2.1 million square feet of GLA located in
Las Vegas, Nevada; Norfolk, Virginia; Kansas City, Missouri and Midland, Texas.
In seeking acquisition opportunities, the Company intends to focus on
high quality office properties and industrial properties in mid-sized markets
that it can acquire at accretive prices. The Company will seek such properties
in markets (i) where the Company believes demand for space in office and
industrial properties is growing, (ii) where the Company believes it will face
less competition for property acquisitions from large, well-capitalized buyers,
(iii) where the Company believes it can add value to properties through
aggressive management, and (iv) where population and employment growth are
strong.
OFFICE PROPERTIES
Florida Sunrise Tower, Coral Springs, Florida. Florida Sunrise Tower is
a ten-story Class-A office building built in 1985. The largest Class-A office
building in Coral Springs, it has approximately 213,000 Square Feet on a 6.0
acre site. As of December 31, 1997, the Property had an average occupancy of
82%. Florida Sunrise Tower has leases with many national credit tenants. The
office building has the following major tenants: Ford Motor Credit Corporation,
State of Florida, Smith Barney, Inc., Unisys Corporation, AF Best Securities
and Tri-M Investments.
Claydesta Plaza, Midland, Texas. Claydesta Plaza is a Class-A office
building built in 1985. It has approximately 570,799 square feet. The office
building is 80% leased and major tenants include Clayton Williams Energy, Oxy,
U.S.A., Norwest Bank Texas, N.A., Smith Barney and Fina Oil and Chemical
Corporation. The building is part of the upscale Claydesta Plaza Complex.
Heritage Center, Midland, Texas. Heritage Center is a Class-A office
building built in 1981. It has approximately 235,000 square feet. The office
building is 81% leased and major tenants include Texaco, Inc., Sproles-Woodard
& Co. and Trend Exploration.
Ten Conoco, Midland, Texas. Ten Conoco is a Class-A office building
built in 1982. It has approximately 175,007 square feet. The office building
is 92% leased and major tenants include Conoco, Diabetes Center of the
Southwest, Inc. and Midland Orthopedic Clinic. The building is part of the
upscale Claydesta Plaza Complex.
The following tables set forth scheduled lease expirations during the
next 10 years for the Office Properties as of December 31, 1997:
34
<PAGE> 42
<TABLE>
<CAPTION>
GROSS LEASABLE AREA ANNUALIZED NET RENT
------------------------- --------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT PERCENT AVERAGE PER
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL AMOUNT OF TOTAL SQ. FT.
- -------- ---------- ------------- ----------- ---------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
FLORIDA SUNRISE 1998 12 17,638 8.7% $291 12.2% $16.52
1999 8 8,427 4.2 127 5.3 15.02
2000 8 67,208 33.3 1,016 42.4 15.11
2001 6 26,960 13.4 367 15.3 13.60
2002 4 10,228 5.1 148 6.2 14.49
2003 1 7,343 3.6 100 4.2 13.55
2004 2 15,781 7.8 221 9.2 14.00
2005 2 6,750 3.3 127 5.3 18.74
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
---- ------- ----- ----- ----- -------
TOTAL 43 160,335 79.5% $2,395 100.0% $14.94
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CLAYDESTA 1998 36 60,782 13.8% $555 16.2% $9.13
1999 11 36,908 8.4 324 9.5 8.78
2000 7 38,206 8.7 368 10.7 9.62
2001 6 17,469 4.0 177 5.2 10.13
2002 6 134,425 30.5 1,243 36.3 9.25
2003 - - - - - -
2004 1 16,073 3.6 36 1.1 2.24
2005 - - - - - -
2006 - - - - - -
2007 1 6,088 1.4 61 1.8 10.00
2008+ 1 31,123 7.1 662 19.3 21.27
---- ------- ----- ----- ----- -------
TOTAL 69 341,074 77.4% $3,426 100.0% $10.04
</TABLE>
35
<PAGE> 43
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
HERITAGE 1998 9 17,724 8.3% $119 6.8% $6.72
1999 4 154,861 72.6 1,618 93.0 10.45
2000 - - - - - -
2001 - - - - - -
2002 1 200 0.1 3 .2 15.00
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
---- --------- ------ ------ ------ ------
TOTAL 14 172,785 81.0% $1,740 100.0% $10.07
CONOCO 1998* 12 144,988 80.4% $1,311 88.2% $9.04
1999 3 15,203 8.4 123 8.3 8.11
2000 2 6,253 3.4 52 3.5 8.25
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
---- --------- ------ ------ ----- ------
TOTAL 17 166,444 92.2% $1,486 100.0% $8.93
</TABLE>
* On March 2, 1998, an existing major tenant signed a new five year lease
with a four year minimum lease payment on 109,506 square feet at a straight
rate of $9.13, reducing the percentage of total building GLA that is scheduled
to expire in 1998 from 80.4% to 17.2%. The Company will not incur any costs
for tenant improvements on such lease. Tenants are no longer charged for
basement storage, reducing GLA by 5,425 square feet.
INDUSTRIAL PROPERTIES
D'Iberville, D'Iberville, Mississippi. D'Iberville, completed in
November 1997, is a single-story warehouse containing a total of 96,000 square
feet on approximately eight acres. The warehouse is constructed of concrete
block poured and has a four phase roof system and eight dock doors. Parking is
provided by 100 surface spaces. Imperial Palace of Mississippi, Inc. and
Imperial Laundry, Inc., which are affiliates of the Prior Owners, occupy 100%
of the building.
Caballo, Las Vegas, Nevada. Caballo is a single-story, 62,000 square
foot industrial office/warehouse building on 2.3 acres built in 1994. The
building is constructed of concrete block poured with a four phase roof system
and five loading dock doors. Parking is provided by 67 surface spaces. The
property is adjacent to McCarren International Airport and Hughes Airport
Center, the premier business park in South Las Vegas. The property has freeway
visibility from the Southern Beltway/Airport Interconnect. The property is
100% leased to Crown Laboratories, Inc., which produces nutritional and dietary
products.
36
<PAGE> 44
Escondido, Las Vegas, Nevada. Escondido is two single-story industrial
warehouses containing 153,120 square feet on 5.8 acres built in 1995. The
building is constructed of concrete block poured and has a four phase roof
system and seven dock doors. Parking is provided by 150 surface spaces. The
property is 100% occupied and major tenants include Imperial Palace, Inc., an
affiliate of the Prior Owners, and WalMart.
Polaris, Las Vegas, Nevada. Polaris, scheduled for completion in March
1998, is a single-story warehouse containing 53,995 square feet on
approximately 2.2 acres. The warehouse is constructed of concrete block poured
with a four phase roof system, one dock door and one drive-in door. The
warehouse is located approximately one mile west of the Las Vegas Strip.
Parking is provided by 56 surface spaces. Imperial Palace Hotel and Casino,
Inc., an affiliate of the Prior Owners, will occupy 100% of the building.
The following tables set forth scheduled lease expirations during the
next 10 years for the Industrial Properties as of December 31, 1997:
<TABLE>
<CAPTION>
GROSS LEASABLE AREA ANNUALIZED NET RENT
------------------------- --------------------------------
LEASE NO. OF LEASES APPROXIMATE PERCENT PERCENT AVERAGE PER
PROPERTY EXPIRATION EXPIRING SQ. FT. OF TOTAL AMOUNT OF TOTAL SQ. FT.
- -------- ---------- ------------- ----------- ---------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CABALLO 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 1 62,000 100.0% $313 100.0% $5.04
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
---- --------- ------ ----- ----- -----
TOTAL 1 62,000 100.0% $313 100.0% $5.04
ESCONDIDO 1998 4 133,320 87.1% $782 86.8% $5.86
1999 1 19,800 12.9 118 13.2 5.98
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 - - - - - -
2008+ - - - - - -
---- --------- ------ ------ ----- -----
TOTAL 5 153,120 100.0% $900 100.0% $5.88
</TABLE>
37
<PAGE> 45
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
D'IBERVILLE 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007 2 96,000 100.0% $576 100.0% $6.00
2008+ - - - - - -
---- --------- ------ ------ ----- -----
TOTAL 2 96,000 100.0% $576 100.0% $6.00
POLARIS 1998 - - - - - -
1999 - - - - - -
2000 - - - - - -
2001 - - - - - -
2002 - - - - - -
2003 - - - - - -
2004 - - - - - -
2005 - - - - - -
2006 - - - - - -
2007* 1 53,995 100.0% $324 100.0% $6.00
2008+ - - - - - -
---- --------- ------ ------ ----- -----
TOTAL 1 53,995 100.0% $324 100.0% $6.00
</TABLE>
* The Polaris lease will be effective upon completion of the building,
anticipated to be May 1998.
38
<PAGE> 46
LEASE EXPIRATIONS
The following table sets forth certain information regarding lease
expirations for the Properties for each of the ten years beginning with 1998,
assuming that none of the tenants exercises renewal options or termination
rights:
<TABLE>
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
-----------------------------------------
% OF TOTAL % OF TOTAL
NUMBER OF SQUARE FOOTAGE PORTFOLIO PORTFOLIO ANN.
LEASES UNDER EXPIRING EXPIRING TOTAL ANN. ANN. BASE RENT/
YEAR EXPIRING LEASES GLA BASE RENT BASE RENT SQ. FT.
---- -------- ----------------- --- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1998* 73 374,452 26.7% $3,058 27.4% $8.17
1999 27 235,199 16.8 2,311 20.7 9.82
2000 17 111,667 8.0 1,435 12.8 12.85
2001 12 44,429 3.2 544 4.9 12.23
2002 11 144,853 10.3 1,394 12.5 9.62
2003 1 7,343 0.5 100 0.9 13.55
2004 4 93,854 6.7 583 5.2 6.21
2005 2 6,750 0.5 127 1.1 18.74
2006 - - - - - -
2007 4 156,083 11.1 961 8.6 6.16
2008+ 1 31,123 2.2 662 5.9 21.27
----- ----------- ----- --------- ------- ------
152 1,205,753 86.0% $11,173 100.0% $ 9.27
</TABLE>
* On March 2, 1998, an existing major tenant signed a new five year lease
with a four year minimum lease payment on 109,506 square feet at a straight-
line rate of $9.13, reducing the percentage of total GLA that is scheduled to
expire in 1998 from 26.7% to 18.6%. The Company will not incur any costs for
tenant improvements on such lease. Tenants are no longer charged for basement
storage, reducing GLA by 5,425 square feet.
MAJOR TENANTS
The following table sets forth certain information as of December 31,
1997, with respect to certain of the Company's major tenants:
39
<PAGE> 47
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
<TABLE>
<CAPTION>
LEASE LEASED GLA
NUMBER OF EXPIRATION RENEWAL AS OF 12/31/97 % OF TOTAL
TENANT LEASES DATE OPTION (SQ. FT.) LEASED GLA
------ ------ ---- ------ --------- ----------
<S> <C> <C> <C> <C> <C>
Texaco, Inc. 1 8/31/99 Y 143,431 11.6%
Conoco, Inc. 3 9/30/03 Y 114,931 9.3
OXY USA, Inc. 1 7/31/02 Y 84,939 6.9
Imperial Palace Hotel & Casino* 4 N 117,355 9.5
Norwest Bank Texas, N.A 1 11/14/28 Y 31,123 2.5
State of Florida 2 1/19/00 Y 32,521 2.6
Imperial Palace of Miss., Inc. 1 9/30/07 N 74,000 6.0
Crown Laboratories, Inc. 1 2/29/04 Y 62,000 5.0
Ford Motor Credit Company 1 7/14/00 Y 22,512 1.8
Smith Barney, Inc. 2 6/30/07 Y 21,869 1.8
5/31/04
Clayton Williams Energy, Inc. 1 2/28/02 Y 27,853 2.3
Fina Oil & Chemical Co. 1 2/28/00 Y 18,489 1.5
Unisys Corporation 1 9/14/01 Y 13,376 1.1
Imperial Laundry, Inc. 1 9/30/07 N 22,000 1.8
-- ------- ----
TOTAL 21 786,399 63.9%
<CAPTION>
ANNUALIZED BASE RENT IN PLACE AT 12/31/97
-------------------------------------------
ANN. % OF TOTAL
TOTAL ANN. BASE RENT/ ANN.
TENANT BASE RENT SQ. FT. BASE RENT
------ --------- ------- ----------
<S> <C> <C> <C>
Texaco, Inc. $ 1,588 $ 11.07 14.2%
Conoco, Inc. 1,094 9.52 9.8
OXY USA, Inc. 773 9.10 6.9
Imperial Palace Hotel & Casino* 704 6.00 6.3
Norwest Bank Texas, N.A 662 21.27 5.9
State of Florida 500 15.38 4.5
Imperial Palace of Miss., Inc. 444 6.00 4.0
Crown Laboratories, Inc. 326 5.25 2.9
Ford Motor Credit Company 314 13.94 2.8
Smith Barney, Inc. 282 12.89 2.5
Clayton Williams Energy, Inc. 258 9.25 2.3
Fina Oil & Chemical Co. 185 10.00 1.7
Unisys Corporation 181 13.52 1.6
Imperial Laundry, Inc. 132 6.00 1.2
-------- -------- ----
TOTAL $ 7,442 $ 9.46 66.6%
</TABLE>
* Includes Polaris lease, which will be effective upon completion of the
building, anticipated to be May 1998.
40
<PAGE> 48
OPERATING DATA
The following table sets forth operating data of certain of the
Properties:
<TABLE>
<CAPTION>
SUNRISE CLAYDESTA HERITAGE TEN CONOCO D'IBERVILLE CABALLO ESCONDIDO
------- --------- ------- ----------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OCCUPANCY RATE
1997 79% 77% 81% 92% 100% 100% 100%
1996 77% * 90% *
1995 * * 88% *
1994 * * * * *
1993 * * * * *
</TABLE>
<TABLE>
<CAPTION>
10% TENANTS Ford Motor Oxy USA, Inc. Texaco, Inc. Conoco, Inc. Imperial Crown Imperial
Credit Corp. Palace of Laboratories, Palace Hotel
Mississippi Inc. and Casino
State of
Florida Imperial
Laundry, Inc.
BUILDING BUSINESS Financial, Oil and Gas, Oil and Gas Oil and Gas Warehouse, Manufacturer
Technological, Financial, Laundry Health Food
Government Technological Products
<S> <C> <C> <C> <C> <C> <C> <C>
RENT PER SQ. FOOT
1997 $14.94 $10.04 $10.07 $8.93 $6.00 $5.04 $5.88
1996 8.05 * 7.81 *
1995 * * 7.85 *
1994 * * * * *
1993 * * * * *
</TABLE>
* Property not owned by Prior Owners.
41
<PAGE> 49
CURRENT AND PROSPECTIVE MARKETS
Upon completion of the Offering and the Formation Transactions, the
Company will have Properties in four primary markets: Coral Springs, Florida;
Las Vegas, Nevada; Gulfport/Biloxi, Mississippi and Midland/Odessa, Texas. The
Company intends to focus its property acquisition efforts in Florida and
Nevada. In addition, the Company will target properties in the Hampton
Roads/Norfolk, Virginia market. Presented below is a discussion of these
markets.
Information contained in this section contains "forward-looking
statements" relating to the future performance of the economies of Coral
Springs (Broward/Dade/Palm Beach Counties), Florida; Midland/Odessa, Texas;
Gulfport/Biloxi, Mississippi; Las Vegas, Nevada and Norfolk/Hampton Roads,
Virginia, and the office and industrial property markets thereof. Actual
results may differ materially from those set forth herein as the result of a
number of factors, including, without limitation, the national and regional
economic climate (which may be adversely affected by business layoffs or
downsizing, industry slowdowns, relocations of business, changing demographics,
infrastructure quality and governmental budgetary constraints) and priorities
and conditions in the national and regional office and industrial property
markets (such as oversupply of or reduced demand for office or industrial
space).
Florida
The Coral Springs (Broward/Dade/Palm Beach Counties) Metropolitan
Market.
Upon completion of the Offering and the Formation Transactions, the
Company will own one high quality Office Property in the Coral Springs (Broward
County) metropolitan market. The Company believes the central and south
Florida markets present excellent opportunities.
Coral Springs is located between Miami and West Palm Beach,
approximately eight miles northwest of Fort Lauderdale. The City of Coral
Springs was incorporated in 1963 and consists of approximately 20 square miles
under a master land use plan. Coral Springs is the northernmost city in
Broward County. Historically, Coral Springs has experienced explosive growth.
In 1970, the city contained an estimated 1,590 persons, expanding to 37,349
persons in 1980 and is estimated to expand to more than 100,000 persons in
1998. By April 1, 1998, Broward County is estimated to have a population of
1,433,000, Dade County 2,079,000 and Palm Beach County 1,026,000, for a total
in the three county metropolitan area of 4,538,000 persons.
Major highways directly serving Coral Springs are the Sawgrass
Expressway, U.S. Highway 441, and Highway 817. The Fort Lauderdale Hollywood
International Airport is located 15 miles southeast of Coral Springs, while the
Palm Beach Airport is situated approximately 30 miles northeast.
The Tri-County (Broward/Dade/Palm Beach) office market comprised 60.2
million square feet as of 1997, with an average vacancy rate for Class A & B
space of approximately 10%. The average full service rental rate for all
classes is $17.71 per square foot, with the average Class A rental rate
slightly over $20.00 per square foot.
The Broward County office market totals 16.2 million square feet, with
an average vacancy rate in 1997 for Class A & B space of approximately 9%. The
average full service rental rate for all classes is $17.30 per square foot,
with the average Class A rental rate over $20.00 per square foot.
The Coral Springs office submarket in Broward County comprises 1.25
million square feet, with an average vacancy rate in 1997 of approximately 7.5%
for Class A & B space, with the vacancy rate expected to decrease in 1998. The
average full service rental rate for all classes is over $15.00, with the rate
expected to increase in 1998.
The Dade County office market totals 31.0 million square feet, with an
average vacancy rate in 1997 for Class A & B space of approximately 12%, which
represents a decrease of 4 to 5% from 1996. The average full service rental
rate for all classes is $18.33 per square foot, with the average Class A rental
rate over $20.00 per square foot. In 1998, overall vacancy rates are expected
to decrease and rental rates are expected to increase.
The Palm Beach County office market totals 13.0 million square feet,
with an average vacancy rate in 1997 for Class A & B space of approximately
10%, which represents a decrease of approximately 3% from 1996. The average
full
42
<PAGE> 50
service rental rate for all classes is $17.50 per square foot, with the average
Class A rental rate approximately $20.00 per square foot. In 1998, overall
vacancy rates are expected to decrease and rental rates are expected to
increase.
The Tri-County (Broward/Dade/Palm Beach) industrial market comprises
over 76.7 million square feet as of 1997, with warehouse/distribution space of
approximately 8%. The average vacancy rate for office/service space is
approximately 8%, down by 2% from 1996. The average gross rental rate for
warehouse/distribution space is approximately $6.00 per square foot and
office/service space is approximately $9.00 per square foot.
The Broward County industrial market totals approximately 19.0 million
square feet, with an average vacancy rate in 1997 for warehouse/distribution
space of approximately 8%, down by 1% from 1996. The average vacancy rate for
office/service space is approximately 10%, a 2% decrease from 1996. The
average gross rental rate for warehouse/distribution space is approximately
$6.00 per square foot and office/service space is approximately $9.00 per
square foot.
The Dade County industrial market totals approximately 49.1 million
square feet, with an average vacancy rate in 1997 for warehouse/distribution
space of approximately 7%. The average vacancy rate for office/service space
is approximately 8%. The average gross rental rate for warehouse/distribution
space is approximately $5.00 per square foot and office/service space is over
$9.00 per square foot.
The Palm Beach County industrial market totals approximately 8.6 million
square feet, with an average vacancy rate in 1997 for warehouse/distribution
space of approximately 7%, down by 3% from 1996. The average vacancy rate for
office/service space is approximately 7%. The average gross rental rate for
warehouse/distribution space is approximately $6.00 per square foot and
office/service space is approximately $8.00 per square foot.
Texas
The Midland/Odessa Metropolitan Market
Upon completion of the Offering and the Formation Transactions, the
Company will own and operate three Office Properties in the Midland/Odessa
Metropolitan Market. The Office Properties are among the highest quality
buildings in Midland and two of the Properties are in the prestigious Claydesta
Plaza Center.
Midland is located in West Texas, approximately 300 miles west of
Dallas/Fort Worth. The following companies have facilities in Midland: Chevron
USA, Inc.; Mobil Exploration & Production U.S.; Burlington Resources; Parker &
Parsley; WalMart; Clayton W. Williams, Jr. Co.; Compressor Systems, Inc.;
Conoco, Inc.; Marathon Oil Company; Meridian Oil; Shell Pipeline; Texaco, Inc.;
Texas Instruments, Inc.; Coca-Cola Bottling; Albertson's; Dillard's; Kmart;
NationsBank; and UNOCAL. Together with its sister city of Odessa, which lies
20 miles to the southwest, Midland forms a single MSA (metropolitan statistical
area) of a quarter million people. The Midland/Odessa MSA has attracted
significant interest from national retailers while the oil industry remains the
dominant industry. Midland County has seen a 9.1% growth in population from
1990 to 1996. The median income is $45,965, compared to $40,386 for the State
of Texas. By 1999, median income is projected to be $53,852.
Mississippi
The Gulfport/Biloxi Metropolitan Market
Upon completion of the Offering and the Formation Transactions, the
Company will own one Industrial Property in the City of D'Iberville
(Gulfport/Biloxi) metropolitan market, Mississippi, which was developed by the
Prior Owner.
The Gulfport/Biloxi metropolitan market has a diverse economy that
includes port cargo, gaming/tourism and manufacturing/shipbuilding. In
addition, the metropolitan area has seen growth in retail facilities and home
building. The gaming industry has attracted major casino operators and has
become one of the largest employers in the metropolitan area. The unemployment
rate has declined from 7.2% in 1992 to 5.0% in 1997.
43
<PAGE> 51
Nevada
The Las Vegas Metropolitan Market
After completion of the Offering and the Formation Transactions, the
Company will own three Industrial Properties in the City of Las Vegas, which
were developed by the Prior Owners.
Las Vegas is located in Clark County, Nevada. The county comprises
approximately 7,910 square miles of which the Las Vegas Metropolitan Area
contains 550 square miles. The Las Vegas Metropolitan area is one of the
fastest growing areas in the United States, with a 40% growth rate from 1990 to
1995 and a current population estimated at 1,138,000.
Las Vegas has four major highways that connect the city with such
metropolitan areas as Los Angeles, California, Phoenix, Arizona and Reno,
Nevada. Las Vegas is positioned at the hub of an eleven-state region having a
population base of 42 million residents. Air transportation is provided by
McCarren International Airport and McCarren International Airport's Air Cargo
Center.
Nevada has no personal income, corporate income, inheritance, estate or
gift taxes, which the Company believes will promote growth in the Las Vegas
Metropolitan Area. The Nevada Freeport Law exempts all personal property from
state taxation that is in transit through the state while it is being stored,
assembled, or processed for ultimate use in another state. This law has
created a surge in demand for industrial space.
The Las Vegas industrial market, generally divided into ten submarkets
with more than 1,200 industrial buildings in excess of 5,000 square feet, had
grown to approximately 48.2 million square feet through the third quarter of
1997. The market has expanded dramatically since 1985, when it comprised
approximately 17.0 million square feet of space. Net absorption through the
first three quarters of 1997 totaled approximately 3 million square feet. The
average vacancy rate for the entire Las Vegas industrial market is
approximately 9%. Average triple net lease rates through the third quarter of
1997 range from $0.32 to $0.65 per square foot per month, depending on
submarket and size of space. The Company believes that the market will
continue to expand to include large national and international tenants desiring
to take advantage of the Nevada business climate.
The Las Vegas office market as of the end of 1997 had an existing office
space inventory base totaling approximately 15 million square feet, with a
vacancy factor for all classes of approximately 12% in 403 properties. The
high quality office space vacancy factor was approximately 6%. The weighted
average lease rate for vacant space in the market totaled approximately $1.74
per square foot, up from $1.69 per square foot at the end of the first quarter
of 1997. Net absorption for 1997 totaled approximately 1 million square feet.
SIOR, which publishes an annual survey of office and industrial markets,
forecasts growth in rents in Las Vegas of 11% to 15% for all industrial
property types (i.e., warehouse, manufacturing, and office/showroom). Side
absorption and construction are both forecasted to increase approximately 20%
over 1993 to meet tenant demand. According to SIOR, the Las Vegas industrial
market for spaces of less than 5,000 square feet has a moderate shortage, and
the market for spaces of 5,000 square feet or greater has a substantial
shortage.
Virginia
The Norfolk/Hampton Roads Metropolitan Market
The Norfolk/Hampton Roads metropolitan market has a diverse economy
known for its shipbuilding facilities, military complexes, and natural harbor.
The metropolitan market is now emerging as a center for high technology. The
area has two national laboratories in the Thomas Jefferson National Accelerator
Facility (Jefferson Lab) and the NASA Langley Research Center. Over 15% of
workers in the metropolitan market are employed by the Department of Defense.
Key companies in the market are Advanced Technologies, Canon Virginia Inc.,
Siemens Automotive and O & K Escalator. In addition, many telecommunications
centers, such as MCI, Harris Select and United Parcel, have expanded into the
market. Old Dominion University is one of the seven higher learning
institutions in the region. Hampton Roads
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has grown to a population base of approximately 1,540,000 persons and is now
the country's 27th largest metropolitan area.
The office market in Hampton Roads has rebounded from the conditions of
the early 1990s, with an average office rental rate of $17.50 per square foot.
The vacancy rate declined to 9.6% in 1997. The industrial market saw a modest
decline in vacancy rates in 1997, which in turn has pushed gross annual rents
to more than $5.00 per square foot in some larger industrial properties,
compared to $3.00 a year ago. The demand for small warehouses with 5,000 to
15,000 square feet is especially strong, with annual rents surpassing $6.00 per
square foot.
CAPITAL EXPENDITURES
Capital expenditures may fluctuate in any given period depending upon
the nature, extent and timing of improvements required to be made in the
Company's Property portfolio. The Company plans to continue an active
preventive maintenance program in order to minimize required capital
improvements. In addition, capital improvement costs are recoverable from
tenants in many instances.
Tenant improvement and leasing costs also may fluctuate in any given
period depending upon factors such as the term of the lease, the type of lease
(renewal or replacement tenant), the involvement of external leasing agents and
overall competitive market conditions. Management believes that, as its markets
continue to recover, the level of tenant improvement and leasing costs incurred
by the Company will decrease on a per square foot basis.
The Company anticipates capital expenditures and tenant improvement
reserves of $0.20 per square foot for the Office Properties and $0.08 per
square foot for the Industrial Properties. The Company will make appropriate
adjustments to these reserves commensurate with changes in its portfolio.
COMPETITION
The Company will compete with other owners and developers of office and
industrial properties, some of whom may have greater resources and more
experience than the Company. An increase in the number of competitive
properties in any particular market in which the Properties are located could
have a material adverse effect on the Company's ability to lease space at the
Properties or any newly-acquired property and could adversely affect the rental
rates at the properties owned by the Company. The Company believes, however,
that its acquisition and internal growth strategies will enable it to compete
effectively in its target markets. The Company also believes that (i) proceeds
from the Offering, (ii) the Line of Credit, (iii) its ability to acquire
properties by issuing OP Units, and (iv) its ability as a public company to
raise funds through the capital markets during periods when conventional
sources of financing may be unavailable or prohibitively expensive will provide
the Company with competitive advantages.
INSURANCE
The Company will carry comprehensive liability, fire, extended coverage
and rental loss insurance covering all of the Properties, with policy
specifications and insured limits that the Company believes are adequate and
appropriate under the circumstances. There are, however, certain types of
losses that are not generally insured because they are either uninsurable or
not economically feasible to insure. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its capital invested in
any such Property, as well as the anticipated future revenues from such
Property and, in the case of recourse debt, the Company would remain obligated
for any mortgage debt, if any, or other financial obligations related to such
Property. Any such loss would adversely affect the Company. Moreover, as a
general partner of the Operating Partnership, the Company will generally be
liable for any of the Operating Partnership's unsatisfied obligations other
than non-recourse obligations. The Company believes that the Properties will
be adequately insured; however, no assurance can be given that material losses
in excess of insurance proceeds will not occur in the future.
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<PAGE> 53
RENTAL REVENUES
Substantially all of the income from the Properties consists of rent
received under long-term leases. In addition, certain leases provide for
payment from tenants of a pro rata share of the real estate taxes, insurance,
utilities and common area maintenance of the property.
LEGAL PROCEEDINGS
The Company is not presently involved in any litigation nor, to its
knowledge, is any litigation threatened against the Company or any of the
Properties, except for routine litigation arising in the ordinary course of
business that, in the opinion of the executive officers of the Company, would
not have a material adverse effect on the Company.
REGULATIONS
General. The Properties, as well as any other properties that the
Company may acquire in the future, are subject to various federal, state and
local laws, ordinances and regulations, including, among other things, zoning
regulations, land use controls, and environmental controls relating to air and
water quality, noise pollution and indirect environmental impacts such as
increased motor vehicle activity. The Company believes that each Property,
when acquired, will have all permits and approvals necessary under current law.
Insurance. The Company believes that the Properties are covered by
adequate property and liability insurance provided by reputable, commercially
rated companies and with commercially reasonable deductibles and limits.
Management expects to maintain such insurance coverage and to obtain similar
coverage with respect to any additional properties acquired by the Company in
the future. The Company has obtained or will obtain title insurance relating to
the Properties in an aggregate amount that the Company believes to be adequate.
See "Risk Factors--Uninsured Loss and Condemnation."
Americans With Disabilities Act. The Properties are subject to the ADA.
The ADA has separate compliance requirements for "public accommodations" and
"commercial facilities" but generally requires that all public facilities be
made accessible to people with disabilities. The requirements became effective
in 1992. Compliance with the ADA requirements could require removal of access
barriers and other capital improvements at the Properties. Noncompliance could
result in the imposition of fines by the U.S. government or an award of damages
to private litigants. The Company believes that the Properties are
substantially in compliance with these requirements.
ENVIRONMENTAL MATTERS
Under CERCLA, as well as similar state and local laws, owners and
operators of property, both past and present, may be held financially
responsible for the investigation and, if appropriate, the remediation of
hazardous substance releases into the environment. Other parties who arranged
for the disposition of hazardous substances or transported hazardous substances
for disposition also may be held liable. Liability under CERCLA and similar
laws is strict, joint and several and, in many instances, may be imposed
without regard to the party's culpability concerning the hazardous substance
release. Potentially responsible parties may be liable to one another, the
government and, in some instances, third parties.
Costs recoverable under CERCLA must be consistent with the National
Contingency Plan, which establishes a procedure whereby contaminated properties
are identified and, if necessary, remediated in a priority fashion. If
conducted in the appropriate manner, these costs will include, but may not be
limited to, funds expended to investigate and to remediate hazardous substance
releases. Costs associated with any such environmental activity may be
substantial.
All of the Properties, except those currently under development, have
been subject to Phase I environmental audits. See "Risk Factors--Environmental
Matters." The purpose of the Phase I environmental assessments was to
determine if past or present uses of, or conditions on, the Properties or
properties in the vicinity of the Properties, indicate the potential for soil
or groundwater contamination or if other environmental conditions might affect
future uses of the Properties or liability associated therewith. The Phase I
environmental assessments generally included the following: visual inspection
of the property, review of available land use records, interviews with property
representatives; examination of information from environmental agencies; and a
walk-through survey for suspected asbestos and
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<PAGE> 54
lead-containing materials. As may be required by any applicable federal, state
or local laws, the Company has addressed or will address any recommendations
contained in the Phase I environmental assessment reports.
None of the reports from the Phase I environmental assessments or
subsequent investigations has revealed, nor is the Company aware of, any
environmental condition that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations. The Company
believes that the Properties are in compliance in all material respects with
applicable federal, state and local laws, ordinances and regulations concerning
the presence of hazardous substances. It is possible, however, that the Phase
I environmental assessments and subsequent investigations did not reveal all
environmental liability concerns or that there are material environmental
liabilities of which the Company is unaware. Accordingly, no assurance can be
given that: (i) future laws, ordinances or regulations will not require or
impose any material expenditures or liabilities in connection with the
environmental conditions by or on the Company or the Properties: (ii) the
current environmental condition of each Property will not be affected by
tenants and occupants of such Property, by the condition of properties in the
vicinity of such Property or by third parties unrelated to the Company; and
(iii) prior owners or prior or current tenants of a Property did not create any
material adverse environmental condition of which the Company is unaware.
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<PAGE> 55
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's current policies with
respect to investments, financings, affiliate transactions and certain other
activities. The Company's policies with respect to these activities have been
determined by Management and may be amended or revised from time to time at the
discretion of the Board of Trust Managers without a vote of the shareholders of
the Company. No assurance can be given that the Company's investment
objectives will be attained or that the value of the Company will not decrease.
ACQUISITION STRATEGY
In seeking acquisition opportunities, the Company intends to focus on
high quality office properties and industrial properties that it can acquire at
accretive prices. The Company will seek such properties in markets (i) where
the Company believes demand for space in office and industrial properties is
growing, (ii) where the Company believes it will face less competition for
property acquisitions from large, well-capitalized buyers, (iii) where the
Company believes it can add value to properties through aggressive management,
and (iv) where population and employment growth are strong.
The Company believes that its most attractive acquisition opportunities
will be individual properties and mid-sized portfolios. The Company may
consider acquisition opportunities that have operating, legal, tax or financial
complexities that may make such transactions less attractive to other potential
buyers. In implementing its acquisition strategy, the Company plans to utilize
the extensive network of contacts developed by its executive officers among
real estate brokers, financial institutions and investors.
The Company intends to focus on its target markets. The Company may,
however, acquire properties in other markets when potential returns justify
such acquisitions. The Company may also develop its own properties when
potential returns justify development. The Company intends to acquire
properties that are currently accretive, as well as accretive in the long-term.
INTERNAL GROWTH STRATEGY
The Company's internal growth strategy is to increase cash flow at its
properties by (i) contracting for periodic rent increases and renewing or
replacing existing leases with new leases at higher rental rates, (ii) making
regular capital improvements and conducting preventive maintenance, (iii)
providing quality service, and (iv) aggressively managing its operating
expenses. The Company believes that providing quality service, performing
regular capital improvements and conducting preventive maintenance will enable
it to secure higher rental rates. The Company believes that providing a level
of service that exceeds that of its competitors and maintaining the aesthetic
attractiveness and functional efficiency of its properties with capital
improvements and active preventive maintenance will enhance its ability to
attract and retain tenants. The Company believes that capital improvements and
preventive maintenance will also enhance the market value of its properties.
The Company will aggressively manage operating expenses by, among other things,
expanding the management functions conducted in-house by the Company.
The Company intends to implement its internal growth strategy by
providing operating autonomy and performance-based incentives to operating
personnel. The Company will adopt an incentive share plan to compensate,
attract and retain quality personnel.
INVESTMENT OBJECTIVES
The Company's investment objective is to provide quarterly cash
distributions and to achieve long-term capital appreciation through increases
in cash flow and the value of the Company. The Company will seek to accomplish
these objectives through the ownership of the Properties, improved operations
of the Properties, acquisitions of additional properties, lease-up of unleased
space in existing Properties and in any acquired properties and, where
appropriate, renovations and expansions of these properties. The key criteria
for new investments will be the opportunity for growth in per share Funds From
Operations.
The Company may purchase properties for long-term investment, expand and
improve the Properties, or sell such Properties, in whole or in part, when
circumstances warrant. The Company may also participate with other entities
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in property ownership through joint ventures or other types of co-ownership.
The Company may acquire properties subject to existing mortgage financing and
other indebtedness, which may have priority over the equity interest of the
Company. While the Company emphasizes equity real estate investments, it may,
in its discretion, invest in mortgages, stock of other real estate investment
trusts and other real estate interests. Mortgage investments may include
participating or convertible mortgages. The Company has not previously
invested in mortgages or stock of other real estate investment trusts, and
currently has no plans to do so.
SALE OF PROPERTY
The Company does not currently intend to dispose of any of the
Properties, although it reserves the right to do so if, based upon Management's
periodic review of the Company's Properties, Management proposes the
disposition of a Property or Properties and the Trust Managers determine that
such action would be in the best interests of the Company. For a description
of certain tax consequences arising from the disposition of a Property, see
"Federal Income Tax Consequences--Federal Taxation of the Company--Dispositions
of Assets."
FINANCING POLICY
Management is in negotiations with several banks to provide the Line of
Credit to facilitate the Company's ability to acquire properties. The Company
intends to maintain a capital structure with a debt to Total Market
Capitalization of no more than approximately 50%. Immediately after the
Offering, the Company will have no debt. See "Policies with Respect to Certain
Activities -- Financing Policy."
The Company believes its use of debt and equity financing will create a
flexible capital structure that will enable the Company to pursue its
acquisition and internal growth strategies and maximize returns to its
shareholders.
WORKING CAPITAL RESERVES
The Operating Partnership will maintain working capital reserves in
amounts that the Trust Managers determine to be adequate to meet normal
contingencies in connection with the operation of the Operating Partnership's
business and investments.
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers (other than the
Operating Partnership) for the purpose of exercising control over such issuers,
(ii) underwrite securities of other issuers or (iii) actively trade in loans or
other investments.
The Company may make investments other than as previously described,
although it does not currently intend to do so. The Company has not made any
loans to third parties since its formation, although it may in the future make
loans to such persons and entities, including, without limitation, its
officers, and to joint ventures in which it participates. Since formation, the
Company has not engaged in trading, underwriting or agency distribution or sale
of securities of other issuers, and the Company does not intend to do so in the
future. The Company's policies with respect to such activities may be reviewed
and modified from time to time by the Trust Managers without the vote of the
shareholders.
At all times, the Company intends to make investments in such a manner
as to be consistent with the requirements of the Code to qualify as a REIT
unless, because of circumstances or changes in the Code (or in the Treasury
Regulations), the Trust Managers, with the consent of a majority of the
Company's shareholders, determine to revoke the Company's REIT election.
The Company may, under certain circumstances, purchase its Common
Shares in the open market or otherwise. The Trust Managers have no present
intention of causing the Company to repurchase any of the Common Shares, and
any such action would be taken only in conformity with applicable federal and
state laws and the requirements for qualifying as a REIT under the Code and the
Treasury Regulations.
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<PAGE> 57
MANAGEMENT
TRUST MANAGERS AND OFFICERS
The Company's Trust Managers are elected annually by the shareholders
and remain in office until their successors, if any, are elected. The Trust
Managers are responsible for appointing the executive officers of the Company
and for approving borrowings by the Company. The Trust Managers are also
responsible for the adoption from time to time of such investment policies and
limitations as they may deem appropriate in light of the Company's investment
objectives.
The following table sets forth the names and positions of the Trust Managers
and officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- --------------------- --- ------------------------
<S> <C> <C>
Merker, David R. 55 Chairman of the Board, Chief
Executive Officer and Trust
Manager
Lorentzen, Arthur F., Jr. 48 President, Chief Operating
Officer, and Trust Manager
[TO BE ADDED] Chief Financial Officer,
Secretary, and Treasurer
Laffey, Stephen P. 36 Independent Trust Manager
Cook, John F. 70 Independent Trust Manager
Fishman, Edward M. 51 Independent Trust Manager
</TABLE>
DAVID R. MERKER is Chairman of the Board and Chief Executive Officer of
the Company. Since 1988, Mr. Merker has served as Vice President and Chief
Operating Officer of affiliates of Ralph Engelstad that are selling or
contributing the Properties to the Operating Partnership in connection with the
Offering. In such capacity, Mr. Merker has been responsible for all aspects of
operations, including acquisitions, development, marketing and management.
From 1959 to 1987, Mr. Merker worked for C.I.T. Corporation, Westinghouse
Credit Corporation, and Southwest Funding Corporation. These companies
specialized in finance of industrial and real estate related transactions. Mr.
Merker is a native of Kansas City, Missouri and attended De La Salle Military
Academy.
ARTHUR F. LORENTZEN, JR. is President and Chief Operating Officer of the
Company. Since September 1995, Mr. Lorentzen has worked as an independent real
estate consultant. From April 1994 to September 1995, Mr. Lorentzen worked
with Koll-Dove Global Disposition Services with responsibility for real estate
advisory and consulting services. For 24 years prior to April 1994, Mr.
Lorentzen served in various capacities with the FDIC, where he served as
Associate Director (Asset Disposition), Division of Depositor and Asset
Services, formerly the Division of Liquidation, from 1988 to 1993. Mr.
Lorentzen was responsible for the disposition of more than $80 billion in
assets from failed financial institutions. In his last year with FDIC, Mr.
Lorentzen served as Regional Director, leading a $7.7 billion, 6 office, 2,000
employee region. Mr. Lorentzen holds a B.S. degree in Accounting from
Northeastern University, Boston, Massachusetts and a commercial banking
graduate degree from the Pacific Coast Banking School, University of
Washington, Seattle, Washington. Mr. Lorentzen is also a Commissioned Bank
Examiner.
[CHIEF FINANCIAL OFFICER TO BE ADDED]
STEPHEN P. LAFFEY serves as a Trust Manager of the Company. Mr. Laffey
currently serves as President of Equity Capital Markets at Morgan Keegan &
Company, Inc. He joined Morgan Keegan & Company, Inc. in June 1992 to work
with CEO and founder Allen Morgan in international sales. In January 1996, Mr.
Laffey was appointed Director of Equity Research and was named Institutional
Sales Manager in May and Equity Trading Manager in September 1996. After
graduating Magna Cum Laude from Bowdoin College in 1984, Mr. Laffey received an
MBA from Harvard Business School in 1986.
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JOHN F. COOK serves as a Trust Manager of the Company. Mr. Cook served
as President, Chairman, and Chief Executive Officer of Valley Bank and Trust
Co., Grand Forks, North Dakota, from 1972 until his retirement in 1995. Mr.
Cook has served as an officer and board member of many civic, educational,
charitable and fraternal organizations.
EDWARD M. FISHMAN serves as a Trust Manager of the Company. Mr. Fishman
has been President and a shareholder of the law firm Fishman, Jones, Walsh &
Marsh, P.C. in Dallas, Texas, since its founding in 1986, and practices
primarily in the areas of real estate and general corporate planning. Mr.
Fishman graduated Cum Laude from Bowdoin College and received his Juris
Doctorate degree from Columbia University Law School.
STAGGERED BOARD
The Company's Board of Trust Managers is divided into three classes,
with staggered three-year terms. The initial terms of Messrs. Merker and
Lorentzen will expire at the Company's 2000 Annual Shareholder Meeting; of
Messrs. Laffey and Fishman at the Company's 1999 Annual Shareholder Meeting;
and of Mr. Cook at the Company's 1998 Annual Shareholder Meeting. Upon the
expiration of the initial terms, persons will be nominated as Trust Managers
for three-year terms.
COMMITTEES OF THE TRUST MANAGERS
Audit Committee. Promptly following the Offering, the Board of Trust
Managers will establish an Audit Committee that will consist of three
independent Trust Managers. The Audit Committee will make recommendations
concerning the engagement of independent public accountants, review with the
independent public accountants the plans and results of the audit engagement,
approve professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the Company's
internal accounting controls.
Compensation Committee. Promptly following the Offering, the Trust
Managers will establish a Compensation Committee to determine compensation,
including bonuses, for the Company's executive officers. The Company expects
that the Compensation Committee will consist of the majority of the independent
Trust Managers.
COMPENSATION OF TRUST MANAGERS
The Company intends to pay the independent Trust Managers fees for their
services as Trust Managers. Trust Managers will receive annual compensation of
$10,000 plus a fee of $1,000 for attendance at each of the Trust Manager, but
not committee, meetings. Trust Managers who are not independent Trust Managers
will not be paid any trust manager fees.
TRUST MANAGERS AND OFFICERS INSURANCE
The Company will have trust manager and officer liability insurance.
Trust manager and officer liability insurance insures (i) the Trust Managers
and officers of the Company from any claim arising out of an alleged wrongful
act by such persons while acting as Trust Managers and officers of the Company,
and (ii) the Company to the extent that it has indemnified the trust managers
and officers for such loss.
INDEMNIFICATION
The Company has entered into indemnification agreements requiring the
Company to indemnify its officers and Trust Managers and advance expenses to
such persons, to the maximum extent permitted by Texas law. In addition,
pursuant to the Underwriting Agreement, the officers, Trust Managers and
controlling persons of the Company will be indemnified against certain
liabilities by the Underwriters, and the Underwriters will be indemnified
against certain liabilities by the Company. See "Underwriting."
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<PAGE> 59
EXECUTIVE COMPENSATION
To date, the Company has not paid any compensation to its executive
officers. The following table sets forth the estimated 1998 compensation, on
an annualized basis, expected to be paid to the Chairman of the Board and Chief
Executive Officer; President and Chief Operating Officer; and Chief Financial
Officer, Secretary and Treasurer of the Company. In addition, the Company's
executive officers will be eligible to receive cash bonuses at the discretion
of the Compensation Committee under the Plan, as described below. Incentive
compensation will be determined by the Compensation Committee.
<TABLE>
<CAPTION>
PRINCIPAL CAPACITIES ANNUAL
NAME IN WHICH SERVED COMPENSATION (1)
- ---- --------------- ----------------
<S> <C> <C>
Merker, David R. Chairman of the Board and $200,000
Chief Executive Officer
Lorentzen, Arthur F. Jr. President and Chief
Operating Officer $200,000
____________________ Chief Financial Officer, $_______
Secretary and Treasurer
</TABLE>
- ---------------
(1) Amounts are annualized projections for the year ending December 31, 1998.
INCENTIVE SHARE PLAN
The Company has established the Plan to enable Trust Managers, executive
officers and employees of the Company (and including any operating partnership
of the Company) to participate in the ownership of the Company. The Plan is
designed to attract and retain executive officers, Trust Managers and other key
employees of the Company (collectively, the "Plan Participants") and to provide
incentives to such persons to maximize the Company's growth and Cash Available
for Distribution. The Plan provides for awards to the Plan Participants of
both non-qualified stock options and incentive stock options.
The number of Common Shares reserved for issuance under the Plan is
equal to 5% of the Company's equity securities. A committee appointed by the
Board of Trust Managers will administer the Plan and will determine the Plan
Participants, the number of shares to be granted, the number of options and
shares covered thereby to be granted and the terms and conditions of grant
and/or option exercise. The committee is also authorized to adopt, amend and
rescind rules relating to the administration of the Plan.
Non-qualified stock options will provide for the right to purchase
Common Shares at a specified price, which will not be less than the fair market
value on the date of the grant and usually will become exercisable for up to
ten years after the grant date.
Incentive stock options, if granted, will be designed to comply with the
provisions of the Code and will be subject to restrictions contained in the
Code, including exercise prices equal to at least 100% of the fair market value
of the Common Shares on the grant date and a ten-year restriction on their
term.
EMPLOYMENT CONTRACTS
Each of Messrs. Merker and Lorentzen will receive annual cash
compensation and a bonus pursuant to three-year employment contracts, renewable
from year to year thereafter, with the Company. The base salary provided for in
such contracts may be increased after one year at the discretion of the
Compensation Committee. The employment agreements provide that Messrs. Merker
and Lorentzen will be eligible for a cash bonus to be set by the Compensation
Committee, but the contracts do not provide for a minimum bonus. The
agreements provide for Messrs. Merker and Lorentzen to receive severance
payments upon the death, disability, termination or resignation of such
executive, unless
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<PAGE> 60
such executive resigns without "good cause" or unless the Company terminates
such executive with "good reason" (i.e. as a result of gross negligence,
willful misconduct, fraud or a material breach of the employment agreement).
Each such executive will have "good cause" to terminate his employment with the
Company in the event of any material reduction in his compensation or benefits,
material breach or material default by the Company under his employment
agreement or following a change in control of the Company. The severance
payments due to Messrs. Merker and Lorentzen would be equal to base
compensation plus bonus at the most recent annual amount for two years.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 9.20 of the Texas REIT Act, subject to procedures and
limitations stated therein, allows the Company to indemnify any person who was,
is or is threatened to be made a named defendant or respondent in a proceeding
because the person is or was a trust manager or officer against judgments,
penalties (including excise and similar taxes), fines, settlements and
reasonable expenses actually incurred by the person in connection with the
proceeding. The Company is required by Section 9.20 of the Texas REIT Act to
indemnify a trust manager or officer against reasonable expenses incurred by
him in connection with a proceeding in which he is a named defendant or
respondent because he is or was a trust manager or officer if he has been
wholly successful, on the merits or otherwise, in the defense of the
proceeding. Under the Texas REIT Act, trust managers and officers are not
entitled to indemnification if (i) the trust manager or officer is found liable
to the real estate investment trust or is found liable on the basis that
personal benefit was improperly received and (ii) the trust manager or officer
was found liable for willful or intentional misconduct in the performance of
his duty to the real estate investment trust. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any provision of the
Charter of Trust, bylaws, agreements or otherwise. In addition, the Company
has, pursuant to Section 15.10 of the Texas REIT Act, provided in its Charter
that, to the fullest extent permitted by applicable law, a trust manager of the
Company shall not be liable for any act, omission, loss, damage or expense
arising from the performance of his duty under the Texas REIT Act, except for
his own willful misfeasance or gross negligence.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the formation of the Company and prior to the
Offering, certain executive officers and Trust Managers of the Company acquired
a total of 141,260 Common Shares for a purchase price of $0.007 per share. Mr.
Merker purchased 89,258 Common Shares. Arthur F. Lorentzen, Jr. purchased
48,430 Common Shares. Edward M. Fishman purchased 3,572 Common Shares. Each
of these shareholders will experience an immediate accretion in value upon
completion of the Offering. Prior to the Offering, Mr. Merker served as an
executive officer, and managed the real estate operations, of the Prior Owners
and certain affiliates of the Prior Owners.
In connection with the Formation Transactions, affiliates of Ralph
Englestad shall receive 415,312 OP Units redeemable for cash or Common Shares
on a one-for-one basis, at the option of the Company. The Company has rights
of first refusal to purchase other office and industrial properties owned or
under development by affiliates of Mr. Englestad comprising approximately 2.1
million square feet of GLA. In addition, space in certain of the Properties is
leased to entities that are affiliated with Ralph Engelstad.
Edward M. Fishman is a Trust Manager of the Company. Mr. Fishman is
also the President and a shareholder of the law firm of Fishman, Jones, Walsh &
Marsh, P.C., which renders legal services to the Company from time to time.
Stephen P. Laffey is a Trust Manager of the Company. Mr. Laffey also
serves as President of Equity Capital Markets for Morgan Keegan & Company,
Inc., which is acting as an Underwriter in the Offering.
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Partnership Agreement, which is
filed as an Exhibit to the Registration Statement of which this Prospectus is
part.
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. Pursuant to the
Partnership Agreement, the Company, as the sole general partner of the
Operating Partnership, shall have the right and power to make all decisions and
take any and every action with respect to the property, the business and
affairs of the Operating Partnership and shall have all the rights, power and
authority generally conferred by law, or necessary, advisable or consistent
with accomplishing the purposes of the Partnership. All such decisions or
actions made or taken by the general partner shall be binding upon all of the
partners and the Operating Partnership.
AMENDMENT
The consent of limited partners holding 67% of the limited partnership
interests in the Operating Partnership is required with respect to certain
amendments to the Partnership Agreement, including amendments which (i) modify
the allocation of profits, losses, or distributions among the partners, (ii)
modify the issuance and conversion of OP Units, and (iii) modify the provisions
related to the transfer of OP units. The written consent of the general
partner and any partner adversely affected is required to amend the Partnership
Agreement so as to enlarge the obligation of any partner to make capital
contributions to the Operating Partnership. The written consent of all the
partners is required to amend these amendment limitations.
TRANSFERABILITY OF OP UNITS
The Partnership Agreement generally provides that the general partner
may not transfer its interest in the Operating Partnership without the consent
of a majority-in-interest of the limited partners. The limited partners
generally may not transfer their OP Units without the consent of the general
partner.
REDEMPTION OF OP UNITS
Pursuant to the Partnership Agreement, the limited partners will receive
rights which will enable them to request the redemption of their OP Units for
cash or, at the option of the Company, Common Shares ("Redemption Rights").
The Redemption Rights shall be exercisable beginning one year after the OP
Units are issued to the limited partner. A limited partner shall not have the
right to exercise its redemption right for Common Shares if (i) the Company
would, as a result thereof, no longer qualify (or it would be likely that the
Company no longer would qualify) as a REIT under the Code; or (ii) such
exchange would constitute or be likely to constitute a violation of applicable
federal or state securities laws or would violate any applicable provisions of
the organizational documents of the Company (including without limitation any
restrictions on ownership of securities of the Company set forth in the
Declaration of Trust or Bylaws of the Company).
CAPITAL CONTRIBUTIONS
The Company will contribute substantially all of the net proceeds of the
Offering to the Operating Partnership in exchange for an approximate 90.4%
limited partnership interest in the Operating Partnership. The Company will
also hold a 1.0% general partnership interest in the Operating Partnership.
The Prior Owners will contribute two Properties (or interests therein) to the
Operating Partnership in exchange for cash and an aggregate of 415,312 OP
Units, representing an approximate 8.6% limited partnership interest in the
Operating Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds, any partner may, but is not required to,
make an additional capital contribution to the Operating Partnership.
Furthermore, the general partner may loan to the Operating Partnership the
proceeds of any loan obtained or debt securities issued by the Company so long
as the terms of such loan to the Operating Partnership are substantially
equivalent to the loan obtained or debt securities issued by the Company. If
any partner so contributes additional capital to the Operating Partnership, the
partner will receive additional OP Units
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and its percentage interests in the Operating Partnership will be increased on
a proportionate basis based upon the amount of such additional capital
contributions and the value of the Operating Partnership at the time of such
contributions. Conversely, the percentage interests of the other partners will
be decreased on a proportionate basis in the event of additional capital
contributions by the Company. Under the Partnership Agreement, the Company
generally is obligated to contribute the proceeds of a securities offering as
additional capital to the Operating Partnership in exchange for additional OP
Units.
PARTNERS
Unless the general partner determines in good faith that the Operating
Partnership will not be classified as a publicly traded partnership for federal
income tax purposes, the Partnership shall not at any time have more than 100
partners.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2097, or until sooner dissolved pursuant to the terms of the
Partnership Agreement.
TAX MATTERS
Pursuant to the Partnership Agreement, the general partner will be the
tax matters partner of the Operating Partnership and, as such, will have
authority to handle tax audits and to make tax elections under the Code on
behalf of the Operating Partnership.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Shares and OP Units immediately following
the consummation of the Offering and the Formation Transactions by (i) persons
who will own beneficially more than 5% of the outstanding Common Shares or OP
Units; (ii) each Trust Manager and the executive officers of the Company; and
(iii) the Trust Managers and executive officers as a group. Unless otherwise
indicated, each person named in the table has sole voting and investment power
with respect to all of the Common Shares and OP Units shown as beneficially
owned by such person:
<TABLE>
<CAPTION>
Percentage
Number of Percent of Interest in
Common Shares Common Shares Number of Operating
Name of Beneficial Owner Beneficially Owned Outstanding OP Units (2) Partnership
- ------------------------ ------------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
David R. Merker 89,258 1.8%
Arthur F. Lorentzen, Jr. 48,430 1.0%
Edward M. Fishman 3,572 *
Bayview Investments, Inc.(1) 184,906 3.8%
Imperial Warehouse, Inc. (1) 92,107 1.9%
Polaris Warehouse, Inc. (1) 138,299 2.9%
Trust Managers/Officers 141,260 2.9%
as a Group (3 persons)
</TABLE>
- --------------------
* Less than 1%.
(1) Prior Owners
(2) OP Units (other than those owned by the Company) may be redeemed one year
after the completion of the Offering for Common Shares on a one-for-one basis
or, at the option of the Company, for cash.
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<PAGE> 65
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The Charter authorizes the Company to issue up to 100,000,000 Common
Shares at $0.005 par value per share, 10,000,000 Preferred Shares at $0.005 par
value per share, and such other types of classes of shares of beneficial
interest as the Trust Managers may create and authorize from time to time.
Upon completion of the Offering, 4,846,572 Common Shares will be issued and
outstanding (including 415,312 Common Shares issuable upon the conversion of OP
Units). Not included in the issued and outstanding Common Shares are 643,500
Common Shares which may be purchased by the Underwriters to cover
over-allotments. After the Offering, no Preferred Shares will be issued or
outstanding.
Common Shares of Beneficial Interest. Each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of Trust Managers. There is no cumulative
voting in the election of Trust Managers, which means that the holders of a
majority of the outstanding Common Shares can elect all of the Trust Managers
then standing for election. Holders of Common Shares are entitled to such
distributions as may be declared from time to time by the Trust Managers out of
funds legally available therefor. See "Distribution Policy."
Holders of Common Shares have no conversion, redemption or preemptive
rights to subscribe for any securities of the Company. All outstanding Common
Shares will be fully paid and nonassessable. In the event of any liquidation,
dissolution or winding-up of the affairs of the Company, holders of Common
Shares will be entitled to share ratably in the assets of the Company remaining
after provision for payment of liabilities to creditors and payment of
liquidation preferences to holders of Preferred Shares, if any.
Preferred Shares. The Trust Managers are authorized (without any
further action by the shareholders) to issue Preferred Shares in one or more
series and to fix the voting rights, liquidation preferences, dividend rates,
conversion rights, redemption rights and terms, including sinking fund
provisions, and certain other rights and preferences. Satisfaction of any
dividend preferences of outstanding Preferred Shares would reduce the amount of
funds available for the payment of dividends on the Common Shares. Also,
holders of Preferred Shares would normally be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding up of the
Company before any payment is made to the holders of Common Shares. In
addition, under certain circumstances, the issuance of Preferred Shares may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the
Company's securities, or the removal of incumbent Management. The Trust
Managers, without shareholder approval, may issue Preferred Shares with voting
and conversion rights which could adversely affect the holders of Common
Shares.
The Preferred Shares and the variety of characteristics available to it
offers the Company flexibility in financing and acquisition transactions. An
issuance of such shares could dilute the book value or adversely affect the
relative voting power of the Common Shares. The issuance of such shares could
be used to discourage unsolicited business combinations, for example, by
providing for class voting rights which would enable the holder of Preferred
Shares to block such a transaction. Although the Trust Managers are required
when issuing such securities to act based on their best judgment as to the best
interests of the shareholders of the Company, the Trust Managers could act in a
manner which would discourage or prevent a transaction which some shareholders
might believe is in the Company's best interests or in which shareholders could
or would receive a premium for their shares over the market price. Any
Preferred Shares issued would be subject to restrictions similar to that set
forth under "Restrictions on Transfer" below.
The Company has no present intention to issue any Preferred Shares or
any other new class of securities.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, (i) not more than
50% in value of its outstanding Trust Shares may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year; (ii) the Trust Shares
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months or during a proportionate part of a shorter taxable
year; and (iii) certain percentages of the Company's gross income must be from
particular activities. See "Federal Income Tax
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Consequences." Because the Trust Managers believe it is essential for the
Company to continue to qualify as a REIT, the Charter, subject to certain
exceptions, provides that no holder other than any person approved by the Trust
Managers, at their option and in their discretion (provided that such approval
will not result in the termination of the status of the Company as a REIT), may
own, or be deemed to own by virtue of the attribution provisions of the Code,
more than 9.8% of the number or value (in either case as determined in good
faith by the Trust Managers) of the total outstanding Trust Shares. The Trust
Managers may waive the Ownership Limit if evidence satisfactory to the Trust
Managers and the Company's tax counsel is presented that such ownership will
not then or in the future jeopardize the Company's status as a REIT. As a
condition of such waiver, the intended transferee must give written notice to
the Company of the proposed transfer and must furnish such opinions of counsel,
affidavits, undertakings, agreements and information as may be required by the
Trust Managers no later than the fifteenth day prior to any transfer which, if
consummated, would result in the intended transferee owning Trust Shares in
excess of the Ownership Limit. The foregoing restrictions on transferability
and ownership will not apply if the Trust Managers determine that it is no
longer in the best interests of the Company to attempt to qualify, or to
continue to qualify, as a REIT. Any transfer or issuance of Trust Shares or
any security convertible into Trust Shares that would (i) create a direct or
indirect ownership of Trust Shares in excess of the Ownership Limit; (ii) with
respect to transfers only, result in the Trust Shares being owned by fewer than
100 persons; (iii) result in the Company being "closely held" within the
meaning of Section 856(h) of the Code; (iv) result in the Company owning 10% or
more of the ownership interests in any tenant or subtenant; or (v) result in
the Company's disqualification as a REIT, shall be null and void, and the
intended transferee will acquire no rights to the Trust Shares. The Company's
Charter provides that any or all Excess Securities that are proposed to be
transferred pursuant to a transfer which, if consummated, would result in the
intended transferee owning Trust Shares in excess of the Ownership Limit, or
would otherwise jeopardize the REIT status of the Company, shall be deemed to
be transferred to a trust ("Beneficial Trust") to be held for the exclusive
benefit of a charitable beneficiary. The trustee of the Beneficial Trust, as
record holder of the Excess Securities, shall be entitled to receive all
dividends and distributions as may be declared by the Board of Trust Managers
on such Excess Securities for the benefit of the charitable beneficiary. The
trustee of the Beneficial Trust may select a transferee to whom the Excess
Securities may be sold without exceeding the Ownership Limit, and the intended
transferee (the transfer of the Excess Securities to whom would violate the
Ownership Limit) shall receive such sale proceeds form the trustee of the
Beneficial Trust. In addition, the Company shall have the right to purchase
any Excess Securities for a period of ninety days after the transfer that
created such Excess Securities. Any dividend or distribution paid to a
proposed transferee on Excess Securities prior to the discovery by the Company
that such Excess Securities have been transferred in violation of the
provisions of the Charter shall be repaid to the Company. If the foregoing
transfer restrictions are determined to be void or invalid by virtue of any
legal decision, statute, rule or regulation, then the intended transferee of
any Excess Securities may be deemed, at the option of the Company, to have
acted as an agent on behalf of the Company in acquiring such Excess Securities
and to hold such Excess Securities on behalf of the Company.
PREEMPTIVE RIGHTS AND CUMULATIVE VOTING
The Common Shares issued by the Company shall have no preemptive rights,
and no shareholder may cumulate their votes in the election of Trust Managers.
The prohibition on cumulative voting is meant to insure that the vote of
holders of a majority of outstanding voting Common Shares elects Trust
Managers, rather than a plurality of the voting Common Shares voted in the
election of Trust Managers.
SHARE DISTRIBUTIONS
The Charter allows for the payment of Common Share distributions to be
paid in Common Shares of the Company, cash and property. The general effect of
the provision is to afford the Company greater flexibility in the means by
which it pays distributions to its shareholders. When making a determination
of whether to declare a distribution, the Trust Managers shall make the
determination consistent with their fiduciary duties as Trust Managers.
However, no distribution shall be declared or paid when the Company is unable
to pay its debts as they become due in the usual course of its business, or
when the payment of such distribution would result in the Company being unable
to pay its debts as they become due in the usual course of business.
REDEMPTION OF COMPANY SHARES
The Company may purchase or acquire its own shares, subject to the
limitations of the Texas REIT Act. The Texas REIT Act allows REITs formed
thereunder to redeem or purchase shares unless (i) after giving effect thereto,
the Company would be insolvent, or (ii) the amount paid therefor exceeds the
surplus of the Company. The term "surplus"
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is defined by reference to the Texas Business Corporation Act as the excess of
the net assets of a corporation over its stated capital. Moreover, if the net
assets of the Company are not less than the proposed distribution, the Company
may make a distribution to purchase or redeem any of its shares if the purchase
or redemption is made, for example, to effect the purchase or redemption of
redeemable shares in accordance with the Texas REIT Act that requires rights of
redemption to be enumerated by a Texas REIT in its operative declaration of
trust. The Charter provision affords the Company a means of distributing
assets of the Company by acquiring outstanding Common Shares, as well as the
ability to redeem shares in transactions in which such a redemption may be
beneficial to the Company and its shareholders.
VOTING RIGHTS
Each shareholder shall be entitled at each meeting of shareholders to
one vote on each matter submitted to a vote at such meeting for each share
having voting rights registered in his name on the books of the Company at the
time of the closing of the share transfer books (or at the record date) for
such meeting. When a quorum is present at any meeting (and not withstanding
the subsequent withdrawal of enough shareholders to leave less than a quorum
present), the votes of a majority of the Common Shares entitled to vote,
present in person or by proxy, shall decide any matter submitted to such
meeting, unless the matter is one upon which by law or by express provision of
the Charter or of the Bylaws the vote of a greater number is required, in which
case the vote of such greater number shall govern and control the decision of
such matter. In determining the number of Common Shares entitled to vote,
shares abstaining from voting or not voted on a matter (including elections)
will not be treated as entitled to vote.
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CERTAIN PROVISIONS OF THE TEXAS REIT ACT AND OF
THE COMPANY'S CHARTER AND BYLAWS
The following paragraphs summarize certain provisions of Texas law and
the Charter and Bylaws. The summary does not purport to be complete and
reference is made to Texas law and the Charter and Bylaws, copies of which are
exhibits to the registration statement of which this Prospectus is a part.
BOARD OF TRUST MANAGERS
The Bylaws provide that the number of Trust Managers of the Company may
not be fewer than three nor more than ten. In accordance with the terms of the
Charter and Bylaws, the Board of Trust Managers currently consists of five
persons. The Board of Trust Managers is divided into three classes, as nearly
equal in number as possible, so that the term of office of the first class
shall expire at the first annual meeting of shareholders, the term of office of
the second class shall expire at the second annual meeting of shareholders, and
the term of office of the third class shall expire at the third annual meeting
of shareholders. At each annual meeting of shareholders commencing with the
first annual meeting held after such division into classes, Trust Managers
elected to succeed those Trust Managers whose terms then expire shall be
elected for a three year term of office, serving until their successors are
duly elected and qualified or until their death, resignation or removal.
The Bylaws also provide that any vacancy (including a vacancy created by
an increase in the number of Trust Managers) may be filled by a majority of the
remaining Trust Managers or by a vote of the holders of at least a majority of
the outstanding Common Shares at an annual or special meeting of the
shareholders. In addition, the Bylaws also require the affirmative vote of a
majority of the outstanding Common Shares to elect new Trust Managers. Any
Trust Manager that has been previously elected as a Trust Manager by the
shareholders who is not re-elected by such majority vote at a subsequent annual
meeting shall nevertheless remain in office until his or her successor is
elected and qualified.
REMOVAL OF TRUST MANAGERS
The Charter and Bylaws require the affirmative vote of two-thirds of the
outstanding Common Shares to remove a Trust Manager, with or without cause.
BUSINESS COMBINATIONS
The Charter requires that except in certain circumstances, a Business
Combination (as defined below) between the Company and a Related Person (as
defined below) must be approved by the affirmative vote of the holders of 80%
of the outstanding Common Shares of the Company, including the affirmative vote
of the holders of not less than 50% of the outstanding Common Shares not owned
by the Related Person. However, the 50% voting requirement referred to is not
applicable if the Business Combination is approved by the affirmative vote of
the holders of not less than 80% of the outstanding Common Shares.
The Charter provides that a "Business Combination" is: (i) any merger or
consolidation, if and to the extent permitted by law, of the Company or a
subsidiary, with or into a Related Person; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of more than 35% of the book
value of the total assets of the Company and its subsidiaries (taken as a
whole) as of the end of the fiscal year ending prior to the time the
determination is being made, to or with a Related Person; (iii) the issuance or
transfer by the Company or a subsidiary (other than by way of a pro rata
distribution to all shareholders) of any securities of the Company or a
subsidiary of the Company to a Related Person; (iv) any reclassification of
securities (including any reverse share split) or recapitalization by the
Company, the effect of which would be to increase the voting power of the
Related Person; (v) the adoption of any plan or proposal for the liquidation or
dissolution of the Company proposed by or on behalf of a Related Person which
involves any transfer of assets, or any other transaction, in which the Related
Person has any direct or indirect interest (except proportionally as a
shareholder); (vi) any series or combination of transactions having, directly
or indirectly, the same or substantially the same effect as any of the
foregoing; and (vii) and agreement, contract or other arrangement providing,
directly or indirectly, for any of the foregoing.
A "Related Person" generally is defined in the Charter to include any
individual, corporation, partnership or other person and the affiliates and
associates of any such individual, corporation, partnership or other person
which
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individually or together is the beneficial owner in the aggregate of more than
50% of the outstanding Common Shares of the Company.
The 80% and 50% voting requirements outlined above will not apply,
however, if: (i) the Trust Managers by a vote of not less than 80% of the Trust
Managers then holding office (a) have expressly approved in advance the
acquisition of Shares of the Company that caused the Related Person to become a
Related Person or (b) have expressly approved the Business Combination prior to
the date on which the Related Person involved in the Business Combination shall
have become a Related Person; or (ii) the Business Combination is solely
between the Company and another entity, 100% of the voting stock, shares or
comparable interests of which is owned directly or indirectly by the Company;
or (iii) the Business Combination is proposed to be consummated within one
year of the consummation of a Fair Tender Offer (as defined in the Charter) by
the Related Person in which Business Combination the cash or fair market value
of the property, securities or other consideration to be received per share by
all remaining holders of Common Shares of the Company in the Business
Combination is not less than the price offered in the Fair Tender Offer; or
(iv) all of the following conditions shall have been met: (a) the Business
Combination is a merger or consolidation, the consummation of which is proposed
to take place within one year of the date of the transaction pursuant to which
such person became a Related Person and the cash or fair market value of the
property, securities or other consideration to be received per share by all
remaining holders of Common Shares of the Company in the Business Combination
is not less than the highest per-share price, with appropriate adjustments for
recapitalizations and for share splits and share dividends, paid by the Related
Person in acquiring any of its holdings of the Company's Common Shares (a "Fair
Price"); (b) the consideration to be received by such holders is either cash
or, if the Related Person shall have acquired the majority of its holdings of
the Company's Common Shares for a form of consideration other than cash, in the
same form of consideration with which the Related Person acquired such
majority; (c) after such person has become a Related Person and prior to
consummation of such Business Combination: (1) there shall have been no
reduction in the annual rate of dividends, if any, paid per share on the
Company's Common Shares (adjusted as appropriate for recapitalizations and for
share splits, reverse share splits and share dividends), except any reduction
in such rate that is made proportionately with any decline in the Company's net
income for the period for which such dividends are declared and except as
approved by a majority of the Trust Managers continuing in office, and (2) such
Related Person shall not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans, advances, guarantees,
pledges or other financial assistance or any tax credits or other tax
advantages provided by the Company prior to the consummation of such Business
Combination (other than in connection with financing a Fair Tender Offer); and
(d) a proxy statement that conforms in all respects with the provisions of the
Exchange Act and the rules and regulations thereunder shall be mailed to
holders of the Company's Common Shares at least 30 days prior to the
consummation of the Business Combination for the purpose of soliciting
shareholder approval of the Business Combination; or (v) the Rights (as
hereinafter defined) shall have become exercisable.
If a person has become a Related Person and within one year after the
date of the transaction pursuant to which the Related Person became a Related
Person (the "Acquisition Date"), (x) a Business Combination meeting all of the
requirements of clause (iv) above regarding the applicability of the 80% voting
requirement shall not have been consummated, and (y) a Fair Tender Offer shall
not have been consummated, and (z) the Company shall not have been dissolved
and liquidated, then, in such event the beneficial owner of each Common Share
(not including shares beneficially owned by the Related Person) (each such
beneficial owner being hereinafter referred to as a "Holder") shall have the
right (individually a "Right" and collectively the "Rights"), which may be
exercised subject to certain conditions, commencing at the opening of business
on the one-year anniversary date of the Acquisition Date and continuing for a
period of 90 days thereafter (the "Exercise Period"), subject to certain
extensions, to sell to the Company on the terms set forth herein one Share upon
exercise of such Right. At 5:00 P.M., Dallas, Texas time, on the last day of
the Exercise Period, each Right not exercised shall become void, all rights in
respect thereof shall cease as of such time and the Certificates shall no
longer represent Rights.
SHAREHOLDER LIABILITY
Both the Texas REIT Act and the Bylaws provide that shareholders of the
Company shall not be liable personally or individually in any manner whatsoever
for any debt, act, omission or obligation incurred by the Company or Trust
Managers and shall be under no obligation to the Company or its creditors with
respect to his or her shares other than the obligation to pay to the Company
the full amount of the consideration for which his shares were issued. The
Trust Managers intend to conduct the operations of the Company in such a way as
to avoid, as far as practicable, the ultimate liability of the shareholders of
the Company.
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TRUST MANAGER LIABILITY
Pursuant to the Texas REIT Act, the Charter provides that Trust Managers
shall be indemnified against all judgments, penalties (including excise and
similar taxes), fines, amounts paid in settlement and reasonable expenses
actually incurred by the Trust Manager in connection with any Proceeding (as
defined in the Charter) in which he or she was, is or is threatened to be named
defendant or respondent, or in which he or she was or is a witness without
being named a defendant or respondent, by reason, in whole or in part, of his
or her serving or having served, or having been nominated or designated to
serve, as a Trust Manager, to the fullest extent that indemnification is
permitted by Texas law in accordance with the Bylaws. This indemnification
shall not be deemed exclusive of, or to preclude, any other rights to which
those seeking indemnification may at any time be entitled under the Bylaws, any
law, agreement or vote of the shareholders or disinterested Trust Managers.
SPECIAL SHAREHOLDER MEETINGS
The Charter allows for the holders of 5% of the Common Shares to call a
special meeting. This provision was specifically adopted in light of the
Company's Excess Shares provisions, which generally limit the ownership of
Company Shares by persons to 9.8% of the Company's outstanding Common Shares.
The Texas REIT Act provides that holders of 10% of the Shares entitled to vote
may call a special meeting of a REIT formed under the Texas REIT Act unless the
declaration of trust for such REIT provides for a number of shares greater than
or less than 10% of the shares entitled to vote. Without this provision in the
Charter, the Texas REIT Act might prevent special meetings from ever being
called by shareholders of the Company in light of the Excess Shares provision,
which itself is necessary to protect the Company's continued qualification as a
REIT.
TERMINATION OF THE COMPANY
The Charter permits the termination of the Company and the
discontinuation of the operations of the Company by the affirmative vote of the
holders of a majority of the outstanding voting Common Shares.
AMENDMENT OF CHARTER AND BYLAWS
The Charter may be amended from time to time by the affirmative vote of
the holders of at least two-thirds of the outstanding Common Shares. However,
certain provisions of the Charter that relate to Business Combinations, number
and removal of Trust Managers, certain investments and share ownership
requirements may not be amended or repealed, and provisions inconsistent
therewith may not be adopted, except by the affirmative vote of the holders of
at least 80% of the outstanding Common Shares. The Bylaws may be amended by an
affirmative vote of a majority of the Trust Managers. The Bylaws may also be
amended, to the extent not inconsistent with the Texas REIT Act and the Charter
and specified in the notice of the meeting, by an affirmative vote of
two-thirds of the outstanding Common Shares for Section 2.5 (business at the
annual meeting), 3.3 (election of Trust Managers), 3.4 (nomination of Trust
Managers), 3.6 (removal of Trust Managers) and 3.7 (vacancies on the Board) or
Article IX (amendment of Bylaws), and a majority vote for all other provisions.
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SHARES AVAILABLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 4,431,260
Common Shares outstanding (assuming the Underwriters' over-allotment option to
purchase an additional 643,500 Common Shares is not exercised), of which
141,260 Common Shares will constitute "restricted" securities as that term is
defined in Rule 144 under the Securities Act. The 141,260 restricted Common
Shares are subject to 180 day lock-up agreements with the Underwriters. Such
Common Shares will become eligible for sale in the public market upon
registration or from time to time upon the expiration of the applicable holding
period under Rule 144. The remaining Common Shares issued in the Offering will
be freely tradable by persons other than "affiliates" of the Company without
restriction under the Securities Act.
Affiliates of Ralph Engelstad will be issued 415,312 OP Units in
connection with the Formation Transactions. Such Common Shares may be redeemed
for cash or, at the option of the Company, Common Shares on a one-for-one basis
beginning one year after the date of the Offering. The Company intends to
register the Common Shares that may be issued upon redemption of OP Units.
Accordingly, the Common Shares received by Mr. Englestad upon redemption of his
OP Units likely will be freely tradeable after they are redeemed for Common
Shares.
In general, under Rule 144 as currently in effect, if one year has
elapsed since the later of the date of acquisition of restricted securities
from the Company or from any "affiliate" of the Company, as that term is
defined under the Securities Act, the acquiror or subsequent holder thereof is
entitled to sell within any three-month period a number of Common Shares that
does not exceed the greater of 1% of the then-outstanding Common Shares or the
average weekly trading volume of the Common Shares on all exchanges and/or
reported through the automated quotation system of a registered securities
association during the four calendar weeks preceding the date on which notice
of the sale is filed with the Commission. Sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about the Company. If one year has
elapsed since the date of acquisition of restricted securities from the Company
or from any "affiliate" of the Company, and the acquiror or subsequent holder
thereof is deemed not to have been an affiliate of the Company at any time
during the three months preceding a sale, such person would be entitled to sell
such Common Shares in the public market under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements of Rule 144.
In addition, Rule 144A as currently in effect, in general, permits
unlimited resales of certain restricted securities of any issuer provided that
the purchaser is an institution that owns and invests on a discretionary basis
at least $100 million in securities or is a registered broker-dealer that owns
and invests at least $10 million in securities. Rule 144A allows the existing
shareholders of the Company to sell their Common Shares to such institutions
and registered broker-dealers without regard to any volume or other
restrictions. Unlike Rule 144, restricted securities sold under Rule 144A to
non-affiliates do not lose their status as "restricted securities."
Prior to the date of this Prospectus, there has been no public market
for the Common Shares. Trading of the Common Shares is expected to commence
following the completion of the Offering. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price prevailing from time to time. Sales
of substantial amounts of Common Shares or the perception that such sales may
occur could adversely affect prevailing market prices of the Common Shares.
The Trust Managers and certain executive officers of the Company and the
Company have agreed not to offer, sell, contract to sell or otherwise dispose
of any Common Shares for a period of 180 days from the closing of the Offering,
without the prior consent of Morgan Keegan & Company, Inc.
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FEDERAL INCOME TAX CONSEQUENCES
The Company intends to elect to be taxed as a REIT for federal income
tax purposes commencing with its tax year ended December 31, 1998. The
following general summary of the federal tax rules governing a REIT and its
shareholders is based on the Code, judicial decisions, Treasury Regulations,
rulings and other administrative interpretations, all of which are subject to
change. Because many provisions of the Code have been revised substantially by
recent legislation, very few judicial decisions, Treasury Regulations, rulings
or other administrative pronouncements have been issued interpreting many of
the revisions to the Code. Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. has
acted as counsel to the Company and has reviewed this summary and has rendered
an opinion that the description of the law and the legal conclusions contained
herein are correct in all material respects, and the discussion hereunder
fairly summarizes the federal income tax considerations that are likely to be
material to the Company and a holder of a Common Share. However, Investors
should be aware that Congress continues to consider new tax bills.
Accordingly, no assurance can be given that future legislation, administrative
regulations, rulings, or interpretations or court decisions will not alter
significantly the tax consequences described below or that such changes or
decisions will not be retroactive. The Company has not requested, nor does it
presently intend to request, a ruling from the Service with respect to any of
the matters discussed below. Because the provisions governing REITs are
complex, no attempt is made in the following discussion to discuss in detail
all of the possible tax consequences applicable to the Company or its
shareholders, including state tax laws. ACCORDINGLY, THIS DISCUSSION IS NOT
INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING AND EACH PROSPECTIVE INVESTOR
IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR WITH SPECIFIC REFERENCE TO HIS
OR HER OWN TAX SITUATION BEFORE PURCHASING COMMON SHARES.
GENERAL
In general, as long as the Company qualifies as a REIT, it will not be
subject to federal income tax on income or capital gain that it distributes in
a timely manner to shareholders. The Company will, however, be subject to tax
at normal corporate rates upon any taxable income or capital gain not
distributed.
In addition to the opinion filed as an exhibit to the registration
statement of which this Prospectus is a part, the Company and the Underwriters
will, prior to the closing of this offering, obtain an opinion of Liddell,
Sapp, Zivley, Hill & LaBoon, L.L.P., counsel to the Company, that the Company
has been organized in conformity with the requirements for qualification as a
REIT for federal income tax purposes and that its anticipated investments and
its plan of operation (which plan includes complying with all of the REIT
requirements described in this Prospectus) will enable it to continue to so
qualify. Unlike a tax ruling (which will not be sought), an opinion of
counsel, which is based on counsel's review and analysis of existing law, is
not binding on the Service. Accordingly, no assurance can be given that the
Service would not successfully challenge the tax status of the Company as a
real estate investment trust. It must be emphasized that this opinion is based
on various assumptions and is conditioned upon certain representations made by
the Company as to factual matters. In addition, this opinion is based upon the
factual representations of the Company concerning its business and properties
as set forth in this Prospectus and assumes that the actions described in this
Prospectus are completed in a timely fashion. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet, through actual
annual operating results, distribution levels, diversity of stock ownership,
and the various other qualification tests imposed under the Code discussed
below, the results of which will not be reviewed by Liddell, Sapp, Zivley, Hill
& LaBoon, L.L.P. Accordingly, no assurance can be given that the actual
results of the Company's operations for any particular taxable year will
satisfy such requirements. See "Federal Income Tax Consequences--Failure to
Qualify."
If the Service successfully challenged the tax status of the Company as
a REIT, all of the Company's income and capital gains would become subject to
federal income tax (including any applicable alternative minimum tax) at
corporate rates. Consequently, the amount of after tax earnings available for
distribution to shareholders would decrease substantially. In addition, "net
capital gain" (net long-term capital gain in excess of net short-term capital
loss) distributed by the Company would be taxed as ordinary dividends to
shareholders rather than as long-term capital gain. The Company would not be
eligible to re-elect REIT status under the Code until the fifth taxable year
beginning after the taxable year in which it failed so to qualify, unless its
failure to qualify was due to reasonable cause and not to willful neglect and
certain other requirements were satisfied. Also, immediately prior to
requalification as a REIT under the Code, the Company could be taxed on any
unrealized appreciation in its assets.
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Qualification of the Company as a REIT for federal tax purposes will
depend on its continuing to meet various requirements governing, among other
things, the ownership of its Common Shares, the nature of its assets, the
sources of its income, and the amount of its distributions to shareholders.
Although the Trust Managers intend to cause the Company to continue to operate
in a manner that will enable it to comply with such requirements, there can be
no certainty that such intention will be realized. In addition, because the
relevant laws may change, compliance with one or more of the REIT requirements
may be impossible or impractical.
Notwithstanding its qualification as a REIT, the Company may also be
subject to taxation in certain other circumstances. If the Company should fail
to satisfy the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the gross income
attributable to the greater of the amount by which the Company fails the 75% or
the 95% test, multiplied by a fraction intended to reflect the Company's
profitability. The Company will also be subject to a tax of 100% on net income
from "prohibited transactions" (which are, in general, certain sales or other
dispositions of property held primarily for sale to customers in the ordinary
course of business, other than foreclosure property) and, if the Company has
(i) net income from the sale or other disposition of "foreclosure property"
(generally, property acquired by reason of a default on indebtedness or a
lease) which is held primarily for sale to customers in the ordinary course of
business or (ii) other non-qualifying income from foreclosure property, it will
be subject to tax on such income from foreclosure property at the highest
corporate rate. In addition, if the Company should fail to distribute during
each calendar year at least the sum of (i) 85% of its REIT ordinary income for
such year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior years, the Company would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. The Company may also be subject to the corporate
"alternative minimum tax," on its undistributed items of tax preference, as
well as tax in certain situations not presently contemplated. If the Company
acquires any asset from a C corporation (i.e., generally a corporation subject
to full corporate-level tax) in certain transactions in which the basis of the
asset in the hands of the Company is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and the
Company recognizes gain on the disposition of such asset during the ten-year
period beginning on the date on which such asset was acquired by the Company
(the "Recognition Period"), then, pursuant to Treasury Regulations that have
not yet been issued and to the extent of the excess of the fair market value of
the asset as of the date of the Company's acquisition over the Company's
adjusted basis in such asset on such date, such gain will be subject to tax at
the highest regular corporate rate. The results described above with respect
to assets acquired from a C corporation assume that the Company will make an
election pursuant to Internal Revenue Service Notice 88-19 and that the
availability or nature of such election is not modified as proposed in
President Clinton's 1999 federal budget proposal. See "Proposed Tax
Legislation."
REQUIREMENTS FOR QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST
Although the Company must meet certain qualifications to be a real
estate investment trust under the Texas REIT Act (see "Certain Provisions of
the Texas REIT Act and of the Company's Charter and Bylaws"), the Company must
independently qualify as a REIT under the Code. To qualify as a REIT under the
Code, the Company must properly elect to be a real estate investment trust and
must satisfy various requirements in each taxable year. Generally, for federal
income tax purposes an entity will qualify as a REIT if it is a corporation,
trust or association (i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) which would be
taxable as a domestic corporation, but for Sections 856 through 859 of the
Code; (iv) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (v) the beneficial ownership of
which is held by 100 or more persons; (vi) during the last half of each taxable
year not more than 50% in value of the outstanding stock of which is owned,
directly or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) see "Federal Income Tax Consequences --
Requirements for Qualification as a Real Estate Investment Trust - Share
Ownership"; and (vii) which meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a taxable year of less than 12
months. See "Federal Income Tax Consequences -- Requirements for Qualification
as a Real Estate Investment Trust - Share Ownership". Conditions (v) and (vi)
will not apply until after the first taxable year for which an election is made
to be taxed as a REIT.
The Company believes that it will have issued sufficient shares pursuant
to this Offering to allow it to satisfy conditions (v) and (vi). In addition,
the Declaration of Trust provides for restrictions regarding the transfer and
ownership of shares, which restrictions are intended to assist the Company in
continuing to satisfy the share ownership
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requirements described in (v) and (vi) above. Those restrictions may not
ensure that the Company in all cases will be able to satisfy the share
ownership requirements described above. If the Company fails to satisfy those
share ownership requirements, the Company's status as a REIT will terminate.
See "Federal Income Tax Consequences -- Failure to Qualify". However, if the
Company complies with Treasury Regulations for ascertaining the ownership of
its shares (see "Federal Income Tax Consequences -- Requirements for
Qualification as a Real Estate Investment Trust -- Share Ownership") and does
not know or, exercising reasonable diligence would not have known, whether it
failed condition (vi) in a taxable year, it will be treated as meeting
condition (vi) for such taxable year.
Code Section 856(i) provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all
assets, liabilities, and items of income, deduction, and credit of a "qualified
REIT subsidiary" shall be treated as assets, liabilities, and items of income,
deduction, and credit of the REIT. A "qualified REIT subsidiary" is a
corporation, 100% of the stock of which is held by the REIT. Thus, in applying
the requirements described herein, any "qualified REIT subsidiaries" acquired
or formed by the Company will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of such subsidiaries will be treated as
assets, liabilities and items of income, deduction, and credit of the Company.
In the case of a REIT which is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the assets
and gross income of the partnership retain the same character in the hands of
the REIT for purposes of Section 856 of the Code, including satisfying the
gross income tests and the asset tests. Thus, the Company's proportionate
share of the assets, liabilities and items of income of the Operating
Partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the requirements described herein. A summary
of the rules governing the federal income taxation of partnerships and their
partners is provided below in "Federal Income Tax Consideration--Tax Aspects of
the Operating Partnership."
Share Ownership. (a) The beneficial ownership of the Company must be
held by a minimum of 100 persons for at least 335 days of a taxable year
consisting of 12 months (or a proportionate part of a taxable year consisting
of less than 12 full months), and (b) no more than 50% (by value) of the
outstanding shares of the Company may be owned (directly or under rules of
constructive ownership prescribed by the Code) by five or fewer individuals at
any time during the last half of a taxable year (the "50% Shareholder Test").
Certain tax-exempt entities are treated as individuals for purposes of the 50%
Shareholder Test. In addition, the applicable constructive ownership rules
provide, among other things, that Common Shares held by a corporation,
partnership, trust or estate will be regarded as being held proportionately by
its shareholders, partners or beneficiaries, as the case may be, and Common
Shares owned by certain persons will be regarded as being owned by certain
members of their families. Common Shares held by a qualified pension plan will
be treated as held proportionately by its beneficiaries; however, Common Shares
held by a qualified pension plan will be treated as held by one individual if
persons related to the plan (such as the employer, employees, officers, or
Trust Managers) own in the aggregate more than 5% by value of the Common Shares
and the Company has accumulated earnings and profits attributable to any period
for which it did not qualify as a REIT.
To assure continued compliance with the 50% Shareholder Test, the
Company's Declaration of Trust prohibits any investor from acquiring an
interest in the Company such that the investor would own (or be deemed under
the applicable rules of constructive ownership to own) more than 9.8% of the
outstanding Common Shares, unless the Trust Managers (including a majority of
the independent Trust Managers) are provided evidence satisfactory to them in
their sole discretion that the qualification of the Company as a REIT will not
be jeopardized.
Treasury Regulations require the Company to maintain records of the
actual and constructive beneficial ownership of its Common Shares. If the
Company fails to comply with regulations to ascertain its ownership in any
taxable year, it will be subject to a monetary penalty of $25,000 ($50,000 for
intentional violations) for failing to do so. The Company will also be
required, when requested by the IRS, to send curative demand letters. In
accordance with those Regulations, the Company must and will demand from
shareholders written statements concerning the actual and constructive
beneficial ownership of Common Shares. Any shareholder who does not provide
the Company with required information concerning share ownership will be
required to include certain information relating thereto with his income tax
return.
Asset Diversification. At the close of each quarter of the taxable
year, at least 75% of the value of the Company's total assets must be
represented by "real estate assets" (which category includes interests in real
property, mortgages on real property and certain temporary investments), cash,
cash items and U.S. Government securities (the
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"75% Asset Test"). In addition, at those times, no more than 25% of the value
of the Company's total assets may consist, in whole or in part, of securities
in respect of any one issuer in an amount greater in value than 5% of the value
of the Company's total assets or more than 10% of the outstanding voting
securities of such issuer (the "25% Asset Test"). See "Proposed Tax
Legislation." If the Company is in violation of the foregoing requirements
(due to a discrepancy between the value of its investments and such
requirements) after the acquisition of any security or property, then the
Company will be treated as not violating the requirements if it cures the
violation within 30 days of the close of the quarter during which the Company
acquires such asset.
While the Trust Managers intend to manage the Company to meet the 75%
Asset Test and 25% Asset Test, no assurance can be given that the Company will
be able to do so.
The assets of the Company's wholly-owned subsidiaries will be attributed
directly to the Company for purposes of the asset diversification rules.
Additionally, the Company will be deemed to own a proportionate share (based
upon its capital interest) of the assets of any partnerships in which the
Company owns an interest.
Sources of Income. The Company must satisfy two distinct income-based
tests for each taxable year: the "75% Income Test" and the "95% Income Test."
The 75% Income Test requires that at least 75% of the Company's gross
income (other than from certain "prohibited transactions") in each taxable year
consist of certain types of income identified in the Code, including qualifying
rents from real property; qualifying interest on obligations secured by
mortgages on real property or interests in real property; gain from the sale or
other disposition of real property (including interests in real property and
mortgages on real property) held for investment and not primarily for sale to
customers in the ordinary course of business; dividends or other distributions
on, and gain (other than gain from prohibited transactions) from the sale or
other disposition of transferable shares (or transferable certificates of
beneficial interest) in other REITs; abatements and refunds of taxes and real
property; income and gain from certain properties acquired by the Company
through foreclosure; certain commitment fees; gain from the sale or other
disposition of a real estate asset that is not a prohibited transaction solely
by reason of Code Section 857(b)(6); and income earned from certain qualifying
types of temporary investments. Income earned from qualifying temporary
investments means income that is (i) attributable to stock or debt instruments,
(ii) attributable to the temporary investment of capital received by the
Company from the issuance of shares of beneficial interest or from a public
offering of debt securities that have a maturity of at least five years, and
(iii) received or accrued within one year from the date the Company receives
such capital. Interest income and gain realized from the disposition of loans
which are secured solely by real property will constitute qualifying income for
purposes of the 75% Income Test, assuming that such interest income is not
excluded from the calculation of interest for purposes of the 75% Income Test
by reason of such interest being dependent on income or profits as described in
Code Section 856(f) and assuming that any such loan which is disposed of is
held for investment and not primarily for sale to customers in the ordinary
course of a trade or business.
Under the 95% Income Test, at least 95% of the Company's gross income
(other than from certain "prohibited transactions") in each taxable year must
consist of income which qualifies under the 75% Income Test as well as
dividends and interest from any other source, gain from the sale or other
disposition of stock and other securities which are not dealer property, any
payment to the Company under an interest rate swap or cap agreement, option,
futures contract, forward rate agreement, or similar financial instrument
entered into to reduce interest rate risk with respect to indebtedness incurred
or to be incurred to acquire or carry real estate assets, and any gain from the
disposition of such an agreement.
The income of the Company's wholly-owned subsidiaries will be attributed
to the Company for purposes of the income tests described above. Additionally,
a proportionate share of the items of income of any partnership in which the
Company owns an interest will be attributed to the Company (based on the
Company's capital interest in any such partnership).
If the Company fails to meet the requirements of either or both the 75%
Income Test or the 95% Income Test in a taxable year but otherwise meets the
applicable requirements for qualification as a REIT, it may nevertheless
continue to qualify under the Code as a REIT if certain conditions are met.
While satisfaction of the conditions would prevent the Company from losing its
tax status as a REIT, the Company generally would be liable for a special tax
equal to 100% of the gross income attributable to the greater of the amount by
which the Company fails the 75% Income Test or the 95% Income Test, multiplied
by a fraction intended to reflect the Company's profitability.
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Rents received by the Company will qualify as "rents from real property"
in satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents
received from a tenant will not qualify as "rents from real property" in
satisfying the gross income tests if the Company, or an owner of 10% or more of
the Company, directly or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for rents received to qualify as "rents from real property," the Company
generally must not operate or manage the property or furnish or render services
to the tenants of such property, other than through an independent contractor
from whom the Company derives no revenue; provided, however, the Company may
directly perform certain services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant" of the property. Moreover, pursuant to
the Taxpayer Relief Act of 1997, the Company may derive income from non-
qualifying services provided to tenants or from managing or operating a
property which it owns as long as the Company's income from such services does
not exceed one percent of the Company's gross income from the property. The
Company does not and will not (i) charge rent for any property that is based in
whole or in part on the income or profits of any person (except by reason of
being based on a percentage of receipts or sales, as described above), (ii)
rent any property to a Related Party Tenant, (iii) derive rental income
attributable to personal property (other than personal property leased in
connection with the lease of real property, the amount of which is less than
15% of the total rent received under the lease), or (iv) perform services
considered to be rendered to the occupant of the property (unless the income
from those services qualifies as rent from real property pursuant to the
Taxpayer Relief Act of 1997) other than through an independent contractor from
whom the Company derives no revenue. The Company believes that the aggregate
amount of any non-qualifying income in any taxable year will not exceed the
limit on non-qualifying income under the gross income tests.
Distribution Requirements. With respect to each taxable year, the
Company must distribute to shareholders an amount at least equal to the sum of
95% of its "REIT taxable income," computed without regard to the dividends paid
deduction and by excluding any net capital gain ("net investment income"), and
95% of the excess of its net income from "foreclosure property" over the
federal income tax imposed on such income, minus certain items of noncash
income. As noted under the caption "Distributions Policy," the Company intends
to distribute substantially all of its net investment income annually. The
Company likewise intends to distribute annually substantially all of its
realized net capital gains. The Service may waive the distribution requirements
for any tax year if the Company establishes that it was unable to meet such
requirements by reason of distributions previously made to meet the requirement
of section 4981 of the Code (relating to the 4% federal excise tax on
undistributed income discussed below).
Unlike net investment income, the Company's net capital gain need not be
distributed in order for the Company to maintain its status under the Code as a
REIT; however, the Company will be taxable on any net capital gain and net
investment income which it fails to distribute in a timely manner. Pursuant to
the Taxpayer Relief Act of 1997, a REIT may elect to retain and pay income tax
on net long-term capital gains that it receives during a taxable year. If a
REIT makes this election, its shareholders are required to include in their
income as long-term capital gain their proportionate share of the undistributed
long-term capital gains so designated by the REIT. A shareholder will be
treated as having paid his or her share of the tax paid by the REIT in respect
of long-term capital gains so designated by the REIT, for which the shareholder
will be entitled to a credit or refund. In addition, the shareholder's basis
in his or her REIT shares will be increased by the amount of the REIT's
designated undistributed long-term capital gains that are included in the
shareholder's long-term capital gains, reduced by the shareholder's
proportionate share of tax paid by the REIT on those gains that the shareholder
is treated as having paid. The earnings and profits of the REIT will be
reduced, and the earnings and profits of any corporate shareholder of the REIT
will be increased, to take into account amounts designated by the REIT pursuant
to this rule. A REIT must pay its tax on its designated long-term capital
gains within 30 days of the close of any taxable year in which it designates
long-term capital gains pursuant to this rule, and it must mail a written
notice of its designation to its shareholders within 60 days of the close of
the taxable year.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's shares, but rather will reduce the adjusted
basis of such shares. To the extent that such distributions exceed the
adjusted basis of a shareholder's shares they will be included in income as
long-term capital gain (or short-term capital gain if the shares have been held
for one year or less) assuming the shares are a capital asset in the hands of
the shareholder.
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While the Company expects to meet its distribution requirements, its
ability to make distributions may be impaired if it has insufficient cash flow
or otherwise has excessive noncash income or nondeductible expenditures.
Furthermore, the distribution requirement may be determined not to have been
met in a given year by reason of the Service later successfully challenging the
deductibility of a Company expenditure. In such event, however, it may be
possible to cure a failure to meet the distribution requirement with a
"deficiency dividend," but if the Company uses that procedure, it may incur
substantial tax penalties and interest.
The Company will be subject to a nondeductible 4% federal excise tax
with respect to undistributed ordinary income and capital gain net income
unless it also meets a calendar year distribution requirement. To meet this
requirement, the Company must, in general, distribute with respect to each
calendar year an amount equal to the sum of (a) 85% of its ordinary income
(adjusted under the Code for various items), (b) 95% of its capital gains in
excess of its capital losses (subject to certain adjustments) and (c) any
ordinary income and capital gain net income not distributed in prior calendar
years. To the extent that the Company elects to retain and pay income tax on
its net capital gain, such retained amounts will be treated as having been
distributed for purposes of the 4% excise tax. The Company intends to make
distributions to shareholders so that it will not incur this tax but, as noted
above, various situations could make it impractical to meet the prescribed
distribution schedule.
The Company is authorized to issue Preferred Shares. Should the Company
do so, and should the Company distribute a capital gain dividend while
Preferred Shares are outstanding, it may be required to designate a portion of
dividends entitled to be received by holders of the Preferred Shares as capital
gain dividends, thereby reducing the portion of total distributions paid to
holders of the Company's Common Shares which may be characterized as capital
gains dividends.
FEDERAL TAXATION OF THE COMPANY--SPECIFIC ITEMS
Dispositions of Assets. The Company may realize a gain or loss on the
disposition of an asset that it owns. The gain or loss may be capital or
ordinary in character, depending upon a number of factors and the tax rules
governing the type of disposition involved.
If the Company were deemed to be holding property (such as real property
or loans) primarily for sale to customers in the ordinary course of business
(i.e., as a "dealer"), then (a) any gains recognized by the Company upon the
disposition of such property would be subject to a 100% tax on prohibited
transactions and (b) depending on the composition of the Company's total gross
income, the Company could fail the 75% Income Test for qualification as a real
estate investment trust.
Under existing law, whether property is held primarily for sale to
customers in the ordinary course of business must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Company intends to hold all property for investment purposes and
to make occasional dispositions which are, in the opinion of the Trust
Managers, consistent with the Company's investment objectives and in compliance
with all the rules discussed above governing the qualification of the Company
for REIT status under the Code. Accordingly, the Company does not expect to be
treated as a "dealer" with respect to any of its assets. No assurance,
however, can be given that the Service will not take a contrary position.
Alternative Minimum Tax. Under certain circumstances, the Company may
be subject to the alternative minimum tax on its undistributed items of tax
preference.
Net Income From Foreclosure Property. If the Company has net income
from foreclosure property, it will be subject to tax on such income at the
highest corporate rate. Foreclosure property generally means real property
(and any personal property incident to such real property) which is acquired as
a result of a default either on a lease of such property or on indebtedness
which such property secured and with respect to which an appropriate election
is made.
PARTNERSHIP ANTI-ABUSE RULE
The United States Treasury Department has issued a regulation (the
"Anti-Abuse Rule") under the partnership provisions of the Code (the
"Partnership Provisions") that authorizes the Service, in certain "abusive"
transactions involving partnerships, to disregard the form of the transaction
and recast it for federal tax purposes as the Service deems appropriate. The
Anti-Abuse Rule applies where a partnership is formed or utilized in connection
with a transaction (or
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series of related transactions) with a principal purpose of substantially
reducing the present value of the partners' aggregate federal tax liability in
a manner inconsistent with the intent of the Partnership Provisions. The
Anti-Abuse Rule states that the Partnership Provisions are intended to permit
taxpayers to conduct joint business (including investment) activities through a
flexible economic arrangement that accurately reflects the partners' economic
agreement and clearly reflects the partners' income without incurring any
entity-level tax. The purposes for structuring a transaction involving a
partnership are determined based on all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction. A reduction in the
present value of the partners' aggregate federal tax liability through the use
of a partnership does not, by itself, establish inconsistency with the intent
of the Partnership Provisions.
The Anti-Abuse Rule contains an example in which a corporation that
elects to be treated as a REIT contributes substantially all of the proceeds
from a public offering to a partnership in exchange for a general partner
interest. The limited partners of the partnership contribute real property
assets to the partnership, subject to liabilities that exceed their respective
aggregate bases in such property. In addition, the limited partners have the
right, beginning one year after the formation of the partnership, to require
the exchange of their limited partnership interests for cash or REIT shares (at
the Company's option) equal to the fair market value of their respective
interests in the partnership at the time of the exchange. The example
concludes that the use of the partnership is not inconsistent with the intent
of the Partnership Provisions and, thus, cannot be recast by the Service.
Based on the foregoing, the Company believes that the Anti-Abuse Rule will not
have any adverse impact on the Company's ability to qualify as a REIT.
However, the Anti-Abuse Rule is extraordinarily broad in scope and is applied
based on an analysis of all of the facts and circumstances. As a result, there
can be no assurance that the Service will not attempt to apply the Anti-Abuse
Rule to the Company. If the conditions of the Anti-Abuse Rule are met, the
Service is authorized to take appropriate enforcement action, including
disregarding the Operating Partnership for federal tax purposes or treating one
or more of its partners as nonpartners.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and, subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company will
also be disqualified from taxation as a REIT for the taxable years following
the year during which qualification was lost. If the Company's election to be
taxed as a REIT is terminated, the Company will not be eligible to make a new
election to be taxed as a REIT prior to the fifth taxable year after the first
taxable year for which the termination is effective. It is not possible to
state whether in all circumstances the Company would be entitled to such
statutory relief.
TAXATION OF SHAREHOLDERS
Distributions by the Company of net investment income will be taxable to
shareholders as ordinary income to the extent of the current or accumulated
earnings and profits of the Company. Distributions of net capital gain, if any,
designated by the Company as capital gain dividends or retained capital gain
generally will be taxable to shareholders as long-term capital gain, regardless
of the length of time the Common Shares have been held by the shareholders.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income pursuant to Section 291 of the Code.
All distributions are taxable, at least to the extent of the current or
accumulated earnings and profits of the Company, whether received in cash or
invested in additional Common Shares. Further, pursuant to the Taxpayer Relief
Act of 1997, a REIT may elect to retain and pay income tax on net long-term
capital gains that it receives during a taxable year. If a REIT makes this
election, its shareholders are required to include in their income as long-term
capital gain their proportionate share of the undistributed long-term capital
gains so designated by the REIT. A shareholder will be treated as having paid
his or her share of the tax paid by the REIT in respect of long-term capital
gains so designated by the REIT, for which the shareholder will be entitled to
a credit or refund. In addition, the shareholder's basis in his or her REIT
shares will be increased by the amount of the REIT's designated undistributed
long-term capital gains that are included in the shareholder's long-term
capital gains, reduced by the shareholder's proportionate share of tax paid by
the REIT on those gains that the shareholder is treated as having paid. The
earnings and profits of the REIT will be reduced, and the earnings and profits
of any corporate shareholder of the REIT will be increased, to take into
account amounts designated by the REIT pursuant to this rule. A REIT must pay
its tax on its
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designated long-term capital gains within 30 days of the close of any taxable
year in which it designates long-term capital gains pursuant to this rule, and
it must mail a written notice of its designation to its shareholders within 60
days of the close of the taxable year. Distributions in excess of current and
accumulated earnings and profits will not be taxable to a shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's shares,
but rather will reduce the adjusted basis of such shares. To the extent that
such distributions exceed the adjusted basis of a shareholder's shares they
will be included in income as long-term capital gain (or short-term capital
gain if the shares have been held for one year or less) assuming the shares are
a capital asset in the hands of the shareholder. In addition, any dividend
declared by the Company in October, November or December payable to
shareholders of record on a date in such a month and paid during the following
January will be treated as having been received by shareholders on December 31
in the year in which such dividends were declared. Income (including
dividends) from the Company normally will be characterized as "portfolio"
income (as opposed to "passive" income) for purposes of the tax rules governing
"passive" activities; accordingly, passive losses of the shareholder may not be
used to offset income derived by the shareholder from the Company.
In general, any loss upon a sale or exchange of shares by a shareholder
who has held such shares for six months or less (after applying certain holding
period rules), will be treated as a long-term capital loss to the extent of
distributions from the Company required to be treated by such shareholder as
long-term capital gain.
None of the distributions from the Company (as a REIT) received by
corporate shareholders, whether characterized as ordinary income or capital
gain, will qualify for the dividends received deduction generally available to
corporations.
The Company may be required to withhold and remit to the Service 31% of
the dividends paid to any shareholder who (a) fails to furnish the Company with
a properly certified taxpayer identification number, (b) has under reported
dividend or interest income to the Service or (c) fails to certify to the
Company that he is not subject to backup withholding. Any amount paid as
backup withholding will be creditable against the shareholder's income tax
liability. The Company will report to its shareholders and the Service the
amount of dividends paid during each calendar year and the amount of any tax
withheld.
In general, any gain or loss realized upon a taxable disposition of
Common Shares of the Company or upon receipt of a liquidating distribution by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the Common Shares have been held for more than one year
and as short-term capital gain or loss if the Common Shares have been held for
one year or less. The Taxpayer Relief Act of 1997 changed the tax rates and
holding periods applicable to long-term capital gains of individuals. In
general, under applicable provisions of the Taxpayer Relief Act of 1997, the
maximum tax rate applicable to net capital gains of noncorporate taxpayers
realized upon the sale of property held for more than 18 months is 20% (10% for
individuals in a tax bracket below 28%), and the maximum tax rate on net
capital gains of noncorporate taxpayers realized upon the sale of property held
for more than one year but not more than 18 months is 28%. The maximum tax
rate on long-term capital gain from the sale or exchange of "section 1250
property" (i.e., depreciable real property) held for more than 18 months is 25%
to the extent that such gain would have been treated as ordinary income if the
property were "section 1245 property." With respect to distributions
designated by the Company as capital gain dividends and any retained capital
gains that the Company is deemed to distribute, the Company may designate
(subject to certain limits) whether such a distribution is taxable to its
noncorporate shareholders at a 20%, 25%, or 28% rate. Because the tax rates
and applicable holding periods will vary depending upon a shareholder's
individual circumstances, investors should consult their own tax advisors
concerning the effect of these Taxpayer Relief Act of 1997 changes. If,
however, the shareholder receives any capital gain dividends with respect to
Common Shares held six months or less, any loss realized upon a taxable
disposition of such Common Shares shall, to the extent of such capital gain
dividends, be treated as a long-term capital loss. All or a portion of any loss
realized upon a taxable disposition of Common Shares of the Company may be
disallowed if other Common Shares of the Company are purchased (under a
dividend reinvestment plan or otherwise) within 30 days before or after the
disposition.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Except as noted below, based upon a revenue ruling issued by the
Service, dividend distributions by the Company to a shareholder that is a
tax-exempt entity should not constitute "unrelated business taxable income"
("UBTI"), provided that the tax-exempt entity has not financed the acquisition
of its Common Shares with "acquisition indebtedness" within the meaning of the
Code and the Common Shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity. However, if a tax-exempt entity borrows
money to purchase its Common Shares, a
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portion of its income from the Company will constitute UBTI pursuant to the
"debt-financed property" rules of the Code. Furthermore, social clubs,
voluntary employee benefit associations, supplemental unemployment benefit
trusts, and qualified group legal service organizations that are exempt from
taxation under Code Sections 501(c)(7), (9), (17) and (20), respectively, are
subject to different UBTI rules, which generally will require them to
characterize distributions from the Company as UBTI. Also, it should be noted
that dividend distributions by a REIT to an exempt organization that is a
private foundation should constitute investment income for purposes of the
excise tax on net investment income of private foundations imposed by Section
4940 of the Code. If an employee trust qualified under Code Section 401(a) (a
"qualified trust") owns more than 10% by value of the Common Shares in the
Company at any time during a tax year, then a portion of the dividends paid by
the Company to such trust may be treated as UBTI, but only if (i) the Company
would not have qualified as a REIT but for the provisions of the Code which
"look through" such a qualified trust for purposes of determining ownership of
a REIT, (ii) at least one qualified trust holds more than 25% (by value) of the
Common Shares in the Company or one or more qualified trusts (each of which
holds more than 10% of the Common Shares) hold in the aggregate more than 50%
(by value) of the Common Shares, and (iii) at least 5% of the Company's gross
income (less direct expenses related thereto) is derived from the conduct of
unrelated trades or business, determined as if the Company were a tax-exempt
pension fund.
Because of the complexity and variations of the UBTI rules, tax-exempt
entities should consult their own tax advisors.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "non-U.S. shareholders") are complex and no attempt
will be made herein to provide more than a summary of such rules. Prospective
non-U.S. shareholders should consult with their own tax advisors to determine
the impact of federal, state and local income tax laws with regard to an
investment in Common Shares, including any reporting requirements.
Distributions that are not attributable to gain from sales or exchanges
by the Company of "United States Real Property Interests" and not designated by
the Company as capital gain dividends or retained capital gains will be treated
as dividends of ordinary income to the extent that they are made out of current
or accumulated earnings and profits of the Company. Generally, such
distributions will be subject to a U.S. withholding tax equal to 30% of the
gross amount of the distribution unless an applicable tax treaty reduces or
eliminates that tax. However, if income from the investment in the Common
Shares is treated as effectively connected with the non-U.S. shareholder's
conduct of a United States trade or business, the non-U.S. shareholder
generally will be subject to a tax at graduated rates, in the same manner as
U.S. shareholders are taxed with respect to such dividends (and may also be
subject to the 30% branch profits tax in the case of a shareholder that is a
foreign corporation). The Company expects to withhold United States income tax
at the rate of 30% on the gross amount of any such dividends made to a non-U.S.
shareholder unless (a) a lower treaty rate applies and the non-U.S. shareholder
files an IRS Form 1001 or (b) the non-U.S. shareholder files an IRS Form 4224
with the Company claiming that the distribution is effectively connected
income. Under recently promulgated final Treasury Regulations that are
effective for distributions made after December 31, 1998 (the "New Withholding
Regulations"), however, a non-U.S. shareholder who wishes to claim the benefit
of an applicable treaty rate will be required to satisfy applicable
certification requirements. In addition, under the final Treasury Regulations,
in the case of Common Shares held by a foreign partnership, (x) the
certification requirement generally will be applied to the partners in the
partnership and (y) the partnership will be required to provide certain
information, including a United States taxpayer identification number. The New
Withholding Regulations provide look-through rules in the case of tiered
partnerships. Shareholders that are partnerships or entities that are
similarly fiscally transparent for federal income tax purposes, and persons
holding Common Shares through such entities, may be subject to restrictions on
their ability to claim benefits under U.S. tax treaties and should consult a
tax advisor.
The New Withholding Regulations also require a corporation that is a
REIT to treat as a dividend the portion of a distribution that is not
designated as a capital gain dividend or return of basis and apply the 30%
withholding tax (subject to any applicable deduction or exemption) to such
portion, and to apply the FIRPTA withholding rules (discussed below) with
respect to the portion of the distribution that could be designated by the REIT
as capital gain dividend. The New Withholding Regulations will generally be
effective for payments made after December 31, 1998, subject to certain
transition rules.
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In general, backup withholding and information reporting will not apply
to a payment of the proceeds of a sale of Common Shares to or through a foreign
office of a broker. If, however, such broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
that derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (i) such broker has documentary evidence in its records that the
beneficial owner is a non-U.S. shareholder (as defined below) and certain other
conditions are met, or (ii) the beneficial owner otherwise establishes an
exemption. Under the New Withholding Regulations, such payments by a U.S.-
related broker will be subject to backup withholding if such broker has actual
knowledge that the payee is a U.S. person.
Payment to or through a U.S. office of a broker of the proceeds of a
sale of Common Shares is subject to both backup withholding and information
reporting unless the beneficial owner certifies under penalties of perjury that
it is a non-U.S. shareholder or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed
as a refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the Service.
Distributions to a non-U.S. shareholder that are designated by the
Company at the time of distribution as capital gain dividends which are not
attributable to or treated as attributable to the disposition by the Company of
a U.S. real property interest generally will not be subject to U.S. federal
income taxation, except as described below.
Any distributions in excess of current and accumulated earnings and
profits of the Company will not be taxable to a non-U.S. shareholder to the
extent that they do not exceed the adjusted basis of the shareholder's Common
Shares, but rather will reduce the adjusted basis of such Common Shares. To
the extent that such distributions exceed the adjusted basis of a non-U.S.
shareholder's Common Shares, they will give rise to tax liability if the
non-U.S. shareholder would otherwise be subject to tax on any gain from the
sale or disposition of his Common Shares, as described below. If it cannot be
determined at the time a distribution is made whether or not such distribution
will be in excess of current and accumulated earnings and profits, the
distributions will be subject to withholding at the same rate as dividends.
However, amounts thus withheld are refundable if it subsequently is determined
that such distribution was, in fact, in excess of current and accumulated
earnings and profits of the Company.
For any year in which the Company qualifies as a real estate investment
trust, distributions that are attributable to gain from sales or exchanges by
the Company of "United States real property interests" will be taxed to a
non-U.S. shareholder under the provisions of FIRPTA. Under FIRPTA, these
distributions are taxed to a non-U.S. shareholder as if such gain were
effectively connected with a United States business. Non-U.S. shareholders
would thus be taxed at the normal capital gain rates applicable to U.S.
shareholders (subject to applicable alternative minimum tax). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gain
dividend to the extent that such capital gain dividends are attributable to the
sale or exchange by the Company of United States real property interests. This
amount is creditable against the non-U.S. shareholder's federal tax liability.
Fixed rate mortgage loans will not normally be classified as "United States
real property interests."
Gain recognized by a non-U.S. shareholder upon a sale of Common Shares
generally will not be taxed under FIRPTA if the Company is a "domestically
controlled real estate investment trust," defined generally as a real estate
investment trust in which at all times during a specified testing period less
than 50% in value of the Common Shares were held directly or indirectly by
non-U.S. persons. Additionally, gain recognized by a non-U.S. shareholder upon
a sale of Common Shares generally will not be taxed under FIRPTA unless the
shareholder beneficially owns more than 5% of the total fair market value of
the Common Shares at any time during the shorter of the five-year period ending
on the date of disposition or the period during which the shareholder held the
Common Shares. Gain not subject to FIRPTA will be taxable to a non-U.S.
shareholder if (a) investment in the Common Shares is effectively connected
with the non-U.S. shareholder's United States trade or business, in which case
the non-U.S. shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (b) the non-U.S. shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year, in which case the nonresident alien individual
will be subject to a 30% tax on his U.S. source capital gains. If the gain on
the sale of Common Shares becomes subject to taxation under FIRPTA, the
non-U.S. shareholder will be subject to the same
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treatment as U.S. shareholders with respect to such gain (subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals).
Subject to the provisions of any tax treaty that may exist between the
United States and the country in which the foreign holder is domiciled at the
time of his death, an individual foreign shareholder who owns Common Shares at
the time of his death will have the Common Shares subject to federal estate
tax. The federal estate tax will be assessed on the fair market value of such
Common Shares at the time of the foreign holder's death.
THE DISCUSSION SET FORTH IN "TAXATION OF FOREIGN SHAREHOLDERS" DOES NOT
TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE NON-U.S.
SHAREHOLDERS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO THE NEW WITHHOLDING REGULATIONS.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable to the Company's investment in the Operating
Partnership. The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification as a Partnership. The Company will be entitled to
include in its income its distributive share of the Operating Partnership's
income and to deduct its distributive share of the Operating Partnership's
losses only if the Operating Partnership is classified for federal income tax
purposes as a partnership rather than as a corporation or an association
taxable as a corporation. An organization formed as a partnership will be
treated as a partnership, rather than as a corporation, for federal income tax
purposes if (i) it is not expressly classified as a corporation under Section
301.7701-2(b)(1) through (8) of the Treasury Regulations; (ii) it does not
elect to be classified as an association taxable as a corporation; and (iii) it
is not treated as a corporation by virtue of being classified as a "publicly
traded partnership."
Under Section 7704 of the Code, a partnership is treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership" (except in situations in which 90% or more of the partnership's
gross income is of a specified type). A partnership is deemed to be publicly
traded if its interests are either (i) traded on an established securities
market, or (ii) readily tradable on a secondary market (or the substantial
equivalent thereof). While the OP Units will not be traded on an established
securities market, they could possibly be deemed to be traded on a secondary
market or its equivalent due to the Redemption Rights enabling the partners to
dispose of their OP Units.
Under Treasury Regulations governing the classification of partnerships
under Section 7704 (the "PTP Regulations"), the classification of partnerships
is generally based on a facts and circumstances analysis. However, the
regulations also provide limited "safe harbors" which preclude publicly traded
partnership status. Pursuant to one of those safe harbors (the "private
placement safe harbor"), interests in a partnership will not be treated as
readily tradable on a secondary market or the substantial equivalent thereof if
(i) all interests in the partnership were issued in a transaction (or
transactions) that was not required to be registered under the Securities Act,
and (ii) the partnership does not have more than 100 partners at any time
during the partnership's taxable year. In determining the number of partners
in a partnership for this purpose, a person owning an interest in a flow
through entity (i.e., a partnership, grantor trust, or S corporation) that owns
an interest in the partnership is treated as a partner in such partnership only
if (x) substantially all of the value of the person's interest in the
flow-through entity is attributable to the flow-through entity's interest
(direct or indirect) in the partnership and (y) a principal purpose of the use
of the tiered arrangement is to permit the partnership to satisfy the
100-partner limitation.
The Operating Partnership is expected to have less than 100 partners
(including persons owning interests through flow-through entities). The
Operating Partnership has not issued any OP Units required to be registered
under the Securities Act. Thus, the Operating Partnership presently qualifies
for the private placement safe harbor provided in the PTP Regulations. If the
Operating Partnership were to have more than 100 partners (including, in
certain circumstances, persons owning interests through flow-through entities),
it nevertheless would be treated as a partnership for federal income tax
purposes (rather than an association taxable as a corporation) if at least 90%
of its gross income in each taxable year (commencing with the year in which it
is treated as a publicly traded partnership) consists of "qualifying income"
with the meaning of Section 7704(c)(2) of the Code (including interest,
dividends, "real property rents" and gains from the disposition of real
property (the "90% Passive-Type Income Exception").
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If for any reason the Operating Partnership were taxable as a
corporation, rather than as a partnership, for federal income tax purposes, the
Company would not be able to satisfy the income and asset requirements for REIT
status. See "-- Requirements for Qualification as a Real Estate Investment
Trust." In addition, any change in the Operating Partnership's status for tax
purposes might be treated as a taxable event, in which case the Company might
incur a tax liability without any related cash distribution. See "--
Requirements for Qualification as a Real Estate Investment Trust." Further,
items of income and deduction of the Operating Partnership would not pass
through to its partners, and its partners would be treated as shareholders for
tax purposes. Consequently, the Operating Partnership would be required to pay
income tax at corporate tax rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in computing
the Operating Partnership's taxable income.
The following discussion assumes that the Operating Partnership will be
treated as a partnership for federal income tax purposes.
Partnership Allocations. Although a partnership agreement will
generally determine the allocation of income and losses among partners, such
allocations will be disregarded for tax purposes if they do not comply with the
provisions of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Generally, Section 704(b) and the Treasury Regulations
promulgated thereunder require that partnership allocations respect the
economic arrangement of the partners. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership,
which will be determined by taking into account all of the facts and
circumstances relating to the economic arrangement of the partners with respect
to such item. The Operating Partnership's allocations of taxable income and
loss are intended to comply with the requirements of Section 704(b) of the Code
and the Treasury Regulations promulgated thereunder.
Tax Allocations With Respect to the Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to
appreciated or depreciated property (such as the Properties contributed by the
Prior Owners) that is contributed to a partnership in exchange for an interest
in such partnership must be allocated in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of contributed property at the time of
contribution and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such allocations are solely for
federal income tax purposes and do not affect the book capital accounts or
other economic or legal arrangements among the partners. The Operating
Partnership was formed by way of contributions of appreciated property
(including the Properties). Consequently, the Partnership Agreement will
require such allocations to be made in a manner consistent with Section 704(c)
of the Code. In general, the Prior Owners will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition
of any of the contributed assets (including the Properties) which have a
Book-Tax Difference, all income attributable to such Book-Tax Difference will
generally be allocated to the Prior Owners and the Company will generally be
allocated only its share of capital gains attributable to appreciation, if any,
occurring after the closing of this Offering. This will tend to eliminate the
Book-Tax Difference over the life of the Operating Partnership. However, the
special allocation rules of Section 704(c) do not always entirely eliminate the
Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. Thus, the carryover basis of the contributed
assets in the hands the Operating Partnership will cause the Company to be
allocated lower depreciation and other deductions, and possibly an amount of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause the Company to recognize taxable income in excess of cash proceeds, which
might adversely affect the Company's ability to comply with the REIT
distribution requirements. See "-- Requirements for Qualification as a Real
Estate Investment Trust." The foregoing principles also apply in determining
the earnings and profits of the Company for purposes of determining the portion
of distributions taxable as dividend income. The application of these rules
over time may result in a higher portion of distributions being taxed as
dividends than would have occurred had the Company purchased the contributed
assets entirely for cash.
The Treasury Regulations under Section 704(c) of the Code allow
partnerships to use any reasonable method of accounting for Book-Tax
Differences so that the contributing partner receives the tax benefits and
burdens of any built-in gain or loss associated with the contributed property.
Basis in Operating Partnership Interest. The Company's adjusted tax
basis in its interest in the Operating Partnership generally (i) will be equal
to the amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by (a) its
allocable share of the Operating Partnership's
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income and (b) its allocable share of indebtedness of the Operating Partnership
and (iii) will be reduced, but not below zero, by the Company's allocable share
of (a) losses suffered by the Operating Partnership, (b) the amount of cash
distributed to the Company and (c) by constructive distributions resulting from
a reduction in the Company's share of indebtedness of the Operating
Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share
of the indebtedness of the Operating Partnership (such decreases being
considered a cash distribution to the partners), exceeds the Company's adjusted
tax basis, such excess distributions (including such constructive
distributions) constitute taxable income to the Company. Such taxable income
will normally be characterized as a capital gain, and if the Company's interest
in the Operating Partnership has been held for longer than the long-term
capital gain holding period (currently one year), the distributions and
constructive distributions will constitute long-term capital gain. Under
current law, capital gains and ordinary income of corporations are generally
taxed at the same marginal rates.
Sale of the Properties. The Company's share of any gain realized by the
Operating Partnership on the sale of any property held by the Operating
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Operating Partnership's trade or business will be
treated as income from a prohibited transaction that is subject to a 100%
penalty tax. See "-- Requirements for Qualification as a Real Estate
Investment Trust." Such prohibited transaction income may also have an adverse
effect upon the Company's ability to satisfy the income tests for qualification
as a REIT. See "-- Requirements for Qualification as a Real Estate Investment
Trust." Under existing law, whether property is held as inventory or primarily
for sale to customers in the ordinary course of a partnership's trade or
business is a question of fact that depends on all the facts and circumstances
with respect to the particular transaction. The Operating Partnership intends
to hold the Properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, and operating the
Properties (and other similar properties) and to make such occasional sales of
the Properties, including peripheral land, as are consistent with the Operating
Partnership's investment objectives.
OTHER TAXATION
Tax treatment of the Company and its shareholders under tax laws other
than those governing federal income tax may differ substantially from the
federal income tax treatment described in this summary. CONSEQUENTLY, EACH
PROSPECTIVE SHAREHOLDER SHOULD CONSULT WITH HIS OWN TAX ADVISOR WITH REGARD TO
THE STATE, LOCAL AND OTHER TAX CONSEQUENCES (OTHER THAN FEDERAL TAX
CONSEQUENCES) OF AN INVESTMENT IN THE COMPANY.
PROPOSED TAX LEGISLATION
On February 2, 1998, President Clinton released his budget proposal for
fiscal year 1999 (the "Proposal"). Two provisions contained in the Proposal
potentially could affect the Company if enacted in final form as presently
proposed. First, the Proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary).
Currently, a REIT may own no more than 10% of the voting stock of a C
corporation (other than the stock of a qualified REIT subsidiary), but its
ownership of the nonvoting stock of a C corporation is not limited (other than
by the rule that the value of a REIT's combined equity and debt interest in a C
corporation may not exceed 5% of the value of a REIT's total assets). That
provision is proposed to be effective with respect to stock in a C corporation
acquired by a REIT on or after the date of "first committee action" (i.e.,
first action by the House Ways and Means Committee with respect to the
provision). If enacted as presently written, that provision could limit the
Company's ability to use taxable subsidiaries to conduct businesses the income
from which would be nonqualifying income if received directly by the Company.
Second, the Proposal would require recognition of any built-in gain
associated with the assets of a "large" C corporation (i.e., a C corporation
whose stock has a fair market value of more than $5 million) upon its
conversion to REIT status or merger into a REIT. That provision is proposed to
be effective for conversions to REIT status effective for taxable years
beginning after January 1, 1999 and mergers of C corporations into REITs that
occur after December 31, 1998. This provision would require immediate
recognition of any "built-in gain" of an acquired C corporation that is
determined to be "large" if, at any time after December 31, 1998, such
corporation merges into the Company.
77
<PAGE> 85
ERISA CONSIDERATIONS
Because the Common Shares should qualify as a "publicly-offered
security," plans subject to Keogh Plans may purchase Common Shares and treat
such Common Shares, and not the Company's assets, as plan assets. A fiduciary
of an ERISA Plan should consider the fiduciary standards under ERISA in the
context of the plan's particular circumstances before authorizing an investment
of a portion of such plan's assets in Common Shares. Accordingly, among other
factors, such fiduciary should consider (i) whether the plan's aggregate
investments (including such an investment) satisfy the diversification
requirements of Section 404(a)(1)(C) of ERISA, (ii) whether the investment is
in accordance with ERISA, the Code and the documents and instruments governing
the plan (as required by Section 404(a)(1)(D) of ERISA), and (iii) whether the
investment is prudent, considering the role such an investment plays in the
plan's portfolio, the nature of the Company's business, the possible
limitations on the marketability of Common Shares and the anticipated earnings
of the Company. Investors proposing to purchase Common Shares for their IRAs
and Keogh Plans should consider that an IRA and a Keogh Plan may only make
investments that are authorized by the appropriate governing instruments.
Moreover, Keogh Plans that cover Common law employees are also subject to the
ERISA fiduciary standards described above.
Any ERISA Plan or Keogh Plan covering Common law employees should also
consider prohibitions in ERISA relating to improper delegation of control over
or responsibility for "plan assets," prohibitions in ERISA and in the Code
relating to an ERISA Plan's engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code with respect to the plan, and other provisions in ERISA
dealing with "plan assets." The Code provisions relating to a plan's engaging
in certain transactions involving "plan assets" with persons who are
"disqualified persons" under the Code with respect to the plan also apply to
IRAs and all Keogh Plans.
If the assets of the Company were deemed to be "plan assets" of plans
that are holders of Common Shares, Subtitle A and Parts 1 and 4 of Subtitle B
of Title I of ERISA (the prudence and fiduciary standards) with respect to
ERISA Plans and Keogh Plans covering Common law employees, and Section 4975 of
the Code (the prohibitions on transactions involving disqualified persons) with
respect to ERISA Plans, IRAs and Keogh Plans, would extend to transactions
entered into and decisions made by the Company's Management. Furthermore, the
Company's Management would be deemed to be fiduciaries with respect to such
plans.
ERISA and the Code do not define "plan assets." On November 13, 1986,
the U.S. Department of Labor published a final regulation, amended on December
31, 1986 and effective March 13, 1987, relating to the definition of "plan
assets," under which the assets of an entity in which employee benefits plans,
including ERISA Plans, IRAs and Keogh Plans, acquire interests would be deemed
"plan assets" under certain circumstances (the "Regulation"). The Regulation
generally provides that when a plan acquires an equity interest in an entity
which is a "publicly-offered security," the plan's assets include only the
acquired equity interest and not any interest in the underlying assets of the
entity. The Regulation defines a "publicly-offered security" as a security
that is "widely held," freely transferable and registered pursuant to certain
provisions of the federal securities laws. The Company believes that the
Common Shares offered hereby will be a "publicly-offered security," and thus
that the Company's assets will not be deemed to be assets of any employee
benefit plan that is a holder of Common Shares. FIDUCIARIES OF EMPLOYEE
BENEFIT PLANS THAT ARE PROSPECTIVE SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN
COUNSEL AND FINANCIAL ADVISORS TO DETERMINE THE CONSEQUENCES UNDER ERISA OF AN
INVESTMENT IN THE COMPANY, AND TO DETERMINE THE PROPRIETY OF SUCH AN INVESTMENT
IN LIGHT OF THE CIRCUMSTANCES OF THAT PARTICULAR PLAN AND CURRENT APPLICABLE
LAW.
78
<PAGE> 86
UNDERWRITING
The Underwriters named below, acting through their Representative,
Morgan Keegan & Company, Inc., have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock set forth opposite their
respective names below:
<TABLE>
<CAPTION>
Number of
Common Shares
Underwriter to be Purchased
- ----------- ---------------
<S> <C>
Morgan Keegan & Company, Inc.
==========
Total 4,290,000
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated
to purchase all of the Common Shares offered hereby (other than those covered
by the over-allotment option described below) if any such shares are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Common Shares to the public at the offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $____ per Common Share. The Underwriters
may allow, and such dealers may reallow, a discount not in excess of $____ per
Common Share to other dealers. The public offering price and the concessions
and discounts to dealers may be changed by the Representative after the initial
public offering.
The Company has granted to the Underwriters an option, expiring on the
close of business on the thirtieth day subsequent to the date of this
Prospectus, to purchase up to an additional 643,500 Common Shares at the public
offering price, less an underwriting discount, as shown on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the Common Shares.
To the extent that the Underwriters exercise such option, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number of Common Shares set
forth next to such Underwriters name in the preceding table bears to the total
offered initially.
The Company has agreed to indemnify the several Underwriters or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Company has agreed that it will not offer, sell, grant any option
(other than pursuant to the Plan) for the sale of, or otherwise dispose of any
Common Shares, or any securities convertible into, or exercisable or
exchangeable for, Common Shares for a period of 180 days after the date of this
Prospectus, without the prior written consent of Morgan Keegan & Company, Inc.
Such restriction shall not apply, however, to Common Shares issued in exchange
for real property or to Common Shares issued in exchange for units in any
operating partnership controlled by the Company, if such Common Shares are
subject to a restriction on transferability of at least six months. In
addition, the officers and Trust Managers of the Company have agreed with the
Underwriters not to offer, sell or otherwise dispose of any Common Shares for a
period of 180 days after the after the date of this Prospectus, without the
prior written consent of Morgan Keegan & Company, Inc.
The Underwriters do not intend to sell Common Shares to any account over
which they exercise discretionary authority.
Prior to this Offering, there has been no public market for the Common
Shares. The initial public offering price will be determined through
negotiations between the Company and the Representative. Among the factors to
be considered in determining the initial public offering price of the Common
Shares, in addition to prevailing market conditions, will be divided yields and
price-earnings ratios of publicly traded REITs that the Company and the
79
<PAGE> 87
Representative believe to be comparable to the Company, the expected results of
operations of the Company (which are based on the results of operations of the
Properties in recent periods), the current state of the real estate market in
the Company's target markets and an assessment of the Company's Management.
The Company has been advised by the Representative that it presently
intends to make a market in the Common Shares offered hereby; however, the
Representative is not obligated to do so, and any market making activity may be
discontinued at any time. There can be no assurance that an active public
market for the Common Shares will develop and continue after the Offering.
Stephen P. Laffey, who serves as President of Equity Capital Markets at
Morgan Keegan & Company, Inc., the Representative, has agreed to serve as a
Trust Manager of the Company upon completion of the Offering. See
"Management."
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Shares. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering (i.e., if they sell more Common Shares than are
set forth on the cover page of this Prospectus) the Representative may reduce
that short position by purchasing Common Shares in the open market. The
Representative also may elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representative also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Common Shares in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Shares, it may reclaim the amount of the
selling concession from the Underwriters and selling group members that sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security before the distribution is
completed.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above might have on the price of the Common Shares. In
addition, neither the Company nor any of the Underwriters makes any
representations that the Representative will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
80
<PAGE> 88
LEGAL MATTERS
The legality of the Common Shares offered hereby will be passed upon
for the Company by Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., Dallas, Texas.
The description of federal tax matters entitled "Federal Income Tax
Consequences" is based on the opinion of Liddell, Sapp, Zivley, Hill & LaBoon,
L.L.P. The validity of the Common Shares offered hereby will be passed on for
the Underwriters by Hunton & Williams, Richmond, Virginia. Hunton & Williams
will rely on the opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. with
respect to all matters involving Texas law.
81
<PAGE> 89
EXPERTS
The balance sheet of the Company as of February 28, 1998, and the
combined balance sheets of the Properties as of December 31, 1997 and 1996, and
the related combined statements of operations, changes in owners' equity and
cash flows for each of the three years in the period ended December 31, 1997,
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and are
included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
82
<PAGE> 90
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Common Shares offered pursuant to this
Prospectus. This Prospectus, which is part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and financial statement schedules thereto. For further information
with respect to the Company and the Common Shares offered hereby, reference is
made to the Registration Statement and such exhibits and financial statement
schedules, copies of which may be examined without charge at, or obtained upon
payment of prescribed fees from the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding the Company and other registrants that have been filed electronically
with the Commission. The address of such site is http://www.sec.gov.
Statements contained in this Prospectus as to the contents of any
contract or other document that is filed as an exhibit to the Registration
Statement are not necessarily complete, and each such statement is qualified in
its entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with
the Commission pursuant to the Exchange Act. In addition to applicable legal
or Nasdaq requirements, if any, holders of the Common Shares will receive
annual reports containing audited financial statements with a report thereon by
the Company's independent certified public accountants, and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
83
<PAGE> 91
GLOSSARY
"ADA" means the Americans with Disabilities Act of 1990.
"Audit Committee" means the committee, consisting of three independent Trust
Managers, established by the Board of Trust Managers to approve, review, and
establishes procedures related to the Company's independent public accountants.
"Board of Trust Managers" means the Company's Board of Trust Managers.
"Bylaws" means the Company's Bylaws.
"Cash Available for Distribution" is defined as net income (loss) as computed
in accordance with GAAP, excluding gains and losses from debt restructuring and
property sales, plus depreciation and amortization, less capital expenditures.
"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended.
"Charter" means the Company's Declaration of Trust.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means the Company's common shares of beneficial interest,
$0.005 par value per share.
"Company" means Palace REIT, a Texas real estate investment trust.
"Compensation Committee" means the committee established by the Board of Trust
Managers to determine compensation for the Company's executive officers.
"EPS" means earnings per share.
"ERISA" means the Employee Retirement Income Securities Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excess Securities" means the securities into which securities of the Company
owned, or deemed to be owned or transferred to the shareholders in excess of
the Ownership Limit will be automatically exchanged.
"FASB" means the Financial Accounting Standards Board.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended
"FDIC" means the Federal Deposit Insurance Corporation.
"Formation Transactions" means the sequence of transactions in which the
Company will form its operational structure.
"Funds From Operations," as defined by the Board of Governors of NAREIT, means
net income (loss) computed in accordance with GAAP, excluding gains or losses
from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in effect at date of the
Offering.
"GLA" means gross leasable area.
84
<PAGE> 92
"Gross Receipts" means the gross revenues generated by the Company during a
period of time from operations, including rents, percentage rents, tenant
reimbursements, interest and income, but excluding receipts from capital
transactions, including sales, financings, refinancings and the sale of equity
securities.
"Investment Advisors Act" means the Investments Advisors Act of 1974, as
amended.
"IRA" means an individual retirement account.
"Keogh Plans" means plans subject to ERISA, IRAs and H.R. 10 Plans.
"Line of Credit" means the secured line of credit that the Company believes
will facilitate its ability to make property acquisitions.
"Management" means the Company's Board of Trust Managers and executive
officers.
"NAREIT" means the National Association of Real Estate Investment Trusts, Inc.
"Offering" means the initial public offering of the Common Shares as described
in this Prospectus.
"Operating Partnership" means Palace Operating Partnership, L.P., a Delaware
limited partnership.
"OP Units" means operating partnership units of the Operating Partnership.
"Ownership Limit" means the restriction contained in the Charter providing
that, subject to certain exemptions, the holder may not own or be deemed to
own, by virtue of attribution rules of the Code, more than 9.8% of the total
outstanding Trust Shares.
"Partnership Agreement" means the First Amended and Restated Agreement of
Limited Partnership of Palace Operating Partnership, L.P.
"Plan" means the Company's Employee and Trust Manager Incentive Compensation
Plan.
"Plan Participants" means the executive officers, Trust Managers and other
employees of the Company subject to the Plan.
"Preferred Shares" means the Company's preferred shares of beneficial interest,
of which 20,000 shares are authorized to be issued with a $100 par value per
share, the remainder to be issued at no par value.
"Prior Owners" means the entities wholly-owned or controlled by Ralph
Englestad, namely Florida Sunrise, Ltd.; Heritage Loraine, Inc.; Nobody, Inc.;
Imperial Warehouse, Inc.; Bayview Investments, Inc.; Southpark, Ltd.;
Escondido, Inc.; and Polaris Warehouse, Inc.
"Properties" means the eight properties located in Texas, Florida, and Nevada
that the Company has a contract or an option to acquire, and which the Company
intends to acquire prior to or concurrently with the Offering.
"REIT" means a real estate investment trust, as defined by Sections 856 through
860 of the Code.
"Representative" means Morgan Keegan & Company, Inc.
"Service" means the Internal Revenue Service.
"Securities Act" means the Securities Act of 1933, as amended.
"SIOR" means the Society of Industrial and Office Realtors.
"SFAS" means Statement of Financial Accounting Standards.
85
<PAGE> 93
"Texas REIT Act" means the Texas Real Estate Investment Trust Act.
"Total Market Capitalization" means the total number of Common Shares and
Preferred Shares outstanding times the current market price of such shares plus
long-term debt.
"Treasury Regulations" means those regulations promulgated by the Service under
the Code.
"Triple Net Lease" means a lease under which a tenant pays in addition to base
rent its pro rata share of the common area maintenance expenses, real estate
taxes and insurance expenses.
"Trust Managers" means the individuals selected to serve as the Company's trust
managers.
"Trust Shares" means, collectively, the Common Shares and the Preferred Shares.
"Underwriters" means Morgan Keegan & Company, Inc.
"UPREIT" means umbrella limited partnership.
86
<PAGE> 94
INDEX TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PALACE REIT
Pro Forma Combined Balance Sheet as of December 31, 1997 F-2
Pro Forma Combined Statement of Operations for the year ended December 31, 1997 F-3
Notes to Pro Forma Combined Financial Statements F-4
Independent Auditors' Report F-6
Balance Sheet as of February 28, 1998 F-7
Notes to Balance Sheet F-8
PALACE PROPERTIES
Independent Auditors' Report F-9
Combined Financial Statements
Combined Balance Sheets as of December 31, 1997 and 1996 F-10
Combined Statements of Operations for the three years ended
December 31, 1997, 1996 and 1995 F-11
Combined Statements of Changes in Owners' Equity for the three years ended
December 31, 1997, 1996 and 1995 F-12
Combined Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995 F-13
Notes to Combined Financial Statements F-14
</TABLE>
F-1
<PAGE> 95
PALACE REIT
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PALACE
PROPERTIES PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PALACE REIT
----------- ----------- -----------
<S> <C> <C> <C>
REAL ESTATE:
Land $ 3,070,875 $ 2,764,385 c $ 5,835,260
Buildings, improvements and equipment 28,971,990 26,350,416 c 55,322,406
Projects under development 299,919 299,919
------------ ------------ ------------
32,342,784 29,114,801 61,457,585
Less accumulated depreciation (2,547,695) (2,547,695)
------------ ------------ ------------
Real Estate - net 29,795,089 29,114,801 58,909,890
------------ ------------ ------------
59,253,500 a
(20,208,048) b
CASH AND CASH EQUIVALENTS 372,678 (38,995,452) c 422,678
------------ ------------ ------------
RECEIVABLES:
Accounts receivable - net 750,792 750,792
Accounts receivable - related parties 111,000 111,000
------------ ------------ ------------
Receivables - net 861,792 - 861,792
------------ ------------ ------------
DEFERRED COSTS - NET 717,419 717,419
------------ ------------ ------------
PREPAID EXPENSES 323,015 323,015
------------ ------------ ------------
TOTAL ASSETS $ 32,069,993 $ 29,164,801 $ 61,234,794
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Mortgage notes and loans payable - related parties $ 20,208,048 $ (20,208,048) b -
Accounts payable and accrued expenses 730,688 $ 730,688
Tenants' security deposits 174,390 174,390
Other liabilities 150,073 150,073
------------ ------------ ------------
Total liabilities 21,263,199 (20,208,048) 1,055,151
------------ ------------ ------------
MINORITY INTEREST 5,157,395 d 5,157,395
------------ ------------
SHAREHOLDERS' EQUITY:
(926,142) d
OWNERS' EQUITY 10,806,794 (9,880,652) c -
COMMON STOCK 22,156 a 22,156
(4,231,253) d
ADDITIONAL PAID IN CAPITAL 59,231,345 a 55,000,092
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 10,806,794 44,215,454 55,022,248
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,069,993 $ 29,164,801 $ 61,234,794
============ ============ ============
</TABLE>
See notes to pro forma combined financial statements.
F-2
<PAGE> 96
PALACE REIT
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PALACE
PROPERTIES PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PALACE REIT
----------- ------------ ---------
<S> <C> <C> <C>
REVENUES:
Lease rentals $ 9,875,522 $ 9,875,522
Lease rentals - related parties 402,720 402,720
Miscellaneous 10,513 10,513
----------- ------------ ---------
Total revenues 10,288,755 - 10,288,755
----------- ------------ ---------
EXPENSES:
Operation and maintenance 1,592,383 1,592,383
Interest expense - related parties 1,778,723 (1,778,723) e -
Real estate taxes 712,242 712,242
Electricity, water and gas utilities 1,793,141 1,793,141
Management fee 711,026 (711,026) f -
2,117,900 g
General and administrative 575,182 1,164,105 f 3,857,187
Depreciation and amortization 1,115,261 675,652 h 1,790,913
----------- ------------ ---------
Total expenses 8,277,958 1,467,908 9,745,866
----------- ------------ ---------
NET INCOME BEFORE MINORITY INTEREST 2,010,797 (1,467,908) 542,889
MINORITY INTEREST 46,526 i 46,526
----------- ------------ ---------
NET INCOME APPLICABLE TO
COMMON SHAREHOLDERS $ 2,010,797 $ (1,514,434) $ 496,363
=========== ============ =========
COMMON SHARES OUTSTANDING 4,431,260
=========
PRO FORMA NET INCOME PER COMMON SHARE $ 0.11
=========
</TABLE>
See notes to pro forma combined financial statements.
F-3
<PAGE> 97
PALACE REIT
Notes to Pro Forma Combined Financial Statements
The accompanying pro forma combined financial statements present pro forma
information for the Company and the Properties. The pro forma financial
statements are based on the historical financial statements of the Properties.
The accompanying pro forma combined balance sheet as of December 31, 1997 has
been presented on the assumption that the Offering and related acquisition of
the Properties occurred on December 31, 1997. The accompanying pro forma
combined statement of operations for the year ended December 31, 1997 has been
presented on the assumption that the Offering and related acquisition of the
Properties occurred on January 1, 1997. These pro forma financial statements are
not necessarily indicative of the results that will be achieved for future
periods as a result of the Offering and related acquisition of the Properties.
These pro forma financial statements and related notes should be read in
conjunction with the Company's and Properties' combined financial statements
included elsewhere in this Prospectus.
For purposes of these pro forma combined financial statements, the Company has
assumed an initial public offering price of $15.00 per share, the midpoint of
the range of the estimated initial public offering price.
The pro forma adjustments contained in the accompanying pro forma combined
financial statements reflect:
(a) Adjustment to Cash, Common Stock and Additional Paid in Capital to
reflect the issuance of and the net proceeds from the offering of
4,290,000 Common Shares of stock.
(b) The payment to the Prior Owners representing the amount necessary to
retire $20,208,048 of indebtedness related to the Properties.
(c) The acquisition by the Company of a 91.43% interest in the Operating
Partnership in exchange for the net proceeds of the Offering after
retirement of indebtedness as discussed in (b). The net proceeds after
retirement of indebtedness and the Operating Partnership's retention of
$50,000 for working capital purposes is estimated to be $38,995,452
which exceeds the owners' historical cost basis for 91.43% of the
Properties by $29,114,801. The Company will allocate such amounts based
on its estimate of the fair market value of the Properties. For
purposes of these pro forma combined financial statements the Company
has estimated that such amount will be allocated as follows:
<TABLE>
<S> <C>
Land $ 2,764,385
Buildings, improvements and equipment 26,350,416
-----------
Real Estate - net $29,114,801
===========
</TABLE>
F-4
<PAGE> 98
(d) The issuance of 415,312 OP Units (an 8.57% minority interest in the
Company), in exchange for the owners' contribution of the Properties to
the Operating Partnership. The operating partnership pro forma equity
is approximately $60,180,000 of which an 8.57% interest would be
$5,157,395. The receipt of OP Units by the Prior Owners is in addition
to the Offering proceeds described in (c).
(e) The elimination of interest expense related to the retirement of
indebtedness as discussed in (b).
(f) Elimination of management fees paid to an unrelated party for the
management of certain of the properties and the addition of costs to be
incurred associated with the management of the Properties by the
Company. Such additional costs represent legal, audit, office costs,
salaries and other general and administrative expenses to be paid by
the Company as follows:
<TABLE>
<S> <C>
Salaries and benefits - executive officers $ 624,000
Other salaries and benefits 60,000
Directors and officers insurance 200,000
Legal and accounting 86,000
Directors fees and travel 42,000
SEC reporting and other stockholder costs 92,540
Office rent, telephone, supplies and other administrative costs 54,965
Other 4,600
----------
$1,164,105
==========
</TABLE>
Salaries and benefits for executive officers are based upon agreements
with two of the officers and management's estimate with respect to
others. Other amounts are based upon management's estimates of expenses
to be incurred given the Company's estimated level of operations and
related administrative requirements.
(g) Additional compensation expense related to the sale of 141,260 shares
of stock to certain officers and a trust manager of the Company at a
price below the Offering price of such shares. The Company estimates
such cost to be $2,117,900, equal to the estimated per share price in
the Offering.
(h) Additional depreciation related to the allocation of the purchase price
noted in (c) assuming an estimated useful life of 39 years.
(i) To reflect 8.57% of net income as income applicable to minority
interest.
F-5
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
Palace REIT:
We have audited the accompanying balance sheet of Palace REIT as of February 28,
1998. This balance sheet is the responsibility of the trust's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and the significant estimates made by management, as
well as evaluating the overall balance sheet presentation. We believe that our
audit of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet presents fairly, in all material respects, the
financial position of Palace REIT as of February 28, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 28, 1998
F-6
<PAGE> 100
PALACE REIT
BALANCE SHEET
FEBRUARY 28, 1998
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash $ 1,000
=======
Shareholders' Equity:
Common Stock, par value $.005, 100,000,000 shares
authorized, 141,260 shares outstanding $ 706
Additional paid in capital 294
-------
Total Shareholders' Equity $ 1,000
=======
</TABLE>
See notes to balance sheet.
F-7
<PAGE> 101
PALACE REIT
NOTES TO BALANCE SHEET
FEBRUARY 28, 1998
- --------------------------------------------------------------------------------
1. FORMATION OF THE COMPANY
Palace REIT (the "Company"), a Texas trust, was formed in January 1998 to
issue through a public offering 4,290,000 shares of beneficial interest
and to simultaneously acquire, through contribution and with the proceeds
of such offering, eight office and industrial properties (the
"Properties") from affiliates of an individual and his wife. Upon
completion of the offering the Company will own, operate and manage such
properties through a subsidiary, Palace Operating Partnership, L.P. The
owners of the Properties will receive an ownership interest in Palace
Operating Partnership, L.P. (which interests are redeemable, at the option
of the holder, for 415,312 Common Shares of beneficial interest in the
Company beginning on the first anniversary of the closing of the Offering)
and the net proceeds of the public offering, net of offering cost and
$50,000 to be retained by the Company for working capital.
2. INCOME TAXES
It is the intent of the Company to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended. As a
REIT, the Company generally will not be subject to federal income tax to
the extent that it distributes at least 95% of its REIT taxable income to
its shareholders. REIT's are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate tax rates.
3. SHAREHOLDERS' EQUITY AND BENEFICIAL INTEREST
The Company is authorized to issue up to 100,000,000 Common Shares of
$0.005 par value stock and 10,000,000 Preferred Shares of $0.005 par value
stock.
The Company has established an Incentive Share Plan (the "Plan") to enable
trust managers, executive officers and employees to participate in the
ownership of the Company. Five percent of the Company's equity securities
are reserved for issuance under the Plan.
The Company will enter into employment agreements with certain of its
executive officers and has sold 141,260 Common Shares to certain of its
executive officers and a trust manager at a price substantially less than
the expected public offering price.
F-8
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
Palace Properties:
We have audited the accompanying combined balance sheets of the Palace
Properties (the "Properties") as of December 31, 1997 and 1996, and the related
combined statements of operations, changes in owners' equity and cash flows for
each of the three years in the period ended December 31, 1997. These combined
financial statements are the responsibility of the Properties' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements present fairly, in all
material respects, the financial position of Palace Properties at December 31,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 28, 1998
F-9
<PAGE> 103
PALACE PROPERTIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
REAL ESTATE (Notes 3 and 8):
Land $ 3,070,875 $ 2,925,875
Buildings and improvements 28,971,990 26,168,962
Projects under development 299,919 70,539
------------ ------------
32,342,784 29,165,376
Less accumulated depreciation and amortization (2,547,695) (1,688,018)
------------ ------------
Real estate - net 29,795,089 27,477,358
------------ ------------
CASH AND CASH EQUIVALENTS 372,678 138,114
------------ ------------
RECEIVABLES:
Accounts receivable - net 750,792 403,542
Accounts receivable - related parties (Note 4) 111,000
------------ ------------
Receivables - net 861,792 403,542
DEFERRED COSTS - NET (Note 2) 717,419 703,382
PREPAID EXPENSES 323,015 280,218
------------ ------------
TOTAL ASSETS $ 32,069,993 $ 29,002,614
============ ============
LIABILITIES AND OWNERS' EQUITY
LIABILITIES:
Mortgage notes and loans payable - related parties (Note 3) $ 20,208,048 $ 20,510,657
Accounts payable and accrued expenses 730,688 290,415
Tenants' security deposits 174,390 160,611
Other liabilities 150,073 26,501
------------ ------------
Total liabilities 21,263,199 20,988,184
OWNERS' EQUITY 10,806,794 8,014,430
------------ ------------
TOTAL LIABILITIES AND OWNERS' EQUITY $ 32,069,993 $ 29,002,614
============ ============
</TABLE>
See notes to combined financial statements.
F-10
<PAGE> 104
PALACE PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
REVENUES:
Lease rentals (Note 4) $ 9,875,522 $ 9,638,280 $ 4,945,110
Lease rentals - related parties (Note 4) 402,720 158,400 26,400
Miscellaneous 10,513 10,125 4,486
----------- ----------- -----------
Total revenues 10,288,755 9,806,805 4,975,996
----------- ----------- -----------
EXPENSES:
Operation and maintenance 1,592,383 1,637,568 888,835
Interest expense - related parties 1,778,723 1,119,130 330,124
Real estate taxes 712,242 728,270 289,071
Electricity, water and gas utilities 1,793,141 1,766,996 932,515
Management fee (Note 5) 711,026 848,036 370,426
General and administrative 575,182 505,741 344,339
Depreciation and amortization 1,115,261 1,035,291 596,039
Loss on disposal of tenant improvements 152,063
----------- ----------- -----------
Total expenses 8,277,958 7,793,095 3,751,349
----------- ----------- -----------
NET INCOME $ 2,010,797 $ 2,013,710 $ 1,224,647
=========== =========== ===========
</TABLE>
See notes to combined financial statements.
F-11
<PAGE> 105
PALACE PROPERTIES
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1995 $ 9,484,165
Distributions (467,718)
Contributions 10,671,897
Net income 1,224,647
------------
BALANCE, DECEMBER 31, 1995 20,912,991
Distributions (16,827,949)
Contributions 1,915,678
Net income 2,013,710
------------
BALANCE, DECEMBER 31, 1996 8,014,430
Distributions (1,169,194)
Contributions 1,950,761
Net income 2,010,797
------------
BALANCE, DECEMBER 31, 1997 $ 10,806,794
============
</TABLE>
See notes to combined financial statements.
F-12
<PAGE> 106
PALACE PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,010,797 $ 2,013,710 $ 1,224,647
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,115,261 1,035,291 596,039
Loss on disposal of tenant improvements 152,063
Changes in operating assets and liabilities:
Receivables (458,250) (79,727) (266,169)
Deferred costs (268,653) (598,755) (107,788)
Prepaid expenses (42,797) (52,081) (118,210)
Accounts payable and accrued expenses 440,273 (231,274) 311,719
Other liabilities 137,351 (212,671) (19,339)
------------ ------------ ------------
Net cash provided by operating activities 2,933,982 2,026,556 1,620,899
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Additions to real estate (3,033,377) (1,110,181) (3,173,647)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to owners (1,169,194) (16,827,949) (467,718)
Capital contributions 1,805,761 1,915,678 2,336,977
Proceeds from notes payable 16,387,053
Repayment of notes payable (302,608) (2,726,455)
------------ ------------ ------------
Net cash provided by (used in) financing activities 333,959 (1,251,673) 1,869,259
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 234,564 (335,298) 316,511
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 138,114 473,412 156,901
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 372,678 $ 138,114 $ 473,412
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 1,736,149 $ 1,117,982 $ 257,576
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Property contributed by owners $ 145,000 $ $ 8,334,920
============ ============ ============
Notes payable assumed with property acquired and
repaid $ $ 4,159,005 $
============ ============ ============
</TABLE>
See notes to combined financial statements.
F-13
<PAGE> 107
PALACE PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS--The Palace Properties (not a legal entity) represent a
combination of eight office and industrial properties (the "Properties")
as described below. The Properties are located in the states of Texas,
Florida, Nevada and Mississippi. The Properties are owned 100% by various
Sub-chapter S Corporations, which are commonly owned and controlled.
Palace Properties represents those real estate operations that will be
sold or contributed to a newly formed Real Estate Investment Trust
("REIT"), Palace REIT (the "Company").
Those properties owned and operated at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
PROPERTY ADDRESS
<S> <C>
Office:
Florida Sunrise Tower ("Sunrise") 3111 University Drive, Coral Springs, Florida
Ten Conoco Plaza ("Conoco") 10 Desta Drive, Midland, Texas
Heritage Center ("Heritage") 500 North Loraine Street, Midland, Texas
Claydesta Center ("Claydesta") One Desta Drive, Midland, Texas
Industrial:
Caballo ("Caballo") 6780 Caballo Road, Las Vegas, Nevada
Escondido ("Escondido") 6620 Escondido, Las Vegas, Nevada
Polaris ("Polaris") 5425 Polaris Avenue, Las Vegas, Nevada
D'Iberville ("D'Iberville") 4120 Brodie Road, D'Iberville, Mississippi
</TABLE>
Heritage and Claydesta were acquired on February 14, 1996 and August 16,
1995, respectively. Escondido and D'Iberville were developed by the owner
and operations began in August 1995 and October 1997, respectively.
Polaris is currently under development and is expected to be completed in
April 1998. The owners began operating all other properties prior to 1995.
The accompanying combined financial statements include the operations of
the Properties for the periods presented or from the date of acquisition
or inception as applicable.
All significant intercompany accounts and transactions have been
eliminated in combination.
REAL ESTATE--Management periodically assesses the recoverability of the
recorded value of its properties and related assets by comparing their
carrying value to the undiscounted cash flows expected to be generated by
such assets. The Properties policy is to recognize impairment losses when
such estimated cash flows are not sufficient to recover the recorded
value.
Expenditures for ordinary maintenance and repairs are expensed to
operations as incurred. Significant renovations and improvements which
improve and/or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life. Interest and other direct
costs incurred during periods of construction are capitalized as a
component of building costs. Depreciation is calculated on the
straight-line method over the estimated useful lives of assets, which are
as follows:
F-14
<PAGE> 108
<TABLE>
<CAPTION>
TERM
<S> <C>
Buildings and improvements Primarily 39 years
Tenant improvements Term of related leases
</TABLE>
CONCENTRATION OF RISK--A significant portion of the Properties' revenues
are obtained from office properties located in the state of Texas. In
addition, the Properties also derive a significant portion of their
revenues from leases to companies in the Oil Industry.
DEFERRED COSTS--Deferred financing costs are amortized on the
straight-line method over the terms of the loans, which approximates the
interest method. Deferred leasing costs are amortized on the straight-line
method over the terms of the related lease agreements.
RENTAL REVENUE--Rental revenue is recorded on the straight-line method
over the terms of the related lease agreements. As a result, $547,724,
$311,113 and $35,225 of non-cash rents were recorded as rental revenue
during the years ended December 31, 1997, 1996 and 1995, respectively, and
are included in accounts receivable. As of December 31, 1997 and 1996, the
balance of the accounts receivable relating to the straight-lining of
rental revenue is $275,888 and $236,611, respectively.
Revenues from two major tenants each exceeded 10% of the Properties' total
revenues for the years ended December 31, 1997 and 1996. Such revenues
were approximately $1,529,000 and $1,193,000, and $1,094,000 and
$1,010,000 for each of the two tenants for the years ended December 31,
1997 and 1996. For the year ended December 31, 1995 revenues from one
major tenant exceeded 10% of the Properties' total revenues. Such revenues
were $962,000, for this major tenant for the year ended December 31, 1995.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE--The Company provides an
allowance for doubtful accounts against the portion of accounts receivable
which is determined to be uncollectible. Accounts receivable in the
combined balance sheets are shown net of an allowance for doubtful
accounts of $136,931 and $77,778 as of December 31, 1997 and 1996,
respectfully.
NEW ACCOUNTING PRONOUNCEMENTS--The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This statement requires businesses to
disclose comprehensive income and its components in their financial
statements. Management intends to comply with the disclosure requirements
of this statement in the year ending December 31, 1998.
The FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which is effective for fiscal years beginning
after December 15, 1997. This statement redefines how operating segments
are determined and requires qualitative disclosure of certain financial
and descriptive information about a company's operating segments. The
Company will adopt SFAS No. 131 in the year ending December 31, 1998.
Management has not finalized its analysis of which operating segments it
will report on to comply with SFAS No. 131.
INCOME TAXES--The Properties pay no income taxes, and the income or loss
from the Properties is included on the income tax returns of the owners.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The
preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the combined
financial statements and accompanying notes. Significant estimates used by
the Properties include the estimated useful lives for
F-15
<PAGE> 109
depreciable and amortizable assets and costs, and the estimated allowance
for doubtful accounts receivable. Actual results could differ from those
estimates.
2. DEFERRED COSTS
Deferred costs consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Financing costs $ 318,039 $ 318,039
Leasing costs 951,826 683,172
---------- ----------
1,269,865 1,001,211
Less accumulated amortization 552,446 297,829
---------- ----------
Total $ 717,419 $ 703,382
========== ==========
</TABLE>
3. MORTGAGE NOTES AND LOANS PAYABLE - RELATED PARTIES
The following is a summary of mortgage notes and loans payable as of
December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Loans payable - affiliate; interest at 12% per annum payable
monthly, principal payable on demand $ 314,068 $ 210,657
Mortgage notes payable to owners; interest at Prime or LIBOR plus 1.25 at
borrowers option (8.5% per annum at December 31, 1997) with principal and
interest
payable semi-annually through May 31, 2001 19,893,980 20,300,000
----------- -----------
Total $20,208,048 $20,510,657
=========== ===========
</TABLE>
The owners have entered into a mortgage note agreement (the "Agreement")
with commercial lenders providing a maximum loan of $30,000,000 (the
"Loan"). The owners loaned the proceeds of the Loan to various properties.
The Loan is collateralized by a first mortgage on the individual
properties of Claydesta, Heritage and Conoco with a net book value of
$15,453,208 at December 31, 1997. The terms of the Loan are identical to
those of the Mortgage Notes payable to the owners, discussed above.
Aggregate maturities of mortgage notes and loans payable at December 31,
1997 are due in future years as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C> <C>
1998 $ 923,098
1999 1,082,720
2000 1,691,750
2001 16,510,480
-----------
Total $20,208,048
===========
</TABLE>
F-16
<PAGE> 110
4. FUTURE MINIMUM LEASE INCOME
The Properties have entered into lease agreements with lease terms ranging
from one year to forty-five years. The leases generally provide for
tenants to share in increases in operating expenses and real estate taxes
in excess of specified base amounts.
The total future minimum rentals to be received under such noncancelable
operating leases executed as of December 31, 1997 exclusive of tenant
reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
<S> <C>
1998 $ 10,088,070
1999 7,881,558
2000 5,479,636
2001 4,665,701
2002 3,489,228
Thereafter 23,325,376
------------
$ 54,929,569
============
</TABLE>
Certain industrial properties are leased to affiliates of the Properties
with remaining lease terms of up to ten years. Future minimum rentals
include amounts to be received from affiliates totaling $6,518,160.
5. MANAGEMENT FEES
The three properties located in Texas are managed by an unaffiliated third
party for fees which include 3% of monthly rents collected plus expenses
incurred. In addition, they receive a 3% commission on all new leases.
Such amounts are reflected in the statement of operations as management
fees.
In connection with the leasing and management of the Properties, other
entities under control of the owners have provided certain services for
the benefit of the Properties which were not charged to the Properties.
Such amounts incurred were estimated to be $16,000, $16,000 and $14,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The
Properties have recognized such expenses in the statements of operations
for each applicable year and have recorded such amounts as contributions
to owners' equity.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Properties in
estimating its fair value disclosures for financial instruments:
MORTGAGE NOTES PAYABLE--The carrying amount of the Properties' variable
rate borrowings approximates fair value based on the current rate offered
the Properties for similar types of borrowing arrangements.
OTHER--The carrying amount of all other financial instruments approximates
their fair value due to their short term nature.
F-17
<PAGE> 111
7. COMMITMENTS AND CONTINGENCIES
One of the Properties has a $50,000 bank letter of credit which expires on
December 31, 1998. There were no short-term borrowings outstanding on the
letter of credit at December 31, 1997 and 1996.
The Properties are defendants in legal actions arising during the normal
course of business. Management believes that the ultimate outcome of those
actions will not materially affect the Properties' combined financial
position, results of operations or cash flows.
8. REAL ESTATE AND ACCUMULATED DEPRECIATION
Real estate and accumulated depreciation, by property, consists of the
following at December 31, 1997:
<TABLE>
<CAPTION>
COSTS CAPITALIZED SUBSEQUENT
INITIAL COSTS TO ACQUISITION/CONSTRUCTION
BUILDING AND BUILDING AND
LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
<S> <C> <C> <C> <C> <C>
Office:
Sunrise $ $ 745,421 $ 5,492,677 $ $ 3,265,657
Conoco 4,022,920 767,085 2,240,411 428,347
Heritage 4,410,000 165,792 3,993,213 65,854
Claydesta 11,461,060 949,316 7,385,604 290,956
Industrial:
Caballo 113,745 1,244,004
Escondido 122,949 2,890,267 29,067 20,000
Polaris 32,500 299,919
D'Iberville 145,000 1,655,000
------------ ----------- ------------ -------- -----------
Total $ 19,893,980 $ 3,041,808 $ 25,201,095 $ 29,067 $ 4,070,814
============ =========== ============ ======== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS AMOUNT
DATE OF
BUILDING AND ACCUMULATED ACQUISITION/
LOCATION LAND IMPROVEMENTS TOTAL DEPRECIATION (1) CONSTRUCTION
<S> <C> <C> <C> <C> <C>
Office:
Sunrise $ 745,421 $ 8,758,334 $ 9,503,755 $ 1,416,290 12/29/92
Conoco 767,085 2,668,758 3,435,843 209,435 07/12/94
Heritage 165,792 4,059,067 4,224,859 209,797 02/14/96
Claydesta 949,316 7,676,560 8,625,876 414,138 08/16/95
Industrial:
Caballo 113,745 1,244,004 1,357,749 108,640 07/13/94
Escondido 152,016 2,910,267 3,062,283 177,857 08/21/95
Polaris 32,500 299,919 332,419 07/22/96
D'Iberville 145,000 1,655,000 1,800,000 11,538 10/01/97
----------- ------------ ------------ -----------
Total $ 3,070,875 $ 29,271,909 $ 32,342,784 $ 2,547,695
=========== ============ ============ ===========
</TABLE>
F-18
<PAGE> 112
(1) Depreciable lives range from primarily thirty-nine years for
buildings and improvements, to the term of related leases for
tenant improvements.
The following table reconciles the historical cost of the Palace
Properties from January 1, 1995 to December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $ 29,165,376 $ 24,108,257 $ 12,599,690
Additions, during year - Acquisition,
improvements, etc 3,177,712 5,269,186 11,508,567
Deductions during year - Write-off of
tenant improvements (304) (212,067)
------------ ------------ ------------
Balance, end of year $ 32,342,784 $ 29,165,376 $ 24,108,257
============ ============ ============
</TABLE>
The following table reconciles the accumulated depreciation from January
1, 1995 to December 31, 1997.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, beginning of year $ 1,688,018 $ 925,857 $ 329,818
Additions, during year - Depreciation and
amortization for the year 860,645 822,165 596,039
Deductions during year - Accumulated
depreciation of written-off tenant improvements (968) (60,004)
----------- ----------- -----------
Balance, end of year $ 2,547,695 $ 1,688,018 $ 925,857
=========== =========== ===========
</TABLE>
F-19
<PAGE> 113
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein, and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company, the Company's Trust Managers or any of the
Underwriters. This Prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
an offer to buy, to any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Information . . . . . . . . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policies with Respect to Certain Activities . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions . . . . . . . . . . . . . . . .
Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Description of Shares of Beneficial Interest . . . . . . . . . . . . . . . . .
Certain Provisions of the Texas REIT Act and of the Company's
Charter and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares Available for Future Sale . . . . . . . . . . . . . . . . . . . . . . .
Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . .
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
Until , 1998 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
4,290,000 SHARES
PALACE REIT
COMMON SHARES OF
BENEFICIAL INTEREST
---------------
PROSPECTUS
---------------
MORGAN KEEGAN & COMPANY, INC.
__________, 1998
<PAGE> 114
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the offering of the Common Shares being registered. All of the
amounts shown are estimates except the Securities and Exchange Commission
registration fee, the NASD fee and the Nasdaq Stock Market listing fee.
<TABLE>
<CAPTION>
Item Amount
- ---- ----------
<S> <C>
Registration Fee - Securities and Exchange Commission $ 23,000
NASD Fee 8,000
NASDAQ Stock Market Entry Fee 55,000
Transfer Agent's and Registrar's Fees 5,000
Printing and Engraving Fees 134,000
Legal Fees and Expenses (other than Blue Sky) 125,000
Accounting Fees and Expenses 128,000
Blue Sky Fees and Expenses (including fees of counsel) 15,000
Miscellaneous Expenses 100,000
----------
TOTAL $ 593,000
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES
Not applicable.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES
On February 11, 1998, an aggregate of 141,260 Common Shares were sold by
the Company to Messrs. Merker, Lorentzen and Fishman. This issuance of Common
Shares was effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
On March 11, 1998, the Operating Partnership agreed to issue an
aggregate of 415,312 OP Units to Bayview Investments, Inc., Imperial Speedway,
Inc. and Polaris Warehouse, Inc. in exchange for certain of the Properties,
subject to the completion of the Offering and certain other conditions. This
issuance will be effected in reliance upon an exemption from registration under
Section 4(2) of the Securities Act as a transaction not involving a public
offering.
ITEM 34. INDEMNIFICATION OF TRUST MANAGERS AND OFFICERS
Subsection (B) of Section 9.20 of the Texas REIT Act authorizes a REIT
to indemnify any person who was, is, or is threatened to be made a named
defendant or respondent in any threatened, pending, or completed action, suit
or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding, or any inquiry
or investigation that can lead to such an action, suit or proceeding because
the person is or was a trust manager, officer, employee or agent of the REIT or
is or was serving at the request of the REIT as a trust manager, director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another REIT, corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise against
expenses (including court costs and attorney fees), judgments, penalties, fines
and settlements if he conducted himself in good faith and reasonably believed
his conduct was in or not opposed to the best interests of the REIT and, in the
case of any criminal proceeding, had no reasonable cause to believe that his
conduct was unlawful.
The Texas REIT Act further provides that, except to the extent otherwise
permitted by the Texas REIT Act, a person may not be indemnified in respect of
a proceeding in which the person is found liable on the basis that personal
benefit was improperly received by him or in which the person is found liable
to the REIT. Indemnification pursuant to Subsection (B) of Section 9.20 of the
Texas REIT Act is limited to reasonable expenses actually incurred and may
II-1
<PAGE> 115
not be made in respect of any proceeding in which the person has been found
liable for willful or intentional misconduct in the performance of his duty to
the REIT.
Subsection (C) of Section 15.10 of the Texas REIT Act provides that a
trust manager shall not be liable for any claims or damages that may result
from his acts in the discharge of any duty imposed or power conferred upon him
by the REIT if, in the exercise of ordinary care, he acted in good faith and in
reliance upon information, opinions, reports or statements, including financial
statements and other financial data, concerning the REIT, that were prepared or
presented by officers or employees of the REIT, legal counsel, public
accountants, investment bankers or certain other professionals, or a committee
of trust managers of which the trust manager is not a member. In addition, no
trust manager shall be liable to the REIT for any act, omission, loss, damage
or expense arising from the performance of his duty to a REIT, save only for
his own willful misfeasance, willful malfeasance or gross negligence.
The Company's Declaration of Trust provides for indemnification by the
Company of its Trust Managers and officers to the fullest extent permitted by
the Texas REIT Act.
The Company has entered into indemnification agreements requiring the
Company to indemnify its Trust Managers and officers, and advance expenses, to
the maximum extent permitted by Texas law.
The Company intends to maintain Trust Manager and officer liability
insurance.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
ITEM 35. TREATMENT OF PROCEEDS FROM COMMON SHARES BEING REGISTERED
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS
Pro forma Combined Balance Sheet - Palace REIT
Pro forma Combined Statement of Operations - Palace REIT
Notes to Pro forma Combined Financial Statements - Palace REIT
Independent Auditors' Report - Palace REIT
Balance Sheet - Palace REIT
Notes to Balance Sheet - Palace REIT
Independent Auditors' Report - Palace Properties
Combined Financial Statements - Palace Properties
Combined Balance Sheets
Combined Statements of Operations
Combined Statements of Changes in Owners' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements - Palace Properties
B. EXHIBITS
<TABLE>
<S> <C>
* 1.1 Form of Underwriting Agreement.
** 3.1 Declaration of Trust.
* 3.2 Bylaws.
* 4.1 Form of Common Share Certificate.
</TABLE>
II-2
<PAGE> 116
<TABLE>
<S> <C>
* 5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding the legality of
the Common Shares.
* 8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding tax matters.
* 10.1 First Amended and Restated Agreement of Limited Partnership of the Operating
Partnership.
** 10.2 Employment Contract by and between the Company and David. R. Merker.
** 10.3 Employment Contract by and between the Company and Arthur F. Lorentzen, Jr.
* 10.4 Employee and Trust Manager Incentive Share Plan of the Company.
** 10.5 Form of Contribution and Exchange Agreement dated as of ________, 1998, by
and among the Prior Owners and the Operating Partnership and the Company.
** 10.6 Form of Purchase and Sale Agreement dated as of _______, 1998, by and among the
Prior Owners and the Operating Partnership and the Company.
** 10.7 Right of First Refusal Agreement dated as of March 6, 1998, by and between the
Company, the Operating Partnership, Neva Properties, Ltd., Natex, Ltd., Ralph
Englestad, Ltd., Anywhere, Ltd., Who, Ltd., Smith Tower, Ltd., and Las Vegas Motor
Speedway, Inc.
* 10.8 Form of Indemnification Agreement.
* 11.1 Statement Regarding Computation of Per Share Earnings.
** 23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
* 23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Included in response to
items 5.1 and 8.1.
** 24.1 Power of Attorney (included herein on signature page).
* 27.1 Financial Data Schedule.
</TABLE>
- ------------------
* To be filed by amendment.
** Filed herewith.
ITEM 37. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
representatives of the Underwriters at the closing specified in
the Underwriting Agreement certificates in such denominations and
registered in such names as required by the representatives of
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to Trust Managers, officers, and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a trust manager, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such trust manager, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE> 117
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act Palace REIT certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-11 and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Dallas, State of Texas, on March 12, 1998.
PALACE REIT
/s/ David R. Merker
---------------------------------------------
By: David R. Merker, Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints David R. Merker and Arthur F. Lorentzen,
Jr., and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this registration statement, and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
that said attorneys-in-fact and agents, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, as amended, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ David R. Merker Chairman of the Board, Chief March 12, 1998
------------------------------------- Executive Officer and Trust
David R. Merker Manager
(principal executive officer)
/s/ Arthur F. Lorentzen, Jr. President, Chief Operating Officer
------------------------------------- and Trust Manager (interim
Arthur F. Lorentzen, Jr. principal financial and accounting March 12, 1998
officer)
Chief Financial Officer, Secretary ________, 1998
------------------------------------- and Treasurer
/s/ Edward M. Fishman Trust Manager March 12, 1998
-------------------------------------
Edward M. Fishman
Trust Manager ________, 1998
-------------------------------------
John F. Cook
Trust Manager ________, 1998
-------------------------------------
Stephen P. Laffey
</TABLE>
II-5
<PAGE> 119
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
-------- -----------
<S> <C>
* 1.1 Form of Underwriting Agreement.
** 3.1 Declaration of Trust.
* 3.2 Bylaws.
* 4.1 Form of Common Share Certificate.
* 5.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding the legality of the Common
Shares.
* 8.1 Opinion of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P., regarding tax matters.
* 10.1 First Amended and Restated Agreement of Limited Partnership of the Operating Partnership.
** 10.2 Employment Contract by and between the Company and David. R. Merker.
** 10.3 Employment Contract by and between the Company and Arthur F. Lorentzen, Jr.
* 10.4 Employee and Trust Manager Incentive Share Plan of the Company.
Form of Contribution and Exchange Agreement dated as of _______, 1998, by and among the Prior
** 10.5 Owners and the Operating Partnership and the Company.
** 10.6 Form of Purchase and Sale Agreement dated as of _______, 1998, by and among the Prior Owners and
the Operating Partnership and the Company.
** 10.7 Right of First Refusal Agreement dated as of March 6, 1998, by and between the Company, the
Operating Partnership, Neva Properties, Ltd., Natex, Ltd., Ralph Englestad, Ltd., Anywhere,
Ltd., Who, Ltd., Smith Tower, Ltd., and Las Vegas Motor Speedway, Inc.
* 10.8 Form of Indemnification Agreement.
* 11.1 Statement Regarding Computation of Per Share Earnings.
** 23.1 Independent Auditors' Consent, Deloitte & Touche LLP.
* 23.2 Consent of Liddell, Sapp, Zivley, Hill & LaBoon, L.L.P. Included in response to items 5.1 and
8.1.
** 24.1 Power of Attorney (included herein on signature page).
* 27.1 Financial Data Schedule.
</TABLE>
- --------------------
* To be filed by amendment.
** Filed herewith.
<PAGE> 1
EXHIBIT 3.1
DECLARATION OF TRUST
OF
PALACE REIT
The undersigned, acting as the Trust Managers of a real estate
investment trust organized under the Texas Real Estate Investment Trust Act, as
amended (the "Texas REIT Act"), hereby adopt the following Declaration of Trust
for such trust.
ARTICLE ONE
The name of the trust (the "Trust") is "Palace REIT." An assumed name
certificate setting forth such name has been filed in the manner prescribed by
law.
ARTICLE TWO
The Trust is formed pursuant to the Texas REIT Act and has the
following as its purpose:
To purchase, hold, lease, manage, sell, exchange, develop,
subdivide and improve real property and interests in real
property, and in general, to carry on any other business and
do any other acts in connection with the foregoing and to have
and exercise all powers conferred by the laws of the State of
Texas upon real estate investment trusts formed under the
Texas REIT Act, and to do any or all of the things hereinafter
set forth to the same extent as natural persons might or could
do. The term "real property" and the term "interests in real
property" for the purposes stated herein shall not include
severed mineral, oil or gas royalty interests.
ARTICLE THREE
The address of the Trust's principal office and place of business is
8117 Preston Road, Suite 440, Dallas, Texas 75225.
ARTICLE FOUR
The street address of the Trust's registered office is 8117 Preston
Road, Suite 440, Dallas, Texas 75225. The name of the Trust's registered agent
at that address is Edward M. Fishman.
<PAGE> 2
ARTICLE FIVE
The names and business addresses of the Trust Managers approving and
adopting this Declaration of Trust are as follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
David R. Merker 3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109
Arthur F. Lorentzen, Jr. 3535 Las Vegas Boulevard South
Las Vegas, Nevada 89109
</TABLE>
ARTICLE SIX
The period of the Trust's duration is perpetual. The Trust may be
sooner terminated by the vote of the holders of at least a majority of the
outstanding voting Shares (as defined in Article Seven).
ARTICLE SEVEN
The aggregate number of shares of beneficial interest which the Trust
shall have authority to issue is 100,000,000 common shares, $0.005 par value
per share ("Common Shares"), and 10,000,000 preferred shares, $0.005 par value
per share ("Preferred Shares"). All of the Common Shares shall be equal in all
respects to every other such Common Share, and shall have no preference,
conversion, exchange or preemptive rights.
Unless otherwise specified, the term "Shares" in this Declaration of
Trust shall be deemed to refer to the Common Shares and, solely to the extent
specifically required by law or as specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, to the Preferred Shares. For purposes of Articles
Ten and Nineteen (other than Article Nineteen (j)) of this Declaration of
Trust, the term Shares shall be deemed to refer to both the Common Shares and
the Preferred Shares and, for purposes of such Articles Ten and Nineteen (other
than Article Nineteen (j)), the number of outstanding Shares shall be deemed to
be equal to the value of the Trust's outstanding Shares as determined from time
to time by resolution of the Trust Managers, such determination to include an
allocation of relative value among the Common Shares and any outstanding series
of Preferred Shares.
The Trust may issue one or more series of Preferred Shares, each such
series to consist of such number of shares as shall be determined by resolution
of the Trust Managers creating such series. The Preferred Shares of each such
series shall have such designations, preferences, conversion, exchange or other
rights, participations, voting powers, options, restrictions, limitations,
2
<PAGE> 3
special rights or relations, limitations as to dividends, qualifications or
terms, or conditions of redemption thereof, as shall be stated and expressed by
the Trust Managers in the resolution or resolutions providing for the issuance
of such series of Preferred Shares pursuant to the authority to do so which is
hereby expressly vested in the Trust Managers.
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, the number of shares of any such series so set
forth in such resolution or resolutions may be increased or decreased (but not
below the number of shares of such series then outstanding) by a resolution or
resolutions likewise adopted by the Trust Managers.
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, Preferred Shares redeemed or otherwise acquired by
the Trust shall assume the status of authorized but unissued Preferred Shares
and shall be unclassified as to series and may thereafter, subject to the
provisions of this Article Seven and to any restrictions contained in any
resolution or resolutions of the Trust Managers providing for the issuance of
any such series of Preferred Shares, be reissued in the same manner as other
authorized but unissued Preferred Shares.
Except as otherwise specifically provided in any resolution or
resolutions of the Trust Managers providing for the issue of any particular
series of Preferred Shares, holders of Preferred Shares shall have no
preemptive rights.
Except as otherwise specifically required by law or this Declaration
of Trust or as specifically provided in any resolution or resolutions of the
Trust Managers providing for the issuance of any particular series of Preferred
Shares, the exclusive voting power of the Trust shall be vested in the Common
Shares of the Trust. Each Common Share entitles the holder thereof to one vote
at all meetings of the shareholders of the Trust.
ARTICLE EIGHT
The Trust shall issue Shares for consideration consisting of any
tangible or intangible benefit to the Trust, including cash, promissory notes,
services performed, contracts for services to be performed, or other securities
of the Trust, such consideration to be determined by the Trust Managers.
ARTICLE NINE
The Trust Managers shall manage all money and/or property received for
the issuance of Shares for the benefit of the shareholders of the Trust.
3
<PAGE> 4
ARTICLE TEN
The Trust will not commence business until it has received for the
issuance of Shares consideration of at least $1,000 value.
ARTICLE ELEVEN
The Trust shall not engage in any activities beyond the scope of the
purpose of a real estate investment trust formed pursuant to the Texas REIT
Act, as such purpose is set forth in Article Two hereof.
ARTICLE TWELVE
Cumulative voting for the election of Trust Managers is prohibited.
ARTICLE THIRTEEN
(a) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any "Related Person" (as hereinafter defined), shall be required
for the approval or authorization of any "Business Combination" (as hereinafter
defined); provided, however, that the 50% voting requirement referred to above
shall not be applicable if the Business Combination is approved by the
affirmative vote of the holders of not less than 90% of the outstanding Shares;
provided further, that neither the 80% voting requirement nor the 50% voting
requirement referred to above shall be applicable if:
(i) The Trust Managers of the Trust by a vote of not less
than 80% of the Trust Managers then holding office (A)
have expressly approved in advance the acquisition of
Shares of the Trust that caused the Related Person to
become a Related Person or (B) have expressly approved
the Business Combination prior to the date on which the
Related Person involved in the Business Combination
shall have become a Related Person; or
(ii) The Business Combination is solely between the Trust and
another entity, 100% of the voting stock, shares or
comparable interests of which is owned directly or
indirectly by the Trust; or
(iii) The Business Combination is proposed to be consummated
within one year of the consummation of a Fair Tender
Offer (as hereinafter defined) by the Related Person in
which Business Combination the cash or Fair Market
4
<PAGE> 5
Value (as hereinafter defined) of the property,
securities or other consideration to be received per
Share by all remaining holders of Shares of the Trust in
the Business Combination is not less than the price
offered in the Fair Tender Offer; or
(iv) of conditions (A) through (D) of this subparagraph (iv)
shall have been met: (A) if and to the extent permitted
by law, the Business Combination is a merger or
consolidation, consummation of which is proposed to take
place within one year of the date of the transaction
pursuant to which such person became a Related Person
and the cash or Fair Market Value of the property,
securities or other consideration to be received per
Share by all remaining holders of Shares of the Trust in
the Business Combination is not less than the Fair Price
(as hereinafter defined); (B) the consideration to be
received by such holders is either cash or, if the
Related Person shall have acquired the majority of its
holdings of the Trust's Shares for a form of
consideration other than cash, in the same form of
consideration with which the Related Person acquired
such majority; (C) after such person has become a
Related Person and prior to consummation of such
Business Combination: (1) there shall have been no
reduction in the annual rate of dividends, if any, paid
per Share on the Trust's Shares (adjusted as appropriate
for recapitalizations and for Share splits, reverse
Share splits and Share dividends) except any reduction
in such rate that is made proportionately with any
decline in the Trust's net income for the period for
which such dividends are declared and except as approved
by a majority of the Continuing Trust Managers (as
hereinafter defined), and (2) such Related Person shall
not have received the benefit, directly or indirectly
(except proportionately as a shareholder), of any loans,
advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages
provided by the Trust prior to the consummation of such
Business Combination (other than in connection with
financing a Fair Tender Offer); and (D) a proxy
statement that conforms in all respects with the
provisions of the Securities Exchange Act of 1934 (the
"Exchange Act") and the rules and regulations thereunder
(or any subsequent provisions replacing the Exchange Act
or the rules or regulations thereunder) shall be mailed
to holders of the Trust's Shares at least 45 days prior
to the consummation of the Business Combination for the
purpose of soliciting shareholder approval of the
Business Combination; or
(v) The "Rights" (as defined in paragraph (b) of this Article
Thirteen) shall have become exercisable.
(b) If a person has become a Related Person and within one year
after the date (the "Acquisition Date") of the transaction pursuant to which the
Related Person became a Related Person (x) a Business Combination meeting all of
the requirements of subparagraph (iv) of the proviso to
5
<PAGE> 6
paragraph (a) of this Article Thirteen regarding the applicability of the 80%
voting requirement shall not have been consummated and (y) a Fair Tender Offer
shall not have been consummated and (z) the Trust shall not have been dissolved
and liquidated, then, in such event the beneficial owner of each Share (not
including Shares beneficially owned by the Related Person) (each such
beneficial owner being hereinafter referred to as a "Holder") shall have the
right (individually a "Right" and collectively the "Rights"), which may be
exercised subject to the provisions of paragraph (d) of this Article Thirteen,
commencing at the opening of business on the one-year anniversary date of the
Acquisition Date and continuing for a period of 90 days thereafter, subject to
extensions as provided in paragraph (d) of this Article Thirteen (the "Exercise
Period"), to sell to the Trust on the terms set forth herein one Share upon
exercise of such Right. Within five business days after the commencement of
the Exercise Period the Trust shall notify the Holders of the commencement of
the Exercise Period, specifying therein the terms and conditions for exercise
of the Rights. During the Exercise Period, each certificate representing
Shares beneficially owned by a Holder (a "Certificate") shall also represent
the number of Rights equal to the number of Shares represented thereby and the
surrender for transfer of any Certificate shall also constitute the transfer of
the Rights represented by such Shares. At 5:00 P.M., Dallas, Texas time, on
the last day of the Exercise Period, each Right not exercised shall become
void, all rights in respect thereof shall cease as of such time and the
Certificates shall no longer represent Rights.
(c) The purchase price for a Share upon exercise of an accompanying
Right shall be equal to the then-applicable Fair Price paid by the Related
Person (plus, as an allowance for interest, an amount equal to the prime rate
of interest as published in the Wall Street Journal and as in effect from time
to time from the Acquisition Date until the date of the payment for such Share
but less the amount of any cash and the Fair Market Value of any property or
securities distributed with respect to such Shares as dividends or otherwise
during such time period), pursuant to the exercise of the Right relating
thereto. In the event the Related Person shall have acquired any of its
holdings of the Trust's Shares for a form of consideration other than cash, the
value of such other consideration shall be the Fair Market Value thereof.
(d) Notwithstanding the foregoing in paragraph (b) of this Article
Thirteen, the Exercise Period will be deferred in the event (a "Deferral
Event") that the Trust is otherwise prohibited under applicable law from
repurchasing Shares pursuant to the Rights. In the event the Exercise Period
is deferred, or if at any time the Trust reasonably anticipates that a Deferral
Event will exist, the Trust will, as soon as practicable, notify the Holders.
If at the end of any fiscal quarter the Deferral Event ceases to exist, notice
shall be given to the Holders of the commencement of the deferred Exercise
Period, which Exercise Period shall commence no sooner than 15 days nor more
than 45 days from the date of such notice and which shall continue in effect
for a period of time equal in duration to the previously unexpired portion of
the Exercise Period. Notwithstanding any other provision of this Declaration
of Trust to the contrary, during the Exercise Period (including during the
existence of any Deferral Event), neither the Trust nor any subsidiary may
declare or pay any dividend or make any distribution on its Shares or to its
shareholders (other than dividends or distributions payable in its Shares or,
in the case of any subsidiary, dividends payable to the Trust) or purchase,
redeem or otherwise acquire or retire for value, or permit any subsidiary to
purchase or
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otherwise acquire for value, any Shares of the Trust if, upon giving effect to
such dividend, distribution, purchase, redemption, or other acquisition or
retirement, the aggregate amount expended for all such purposes (the amount
expended for such purposes, if other than in cash, to be determined by a
majority of the Continuing Trust Managers, whose determination shall be
conclusive) would prejudice the ability of the Trust to satisfy its maximum
obligation to purchase Shares upon exercise of the Rights.
(e) Rights may be exercised upon surrender to the Trust's principal
transfer agent (the "Transfer Agent") at its principal office of the
Certificate or Certificates evidencing the Shares to be tendered for purchase
by the Trust, together with the form on the reverse thereof completed and duly
signed in accordance with the instructions thereon. In the event that a Holder
shall tender a Certificate which represents greater than the number of Shares
which the Holder elects to require the Trust to purchase upon exercise of the
Rights, the Holder shall designate on the reverse side of such Certificate the
number of Shares to be sold from such Certificate. The Transfer Agent shall
thereupon issue a new Certificate or Certificates for the balance of the number
of Shares not sold to the Trust, which new Certificate or Certificates shall
also represent Rights for an equivalent number of Shares.
(f) For the purposes of this Article:
(i) The term "Business Combination" shall mean (A) any merger
or consolidation, if and to the extent permitted by law,
of the Trust or a subsidiary, with or into a Related
Person, (B) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition, of all or any Substantial
Part (as hereinafter defined) of the assets of the Trust
and its subsidiaries (taken as a whole) (including,
without limitation, any voting securities of a
subsidiary) to or with a Related Person, (C) the
issuance or transfer by the Trust or a subsidiary (other
than by way of a pro rata distribution to all
shareholders) of any securities of the Trust or a
subsidiary of the Trust to a Related Person, (D) any
reclassification of securities (including any reverse
Share split) or recapitalization by the Trust, the
effect of which would be to increase the voting power
(whether or not currently exercisable) of the Related
Person, (E) the adoption of any plan or proposal for the
liquidation or dissolution of the Trust proposed by or
on behalf of a Related Person which involves any
transfer of assets, or any other transaction, in which
the Related Person has any direct or indirect interest
(except proportionately as a shareholder), (F) any
series or combination of transactions having, directly
or indirectly, the same or substantially the same effect
as any of the foregoing, and (G) any agreement, contract
or other arrangement providing, directly or indirectly,
for any of the foregoing.
(ii) The term "Continuing Trust Manager' shall mean (x) any
Trust Manager of the Trust who is not affiliated with a
Related Person and who was a Trust
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<PAGE> 8
Manager immediately prior to the time that the Related
Person became a Related Person, and (y) any other Trust
Manager who is not affiliated with the Related Person
and is recommended either by a majority of the persons
described in clause (x) of this subparagraph (ii) or by
persons described in this clause (y) who are then Trust
Managers of the Trust to succeed a person described in
either the said clause (x) or clause (y) as a Trust
Manager of the Trust.
(iii) The term "Fair Market Value" shall mean: (A) in the case
of securities, the highest closing sale price during the
30-day period immediately preceding the date in question
of such security on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such security is
not quoted on the Composite Tape on the New York Stock
Exchange, or, if such security is not listed on such
Exchange, on the principal United States securities
exchange registered under the Exchange Act on which such
security is listed, or, if such security is not listed
on any such exchange, the highest closing bid quotation
with respect to such security during the 30-day period
preceding the date in question on the National
Association of Securities Dealers, Inc. Automated
Quotation System or any system then in use, or if no
such quotations are available, the fair market value on
the date in question of such security as reasonably
determined by an independent appraiser selected by a
majority of the Continuing Trust Managers (or, if there
are no Continuing Trust Managers, by the investment
banking firm most recently retained by the Trust) in
good faith; and (B) in the case of property other than
cash or stock, the fair market value of such property on
the date in question as reasonably determined by an
independent appraiser selected by a majority of the
Continuing Trust Managers (or, if there are no
Continuing Trust Managers, by the investment banking
firm most recently retained by the Trust) in good faith.
In each case hereunder in which an independent appraiser
is to be selected to determine Fair Market Value, (1) in
the event (x) there are no Continuing Trust Managers,
and (y) the investment banking firm most recently
retained by the Trust is unable or elects not to serve
as such appraiser, or (2) in the event there are
Continuing Trust Managers that do not select an
independent appraiser within 10 days of a request for
such appointment made by a Related Person, such
independent appraiser may be selected by such Related
Person.
(iv) The term "Fair Price" shall mean the highest per-Share
price (which, to the extent not paid in cash, shall
equal the Fair Market Value of any other consideration
paid), with appropriate adjustments for
recapitalizations and for Share splits, reverse Share
splits and Share dividends, paid by the Related Person
in acquiring any of its holdings of the Trust's Shares.
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<PAGE> 9
(v) The term "Fair Tender Offer" shall mean a bona fide
tender offer for all of the Trust's Shares outstanding
(and owned by persons other than a Related Person if the
tender offer is made by the Related Person), whether or
not such offer is conditional upon any minimum number of
Shares being tendered, in which the aggregate amount of
cash or the Fair Market Value of any securities or other
property to be received by all holders who tender their
Shares for each Share so tendered shall be at least
equal to the then applicable Fair Price paid by a
Related Person or paid by the person making the tender
offer if such person is not a Related Person. In the
event that at the time such tender offer is commenced
the terms and conduct thereof are not directly regulated
by Section 14(d) or 13(e) of the Exchange Act and the
general rules and regulations promulgated thereunder,
then the terms of such tender offer regarding the time
such offer is held open and regarding withdrawal rights
shall conform in all respects with such terms applicable
to tender offers regulated by either of such Sections of
the Exchange Act. A Fair Tender Offer shall not be
deemed to be "consummated" until Shares are purchased
and payment in full has been made for all duly tendered
Shares.
(vi) The term "Related Person" shall mean and include any
individual, corporation, partnership or other "person"
(as defined in Section 13(d)(3) of the Exchange Act),
and the "Affiliates" and "Associates" (as defined in
Rule 12b-2 of the Exchange Act) of any such individual,
corporation, partnership or other person which
individually or together is the "Beneficial Owner" (as
defined in Rule 13d-3 of the Exchange Act) in the
aggregate of more than 50% of the outstanding Shares of
the Trust, other than the Trust or any employee benefit
plan(s) sponsored by the Trust.
(vii) The term "Substantial Part" shall mean more than 35% of
the book value of the total assets of the Trust and its
subsidiaries (taken as a whole) as of the end of the
fiscal year ending prior to the time the determination
is being made.
(viii) Any person (as such term is defined in subsection (vi) of
this paragraph (f)) that has the right to acquire any
Shares of the Trust pursuant to any agreement, or upon
the exercise of conversion rights, warrants or options,
or otherwise, shall be deemed a Beneficial Owner of such
Shares for purposes of determining whether such person,
individually or together with its Affiliates and
Associates, is a Related Person.
(ix) For purposes of subparagraph (iii) of paragraph (a) of
this Article Thirteen, the term "other consideration to
be received" shall include, without limitation, Shares
of the Trust retained by its existing public
shareholders in the event of a Business Combination in
which the Trust is the surviving entity.
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(g) The affirmative vote of the holders of not less than 80% of the
outstanding Shares of the Trust, including the affirmative vote of the holders
of not less than 50% of the outstanding Shares not owned, directly or
indirectly, by any Related Person (such 50% voting requirement shall not be
applicable if such amendment, alteration, change, repeal or rescission is
approved by the affirmative vote of not less than 90% of the outstanding
Shares) shall be required to amend, alter, change, repeal or rescind, or adopt
any provisions inconsistent with, this Article Thirteen.
(h) The provisions of this Article Thirteen shall be subject to all
valid and applicable laws, including, without limitation, the Texas REIT Act,
and, in the event this Article Thirteen or any of the provisions hereof are
found to be inconsistent with or contrary to any such valid laws, such laws
shall be deemed to control and this Article Thirteen shall be regarded as
modified accordingly, and, as so modified, to continue in full force and
effect.
ARTICLE FOURTEEN
The Trust Managers may from time to time declare, and the Trust may
pay, dividends or distributions on its outstanding Shares in cash, in property
or in its Shares, except that no dividend or distribution shall be declared or
paid when (i) the Trust is unable to pay its debts as they become due in the
usual course of its business, or when the payment of such dividend or
distribution would result in the Trust being unable to pay its debts as they
become due in the usual course of business, or (ii) the amount of the dividend
or distribution exceeds the surplus of the Trust, except as set forth in the
Texas REIT Act.
ARTICLE FIFTEEN
Upon resolution adopted by the Trust Managers, the Trust shall be
entitled to purchase or redeem, directly or indirectly, its own Shares, subject
to any limitations of the Texas REIT Act.
ARTICLE SIXTEEN
(a) In this Article:
(i) "Indemnitee" means (A) any present or former Trust
Manager or officer of the Trust, (B) any person who
while serving in any of the capacities referred to in
clause (A) hereof served at the Trust's request as a
trust manager, director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar
functionary of another real estate investment trust or
foreign or domestic corporation, partnership, joint
venture, sole proprietorship, trust, employee benefit
plan or other enterprise and (C) any person nominated or
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designated by (or pursuant to authority granted by) the
Trust Managers or any committee thereof to serve in any
of the capacities referred to in clauses (A) or (B)
hereof.
(ii) "Official Capacity" means (A) when used with respect to
a Trust Manager, the office of Trust Manager of the
Trust and (B) when used with respect to a person other
than a Trust Manager, the elective or appointive office
of the Trust held by such person or the employment or
agency relationship undertaken by such person on behalf
of the Trust, but in each case does not include service
for any other real estate investment trust or foreign or
domestic corporation or any partnership, joint venture,
sole proprietorship, trust, employee benefit plan or
other enterprise.
(iii) "Proceeding" means any threatened, pending or completed
action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal
in such an action, suit or proceeding, and any inquiry
or investigation that could lead to such an action, suit
or proceeding.
(b) The Trust shall indemnify every Indemnitee against all
judgments , penalties (including excise and similar taxes), fines, amounts paid
in settlement and reasonable expenses actually incurred by the Indemnitee in
connection with any Proceeding in which he or she was, is or is threatened to
be named defendant or respondent, or in which he or she was or is a witness
without being named a defendant or respondent, by reason, in whole or in part,
of his or her serving or having served, or having been nominated or designated
to serve, in any of the capacities referred to in paragraph (a)(i) of this
Article Sixteen, to the fullest extent that indemnification is permitted by
Texas law. An Indemnitee shall be deemed to have been found liable in respect
of any claim, issue or matter only after the Indemnitee shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom. Reasonable expenses shall include, without limitation, all court
costs and all fees and disbursements of attorneys for the Indemnitee.
(c) Without limitation of paragraph (b) of this Article Sixteen and
in addition to the indemnification provided for in paragraph (b) of this
Article Sixteen, the Trust shall indemnify every Indemnitee against reasonable
expenses incurred by such person in connection with any proceeding in which he
or she is a witness or a named defendant or respondent because he or she served
in any of the capacities referred to in paragraph (a)(i) of this Article
Sixteen.
(d) Reasonable expenses (including court costs and attorneys' fees)
incurred by an Indemnitee who was or is a witness or was, is or is threatened
to be made a named defendant or respondent in a Proceeding shall be paid or
reimbursed by the Trust at reasonable intervals in advance of the final
disposition of such Proceeding after receipt by the Trust of a written
undertaking by or on behalf of such Indemnitee to repay the amount paid or
reimbursed by the Trust if it shall ultimately be determined that he or she is
not entitled to be indemnified by the Trust as authorized in this Article
Sixteen. Such written undertaking shall be an unlimited obligation of the
Indemnitee
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but need not be secured and it may be accepted without reference to financial
ability to make repayment. Notwithstanding any other provision of this Article
Sixteen, the Trust may pay or reimburse expenses incurred by an Indemnitee in
connection with his or her appearance as a witness or other participation in a
Proceeding at a time when he or she is not named a defendant or respondent in
the Proceeding.
(e) The indemnification provided by this Article Sixteen shall (i)
not be deemed exclusive of, or to preclude, any other rights to which those
seeking indemnification may at any time be entitled under the Trust's Bylaws,
any law, agreement or vote of shareholders or disinterested Trust Managers, or
otherwise, or under any policy or policies of insurance purchased and
maintained by the Trust on behalf of any Indemnitee, both as to action in his
or her Official Capacity and as to action in any other capacity, (ii) continue
as to a person who has ceased to be in the capacity by reason of which he or
she was an Indemnitee with respect to matters arising during the period he or
she was in such capacity, and (iii) inure to the benefit of the heirs,
executors and administrators of such a person.
(f) The provisions of this Article Sixteen (i) are for the benefit
of, and may be enforced by, each Indemnitee of the Trust, the same as if set
forth in their entirety in a written instrument duly executed and delivered by
the Trust and such Indemnitee and (ii) constitute a continuing offer to all
present and future Indemnitees. The Trust, by its adoption of this Declaration
of Trust, (x) acknowledges and agrees that each Indemnitee of the Trust has
relied upon and will continue to rely upon the provisions of this Article
Sixteen in becoming, and serving in any of the capacities referred to in
paragraph (a)(i) of this Article Sixteen, (y) waives reliance upon, and all
notice of acceptance of, such provisions by such Indemnitees and (z)
acknowledges and agrees that no present or future Indemnitee shall be
prejudiced in his or her right to enforce the provisions of this Article
Sixteen in accordance with their terms by any act or failure to act on the part
of the Trust.
(g) No amendment, modification or repeal of this Article Sixteen or
any provision of this Article Sixteen shall in any manner terminate, reduce or
impair the right of any past, present or future Indemnitees to be indemnified
by the Trust, nor the obligation of the Trust to indemnify any such
Indemnitees, under and in accordance with the provisions of this Article
Sixteen as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters occurring, in
whole or in part, prior to such amendment, modification or repeal, regardless
of when such claims may be asserted.
(h) If the indemnification provided in this Article Sixteen is
either (i) insufficient to cover all costs and expenses incurred by any
Indemnitee as a result of such Indemnitee being made or threatened to be made a
defendant or respondent in a Proceeding by reason of his or her holding or
having held a position named in paragraph (a)(i) of this Article Sixteen or
(ii) not permitted by Texas law, the Trust shall indemnify, to the fullest
extent that indemnification is permitted by Texas law, every Indemnitee with
respect to all costs and expenses incurred by such Indemnitee as a result of
such Indemnitee being made or threatened to be made a defendant or respondent
in a Proceeding by
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reason of his or her holding or having held a position named in paragraph
(a)(i) of this Article Sixteen.
(i) The indemnification provided by this Article Sixteen shall be
subject to all valid and applicable laws, including, without limitation, the
Texas REIT Act, and, in the event this Article Sixteen or any of the provisions
hereof or the indemnification contemplated hereby are found to be inconsistent
with or contrary to any such valid laws, such laws shall be deemed to control
and this Article Sixteen shall be regarded as modified accordingly, and, as so
modified, to continue in full force and effect.
ARTICLE SEVENTEEN
No Trust Manager or officer of the Trust shall be liable to the Trust
for any act, omission, loss, damage, or expense arising from the performance of
his or her duties under the Trust save only for his or her own willful
misfeasance or malfeasance or negligence. In discharging their duties to the
Trust, Trust Managers and officers of the Trust shall be entitled to rely upon
experts and other matters as provided in the Texas REIT Act and the Trust's
Bylaws.
ARTICLE EIGHTEEN
The number of Trust Managers may be increased from time to time by the
affirmative vote of the majority of the Trust Managers or decreased by the
unanimous vote of the Trust Managers. Each Trust Manager shall serve until his
or her successor is elected and qualified or until his or her death,
retirement, resignation or removal.
A Trust Manager may be removed by the vote of the holders of
two-thirds of the outstanding Shares at a special meeting of the shareholders
called for such purpose pursuant to the Trust's Bylaws.
ARTICLE NINETEEN
(a) Beginning with the date of the Initial Public Offering and
prior to the Restriction Termination Date, no Person may actually,
beneficially, or constructively own Shares of any class or series with an
aggregate value in excess of 9.8% of the aggregate value of all outstanding
Shares of such class or series of Shares or more than 9.8% of the number of
outstanding Shares of any class or series of Shares (the limitation on the
ownership of outstanding Shares is referred to in this Article Nineteen as the
"Ownership Limit" and the 9.8% threshold is referred to in this Article
Nineteen as the "Percentage Limit"), and no Securities (as hereinafter defined)
shall be accepted, purchased, or in any manner acquired by any Person if such
issuance or transfer would result in that Person's ownership of Shares
exceeding the Percentage Limit. For purposes of determining if the Ownership
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Limit is exceeded by a Person, Convertible Securities (as hereinafter defined)
owned by such Person shall be treated as if the Convertible Securities owned by
such Person had been converted into Shares. The Ownership Limit shall not
apply (i) to the acquisition of Securities of the Trust by an underwriter in a
public offering of Securities of the Trust, or in any transaction involving the
issuance of Securities by the Trust, in which a majority of the Trust Managers
determines that the underwriter or other Person or party initially acquiring
such Securities will timely distribute such Securities to or among others so
that, following such distribution, none of such Securities will be Excess
Securities (as hereinafter defined), or (ii) to the acquisition of Securities
pursuant to an exception made pursuant to paragraph (h) hereof.
(b) Nothing in this Article Nineteen shall preclude the settlement
of any transaction in Securities entered into through the facilities of the New
York Stock Exchange. If any Securities are accepted, purchased, or in any
manner acquired by any Person resulting in a violation of paragraph (a) or (e)
hereof, such issuance or transfer shall be valid only with respect to such
amount of Securities issued or transferred as does not result in a violation of
paragraph (a) or (e) hereof, and such acceptance, purchase or acquisition shall
be void ab initio with respect to the amount of Securities that results in a
violation of paragraph (a) or (e) hereof (the "Excess Securities"), and the
intended transferee of such Excess Securities shall acquire no rights in such
Excess Securities except as set forth in subsection (d) below.
(c) Each shareholder shall, within ten days of demand by the Trust
disclose to the Trust in writing such information with respect to his, her or
its ownership of shares as the Trust Managers in their discretion deem
necessary or appropriate in order that the Trust may fully comply with all
provisions of the Internal Revenue Code of 1986, as amended, and any successor
statute (the "Code") relating to REITs and all regulations, rulings and cases
promulgated or decided thereunder (the "REIT Provisions") and to comply with
the requirements of any taxing authority or governmental agency. All Persons
who actually, beneficially or constructively own in excess of 5% (or such lower
percentage as required pursuant to Treasury Regulations) of the Shares must
disclose in writing such ownership information to the Trust no later than
January 31 of each year.
(d) The Excess Securities, and the owners thereof, shall have the
following characteristics, rights and powers:
(i) Upon any purported purchase, sale, exchange, acquisition,
disposition or other transfer or upon any change in the
capital structure of the Trust (including any redemption
of Securities) that results in Excess Securities
pursuant to paragraphs (a) or (e) of this Article
Nineteen, such Excess Securities shall be deemed to have
been transferred to a trust ("Beneficial Trust") for
registration in the name of the Trustee (as hereinafter
defined) for the exclusive benefit of the Charitable
Beneficiary (as hereinafter defined) to whom an interest
in such Excess Securities may later be transferred
pursuant to subparagraph (v) of this subsection (d).
Such transfer to a Beneficial Trust shall be effective
as of the close of business on the business day prior to
the
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date of the transfer or other change in the capital
structure of the Trust. The Trust shall name a Trustee
and Charitable Beneficiary of each Beneficial Trust
within five days after discovery of the existence
thereof. Any such Excess Securities so held in the
Beneficial Trust shall be issued and outstanding shares
of the Trust. The Purported Record Transferee (as
hereinafter defined) (or Purported Beneficial Transferee
(as hereinafter defined), if applicable) shall have no
rights in such Excess Securities except as provided in
this subsection (d).
(ii) The Trustee, as record holder of the Excess Securities,
shall be entitled to receive all dividends and
distributions as may be declared by the Board of Trust
Managers on such Excess Securities, and shall hold such
dividends or distributions in trust for the benefit of
the Charitable Beneficiary. The Purported Record
Transferee (or Purported Beneficial Transferee, if
applicable) with respect to the Excess Securities shall
repay to the Trustee the amount of any dividends or
distributions received by it that (a) are attributable
to any Excess Securities and (b) the record date of
which was on or after the date that such shares became
Excess Securities. The Trust shall take all measures
that it determines reasonably necessary to recover the
amount of any such dividend or distribution paid to the
Purported Record Transferee (or Purported Beneficial
Transferee, if applicable), including, if necessary,
withholding any portion of future dividends or
distributions payable on Excess Securities beneficially
owned or constructively owned by the Person who, but for
the provisions of subparagraph (i) of this subsection
(d), would constructively own or beneficially own the
Excess Securities; and, as soon as reasonably
practicable following the Trust's receipt or withholding
thereof, shall pay over to the Trustee for the benefit
of the Charitable Beneficiary the dividends so received
or withheld, as the case may be.
(iii) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of, or any distribution of the
assets of the Trust (other than a dividend), the Trustee
of each Beneficial Trust shall be entitled to receive,
ratably with each other holder of Securities of the same
class or series, that portion of the assets of the Trust
which is available for distribution to the holders of
such class and series of Securities. The Trustee shall
distribute to the Purported Record Transferee the
amounts received upon such liquidation, dissolution, or
winding up, or distribution, provided, however, that the
Purported Record Transferee shall not be entitled to
receive amounts pursuant to subparagraph (iii) of this
subsection (d) in excess of, in the case of a purported
transfer in which the Purported Record Transferee gave
value for Securities and which transfer resulted in the
transfer of Excess Securities to the Beneficial Trust,
the price per share or security, if any, such Purported
Record Transferee paid for the Securities and, in the
case of a transfer in
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which the Purported Record Transferee did not give value
for such Securities (e.g., if the Securities were
received through a gift or devise) and which transfer
resulted in the transfer of Excess Securities to the
Beneficial Trust, the price per share or security equal
to the Market Price (as hereinafter defined) on the date
of such transfer. Any remaining amount in such
Beneficial Trust shall be distributed to the Charitable
Beneficiary.
(iv) The Trustee shall be entitled to vote all Excess
Securities. Any vote by a Purported Record Transferee
as a holder of Shares or Securities prior to the
discovery by the Trust that the Securities are Excess
Securities shall, subject to applicable law, be
rescinded and shall be void ab initio with respect to
such Excess Securities and the Purported Record
Transferee shall be deemed to have given, as of the
close of business on the business day prior to the date
of the purported transfer that results in the transfer
to the Beneficial Trust of Excess Securities under
subparagraph (i) of this subsection (d), an irrevocable
proxy to the Trustee to vote the Excess Securities in
the manner in which the Trustee, in its sole and
absolute discretion, desires.
(v) The Trustee shall have the exclusive and absolute right
to designate a Permitted Transferee (as hereinafter
defined) of any Excess Securities. In an orderly
fashion so as not materially and adversely to affect the
Market Price of the Excess Securities, the Trustee shall
designate any Person as Permitted Transferee, provided,
however, that (a) the Permitted Transferee so designated
purchases for valuable consideration (whether in a
public or private sale), at a price as set forth in
subparagraph (vii) of this subsection (d), the Excess
Securities and (b) the Permitted Transferee so
designated may acquire such Excess Securities without
such acquisition resulting in a transfer to a Beneficial
Trust and the redesignation of such Securities so
acquired as Excess Securities under subparagraph (i) of
this subsection (d). Upon the designation by the
Trustee of a Permitted Transferee in accordance with the
provisions of subsection (a) or (e) hereof, the Trustee
of a Beneficial Trust shall (w) cause to be transferred
to the Permitted Transferee that number of Excess
Securities acquired by the Permitted Transferee, (x)
cause to be recorded on the books of the Trust that the
Permitted Transferee is the holder of record of such
number of Securities, (y) cause the Excess Securities to
be canceled, and (z) distribute to the Charitable
Beneficiary any and all amounts held with respect to the
Excess Securities after making that payment to the
Purported Record Transferee pursuant to subparagraph
(vi) of this subsection (d).
(vi) Any Purported Record Transferee shall be entitled
(following discovery of the Excess Securities and
subsequent designation of the Permitted Transferee in
accordance with subparagraph (v) of this subsection (d))
to receive from
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the Trustee upon the sale or other disposition of such
Excess Securities the lesser of (a) in the case of (1) a
purported transfer in which the Purported Record
Transferee (or Purported Beneficial Transferee, if
applicable) gave value for Securities and which transfer
resulted in the transfer of Excess Securities to the
Beneficial Trust, the price per share, if any, such
Purported Record Transferee (or Purported Beneficial
Transferee, if applicable) paid for the Securities, or
(2) a transfer in which the Purported Record Transferee
(or Purported Beneficial Transferee, if applicable) did
not give value for such Securities (e.g., if the
Securities were received through a gift or devise) and
which transfer resulted in the transfer of Excess
Securities to the Beneficial Trust, the price per share
equal to the Market Price on the date of such transfer,
and (b) the price per share received by the Trustee of
the Beneficial Trust from the sale or other disposition
of such Excess Securities in accordance with
subparagraphs (v) or (vii) of this subsection (d). Any
amounts received by the Trustee in respect of such
Excess Securities and in excess of such amounts to be
paid the Purported Record Transferee pursuant to
subparagraph (vi) of this subsection (d) shall be
distributed to the Charitable Beneficiary in accordance
with the provisions of subparagraph (v) of this
subsection (d). Each Charitable Beneficiary and
Purported Record Transferee (and Purported Beneficial
Transferee, if different) waives any and all claims that
each may have against the Trustee and the Beneficial
Trust arising out of the disposition of the Excess
Securities, except for claims arising out of the gross
negligence or willful misconduct of, or any failure to
make payments in accordance with this subsection (d) by
such Trustee or the Trust
(vii) Excess Securities shall be deemed to have been offered
for sale to the Trust, or its designee, at a price per
share equal to the lesser of (a) the price per share in
the transaction that created such Excess Securities (or,
in the case of devise or gift, the Market Price at the
time of such devise or gift) and (b) the Market Price on
the date the Trust, or its designee, accepts such offer.
The Trust shall have the right to accept such offer for
a period of ninety days after the later of (y) the date
of the transfer which resulted in such Excess Securities
and (z) the date the Trust determines in good faith that
a transfer resulting in Excess Securities has occurred,
if the Trust does not receive a notice of such transfer
pursuant to subparagraph (v) of this subsection (d).
(e) Any sale, transfer, gift, assignment, devise or other
disposition of Shares or of any interest in Shares, including a "transfer"
resulting from a change in the capital structure of the Trust or the grant of
an option to acquire Shares or any interest therein (collectively, a
"transfer") that, if effective, would result in (i) a violation of the
Ownership Limit shall be void ab initio as to the Shares that would cause such
violation, (ii) the Shares of the Trust being owned by less than 100 persons
(determined without reference to any rules of attribution) shall be void ab
initio as to the
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Shares which would otherwise be beneficially owned by the transferee, (iii) the
Trust being "closely held" within the meaning of Section 856(h) of the Code,
shall be void ab initio as to the transfer of the Shares that would cause the
Trust to be "closely held" within the meaning of Section 856(h) of the Code,
(iv) the Trust owning, directly or indirectly, 10% or more of the ownership
interest in any tenant or subtenant of the Trust's real property within the
meaning of Section 856(d)(2)(B) of the Code and the Treasury Regulations
thereunder, shall be void ab initio, or (v) the disqualification of the Trust
as a REIT shall be void ab initio as to the transfer of the Shares that would
cause the Trust to be disqualified as a REIT, and, in the case of each of
clauses (i), (ii), (iii), (iv) and (v) of this paragraph (e), the intended
transferee shall acquire no rights in such Shares except as set forth in
subsection (d) above.
(f) For purposes of this Article Nineteen:
(i) The term "Charitable Beneficiary" shall mean, with
respect to any Beneficial Trust, one or more
organizations described in each of Section 170(b)(1)(A)
(other than clauses (vii) or (viii) thereof) and Section
170(c)(2) of the Code that are named by the Trustee as
the beneficiary or beneficiaries of such Beneficial
Trust, in accordance with the provisions of subparagraph
(i) of subsection (d) of this Article Nineteen.
(ii) The term "Convertible Securities" means any securities of
the Trust that are convertible into Shares.
(iii) The term "individual" shall mean any natural person as
well as those organizations treated as natural persons
under Section 542(a) of the Code.
(iv) The term "Initial Public Offering" means the sale of
shares pursuant to the Trust's first effective
registration statement for such shares filed under the
Securities Act of 1933, as amended.
(v) The term "Market Price" means the average of the last
reported sales price of Common Shares reported on the
New York Stock Exchange on the five trading days
immediately preceding the relevant date, or if the
Common Shares are not then traded on the New York Stock
Exchange, the last reported sales price of the Common
Shares on the five trading days immediately preceding
the relevant date as reported on any exchange or
quotation system over which the Common Shares may be
traded, or if the Common Shares are not then traded over
any exchange or quotation system, then the market price
of the Common Shares on the relevant date as determined
in good faith by the Trust Managers.
(vi) The term "ownership" (including "own" or "owns") of
Shares means beneficial ownership. Beneficial
ownership, for this purpose shall be defined
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to include actual ownership by a Person, as well as
constructive ownership by such Person after application
of principles in accordance with or by reference to
Sections 318, 544 or 856 of the Code or for purposes of
Rule 13(d) of the Exchange Act.
(vii) The term "Permitted Transferee" shall mean any Person
designated as a Permitted Transferee in accordance with
the provisions of subparagraph (v) of subsection (d) of
this Article Nineteen.
(viii) The term "Person" includes an individual, corporation,
partnership, association, joint stock company, limited
liability company, trust, unincorporated association or
other entity and also includes a "group" as that term is
defined in Section 13(d)(3) of the Exchange Act.
(ix) The term "Purported Beneficial Transferee" shall mean,
with respect to any purported transfer that results in
Excess Securities, the purported beneficial transferee
for whom the Purported Record Transferee would have
acquired Securities of the Trust if such transfer had
been valid under subsection (a) or (e) of this Article
Nineteen.
(x) The term "Purported Record Transferee" shall mean, with
respect to any purported transfer which results in
Excess Securities, the Person who would have been the
record holder of the Securities of the Trust if such
transfer had been valid under subsection (a) or (e) of
this Article Nineteen.
(xi) The term "REIT" means a "real estate investment trust"
as defined in Section 856 of the Code and applicable
Treasury Regulations.
(xii) The term "Restriction Termination Date" means the first
day after the date of the Initial Public Offering on
which the Board of Trust Managers and the shareholders
determine that it is no longer in the best interests of
the Trust to attempt to, or continue to, qualify as a
REIT.
(xiii) The term "Securities" means Shares and Convertible
Securities.
(g) If any of the restrictions on transfer set forth in this
Article Nineteen are determined to be void, invalid or unenforceable by virtue
of any legal decision, statute, rule or regulation, then the intended
transferee of any Excess Securities may be deemed, at the option of the Trust,
to have acted as an agent on behalf of the Trust in acquiring the Excess
Securities and to hold the Excess Securities on behalf of the Trust.
(h) The Percentage Limit set forth in paragraph (a) hereof shall
not apply to Securities which the Trust Managers in their sole discretion may
exempt from the Percentage Limit while
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<PAGE> 20
owned by a Person who has provided the Trust with evidence and assurances
acceptable to the Trust Managers that the qualification of the Trust as a REIT
would not be jeopardized thereby. The Trust Managers, in their sole
discretion, may at any time revoke any exception pursuant to this paragraph (h)
in the case of any Person, and upon such revocation, the provisions of
paragraph (a) hereof shall immediately become applicable to such Person and all
Securities which such Person may own. A decision to exempt or refuse to exempt
from the Percentage Limit the ownership of certain designated Securities, or to
revoke an exemption previously granted, shall be made by the Trust Managers in
their sole discretion, based on any reason whatsoever, including, but not
limited to, the preservation of the Trust's qualification as a REIT.
(i) Subject to the provisions of the first sentence of paragraph
(b) hereof, nothing herein contained shall limit the ability of the Trust to
impose or to seek judicial or other imposition of additional restrictions if
deemed necessary or advisable to protect the Trust and the interests of its
security holders by preservation of the Trust's status as a qualified REIT
under the Code.
(j) All Persons who own 5% or more of the Trust's outstanding
Shares (or such lower percentage as required pursuant to Treasury Regulations)
during any taxable year of the Trust shall file with the Trust an affidavit
setting forth the number of Shares during such taxable year (i) owned directly
(held of record by such Person or by a nominee or nominees of such Person) and
(ii) constructively owned (within the meaning of Section 544 of the Code or for
purposes of Rule 13(d) of the Exchange Act) by the Person filing the affidavit.
The affidavit to be filed with the Trust shall set forth all the information
required to be reported (i) in returns of shareholders under Section 1.857-9 of
the Treasury Regulations or similar provisions of any successor Treasury
Regulations and (ii) in reports to be filed under Section 13(d) of the Exchange
Act. The affidavit or an amendment to a previously filed affidavit shall be
filed with the Trust annually within 60 days after the close of the Trust's
taxable year. A Person shall have satisfied the requirements of this paragraph
(j) if the person furnishes to the Trust the information in such person's
possession after such person has made a good faith effort to determine the
Shares it owns and to acquire the information required by Treasury Regulations
section 1.857-9 or similar provisions of any successor regulation.
ARTICLE TWENTY
The Board of Trust Managers shall use its best efforts to cause the
Trust to qualify for U.S. federal income tax treatment in accordance with the
provisions of the Code applicable to REITs. In furtherance of the foregoing,
the Board of Trust Managers shall use its best efforts to take such actions as
are necessary, and may take such actions as it deems desirable (in its sole
discretion) to preserve the status of the Trust as a REIT.
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ARTICLE TWENTY-ONE
This Declaration of Trust may be amended from time to time by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting Shares, except that (i) Article Eleven hereof (relating to the
prohibition against engaging in non-real estate investment trust businesses);
(ii) Article Thirteen hereof (relating to the approval of Business
Combinations); (iii) Article Eighteen hereof (relating to the number and
removal of Trust Managers); (iv) Article Nineteen hereof (relating to Share
ownership requirements); and (v) this Article Twenty-One may not be amended or
repealed, and provisions inconsistent therewith and herewith may not be
adopted, except by the affirmative vote of the holders of at least 80% of the
outstanding voting Shares.
ARTICLE TWENTY-TWO
Special meetings of the shareholders for any purpose or purposes,
unless otherwise prescribed by law or by the Declaration of Trust, may be
called by the Trust Managers, any officer of the Trust or the holders of at
least 5% of all of the shares entitled to vote at such meeting.
ARTICLE TWENTY-THREE
If any provision of this Declaration of Trust or any application of
any such provision is determined to be invalid by any federal or state court
having jurisdiction over the issue, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be
affected only to the extent necessary to comply with the determination of such
court. In lieu of such illegal, invalid or unenforceable provision, there
shall be added automatically as a part of this Declaration of Trust, a legal,
valid and enforceable provision as similar in terms to such illegal, invalid or
unenforceable provision as may be possible, and the parties hereto request the
court or any arbitrator to whom disputes relating to this Declaration of Trust
are submitted to reform the otherwise illegal, invalid or unenforceable
provision in accordance with this Article Twenty-Three.
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IN WITNESS WHEREOF, the undersigned Trust Managers do hereby execute
this Declaration of Trust as of the 21st day of January, 1998.
/s/ David R. Merker
---------------------------
DAVID R. MERKER
/s/ Arthur F. Lorentzen, Jr.
---------------------------
ARTHUR F. LORENTZEN, JR.
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<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT CONTRACT
PALACE REIT
TEXAS REAL ESTATE INVESTMENT TRUST
THIS EMPLOYMENT CONTRACT is executed as of May 1, 1998, by and between
PALACE REIT, a Texas real estate investment trust ("Company") and DAVID R.
MERKER ("Employee").
1. EMPLOYMENT
The Company hereby employs Employee and Employee hereby accepts
employment upon the terms and conditions set forth below.
2. TERM AND RENEWAL
2.1 Term. The term of this Contract shall be deemed to have
commenced on the date of this Contract (the "Effective Date"), and shall
continue for three (3) years from the Effective Date (the "Term") on the terms
and conditions set forth below, unless sooner terminated as provided in Article
5 below.
2.2 Extension. Following the expiration of each year of the Term
and provided that this Contract has not been terminated pursuant to Article 5
below, and every year thereafter, the Contract shall be automatically renewed
for an additional twelve (12) month period, effective on each anniversary date
of the Effective Date.
3. COMPENSATION
3.1 Base Compensation. For the services to be rendered by
Employee under this Contract, Employee shall be entitled to receive, commencing
as of the Effective Date, an initial annual base compensation ("Base
Compensation") of $200,000.00 payable in twelve (12) equal monthly payments.
This Base Compensation shall be reviewed and adjusted annually as determined by
the Compensation Committee of the Board (the "Board"), but in no event will the
annual Base Compensation be less than the initial amount set forth above.
3.2 Options. The Compensation Committee may, at its discretion and
pursuant to the provisions of the Company's Stock Option Plan, issue to
Employee additional Options to purchase shares of the Company's stock to
compensate Employee for services rendered to the Company and/or as an incentive
for services to be performed in the future.
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3.3 Insurance Benefits.
(a) The Company shall provide to Employee, his spouse and
dependant children, at its sole cost, such health, dental and optical insurance
as the Company may from time to time make available to its other executive
employees.
(b) The Company shall provide Employee such disability
and/or life insurance as the Company in its sole discretion may from time to
time make available to its other executive employees.
3.4 Bonus Compensation. At least annually, the Compensation
Committee of the Board shall review Employee's performance and may award
Employee a cash bonus which the Board shall reasonably determine as fairly
compensating and awarding Employee for service to the Company and/or as an
incentive for continued service to the Company. The amount of such cash bonus
is dependent on, among other things, the achievement of certain performance
levels by the Company, including growth in funds from operations, and
Employee's performance and contribution to increasing the Company's funds from
operations. The amount of such bonus shall be limited to 100% of Employee's
Base Compensation for the year awarded.
3.5 Method of Payment. The monetary compensation payable to
Employee hereunder may be paid in whole or in part, from time to time, by the
Company, its subsidiaries and/or its affiliates, but shall at all times remain
the responsibility of the Company.
4. DUTIES
4.1 Service. Employee shall serve as Chairman of the Board and
Chief Executive Officer of the Company, which office shall at all times
hereunder have the status and duties currently set forth in the Company's
Bylaws, and shall serve as a member of the Board of Trust Managers of the
Company (subject to shareholder approval when required). At the request of the
Board, subject to shareholder approval when required, Employee shall serve as a
director and/or officer of such of the Company's subsidiaries and/or affiliates
as the board may request. Employee may, at his discretion, serve the Company
in other offices and capacities in addition to the foregoing, but shall not be
required to do so. In the event the Company and the Employee voluntarily agree
that Employee shall terminate his service in any one or more of the
aforementioned-capacities, or Employee's service in one or more of the
aforementioned capacities is terminated, Employee's compensation as specified
in the Contract, shall not be diminished or reduced in any manner.
Any change of Employee's status as an officer of the Company as herein
provided or any material decrease in Employee's authority or responsibilities
hereunder, without Employee's written consent shall, at Employee's election,
constitute a material breach of this Contract and immediate termination without
cause of Employee's employment hereunder.
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4.2 Devotion of Time and Effort. Employees shall use his good
faith best efforts and judgement in performing his duties as required hereunder
and to act in the best interests of the Company. Employee shall devote such
time, attention and energies to the business of the Company as are reasonably
necessary to satisfy Employee's required responsibilities and duties hereunder.
4.3 Other Activities. Employee may engage in other activities for
his own account during the term of this Contract including charitable
activities, community activities and/or other business activities.
4.4 Vacation. It is understood and agreed that Employee shall be
entitled to four (4) weeks vacation per year. During such vacation periods,
Employee shall not be relieved of his duties under this Contract, and there
will be no abatement or reduction of Employee's compensation hereunder.
4.5 The Company's Obligations. The Company shall provide Employee
with any and all necessary appropriate current financial information and access
to current information and records regarding all material transactions
involving the Company and/or its subsidiaries and/or affiliates, including but
not limited to acquisition of assets, personnel contracts, dispositions of
assets, service agreements and registration statements or other state or
federal filings or disclosures to carry out his duties and responsibilities
hereunder. In addition, the Company agrees to provide Employee, as a condition
to his services hereunder, such staff, equipment and office space as is
reasonably necessary for Employee to perform his duties hereunder.
5. TERMINATION
5.1 By Company Without Cause. The Company may terminate this
Contract without "cause" (as that term is hereinafter defined), provided that
the Company first delivers to Employee the Company's written election to
terminate this Contract at least ninety (90) days prior to the effective date
of termination.
5.2 Severance Payment.
5.2.1 Amount. In the event the Company terminates
Employee's services hereunder pursuant to Section 5.1, Employee shall
continue to render services pursuant hereto until the date of
termination and shall continue to receive compensation, as provided
hereunder, through the termination date. In addition to other
compensation payable to Employee for services through the termination
date, the Company shall pay Employee on the termination date, as a
single severance payment, an amount (the "Severance Amount") equal to
two times the sum of (i) Employee's current annual Base Compensation,
and (ii) the highest annual bonus paid to Employee with respect to the
two preceding fiscal years.
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5.2.2 Excise Tax Gross-Up.
(a) Notwithstanding anything contained in this Agreement
to the contrary, in the event it shall be determined (pursuant to (b)
below) or finally determined (as defined in (c) below) that any
payment, distribution or benefit by the Company or its predecessors,
or the subsidiaries or affiliates of the Company or its predecessors,
to or for the benefit of Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement
or otherwise, but determined without regard to any additional payments
required under this Section 5.2.2) (a "PAYMENT") is or was subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended, or any interest or penalties are or were incurred by
Employee with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively
referred to as the "EXCISE TAX"), then, within ten (10) days after
such determination or final determination, as the case may be, the
Company shall pay to Employee an additional cash payment or additional
cash payments (hereinafter referred to in the aggregate as the
"GROSS-UP PAYMENT") in an aggregate amount such that after payment by
Employee of all taxes, interest and penalties imposed with respect to
the Gross-Up Payment (including, without limitation, any excise taxes
imposed upon the Gross-Up Payment), Employee retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the payments.
(b) Except as provided in subsection (c) below, the
determination that a Payment is subject to an Excise Tax shall be made
by a certified public accounting firm engaged by Employee ("Employee's
Accountant"). Such determination shall include the amount of the
Gross-Up Payment, including when a Gross-Up Payment is to be paid and
the assumptions to be utilized in arriving at such determination,
which determination shall provide detailed supporting calculations
both to the Company and to the Employee within fifteen (15) business
days of the receipt of notice from the Employee that there has been a
Payment. The calculations prepared by Employee's Accountant shall be
reviewed on behalf of the Company by a certified public accounting
firm engaged by the Company. The Company shall notify Employee within
ten (10) business days of any disagreement or dispute with the
findings of Employee's Accountant, and failure to so notify shall be
considered a determination in favor of the findings of Employee's
Accountant, obligating the Company to make payment as provided in
subsection (a) above. In the event of a dispute between the Company's
accounting firm and Employee's Accountant, such firms shall jointly
select a third nationally recognized certified public accounting firm
to resolve the dispute and the decision of such third firm shall be
final, binding and conclusive upon the Employee and the Company. In
such a case, the third accounting firm's findings (rather than those
of the Employee's Accountant) shall be deemed the binding
determination, obligating the Company to make payment as
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provided in subsection (a) above. All fees and expenses of each of
the accounting firms shall be borne solely by the Company.
(c) (i) Employee shall notify the Company in writing
of any claim by the Internal Revenue Service (or any successor
thereof), that, if successful, would require the payment by the
Company of the Gross- Up Payment. Such notification shall be given as
soon as practicable but no later than thirty (30) days after Employee
receives written notice of such claim and shall apprise the Company of
the nature of such claim and the date on which such claim is requested
to be paid. Employee shall not pay such claim prior to the expiration
of the 30-day period following the date on which Employee gives such
notice to the Company (or such shorter period ending on the date that
any payment of taxes, interest or penalties with respect to such claim
is due). If the Company notifies Employee in writing prior to the
expiration of such period that it desires to contest such claim (and
demonstrates to the reasonable satisfaction of Employee its ability to
make the payments to Employee which may ultimately be required under
this section before assuming responsibility for the claim), Employee
shall:
(A) give the Company any information reasonably
requested by the Company relating to such
claim,
(B) take such action in connection with
contesting such claim as the Company shall
reasonably request in writing from time to
time, including, without limitation,
accepting legal representation with respect
to such claim by an attorney selected by the
Company that is reasonably acceptable to
Employee,
(C) cooperate with the Company in good faith in
order to effectively contest such claim, and
(D) permit the Company to participate in any
proceedings relating to such claim; provided,
however, that the Company shall bear and pay
directly all attorneys fees, costs and
expenses (including additional interest and
penalties) incurred in connection with such
contest and shall indemnify and hold Employee
harmless, on an after-tax basis, for all
taxes, interest and penalties imposed as a
result of such representation, payment of
costs and expenses or indemnification.
Without limitation on the foregoing
provisions of this Section 5.2.2, the Company
shall control all proceedings taken in
connection with such contest and, at its sole
option, may pursue or forego any and all
administrative
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appeals, proceedings, hearings and
conferences with the taxing authority in
respect of such claim and may, at its sole
option, either direct Employee to pay the
tax, interest or penalties claimed and sue
for a refund or contest the claim in any
permissible manner, and Employee agrees to
prosecute such contest to a determination
before any administrative tribunal, in a
court of initial jurisdiction and in one or
more appellate courts, as the Company shall
determine; provided, however, that if the
Company directs Employee to pay such claim
and sue for a refund, the Company shall
advance an amount equal to such payment to
Employee, on an interest-free basis, and
shall indemnify and hold Employee harmless,
on an after-tax basis, from all taxes,
interest or penalties imposed with respect to
such advance or with respect to any imputed
income with respect to such advance; and,
further, provided that any extension of the
statute of limitations relating to payment of
taxes, interest or penalties for the taxable
year of Employee with respect to which such
contested amount is claimed to be due is
limited solely to such contested amount; and,
provided, further, that any settlement of any
claim shall be reasonably acceptable to
Employee and the Company's control of the
contest shall be limited to issues with
respect to which a Gross-Up Payment would be
payable hereunder, and Employee shall be
entitled to settle or contest, as the case
may be, any other issue raised by the
Internal Revenue Service or any other taxing
authority.
(ii) If, after receipt by Employee of an amount
advanced by the Company pursuant to Section 5.2.2 (c) (i),
Employee receives any refund with respect to such claim,
Employee shall (subject to the Company's complying with the
requirements of Section 5.2.2) promptly pay to the Company an
amount equal to such refund (together with any interest paid
or credited thereon after taxes applicable thereto). If,
after the receipt by Employee of an amount advanced by the
Company pursuant to Section 5.2.2 (c) (i), it is finally
determined that Employee is not entitled to any refund with
respect to such claim, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
(iii) For purposes of this Section 5.2.2, whether
the Excise Tax is applicable to a Payment shall be deemed to
be "finally determined" upon the earliest of (A) the
expiration of thirty (30) days following the rendering of a
decision by the Internal Revenue Service (or any successor
thereto) or a court of competent jurisdiction unless, within
such 30-day period, the Company notifies Employee in
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<PAGE> 7
writing of its intent to contest such decision, (B) the
rendering of a decision by the Internal Revenue Service (or
any successor thereto) or a court of competent jurisdiction,
from which decision no further right of appeal exists, or (C)
the expiration of the statutory period (including any
extensions thereto) for the assessment and collection of the
Excise Tax.
5.2.3 The Employee acknowledges that, if he should exercise
any portion of the Options more than three (3) months following the
date of Employee's Termination of Employment for any reason other than
death or disability (within the meaning of Section 22 (e) (3) of the
Code, he will be taxed as to such portion of the Option so exercised,
as if such portion of the Option did not qualify as a "incentive stock
option" (within the meaning of Section 422 of the Code) but rather as
if such portion was a non-qualified option. Employee shall be
required to pay any and all withholding taxes payable at the time of
the exercise of the option or the Company shall have the right to
withhold stock in an amount equal to the amount of the withholding tax
for payment on Employee's behalf.
5.2.4 Notwithstanding anything contained in any stock
option agreement pursuant to which stock options may have been granted
or may in the future be granted to Employee, all stock options held
by Employee and not otherwise exercisable at the time of termination
of the employment of Employee under Section 5.1 shall, immediately
upon such termination, become exercisable in full and Employee shall
have the right to exercise such stock options, as well as all other
stock options held by Employee at the time of such termination, at any
time during the period ending on the 10th anniversary of the
respective date of grant of the option.
5.3 By the Company for Cause. The Company may terminate Employee
for cause at any time, upon written notice. For the Purpose hereof, "cause"
shall mean:
5.3.1 Employee's conviction for a felony; or
5.3.2 Employee's conviction for the crime of theft,
embezzlement or misappropriation against the Company; or
5.3.3 The final determination by a court of competent
jurisdiction or by the Board that Employee has materially breached
Sections 4, 6, or 7 of this Contract, if such breach is incurable; or,
if curable, a determination that Employee had been given reasonable
opportunity to cure and had not done so; or
5.3.4 Employee's death or permanent disability.
In the event Employee is terminated for cause pursuant to this
Section, Employee shall have the right to receive his compensation as otherwise
provided under this Contract through the effective date of termination.
Employee shall have no further right to receive compensation or other
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consideration from the Company, or have any other remedy whatsoever against the
Company, as a result of this Contract or the termination thereof.
The foregoing notwithstanding, in the event Employee is terminated by
reason of his permanent disability or death, the Company shall immediately pay
Employee or his representative a single severance payment as set forth under
Section 5.2, and the Employee shall have the same rights as set forth under
Section 5.2.3 regarding all stock options.
5.4 Employee's Termination for Cause. Employee may terminate this
Agreement at any time if:
5.4.1 The Company is in material breach of its obligations
hereunder; and
5.4.2 Either such breach is incurable or, if curable, has
not been cured within fifteen (15) days following receipt of written
notice of such breach by the Company.
In no event, however, may the Employee terminate this Agreement
without providing the Company with at least ten (10) days written notice of its
intent to terminate this Agreement. In the event Employee terminates this
Contract pursuant to this Section, Employee shall have the same rights and
remedies against the Company as he would have had the Company terminated his
employment without cause pursuant to Section 5.1 hereof (including all rights
under Section 5.2).
5.5 Employee's Voluntary Termination. Employee may, at any time,
terminate this Contract without cause upon written notice delivered to the
Company at least ninety (90) days prior to the effective date of termination.
In the event of such voluntary termination:
5.5.1 Employee shall have the right to monetary
compensation as provided in paragraph 3.1 above through the effective
date of termination, but shall have no further right to compensation
thereafter; and
5.5.2 Employee's stock options shall be null and void as of
the date of termination except as provided in Section 5.6 below.
The Company and Employee shall not have any further right or remedy
against one another in the event Employee terminates this Contract pursuant to
this Section except as provided in Articles 6, 7, 8, and 9 hereof which shall
remain in full force and effect.
5.6 Employee's Retention of Securities. In the event the Company
terminates Employee, without cause, Employee shall retain all options and other
securities he then owns, of record or otherwise, of the Company and/or its
subsidiaries and/or affiliates, and shall have the right to exercise said
options at any time during the remaining term of said option. In the event the
Company
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terminates this Contract for cause pursuant to Section 5.3, or Employee
voluntarily terminates this Contract pursuant to Section 5.5 above, any Options
issued to Employee which may not then have been exercised on the date of said
Termination shall be exercised within three (3) months of the date of
Termination or shall be null and void as of the date three (3) months after
Termination.
5.7 Change of Control. The Employee may terminate his employment
under this Agreement any time within two (2) years after a "change in control"
of the Company. For purposes of this Agreement, a "change in control" shall be
deemed to have occurred upon (a) the acquisition by any person of twenty
percent (20%) of the issued and outstanding stock of the Company, (b) a change
in majority of the members of the Board in connection with a tender, offer,
merger, sale of assets, etc., (c) the sale of all or substantially all of the
Company's assets or (d) a dissolution or liquidation of the Company. In the
event Employee terminates his employment within two (2) years after a change in
control, Employee shall continue to render services pursuant hereto until the
date of termination and shall continue to receive compensation, as provided
hereunder, through the termination date. In addition to other compensation
payable to Employee for services through the termination date, the Employee
shall have the same rights and remedies against the Company as he would have
had the Company terminated his employment without cause pursuant to Section 5.1
hereof (including the right to payments under Section 5.2).
6. TRADE SECRETS
During the term of employment under this Contract, Employee will have
access to and become acquainted with various information not generally
available to the public consisting of records, documents, drawings,
specifications, customer lists, procedural and operational manuals and
information, and financial records and accounts, projections and budgets, and
similar information, all of which are owned by the Company and regularly used
in the operation of the Company's business. Such assets of the Company are
secret, not generally available to the public and give the Company an advantage
over competitors who do not know of or use such information. Employee agrees
such information and documents relating to the business of the Company, whether
they are prepared by Employee or come into Employee's possession in any other
way, are owned by the Company, shall remain the exclusive property of the
Company. Employee covenants that he shall not misuse, misappropriate or
disclose any of the trade secrets described above, directly or indirectly.
Employee acknowledges and agrees not to sell any of the Company's trade
secrets.
7. SOLICITATION OF EMPLOYEES
7.1 Use of Information. Employee acknowledges and agrees that the
names, addresses and relationships of persons who perform services or provide
goods or materials to or for the Company are unique, and that the nature and
substance of the Company's relationship with such persons constitute the
Company's "trade secrets". Employee acknowledges that the sale or unauthorized
use or disclosure of any of such relationships which Employee learned of during
his employment with the Company is not permitted.
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7.2 Non-Disclosure. During the term of his employment with the
Company, and for a period of two (2) years thereafter, Employee shall not,
directly or indirectly, make known to any person, firm or company the substance
or content of any relationship of the Company with any employee, independent
contractor or provider of goods or materials to the Company. Employee agrees
that he shall not solicit, take away or induce any such person to end their
relationship with the Company, or to attempt to do any of the foregoing, or
recruit, hire or otherwise induce any such person to perform services for
Employee, or any other person, firm or company.
8. NON-COMPETITION AFTER TERMINATION
Employee shall not, for a period of one (1) year following the date of
termination, engage in the development, acquisition, construction or management
of any office and industrial properties outside of the Company within the same
markets as the Company. Nothing herein shall relieve or limit Employee's
obligation to comply with Section 6 and 7 above. The restrictions set forth in
this Section shall not apply if Employee is terminated pursuant to Section 5.1
above. If any provision hereof is determined by any court of competent
jurisdiction to be invalid or unenforceable by reason of such provision
extending the covenants and agreements contained herein for too great a period
of time or over too great a geographical area, or being too extensive in any
other respect, such provision shall be interpreted to extend only over the
maximum period of time and geographical area, and to the maximum extent in all
other respects, as to which it is valid and enforceable, all as determined by
such court in such action.
9. INDEMNIFICATION
The Company shall indemnify Employee for all losses sustained by
Employee as a direct or indirect consequence of the discharge of his duties on
behalf of the Company to the fullest extent permitted under applicable law so
long as Employee acted in good faith and in a manner which he believed to be in
the best interests of the Company with respect to the matter giving rise to the
claim or loss which Employee seeks indemnification.
10. BUSINESS EXPENSES
The Company shall promptly, but in no event later than ten (10) days
after submission of a claim of expenditure, reimburse Employee for all
reasonable business expenses incurred by him in connection with the business of
the Company and/or its subsidiaries and/or affiliates, upon presentation to the
Company of written receipts for such expenses.
11. MISCELLANEOUS PROVISIONS
11.1 Binding Effect. This Contract shall be binding upon and inure
to the benefit of any successor or successors of the Company and the personal
representative of Employee.
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11.2 Attorney's Fees. If any legal action, arbitration or other
proceedings is brought for the enforcement of this Contract, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Contract, the prevailing party shall be entitled to recover reasonable
attorney's fees and other costs incurred in that action or proceeding, in
addition to any other relief to which that party would be entitled.
11.3 Entire Contract. This Contract constitutes the entire
agreement of the parties, and supersedes all prior agreements, understandings
and negotiations, whether written or oral, between the Company and Employee
with respect to the employment of Employee by the Company, its subsidiaries
and/or affiliates. This Contract may not be changed orally, but only by
agreement in writing, signed by all parties.
11.4 Provisions Severable. In case any one or more provisions of
this Contract shall be invalid, illegal or unenforceable, in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not, in any way, be affected to impaired thereby.
11.5 Governing Law. This Contract shall be governed by and
construed under the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties hereto have executed this
Contract in Clark County, Nevada.
THE COMPANY: EMPLOYEE:
PALACE REIT
By: /s/ Arthur F. Lorentzen, Jr. /s/ David R. Merker
------------------------------------------ ----------------------
Arthur F. Lorentzen, Jr., President and DAVID R. MERKER
and Chief Operating Officer
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EXHIBIT 10.3
EMPLOYMENT CONTRACT
PALACE REIT
TEXAS REAL ESTATE INVESTMENT TRUST
THIS EMPLOYMENT CONTRACT is executed as of May 1, 1998, by and between
PALACE REIT, a Texas real estate investment trust ("Company") and ARTHUR F.
LORENTZEN, JR. ("Employee").
1. EMPLOYMENT
The Company hereby employs Employee and Employee hereby accepts
employment upon the terms and conditions set forth below.
2. TERM AND RENEWAL
2.1 Term. The term of this Contract shall be deemed to have
commenced on the date of this Contract (the "Effective Date"), and shall
continue for three (3) years from the Effective Date (the "Term") on the terms
and conditions set forth below, unless sooner terminated as provided in Article
5 below.
2.2 Extension. Following the expiration of each year of the Term
and provided that this Contract has not been terminated pursuant to Article 5
below, and every year thereafter, the Contract shall be automatically renewed
for an additional twelve (12) month period, effective on each anniversary date
of the Effective Date.
3. COMPENSATION
3.1 Base Compensation. For the services to be rendered by
Employee under this Contract, Employee shall be entitled to receive, commencing
as of the Effective Date, an initial annual base compensation ("Base
Compensation") of $200,000.00 payable in twelve (12) equal monthly payments.
This Base Compensation shall be reviewed and adjusted annually as determined by
the Compensation Committee of the Board (the "Board"), but in no event will the
annual Base Compensation be less than the initial amount set forth above.
3.2 Options. The Compensation Committee may, at its discretion and
pursuant to the provisions of the Company's Stock Option Plan, issue to
Employee additional Options to purchase shares of the Company's stock to
compensate Employee for services rendered to the Company and/or as an incentive
for services to be performed in the future.
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3.3 Insurance Benefits.
(a) The Company shall provide to Employee, his spouse and
dependant children, at its sole cost, such health, dental and optical insurance
as the Company may from time to time make available to its other executive
employees.
(b) The Company shall provide Employee such disability
and/or life insurance as the Company in its sole discretion may from time to
time make available to its other executive employees.
3.4 Bonus Compensation. At least annually, the Compensation
Committee of the Board shall review Employee's performance and may award
Employee a cash bonus which the Board shall reasonably determine as fairly
compensating and awarding Employee for service to the Company and/or as an
incentive for continued service to the Company. The amount of such cash bonus
is dependent on, among other things, the achievement of certain performance
levels by the Company, including growth in funds from operations, and
Employee's performance and contribution to increasing the Company's funds from
operations. The amount of such bonus shall be limited to 100% of Employee's
Base Compensation for the year awarded.
3.5 Method of Payment. The monetary compensation payable to
Employee hereunder may be paid in whole or in part, from time to time, by the
Company, its subsidiaries and/or its affiliates, but shall at all times remain
the responsibility of the Company.
4. DUTIES
4.1 Service. Employee shall serve as President and Chief
Operating Officer of the Company, which office shall at all times hereunder
have the status and duties currently set forth in the Company's Bylaws, and
shall serve as a member of the Board of Trust Managers of the Company (subject
to shareholder approval when required). At the request of the Board, subject
to shareholder approval when required, Employee shall serve as a director
and/or officer of such of the Company's subsidiaries and/or affiliates as the
board may request. Employee may, at his discretion, serve the Company in other
offices and capacities in addition to the foregoing, but shall not be required
to do so. In the event the Company and the Employee voluntarily agree that
Employee shall terminate his service in any one or more of the
aforementioned-capacities, or Employee's service in one or more of the
aforementioned capacities is terminated, Employee's compensation as specified
in the Contract, shall not be diminished or reduced in any manner.
Any change of Employee's status as an officer of the Company as herein
provided or any material decrease in Employee's authority or responsibilities
hereunder, without Employee's written consent shall, at Employee's election,
constitute a material breach of this Contract and immediate termination without
cause of Employee's employment hereunder.
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4.2 Devotion of Time and Effort. Employees shall use his good
faith best efforts and judgement in performing his duties as required hereunder
and to act in the best interests of the Company. Employee shall devote such
time, attention and energies to the business of the Company as are reasonably
necessary to satisfy Employee's required responsibilities and duties hereunder.
4.3 Other Activities. Employee may engage in other activities for
his own account during the term of this Contract including charitable
activities, community activities and/or other business activities.
4.4 Vacation. It is understood and agreed that Employee shall be
entitled to four (4) weeks vacation per year. During such vacation periods,
Employee shall not be relieved of his duties under this Contract, and there
will be no abatement or reduction of Employee's compensation hereunder.
4.5 The Company's Obligations. The Company shall provide Employee
with any and all necessary appropriate current financial information and access
to current information and records regarding all material transactions
involving the Company and/or its subsidiaries and/or affiliates, including but
not limited to acquisition of assets, personnel contracts, dispositions of
assets, service agreements and registration statements or other state or
federal filings or disclosures to carry out his duties and responsibilities
hereunder. In addition, the Company agrees to provide Employee, as a condition
to his services hereunder, such staff, equipment and office space as is
reasonably necessary for Employee to perform his duties hereunder.
5. TERMINATION
5.1 By Company Without Cause. The Company may terminate this
Contract without "cause" (as that term is hereinafter defined), provided that
the Company first delivers to Employee the Company's written election to
terminate this Contract at least ninety (90) days prior to the effective date
of termination.
5.2 Severance Payment.
5.2.1 Amount. In the event the Company terminates
Employee's services hereunder pursuant to Section 5.1, Employee shall
continue to render services pursuant hereto until the date of
termination and shall continue to receive compensation, as provided
hereunder, through the termination date. In addition to other
compensation payable to Employee for services through the termination
date, the Company shall pay Employee on the termination date, as a
single severance payment, an amount (the "Severance Amount") equal to
two times the sum of (i) Employee's current annual Base Compensation,
and (ii) the highest annual bonus paid to Employee with respect to the
two preceding fiscal years.
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5.2.2 Excise Tax Gross-Up.
(a) Notwithstanding anything contained in this
Agreement to the contrary, in the event it shall be determined
(pursuant to (b) below) or finally determined (as defined in
(c) below) that any payment, distribution or benefit by the
Company or its predecessors, or the subsidiaries or affiliates
of the Company or its predecessors, to or for the benefit of
Employee (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional
payments required under this Section 5.2.2) (a "PAYMENT") is
or was subject to the excise tax imposed by Section 4999 of
the Internal Revenue Code of 1986, as amended, or any interest
or penalties are or were incurred by Employee with respect to
such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred
to as the "EXCISE TAX"), then, within ten (10) days after such
determination or final determination, as the case may be, the
Company shall pay to Employee an additional cash payment or
additional cash payments (hereinafter referred to in the
aggregate as the "GROSS-UP PAYMENT") in an aggregate amount
such that after payment by Employee of all taxes, interest and
penalties imposed with respect to the Gross-Up Payment
(including, without limitation, any excise taxes imposed upon
the Gross-Up Payment), Employee retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the
payments.
(b) Except as provided in subsection (c) below,
the determination that a Payment is subject to an Excise Tax
shall be made by a certified public accounting firm engaged by
Employee ("Employee's Accountant"). Such determination shall
include the amount of the Gross-Up Payment, including when a
Gross-Up Payment is to be paid and the assumptions to be
utilized in arriving at such determination, which
determination shall provide detailed supporting calculations
both to the Company and to the Employee within fifteen (15)
business days of the receipt of notice from the Employee that
there has been a Payment. The calculations prepared by
Employee's Accountant shall be reviewed on behalf of the
Company by a certified public accounting firm engaged by the
Company. The Company shall notify Employee within ten (10)
business days of any disagreement or dispute with the findings
of Employee's Accountant, and failure to so notify shall be
considered a determination in favor of the findings of
Employee's Accountant, obligating the Company to make payment
as provided in subsection (a) above. In the event of a
dispute between the Company's accounting firm and Employee's
Accountant, such firms shall jointly select a third nationally
recognized certified public accounting firm to resolve the
dispute and the decision of such third firm shall be final,
binding and conclusive upon the Employee and the Company. In
such a case, the third accounting firm's findings (rather than
those of the Employee's Accountant) shall be deemed the
binding determination, obligating the Company to make payment
as
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provided in subsection (a) above. All fees and expenses of
each of the accounting firms shall be borne solely by the
Company.
(c) (i) Employee shall notify the Company in
writing of any claim by the Internal Revenue Service (or any
successor thereof), that, if successful, would require the
payment by the Company of the Gross-Up Payment. Such
notification shall be given as soon as practicable but no
later than thirty (30) days after Employee receives written
notice of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is
requested to be paid. Employee shall not pay such claim prior
to the expiration of the 30-day period following the date on
which Employee gives such notice to the Company (or such
shorter period ending on the date that any payment of taxes,
interest or penalties with respect to such claim is due). If
the Company notifies Employee in writing prior to the
expiration of such period that it desires to contest such
claim (and demonstrates to the reasonable satisfaction of
Employee its ability to make the payments to Employee which
may ultimately be required under this section before assuming
responsibility for the claim), Employee shall:
(A) give the Company any information
reasonably requested by the Company
relating to such claim,
(B) take such action in connection with
contesting such claim as the Company
shall reasonably request in writing
from time to time, including,
without limitation, accepting legal
representation with respect to such
claim by an attorney selected by the
Company that is reasonably
acceptable to Employee,
(C) cooperate with the Company in good
faith in order to effectively
contest such claim, and
(D) permit the Company to participate in
any proceedings relating to such
claim; provided, however, that the
Company shall bear and pay directly
all attorneys fees, costs and
expenses (including additional
interest and penalties) incurred in
connection with such contest and
shall indemnify and hold Employee
harmless, on an after-tax basis, for
all taxes, interest and penalties
imposed as a result of such
representation, payment of costs and
expenses or indemnification.
Without limitation on the foregoing
provisions of this Section 5.2.2,
the Company shall control all
proceedings taken in connection with
such contest and, at its sole
option, may pursue or forego any and
all administrative
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appeals, proceedings, hearings and
conferences with the taxing
authority in respect of such claim
and may, at its sole option, either
direct Employee to pay the tax,
interest or penalties claimed and
sue for a refund or contest the
claim in any permissible manner, and
Employee agrees to prosecute such
contest to a determination before
any administrative tribunal, in a
court of initial jurisdiction and in
one or more appellate courts, as the
Company shall determine; provided,
however, that if the Company directs
Employee to pay such claim and sue
for a refund, the Company shall
advance an amount equal to such
payment to Employee, on an
interest-free basis, and shall
indemnify and hold Employee
harmless, on an after-tax basis,
from all taxes, interest or
penalties imposed with respect to
such advance or with respect to any
imputed income with respect to such
advance; and, further, provided that
any extension of the statute of
limitations relating to payment of
taxes, interest or penalties for the
taxable year of Employee with
respect to which such contested
amount is claimed to be due is
limited solely to such contested
amount; and, provided, further, that
any settlement of any claim shall be
reasonably acceptable to Employee
and the Company's control of the
contest shall be limited to issues
with respect to which a Gross-Up
Payment would be payable hereunder,
and Employee shall be entitled to
settle or contest, as the case may
be, any other issue raised by the
Internal Revenue Service or any
other taxing authority.
(ii) If, after receipt by Employee of an
amount advanced by the Company pursuant to Section 5.2.2 (c)
(i), Employee receives any refund with respect to such claim,
Employee shall (subject to the Company's complying with the
requirements of Section 5.2.2) promptly pay to the Company an
amount equal to such refund (together with any interest paid
or credited thereon after taxes applicable thereto). If,
after the receipt by Employee of an amount advanced by the
Company pursuant to Section 5.2.2 (c) (i), it is finally
determined that Employee is not entitled to any refund with
respect to such claim, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the amount of
Gross-Up Payment required to be paid.
(iii) For purposes of this Section 5.2.2,
whether the Excise Tax is applicable to a Payment shall be
deemed to be "finally determined" upon the earliest of (A) the
expiration of thirty (30) days following the rendering of a
decision by the Internal Revenue Service (or any successor
thereto) or a court of competent jurisdiction unless, within
such 30-day period, the Company notifies Employee in
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writing of its intent to contest such decision, (B) the
rendering of a decision by the Internal Revenue Service (or
any successor thereto) or a court of competent jurisdiction,
from which decision no further right of appeal exists, or (C)
the expiration of the statutory period (including any
extensions thereto) for the assessment and collection of the
Excise Tax.
5.2.3 The Employee acknowledges that, if he should exercise
any portion of the Options more than three (3) months following the
date of Employee's Termination of Employment for any reason other than
death or disability (within the meaning of Section 22 (e) (3) of the
Code, he will be taxed as to such portion of the Option so exercised,
as if such portion of the Option did not qualify as a "incentive stock
option" (within the meaning of Section 422 of the Code) but rather as
if such portion was a non-qualified option. Employee shall be
required to pay any and all withholding taxes payable at the time of
the exercise of the option or the Company shall have the right to
withhold stock in an amount equal to the amount of the withholding tax
for payment on Employee's behalf.
5.2.4 Notwithstanding anything contained in any stock
option agreement pursuant to which stock options may have been granted
or may in the future be granted to Employee, all stock options held
by Employee and not otherwise exercisable at the time of termination
of the employment of Employee under Section 5.1 shall, immediately
upon such termination, become exercisable in full and Employee shall
have the right to exercise such stock options, as well as all other
stock options held by Employee at the time of such termination, at any
time during the period ending on the 10th anniversary of the
respective date of grant of the option.
5.3 By the Company for Cause. The Company may terminate Employee
for cause at any time, upon written notice. For the Purpose hereof, "cause"
shall mean:
5.3.1 Employee's conviction for a felony; or
5.3.2 Employee's conviction for the crime of theft,
embezzlement or misappropriation against the Company; or
5.3.3 The final determination by a court of competent
jurisdiction or by the Board that Employee has materially breached
Sections 4, 6, or 7 of this Contract, if such breach is incurable; or,
if curable, a determination that Employee had been given reasonable
opportunity to cure and had not done so; or
5.3.4 Employee's death or permanent disability.
In the event Employee is terminated for cause pursuant to this
Section, Employee shall have the right to receive his compensation as otherwise
provided under this Contract through the effective date of termination.
Employee shall have no further right to receive compensation or other
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consideration from the Company, or have any other remedy whatsoever against the
Company, as a result of this Contract or the termination thereof.
The foregoing notwithstanding, in the event Employee is terminated by
reason of his permanent disability or death, the Company shall immediately pay
Employee or his representative a single severance payment as set forth under
Section 5.2, and the Employee shall have the same rights as set forth under
Section 5.2.3 regarding all stock options.
5.4 Employee's Termination for Cause. Employee may terminate this
Agreement at any time if:
5.4.1 The Company is in material breach of its obligations
hereunder; and
5.4.2 Either such breach is incurable or, if curable, has
not been cured within fifteen (15) days following receipt of written
notice of such breach by the Company.
In no event, however, may the Employee terminate this Agreement
without providing the Company with at least ten (10) days written notice of its
intent to terminate this Agreement. In the event Employee terminates this
Contract pursuant to this Section, Employee shall have the same rights and
remedies against the Company as he would have had the Company terminated his
employment without cause pursuant to Section 5.1 hereof (including all rights
under Section 5.2).
5.5 Employee's Voluntary Termination. Employee may, at any time,
terminate this Contract without cause upon written notice delivered to the
Company at least ninety (90) days prior to the effective date of termination.
In the event of such voluntary termination:
5.5.1 Employee shall have the right to monetary
compensation as provided in paragraph 3.1 above through the effective
date of termination, but shall have no further right to compensation
thereafter; and
5.5.2 Employee's stock options shall be null and void as of
the date of termination except as provided in Section 5.6 below.
The Company and Employee shall not have any further right or remedy
against one another in the event Employee terminates this Contract pursuant to
this Section except as provided in Articles 6, 7, 8, and 9 hereof which shall
remain in full force and effect.
5.6 Employee's Retention of Securities. In the event the Company
terminates Employee, without cause, Employee shall retain all options and other
securities he then owns, of record or otherwise, of the Company and/or its
subsidiaries and/or affiliates, and shall have the right to exercise said
options at any time during the remaining term of said option. In the event the
Company
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terminates this Contract for cause pursuant to Section 5.3, or Employee
voluntarily terminates this Contract pursuant to Section 5.5 above, any Options
issued to Employee which may not then have been exercised on the date of said
Termination shall be exercised within three (3) months of the date of
Termination or shall be null and void as of the date three (3) months after
Termination.
5.7 Change of Control. The Employee may terminate his employment
under this Agreement any time within two (2) years after a "change in control"
of the Company. For purposes of this Agreement, a "change in control" shall be
deemed to have occurred upon (a) the acquisition by any person of twenty
percent (20%) of the issued and outstanding stock of the Company, (b) a change
in majority of the members of the Board in connection with a tender, offer,
merger, sale of assets, etc., (c) the sale of all or substantially all of the
Company's assets or (d) a dissolution or liquidation of the Company. In the
event Employee terminates his employment within two (2) years after a change in
control, Employee shall continue to render services pursuant hereto until the
date of termination and shall continue to receive compensation, as provided
hereunder, through the termination date. In addition to other compensation
payable to Employee for services through the termination date, the Employee
shall have the same rights and remedies against the Company as he would have
had the Company terminated his employment without cause pursuant to Section 5.1
hereof (including the right to payments under Section 5.2).
6. TRADE SECRETS
During the term of employment under this Contract, Employee will have
access to and become acquainted with various information not generally
available to the public consisting of records, documents, drawings,
specifications, customer lists, procedural and operational manuals and
information, and financial records and accounts, projections and budgets, and
similar information, all of which are owned by the Company and regularly used
in the operation of the Company's business. Such assets of the Company are
secret, not generally available to the public and give the Company an advantage
over competitors who do not know of or use such information. Employee agrees
such information and documents relating to the business of the Company, whether
they are prepared by Employee or come into Employee's possession in any other
way, are owned by the Company, shall remain the exclusive property of the
Company. Employee covenants that he shall not misuse, misappropriate or
disclose any of the trade secrets described above, directly or indirectly.
Employee acknowledges and agrees not to sell any of the Company's trade
secrets.
7. SOLICITATION OF EMPLOYEES
7.1 Use of Information. Employee acknowledges and agrees that the
names, addresses and relationships of persons who perform services or provide
goods or materials to or for the Company are unique, and that the nature and
substance of the Company's relationship with such persons constitute the
Company's "trade secrets". Employee acknowledges that the sale or unauthorized
use or disclosure of any of such relationships which Employee learned of during
his employment with the Company is not permitted.
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7.2 Non-Disclosure. During the term of his employment with the
Company, and for a period of two (2) years thereafter, Employee shall not,
directly or indirectly, make known to any person, firm or company the substance
or content of any relationship of the Company with any employee, independent
contractor or provider of goods or materials to the Company. Employee agrees
that he shall not solicit, take away or induce any such person to end their
relationship with the Company, or to attempt to do any of the foregoing, or
recruit, hire or otherwise induce any such person to perform services for
Employee, or any other person, firm or company.
8. NON-COMPETITION AFTER TERMINATION
Employee shall not, for a period of one (1) year following the date of
termination, engage in the development, acquisition, construction or management
of any office and industrial properties outside of the Company within the same
markets as the Company. Nothing herein shall relieve or limit Employee's
obligation to comply with Section 6 and 7 above. The restrictions set forth in
this Section shall not apply if Employee is terminated pursuant to Section 5.1
above. If any provision hereof is determined by any court of competent
jurisdiction to be invalid or unenforceable by reason of such provision
extending the covenants and agreements contained herein for too great a period
of time or over too great a geographical area, or being too extensive in any
other respect, such provision shall be interpreted to extend only over the
maximum period of time and geographical area, and to the maximum extent in all
other respects, as to which it is valid and enforceable, all as determined by
such court in such action.
9. INDEMNIFICATION
The Company shall indemnify Employee for all losses sustained by
Employee as a direct or indirect consequence of the discharge of his duties on
behalf of the Company to the fullest extent permitted under applicable law so
long as Employee acted in good faith and in a manner which he believed to be in
the best interests of the Company with respect to the matter giving rise to the
claim or loss which Employee seeks indemnification.
10. BUSINESS EXPENSES
The Company shall promptly, but in no event later than ten (10) days
after submission of a claim of expenditure, reimburse Employee for all
reasonable business expenses incurred by him in connection with the business of
the Company and/or its subsidiaries and/or affiliates, upon presentation to the
Company of written receipts for such expenses.
11. MISCELLANEOUS PROVISIONS
11.1 Binding Effect. This Contract shall be binding upon and inure
to the benefit of any successor or successors of the Company and the personal
representative of Employee.
10
<PAGE> 11
11.2 Attorney's Fees. If any legal action, arbitration or other
proceedings is brought for the enforcement of this Contract, or because of an
alleged dispute, breach or default in connection with any of the provisions of
this Contract, the prevailing party shall be entitled to recover reasonable
attorney's fees and other costs incurred in that action or proceeding, in
addition to any other relief to which that party would be entitled.
11.3 Entire Contract. This Contract constitutes the entire
agreement of the parties, and supersedes all prior agreements, understandings
and negotiations, whether written or oral, between the Company and Employee
with respect to the employment of Employee by the Company, its subsidiaries
and/or affiliates. This Contract may not be changed orally, but only by
agreement in writing, signed by all parties.
11.4 Provisions Severable. In case any one or more provisions of
this Contract shall be invalid, illegal or unenforceable, in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not, in any way, be affected to impaired thereby.
11.5 Governing Law. This Contract shall be governed by and
construed under the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties hereto have executed this
Contract in Clark County, Nevada.
THE COMPANY: EMPLOYEE:
PALACE REIT
By: /s/ David R. Merker . /s/ Arthur F. Lorentzen, Jr.
--------------------------------------- ------------------------------
David R. Merker, Chairman of the Board ARTHUR F. LORENTZEN, JR.
and Chief Executive Officer
11
<PAGE> 1
EXHIBIT 10.5
CONTRIBUTION AND EXCHANGE AGREEMENT
by and among
[Contributor]
and
Palace Operating Partnership, L.P., a
Delaware limited partnership
as
the Operating Partnership
and
PALACE REIT, a
Texas real estate investment trust
as
the Company
Dated as of____________,1998
<PAGE> 2
TABLE OF CONTENTS
ARTICLE 1. SUBJECT OF CONVEYANCE........................................ 1
Section 1.1 Conveyance of the Property.................. 1
Section 1.2 Excluded Assets............................. 2
ARTICLE 2. VALUE AND PAYMENT TERMS...................................... 2
Section 2.1 Issuance of OP Units........................ 2
Section 2.2 Designation of Issuance of OP Units......... 3
ARTICLE 3. TITLE........................................................ 3
Section 3.1 Independent Contract Consideration.......... 3
Section 3.2 Inspection Materials........................ 3
Section 3.3 Title Commitment and Survey................. 3
Section 3.4 Title Policy................................ 4
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR................ 5
Section 4.1 Contributor's Representations and Warranties 5
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE OPERATING
PARTNERSHIP AND THE COMPANY..................................11
Section 5.1 Palace's Representations and Warranties.....11
ARTICLE 6. COVENANTS....................................................12
Section 6.1 Covenants of Contributor....................12
Section 6.2 Confidentiality.............................13
Section 6.3 Cooperation.................................13
(i)
<PAGE> 3
Section 6.4 Time of Closing.............................14
ARTICLE 7. CLOSING......................................................14
Section 7.1 The Closing.................................14
Section 7.2 Deliveries at the Closing by Contributor....14
Section 7.3 Deliveries at the Closing by Palace.........15
Section 7.4 Fees and Expenses...........................16
ARTICLE 8. ADJUSTMENTS..................................................16
Section 8.1 Adjustments at the Closing Date.............16
Section 8.2 Adjustments for Assessments.................17
Section 8.3 Other Adjustments...........................17
Section 8.4 Errors in Calculations......................17
Section 8.5 Survival....................................17
ARTICLE 9. CONDITIONS PRECEDENT TO CLOSING..............................17
Section 9.1 Conditions to Obligations of Contributor....17
Section 9.2 Conditions to Obligations of Palace.........18
ARTICLE 10. ASSIGNMENT...................................................19
ARTICLE 11. BROKERS/COMMISSIONS..........................................19
ARTICLE 12. CASUALTY LOSS................................................19
Section 12.1 Maintenance of Insurance Policies...........19
Section 12.2 Risk of Loss................................19
ARTICLE 13. CONDEMNATION.................................................20
(ii)
<PAGE> 4
ARTICLE 14. DEFAULT/REMEDIES............................................ 20
Section 14.1 Termination by Palace......................... 20
Section 14.2 Termination by Contributor.................... 21
ARTICLE 15. TAX MATTERS................................................. 22
Section 15.1 Payment of Taxes by Contributor................ 21
Section 15.2 Definition of Taxes............................ 21
Section 15.3 Allocation Method.............................. 21
Section 15.4 Seller Reliance................................ 2l
Section 15.5 Survival....................................... 21
ARTICLE 16. NOTICE...................................................... 22
ARTICLE 17. MISCELLANEOUS............................................... 22
Section 17.1 Survival of Representation and Warranties...... 22
Section 17.2 Entire Agreement; No Third-Party Rights........ 22
Section 17.3 Amendment...................................... 23
Section 17.4 Governing Law.................................. 23
Section 17.5 Section Headings............................... 23
Section 17.6 Severability................................... 23
Section 17.7 No Other Rights or Obligations................. 23
Section 17.8 Counterparts................................... 23
Section 17.9 Construction................................... 23
Section 17.10 Attorneys' Fees............................... 23
(iii)
<PAGE> 5
Section 17.11 Interpretation............................. 23
Section 17.12 Exclusivity................................ 23
(iv)
<PAGE> 6
SCHEDULES
Schedule 1.1 (a) Land
Schedule 1.1 (d) Leases
Schedule 1.1 (e) Service Contracts
Schedule 1.2 Excluded Assets
EXHIBITS
Exhibit 6. 1 (h) Form of OP Agreement
<PAGE> 7
CONTRIBUTION AND EXCHANGE AGREEMENT
THIS CONTRIBUTION AND EXCHANGE AGREEMENT (the "AGREEMENT") dated as of
____________,1998 (the "EFFECTIVE DATE") is made and entered by and among
(the __________________"CONTRIBUTOR"), PALACE REIT, a Texas real estate
investment trust (the "COMPANY"), and PALACE OPERATING PARTNERSHIP, L.P., a
Delaware limited partnership (the "OPERATING PARTNERSHIP"). The Company and
the Operating Partnership are sometimes hereinafter collectively referred to as
"PALACE".
RECITALS
A. Contributor owns certain improved real property.
B. The Operating Partnership desires to acquire such real
property from Contributor in exchange for units of limited partnership interest
in the Operating Partnership (the "OP UNITS"), which OP Units may be redeemed
for shares of common stock of the Company (the "SHARES") as provided in the
Agreement of Limited Partnership of the Operating Partnership (the "OP
AGREEMENT"). Closing hereunder will be contingent on and concurrent with the
closing of the initial public offering of the Shares (the "OFFERING").
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, do hereby agree as follows:
ARTICLE 1. SUBJECT OF CONVEYANCE.
Section 1. 1 Conveyance of the Property. In accordance with the
terms and conditions of this Agreement and subject to Palace's performance and
satisfaction of the conditions, covenants and obligations contained herein,
Contributor shall convey to the Operating Partnership all of its right, title
and interest in and to the following assets:
(a) the real property described on Schedule 1.1(a) (the
"LAND") and all the buildings, structures, parking areas, landscaping and
improvements located on the Land and all fixtures and other property affixed
thereto (the "IMPROVEMENTS");
(b) (i) any and all rights, titles, power, privileges,
grants, easements, licenses, rights-of-way and interests appurtenant to the
Land and the Improvements, including, without limitation, air rights, water and
water rights, sanitary sewer rights and capacities, development rights, and
rights and interests in and to minerals, oil and gas and other hydro carbons;
(ii) any and all rights, titles, power, privileges, grants, easements,
licenses, easements, rights-of-way and interests of Contributor, either at law
or in equity in possession or in expectancy, in and to any real estate lying
in the streets, highways, roads, alleys, rights-of-way or sidewalks, open or
proposed, in front
<PAGE> 8
of, above, over, under, through or adjoining the Land and in and to any strips
or gores of real estate adjoining the Land; and (iii) all of Contributor's
right, title, claim and interest, if any, in and to any and all rights, titles,
power, privileges, grants, easements, licenses, rights-of-way and interest
appurtenant to or incident to any of the foregoing (the Land and the
Improvements and all of the foregoing are sometimes referred to herein as the
"REAL PROPERTY");
(c) all personal property, fixtures, equipment, inventory
and computer programming and software owned or licensed by Seller and located
on any of the Real Property (collectively, the "PERSONAL PROPERTY");
(d) all leases and other agreements with respect to the
use and occupancy of the Real Property described in the rent roll attached as
Schedule 1.1(d), together with all amendments and modifications thereto and
any guaranties provided thereunder (the "LEASES"), and rents, additional rents,
reimbursements, profits, income, receipts and the amount deposited (the
"SECURITY DEPOSITS") under the Leases in the nature of refundable security for
the obligations of the performance of those parties occupying space at the Real
Property (the "LESSEES") under such Lease;
(e) (i) all permits, licenses, certificates of occupancy,
approvals, dedications, subdivision maps or plats and entitlement issued,
approved or granted by any applicable governmental authority in connection with
the construction, development, ownership, use or operation of the Real
Property, and all other certificates, guaranties and warranties relating to the
Real Property (collectively, the "PERMITS AND LICENSES") and (ii) all of
Contributor's right, title and interest in and to those contracts and
agreements described in Schedule 1.1(e) for the servicing, maintenance and
operation of the Real Property (the "SERVICE CONTRACTS"); (the Permits and
Licenses and the Service Contracts are herein collectively called the
"INTANGIBLE PROPERTY");
(f) all books, records, promotional materials, tenant
data, leasing material and forms, past and current rent rolls, files,
statements, tax returns, market studies, keys, plans, specifications, reports,
tests and other materials of any kind owned by Seller that are or may be used
by Seller in the use and operation of the Real Property or the Personal
Property (collectively, the "BOOKS AND RECORDS");
(g) Any and all structural reviews, architectural
drawings, engineering, environmental, soils, seismic, geological and
architectural reports, studies and certificates and all plans, specifications
and drawings of the Improvements or any portion thereof (collectively, the
"TESTS AND PLANS");
(h) all Seller's right, title, claim and interest, if
any, in and to all trademarks, trade names or symbols under which the Real
Property (or any part thereof) is operated; and
(i) all other rights, privileges and appurtenances owned
by Contributor and in any way related to the rights and interests described
above in this Section 1.1.
2
<PAGE> 9
The Real Property, the Personal Property, the Leases, the Security
Deposits, the Intangible Property, the Books and Records, the Tests and Plans
and the other property interests being transferred hereunder are hereinafter
collectively referred to as the "PROPERTY."
Section 1.2 Excluded Assets. In addition to such other property,
rights and interests of Contributor which are excluded from the conveyance
contemplated by this Agreement through separate, specific reference elsewhere
in this Agreement, all of Contributor's right, title and interest in and to the
items described in Schedule 1.2 are expressly retained by Contributor and
excluded from any conveyance otherwise contemplated by this Agreement.
ARTICLE 2. VALUE AND PAYMENT TERMS.
Section 2.1 Issuance of OP Units. As consideration for conveyance of
the Property by Contributor to the Operating Partnership, at Closing, the
Operating Partnership shall issue to Contributor ________ OP Units.
Section 2.2 Consideration. At the Closing, the Operating Partnership
shall pay Contributor in cash an amount equal to percent (______%) of the
proceeds received by the Operating Partnership from the Offering less
underwriters' fees, offering expenses, including, but not limited to, SEC fees,
NASD fees, printing and engraving expenses, accounting fees and expenses, legal
fees and expenses, blue sky fees, NASDAQ listing fees, transfer agent and
registrar fees and miscellaneous expenses, and $50,000.00 working capital for
the Operating Partnership (the "CASH CONSIDERATION").
Section 2.3 Designation of Issuance of OP Units. The OP Units to be
issued by the Operating Partnership shall be issued to ____________________ at
Closing.
ARTICLE 3. TITLE.
Section 3.1 Independent Contract Consideration. Contemporaneously
with the execution and delivery of this Agreement, the Operating Partnership
has delivered to Contributor, and Contributor hereby acknowledges the receipt
of, a check in the amount of One Hundred Dollars ($100.00) ("INDEPENDENT
CONTRACT CONSIDERATION"), which amount the parties bargained for and agreed to
as consideration for the Operating Partnership's exclusive right to purchase
the Property pursuant to this Agreement and for Contributor's execution,
delivery and performance of this Agreement. The Independent Contract
Consideration is in addition to and independent of any other consideration or
payment provided in this Agreement, is nonrefundable, and it is fully earned
and shall be retained by Contributor notwithstanding any other provision of
this Agreement.
Section 3.2 Inspection Materials. The Seller shall allow the
Operating Partnership and its representatives access to all financial and other
information relating to the Property sufficient to enable them to prepare
audited financial statements in conformity with Regulation S-X of the
3
<PAGE> 10
Securities and Exchange Commission and such other information as may be
necessary in connection with any filings or other disclosures under applicable
stock exchange rules or securities laws.
Section 3.3 Title Commitment and Survey. As soon as practicable
after the Effective Date, Contributor shall obtain and deliver to the Operating
Partnership, at Contributor's sole cost and expense, the following as to the
Property:
(a) Title Commitment. A Commitment for Title
Insurance (the "TITLE COMMITMENT") issued by National Title Company, 1094 E.
Sahara, Las Vegas, Nevada 89104, Attention: C.H. Bouchard, Telephone No. (702)
737-3366 (the "TITLE COMPANY") for a title insurance underwriter acceptable to
the Operating Partnership, for the most recent form of ALTA owner's policy,
covering the Land and Improvements, in an amount designated by the Operating
Partnership and providing for such endorsements as the Operating Partnership
may reasonably require, setting forth the current status of the title to the
Land and Improvements, showing all liens, claims, encumbrances, easements,
rights of way, encroachments, reservations, restrictions, and any other matters
affecting the Land and Improvements, and pursuant to which the Title Company
agrees to issue to the Operating Partnership at Closing an Owner's Policy of
Title Insurance (the "TITLE POLICY") on the most recent form of ALTA
comprehensive coverage owner's policy endorsed as the Operating Partnership may
reasonably require. The Title Commitment shall be accompanied by a true,
complete, and legible copy of all documents and instruments (as recorded, where
applicable) (the "SUPPORTING DOCUMENTS") referred to or identified in the Title
Commitment, including, but not limited to, all deeds and other conveyance
documents evidencing transfer of title into Contributor, lien instruments,
leases, plats, surveys, reservations, restrictions and easements.
(b) UCC Search. Current written reports (the "UCC
SEARCHES") from the Office of the Secretary of State of the State where the
Property is located and the deed recording offices of the county where the
Property is located reflecting the results of current searches of the Uniform
Commercial Code Records maintained by such offices, said UCC Searches to be
made under the name of Contributor.
(c) Survey. An "as built" survey (the "SURVEY"), of the
Land and Improvements made on the ground and certified by a professional land
surveyor licensed in the State in which the Property is located and approved by
the Title Company and Operating Partnership (the "SURVEYOR"). If different
from the description contained in Schedule 1.1(a) attached to this Agreement,
the legal description of the Land contained in the Survey (once the correctness
thereof has been confirmed by Contributor, the Operating Partnership and the
Title Company) shall be substituted for the description of the Land contained
in said Schedule 1.1(a). Such description, if available, shall be used in
the Title Policy and the Deed to be delivered at Closing.
(d) Procedure for Objections to Title Commitment and
Survey. The Operating Partnership shall have ten (10) days after receipt of
the last of the Title Commitment together with complete and legible copies of
all Supporting Documents and the Survey to notify Contributor in
4
<PAGE> 11
writing (the "OBJECTION NOTICE") of any objections the Operating Partnership
may have to matters reflected in or relating to the Title Commitment, the
Supporting Documents or the Survey. If Contributor has not cured or undertaken
in writing to cure prior to Closing any objection set forth in the Objection
Notice to the Operating Partnership's reasonable satisfaction by Closing, the
Operating Partnership shall be entitled to terminate this Agreement by written
notice given by Closing. If the Operating Partnership shall terminate this
Agreement under this Section 3.3(d), neither Palace nor Contributor shall have
any further right or obligation hereunder except for rights or obligations
which survive termination of this Agreement. If the Operating Partnership has
not terminated this Agreement as provided in this Section 3.3(d), any objection
reflected in the Title Commitment which Contributor has failed to cure shall be
a Permitted Encumbrance, unless Contributor shall have undertaken in writing to
cure such objection prior to Closing. As used in this Agreement, the term
"PERMITTED ENCUMBRANCE" shall mean any title exception reflected in the Title
Commitment as to which the Operating Partnership either did not object in
accordance with Section 3.3(d) or any such title exception as to which the
Operating Partnership did object that is not cured prior to Closing in
accordance with Section 3.3(d).
Section 3.4 Title Policy. At the Closing, Contributor shall
provide to the Operating Partnership, at Contributor's sole cost and expense,
as to the Property, the Title Policy issued pursuant to the Title Commitment,
dated as of the Closing Date, in an amount designated by the Operating
Partnership and insuring that the Operating Partnership has good and marketable
title to the Property in fee simple subject to no exceptions other than the
Permitted Encumbrances. The Title Policy shall be in the form required by
Section 3.3(a).
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONTRIBUTOR.
Section 4.1 Contributor's Representations and Warranties. In order
to induce the Company and the Operating Partnership to enter into this
Agreement and to perform their respective obligations hereunder, Contributor
hereby warrants and represents the following, with respect to itself and to the
Property:
(a) Organization, Good Standing and Power. Contributor
is duly organized, validly existing and in good standing, under the laws of the
jurisdiction in which it was organized, is duly authorized to transact business
under the laws of each state in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, and has all requisite power and authority to execute
and deliver this Agreement and all other documents and instruments to be
executed and delivered by it hereunder and to perform its obligations hereunder
and thereunder in accordance with the terms and conditions hereof and thereof.
(b) Authorization, No Violation. Assuming the due and
valid authorization, execution and delivery of this Agreement by Palace, this
Agreement, and the other agreements and documents to be executed by Contributor
hereunder, will be the legal, valid and binding obligation
5
<PAGE> 12
of Contributor, enforceable against Contributor in accordance with their
respective terms, subject to applicable bankruptcy, insolvency, moratorium or
similar laws relating to creditors' rights and general principles of equity.
The performance by Contributor of its duties and obligations under this
Agreement and the documents and instruments to be executed and delivered by it
hereunder will not (i) conflict with, or result in a breach of, or default
under, any provision of any of the Organizational Documents (hereinafter
defined) of Contributor or any agreement, instrument, decree, judgment,
injunction, order, writ, law, rule or regulation, or any determination or award
of any court or arbitrator, to which Contributor is a party or by which its
assets are or may be bound (a "LEGAL REQUIREMENT") or (ii) require any consent,
approval or authorization of, declaration, filing or registration with, or
notice to, any federal, state or local governmental or regulatory authority
having jurisdiction over the Property or Contributor (a "GOVERNMENTAL
AUTHORITY") or any other person or entity or (iii) result in the creation of
any lien or other encumbrance on the Property. As used herein, the term
"ORGANIZATIONAL DOCUMENTS" means as to any entity, its articles or certificate
of incorporation and its bylaws as each of the foregoing may have been or may
hereafter be amended from time to time.
(c) No Right to Acquire Property. No person has any
right or option to acquire all or any portion of the Property or any interest
therein.
(d) Title to Property . Contributor has, and on the
Closing Date will convey to the Operating Partnership, good and marketable
title to the Property, free and clear of any and all liens and encumbrances.
(e) Organizational Documents. The Organizational
Documents of Contributor are in full force and effect and have not been amended
except pursuant to written instrument delivered to Palace. No default has
occurred and is continuing under any such Organizational Document, and no fact
or circumstance has occurred which in and of itself, or with the giving of
notice or the passage of time, or both, would constitute such a default.
(f) Work on Real Property, Liens. No work has been
performed on any Real Property that would require an amendment to the
certificate of occupancy for such Real Property for which an amendment has not
been obtained, and, to Contributor's knowledge, any and all work performed at
the Real Property as of the Effective Date has been, and to the Closing Date
will be, performed in all material respects in accordance with all Legal
Requirements of all applicable Governmental Authorities. Except for items
being paid by Contributor at Closing or prorated at Closing, there are no
outstanding accounts payable or unpaid debts relating to the Property that are
binding on Contributor or would be binding on the Operating Partnership or the
Property, including, without limitation, any unpaid charges, debts,
liabilities, claims or obligations arising from the construction, occupancy,
ownership, use or operation of the Property, which could give rise to any
mechanic's or materialmens' or other statutory liens against any portion of the
Property.
(g) Validity of Service Contracts and Leases. There are no
service contracts,
6
<PAGE> 13
management or maintenance agreements, leases or other agreements affecting the
use or occupancy of the Real Property or other agreements otherwise affecting
the Property or the operation thereof other than the Service Contracts and the
Leases. All of the Service Contracts and the Leases are, and as of the
Effective Date and on the Closing Date will be, in full force and effect
without any material default or claim of material default by any party thereto.
To Contributor's knowledge, all sums presently due and payable by Contributor
under the Service Contracts have been fully paid, and all sums which become due
and payable thereunder between the Effective Date and the Closing Date shall be
fully paid by Contributor within the time periods required thereby. All
agreements with respect to the Property, including, without limitation, all
Leases and Service Contracts, heretofore delivered by Contributor to the
Operating Partnership or its representatives for examination, are true,
correct, and complete copies thereof, and have not been amended except as
evidenced by amendments similarly delivered. Contributor has not entered into
any agreement regarding, nor is the Property or any part thereof subject to,
any rights to acquire or to lease the Property or any part thereof, or to
otherwise obtain any interest therein, and there are no outstanding rights of
first refusal, rights of reverter, purchase options or rights of first offer
relating to the Property or any interest therein.
(h) Litigation. There is no litigation, claim, audit,
action, or proceeding pending or, to Contributor's knowledge, threatened before
or by any Governmental Authority or by Contributor or by any other person or
entity in any manner adversely affecting the Property, or the ability of
Contributor to perform any of its obligations hereunder, and also including,
without limitation, any matter seeking to (i) enjoin, restrain, prohibit or
affect the transaction contemplated hereby, (ii) increase significantly any ad
valorem taxes previously assessed or to be assessed in connection with the
Property, (iii) enjoin a violation of the Property concerning any Legal
Requirement or (iv) attach any portion of the Property.
(i) No Actions Relating to Property. Contributor has not
received any notice of, nor to Contributor's knowledge are there any facts or
circumstances which could give rise to, any pending liens or special
assessments or taxes against any portion of the Property by any Governmental
Authority. There is no pending, or to Contributor's knowledge, threatened,
condemnation, environmental, zoning or other land-use regulation proceeding
against the Property or any portion thereof, nor does Contributor have any
knowledge of any public request, plans, proceedings or proposals for changes in
road grade, access, road widening, realignment or other modification or other
municipal improvements or other matters that may materially affect the Property
or (i) result in a tax, levy or assessment against the Property, or (ii) that
could cause a change or modification of the zoning classification or of any
other Legal Requirements applicable to the Property or any part thereof or
applicable to any property adjacent to the Property, or (iii) otherwise
detrimentally affect the use, zoning, operation or value of the Property.
(j) Compliance With Legal Requirements.
(i) Violations. The Property, as improved by the
Improvements, and the
7
<PAGE> 14
use and operation thereof, do not violate any Legal Requirement of any
applicable Governmental Authority or any easement or restriction affecting the
Property, and Contributor has not received any notice that any building or
other improvement not included in any part of the Property relies on any part
of the Property to fulfill any Legal Requirement applicable to the Property.
(ii) Licenses. Permanent certificates of
occupancy and all licenses, permits, authorizations and approvals required from
all Governmental Authorities and local boards of fire underwriters (or similar
body) have been issued and are in effect for each building or structure
constituting a portion of the Improvements and have been paid for in full and
are in full force and effect.
(iii) No Agreements. There are no agreements with
or commitments to any Governmental Authorities, agencies, utilities or
quasi-governmental entities or other third parties with respect to the Property
which would bind the Property or the Operating Partnership following the
Closing Date, including, without limitation, any agreements or commitments
which will impose an obligation upon the Operating Partnership or its
successors or assigns to make any contribution or dedication of money or land
or to construct, install or maintain any improvements of a public or private
nature on or off the Property, except those agreements which are identified in
the Title Commitment and disclosed by Survey. To Contributor's knowledge, no
governmental authority has imposed any requirement that any owner or developer
of the Property pay directly or indirectly any special fees or contributions or
incur any expenses or obligations in connection with any development of the
Property or any portion thereof.
(iv) Access/Improvements. The Real Property has
access to and from dedicated streets. Contributor has no knowledge of any
pending or threatened governmental proceeding or any other fact or condition
which would purport to limit or would result in the termination of such access
to and from public roads.
(k) Environmental Matters. With respect to environmental
matters affecting the Property:
(i) No Violation of Laws. The Property is not in
violation of any Environmental Laws. Neither Contributor, nor to Contributor's
knowledge any third party, has or is engaged in any operations or activities
upon, or any use or occupancy of the Property, or any portion thereof, for the
purpose of or in any way involving the handling, manufacture, treatment,
storage, use, generation, release, discharge, refining, dumping or disposal of
any Hazardous Materials, accidental or intentional, on, under or in the
Property, or transported any Hazardous Materials to, from or across the
Property, except in compliance with Environmental Laws.
(ii) No Hazardous Materials. No Hazardous
Materials have been constructed, deposited, placed, discharged, stored, or
otherwise located on, under or in the Property by Contributor or to its
knowledge any third party, except in compliance with Environmental Laws.
8
<PAGE> 15
To Contributor's knowledge, (a) the Property has not previously been used as a
landfill or as a dump for garbage or refuse, (b) no Hazardous Materials have
been released into the environment or discharged at, on, from or under the
Property, and (c) no portion of the Property contains any Hazardous Materials,
including, without limitation, any asbestos or asbestos containing materials,
polychlorinated biphenyls and radon, except to the extent that any or all of
the foregoing have been done in compliance with Environmental Laws.
(iii) Notice. Contributor has not received written
notice nor is Contributor aware of (a) the migration of Hazardous Materials
from other properties to the Property (above or below ground), (b) the current
or past use for the disposal, storage, treatment, processing, manufacturing or
other handling of Hazardous Materials on any property adjoining the Property,
and (c) any property adjoining the Property which contains Hazardous Materials.
(iv) Underground Storage Tanks. There are no
underground storage tanks at the Property.
(v) Legal Proceedings and Notices. No
administrative order or notice, consent order, agreement, litigation or
settlement with respect to any Hazardous Materials is in existence with respect
to the Property or, to Contributor's knowledge, proposed, threatened or
anticipated, nor has Contributor received any notice of any such action or
proceeding regarding the Property or any property adjacent to the Property. To
Contributor's knowledge, no investigation with respect to Hazardous Materials
is proposed, threatened or anticipated in respect to the Property, and
Contributor has received no communication from or on behalf of any Governmental
Authority or any other person or entity indicating that any applicable Legal
Requirements relating to Hazardous Materials have been or may have been
violated with respect to the Property. The Property is not currently on and,
to Contributor's knowledge has never been on, any federal or state "Superfund",
or "Superlien" list, and Contributor is not aware that the Property is
anticipated or threatened to be placed on any such list. Contributor has
received no notice of any third party claims regarding damage to property or
persons resulting from any Hazardous Materials affecting the Property or any
adjacent property.
The term "ENVIRONMENTAL LAWS" shall mean the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
42 U.S.C. Sections 9601, et. seq., the Resource Conservation and Recovery Act
of 1976, 42 U.S.C. Sections 6901 et seq., the Toxic Substances Control Act, 15
U.S.C. Sections 2601 et. seq., the Hazardous Materials Transportation Act, 49
U.S.C. 1801 et seq., the Clean Water Act, 33 U.S.C. Sections 1251 et seq., as
said laws have been supplemented or amended to date, the regulations
promulgated pursuant to said laws and any other administrative, federal, state
or local law, statute, rule, regulation or ordinance which regulates or
proscribes the use, storage, disposal, presence, cleanup, transportation or
release or threatened release into the environment of Hazardous Materials. The
term "HAZARDOUS MATERIALS" shall mean any substance, chemical, waste or other
material which is listed, defined or otherwise identified as "hazardous" or
"toxic" under any of the Environmental Laws, and including,
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without limitation, formaldehyde, urea, polychlorinated biphenyls, petroleum,
petroleum product or by-product, crude oil, natural gas, natural gas liquids,
liquefied natural gas, or synthetic gas usable for fuel or mixture thereof,
radon, asbestos and any by-product of same.
(l) Solvency. Contributor is solvent, and has not made a
general assignment for the benefit of creditors or a transfer in fraud of
creditors, or been adjudicated a bankrupt or insolvent, nor has a receiver,
liquidator, custodian, or trustee of any of them or any of their respective
properties (including the Property) been appointed or taken possession of any
of their respective properties, or a petition filed by or against any of them
for bankruptcy, composition, rearrangement, extension, reorganization, or
arrangement pursuant to the Federal Bankruptcy Act or any similar present or
future federal or state insolvency or bankruptcy law or statute, or any
proceeding instituted for the dissolution or liquidation of any of them.
(m) Utilities. To Contributor's knowledge, all
utilities and services necessary for operation of the Improvements (including,
without limitation, road access, gas, water, storm and sanitary sewers,
electricity and telephone), are available at the boundary of Real Property, may
be used or tapped into by Contributor, and, to Contributor's knowledge, after
Closing by the Operating Partnership, will be connected with valid permits, are
of sufficient capacity to meet adequately all needs and requirements necessary
for the use of the Real Property for its intended purposes. To Contributor's
knowledge, the Real Property is legally entitled to be served by such utilities
without further action by Contributor. To Contributor's knowledge, such
utilities and services are properly and fully installed and operating and
comply with all Legal Requirements. To Contributor's knowledge (i) no fact,
condition or proceeding exists which would result in the termination or
impairment of the furnishing of such utilities to the Real Property, and (ii)
no material, latent defects exist in the plumbing, electrical, mechanical,
heating, ventilating or air-conditioning system or other systems in the Real
Property and the same are in good operating order and repair. To Contributor's
knowledge, all utility lines servicing the Real Property are located either
within the boundaries of the Real Property, or within lands dedicated to the
public use, or within recorded easements for such purpose and are serviced and
maintained by the appropriate public or quasi-public entity.
(n) Property Condition. To Contributor's knowledge, (i)
there is no condition or defect of the Property not disclosed in writing to the
Operating Partnership that would, if known, cause a reasonable and prudent
person to decide not to purchase the Property, (ii) the Improvements are free
from material defects in design and construction, (iii) there is no adverse
geological or soil condition affecting the Property, and (iv) there are no
material, latent defects in the roof or other structural components of the
Property. Contributor has not altered the appearance of the Property in any
way that would cause a normal inspection of the Property to not accurately
reveal its present condition and general state of repair. Contributor has not
received written notice of any outstanding requirements or recommendations by
(1) the insurance company(s) currently insuring the Property, or (2) any board
of fire underwriters or other body exercising similar functions, which in any
case require or recommend any repairs or work to be done on the Property of a
material nature.
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(o) Flood Hazard Area. Except as shown on the Surveys,
no portion of the Property is located within any flood plain or flood prone
area.
(p) Taxes. Contributor has paid all Taxes due and
payable prior to the Closing and timely filed all returns and reports required
to be filed prior to the Closing with respect to the ownership and operation of
the Real Property (by it or any predecessor entity) for which the Operating
Partnership could be held liable or a claim made against the Real Property.
There are no audits or other proceedings by any Governmental Authority pending
or threatened with respect to Taxes resulting from the ownership and operation
of the Real Property (by it or any predecessor entities) for which the
Operating Partnership could be held liable or a claim made against the Real
Property, and no agreement extending the period for assessment and collection
has been executed with respect thereto.
(q) Property Reports. Contributor has delivered to the
Operating Partnership true and complete copies of all environmental, asbestos,
soil, substrata and geotechnical reports regarding the Property and surrounding
land in its possession or control.
(r) Insurance. All insurance coverage with respect to
the Property is in full force and effect, insures the Property in reasonably
sufficient amount against all risks usually insured against by persons
operating similar businesses or properties of similar size in the localities
where such businesses or properties are located, provides coverage as may be
required by applicable regulation and by any and all contracts to which
Contributor is a party and has been issued by insurers of recognized
responsibility. There is no default under any such coverage nor has there been
any failure to give notice or present any claim under any such coverage in a
due and timely fashion. There are no outstanding unpaid premiums except in the
ordinary course of business and no notice of cancellation or nonrenewal of any
such coverage has been received. No insurer has advised Contributor that it
intends to reduce coverage, increase premiums or fail to renew any existing
policy or binder.
(s) Contributor Not a Foreign Person. Contributor is not
a "foreign person" which would subject the Operating Partnership to the
withholding tax provisions of Section 1445 of the Internal Revenue Code of
1986, as amended.
(t) Material Facts. No representation or warranty by
Contributor herein, nor any certificate or other writing furnished or to be
furnished by Contributor to the Operating Partnership pursuant hereto or in
connection with the transaction contemplated hereby, contains any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading.
Contributor has no information or knowledge of any change contemplated in any
applicable governmental requirement or any judicial administrative action or
any action by any adjacent landowners or any natural or artificial conditions
upon the Property or any significant adverse fact or condition relating to the
Property or its continued use by the Operating Partnership which has not been
disclosed in writing to the Operating
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Partnership by Contributor or which would prevent, limit, impede or render
materially more costly the Operating Partnership's continued use of the
Property.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE OPERATING PARTNERSHIP AND THE
COMPANY.
Section 5.1 Palace's Representations and Warranties. In order
to induce Contributor to enter into this Agreement and to perform its
obligations hereunder, the Operating Partnership and the Company hereby jointly
and severally warrant and represent the following:
(a) Organization, Good Standing and Power of the Company.
The Company is a real estate investment trust duly organized, validly existing
and in good standing under the laws of the State of Texas, is duly authorized
to transact business under the laws of any state in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary and has all requisite corporate
power and authority to execute and deliver this Agreement and all other
documents and instruments to be executed and delivered by it hereunder and to
perform its obligations hereunder and thereunder in accordance with the terms
and conditions hereof and thereof.
(b) Organization, Valid Existence and Partnership Power
of the Operating Partnership. The Operating Partnership is a limited
partnership duly formed and validly existing under the laws of the State of
Delaware, is duly authorized to transact business under the laws of any state
in which the character of the properties owned or leased by it therein or in
which the transaction of its business makes such qualification necessary has
all requisite partnership power and authority to execute and deliver this
Agreement and all other documents and instruments to be executed and delivered
by it hereunder and to perform its obligations hereunder and thereunder in
accordance with the terms and conditions hereof and thereof.
(c) Authorization, No Violation. Assuming the due and
valid authorization, execution and delivery of this Agreement by Contributor,
this Agreement and the other agreements and documents to be executed and
delivered by each of the Operating Partnership and the Company hereunder, when
duly executed and delivered, will be the legal, valid and binding obligation of
each of the Operating Partnership and the Company, enforceable against the
Operating Partnership and the Company in accordance with their respective
terms, subject to applicable bankruptcy, insolvency, moratorium or similar laws
relating to creditors' rights and general principles of equity. The
performance by each of the Operating Partnership and the Company of its
respective duties and obligations under this Agreement and the documents and
instruments to be executed and delivered by each of them hereunder will not (i)
conflict with, or result in a breach of, or default under, any provision of any
of the organizational documents of either of the Operating Partnership or the
Company or any agreements, instruments or Legal Requirements to which either of
the Operating Partnership or the Company is a party or by which the assets of
either are or may be bound, or (ii) require any consent, approval or
authorization of, or declaration, filing or registration with, or notice
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to, any Governmental Authority.
(d) OP Units and Shares. The OP Units to be issued to
Contributor are duly authorized and, when issued by the Operating Partnership,
will be fully paid and non-assessable, free and clear of any mortgage, pledge,
lien, encumbrance, security interest, claim or rights of interest of any third
party of any nature whatsoever. The Shares to be issued by the Company upon
redemption of the OP Units, upon issuance, will be fully paid and non-
assessable, free and clear of any mortgage, pledge, lien, encumbrance, security
interest, claim or rights of interest of any third party of any nature
whatsoever.
(e) Litigation. There is no pending or, to Palace's
knowledge, threatened litigation against the Operating Partnership or the
Company that if adversely determined would have a material adverse effect on
Palace or its ability to perform its obligations under this Agreement in a
timely manner.
ARTICLE 6. COVENANTS.
Section 6.1 Covenants of Contributor. Contributor covenants and
agrees that between the Effective Date and the Closing Date, unless Palace has
consented in writing to any other act or omission, it shall perform or observe
the following:
(a) Contributor will use commercially reasonable efforts
to obtain Tenant Estoppel Certificates from all tenants at the Property;
(b) Contributor will keep and maintain the Property in
good order and condition, in compliance with all Legal Requirements and will
cause all necessary repairs, renewals and replacements to be made promptly.
Contributor will not manage or maintain the Property differently due to the
transaction contemplated by this Agreement.
(c) Contributor will continue to operate the Property in
the usual and customary manner and will not enter into any new Service Contract
or Lease or extend, renew, amend, cancel or terminate any existing Service
Contract or Lease.
(d) If Contributor discovers any defect, error or
omission in any representation or warranty made in Section 4.1, Contributor
will give the Operating Partnership prompt written notice thereof accompanied
by information in detail reasonably required to correct such defect, error or
omission.
(e) Contributor will make all required payments under any
indebtedness secured by a lien on its Real Property (other than payments due at
stated maturity) within any applicable grace period. Contributor shall also
comply with all other material terms, covenants and conditions of any such
indebtedness.
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(f) Except for the Permitted Encumbrances, Contributor
will not cause or permit the Property, or any interest therein, to be sold,
transferred, alienated, mortgaged, licensed, encumbered or otherwise be
transferred.
(g) Contributor will maintain and keep in full force and
effect the hazard, liability and casualty insurance policies it is currently
maintaining with respect to the Property.
(h) Contributor shall promptly give the Operating
Partnership written notice of, and promptly deliver to the Operating
Partnership, a true and complete copy of any written notice Contributor may
receive, on or before the Closing Date, from any Governmental Authority,
concerning a violation of any applicable Legal Requirement pertaining to the
Property.
(i) At Closing, Contributor shall execute and deliver the
OP Agreement in the form attached hereto as Exhibit 6.1(h), whereby Contributor
shall become a limited partner in the Operating Partnership upon and subject to
the terms of the OP Agreement.
(j) Contributor shall cooperate in the preparation by the
Company of a registration statement on Form S-11 to be filed with the
Securities and Exchange Commission ("SEC") under the 1933 Act in connection
with the Offering. Contributor shall provide the Company with all such
financial and other information relating to the Property and in such form which
would be sufficient to enable the Company to prepare financial statements in
conformity with Regulation S-X of the SEC and such other information as may be
necessary in connection with any filings or other disclosures under applicable
stock exchange rules or securities laws.
Section 6.2 Confidentiality. Except as hereinafter provided,
from and after the execution of this Agreement, Palace and Contributor shall
keep the terms, conditions and provisions of this Agreement confidential and
neither shall make any public announcements hereof unless the other first
approves of same in writing, nor shall either disclose the terms, conditions
and provisions hereof, except to their respective attorneys, accountants,
engineers, surveyors, financiers and bankers. Notwithstanding the foregoing,
in connection with the Offering, Palace will have the absolute right to market
the Shares and prepare and file all necessary or required registration
statements and other papers, documents and instruments necessary or required in
Palace's judgment and that of the attorneys and underwriters to file a
registration statement with respect to the Shares with the SEC and/or similar
state authorities and to cause same to become effective and to disclose therein
and thus to its underwriters, to the SEC and/or to similar state authorities
and to the public all of the terms, conditions and provisions of this
Agreement. The obligations of this Section 6.3 shall survive any termination
of this Agreement.
Section 6.3 Cooperation. Subject to the terms and conditions
herein provided, the parties to this Agreement shall (a) use their best efforts
to cooperate with each other in (i) determining which filings are required to
be made prior to the Closing Date with, and which consents, approvals, permits
or authorizations are required to be obtained prior to the Closing Date from,
Governmental
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Authorities or third parties in connection with the execution and delivery of
this Agreement and the transactions contemplated hereby and (ii) timely making
all such filings and timely seeking all such consents, approvals, permits or
authorizations; (b) use their best efforts to obtain in writing any consents
required from third parties necessary to effectuate the transactions
contemplated hereby; and (c) use their best efforts to take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Closing
Date, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors and other duly authorized
representatives of the parties shall take all such necessary action.
Section 6.4 Time of Closing. Each of the parties hereto shall use
its best efforts to consummate the transactions contemplated hereby on or prior
to the Closing Date.
ARTICLE 7. CLOSING.
Section 7.1 The Closing. The consummation of the transactions
contemplated hereunder (the "CLOSING") shall take place on the date of closing
(the "CLOSING DATE") of the Offering or September 30, 1998, whichever occurs
earlier, at such place as the parties hereto shall mutually agree.
Section 7.2 Deliveries at the Closing by Contributor. At the
Closing, Contributor will deliver or cause to be delivered to the Operating
Partnership the following and, where appropriate, duly executed on behalf of
all necessary parties thereto other than the Operating Partnership and the
Company:
(a) A current schedule of all Leases and the Tenant
Estoppel Certificates or Building Tenants certificate, as required by Section
9.2(b) hereof,
(b) With respect to the Property conveyed to the
Operating Partnership by Contributor as contemplated in Section 1.1 hereof,
(i) a special warranty deed, or the equivalent in the jurisdiction in which the
Real Property is situated ("DEED"), duly executed by Contributor in proper form
for recording so as to convey to the Operating Partnership good and marketable
title to its Real Property, free and clear of all liens and encumbrances,
except the Permitted Encumbrances and (ii) a bill of sale and assignment (the
"BILL OF SALE") duly executed by Contributor conveying to the Operating
Partnership all of Contributor's right, title and interest in and to the
Personal Property, the Leases, the Intangible Property, the Books and Records,
and the Tests and Plans pertaining to its Real Property, and whereby the
Operating Partnership will assume and agree to perform all of Contributor's
duties and obligations under the foregoing assigned documents from and after
the Closing Date.
(c) All original Leases and all other documents
pertaining thereto or copies of same where Contributor, using its best efforts,
is unable to deliver originals and an updated rent roll.
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(d) All other original documents or instruments referred
to herein, including, without limitation, the Service Contracts, Licenses and
Permits, and Tests and Plans or copies of same where Contributor, using its
best efforts, is unable to deliver originals; and keys to the Improvements.
(e) Any affidavits and such other documents or
instruments required by the Title Company to consummate the transactions
contemplated hereby.
(f) Affidavits and other instruments, including but not
limited to all organizational documents of Contributor, including bylaws,
articles of incorporation and certificates of good standing and/or existence
reasonably requested by Palace or the Title Company evidencing the power and
authority of such entity to enter into and perform this Agreement and any
documents to be delivered hereunder.
(g) A certificate executed by a duly authorized
representative of Contributor stating that the representations and warranties
made by Contributor in this Agreement are true and correct in all material
respects as of the Closing Date and that Contributor has performed all of its
covenants and other obligations under this Agreement.
(h) All proper instruments as shall be reasonably
required for the conveyance to the Operating Partnership of all right, title
and interest, if any, of Contributor in and to any award or payment made, or to
be made, (i) for any taking in condemnation, eminent domain or agreement in
lieu thereof of land adjoining all or any part of the Real Property, (ii) for
damage to the Land or the Improvements or any part thereof by reason of change
of grade or closing of any such street, road, highway or avenue, and (z) for
any taking in condemnation or eminent domain of any part of the Land or the
Improvements.
(i) In order to avoid the imposition of the withholding
tax payment pursuant to Section 1445 of the Code, a certificate signed by a
duly authorized representative of Contributor to the effect that Contributor is
not a "foreign person" as that term is defined in section 1445(f)(3) of the
Code.
(j) All such transfer and other tax declarations and
returns and information returns, duly executed and sworn to by Contributor to
the extent required by law in connection with the conveyance of the Property to
the Operating Partnership.
(k) Possession of the Property, subject only to the
Leases, and the Permitted Encumbrances.
(l) The OP Agreement.
(m) The Title Policy.
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(n) Updated UCC Searches.
(o) The Survey.
(p) Such other documents as may be reasonably required or
appropriate to effectuate the consummation of the transactions contemplated by
this Agreement.
Section 7.3 Deliveries at the Closing by Palace. At the
Closing, the Operating Partnership and the Company shall deliver or cause to be
delivered to Contributor the following and, where appropriate, duly executed by
all necessary parties thereto other than Contributor:
(a) The Cash Consideration.
(b) The certificates representing the OP Units to be
issued at the Closing properly issued to the appropriate party.
(c) A certificate executed by a duly authorized
representative of the Operating Partnership and the Company stating that the
representations and warranties made by the Operating Partnership and the
Company in this Agreement are true and correct in all material respects as of
the Closing Date, and that the Operating Partnership and the Company have
performed their respective covenants and other obligations under this
Agreement.
(d) Affidavits and other instruments, including but not
limited to all organizational documents of the Operating Partnership and the
Company including limited partnership agreements, filed copies of limited
partnership certificates, articles of organization, and certificates of good
standing and existence, reasonably requested by Contributor evidencing the
power and authority of the Operating Partnership and the Company to enter into
and perform this Agreement and any documents to be delivered hereunder.
(e) The OP Agreement.
(f) Such other documents as may be reasonably required
or appropriate to effectuate the consummation of the transactions contemplated
by this Agreement.
Section 7.4 Fees and Expenses. Contributor shall pay for
preparation of each Deed and the expense of recording each Deed, including, but
not limited to, transfer, indebtedness, intangible, sales, recordation and/or
conveyance taxes, whether at the local or state level. Subject to Section
17.10, each party shall pay the fees and expenses of its own attorneys and
accountants. Contributor shall pay for the Title Policy, Survey, UCC searches,
documentary stamp taxes, revenue stamps and filing fees, whether at the local
or state level. The parties shall share equally the Title Company's escrow
closing expenses. The provisions of this Section 7.4 shall survive the
Closing.
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ARTICLE 8. ADJUSTMENTS.
Section 8.1 Adjustments at the Closing Date. The following items
shall be apportioned as of midnight on the date preceding the Closing Date
between Contributor and the Operating Partnership:
(a) Rents payable by Lessees as and when collected. All
moneys received from Lessees from and after the Closing shall belong to the
Operating Partnership and shall be applied by the Operating Partnership to
current rents and other charges under the Leases. After application of such
moneys to current rents and charges, the Operating Partnership shall remit to
Contributor any excess amounts paid by a Lessee to the extent that such Lessee
was in arrears in the payment of rent prior to the Closing.
(b) At the Closing, Contributor shall pay to the
Operating Partnership an amount equal to all Security Deposits and any prepaid
rents.
(c) Utility charges payable by Contributor, including,
without limitation, electricity, gas, water and sewer bills. If there are
meters on the Real Property, Contributor will cause readings of all said meters
to be performed not more than ten (10) days prior to the Closing Date. To the
extent said meters are not read prior to Closing, the Operating Partnership
will cause same to be read promptly thereafter and a pro-rata adjustment shall
be made upon said reading.
(d) Amounts payable under the Service Contracts.
(e) Real estate taxes due and payable for the calendar
year. If the Closing Date shall occur before the tax rate is fixed, the
apportionment of real estate taxes shall be upon the basis of the tax rate for
the preceding year applied to the latest assessed valuation. If subsequent to
the Closing Date, real estate taxes (by reason of change in either assessment
or rate or for any other reason) for the Real Property should be determined to
be higher or lower than those that are apportioned, a new computation shall be
made, and Contributor agrees to pay the Operating Partnership any increase
shown by such recomputation and vice versa. All of the foregoing adjustments
shall be made in cash at Closing, with Contributor making a cash payment to
Palace of the net amount due Palace or vice versa. In no event will such
adjustment affect the calculation of Net Value under Section 2.1.
(f) All other items of revenue and expense, such that
Contributor shall be entitled to all revenues and shall be responsible for all
expenses derived from or related to the Property up to but not including the
Closing Date, and the Operating Partnership shall be entitled to all revenues
and shall be responsible for all expenses derived from or related to the
Property from and after the Closing Date.
Section 8.2 Adjustments for Assessments. If,on the Closing Date,
the Real Property or
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any part thereof shall be or shall have been affected by an assessment or
assessments which are or may become payable in annual installments, all the
unpaid installments of any such assessment due and payable on or prior to the
Closing Date shall be paid and discharged by Contributor on the Closing Date.
The Operating Partnership shall pay and discharge all such installments of such
assessments due and payable after the Closing Date.
Section 8.3 Other Adjustments. Except as otherwise provided in this
Agreement, all other adjustments and prorations shall be made in accordance
with the customs in respect to title closings in the State where the Real
Property is located.
Section 8.4 Errors in Calculations. Any errors in calculations or
adjustments shall be corrected or adjusted within one hundred twenty (120) days
after the Closing.
Section 8.5 Survival. The provisions of this Article 8 shall
survive the Closing Date.
ARTICLE 9. CONDITIONS PRECEDENT TO CLOSING.
Section 9.1 Conditions to Obligations of Contributor. The
obligations of Contributor to convey the Property and to perform the other
covenants and obligations to be performed by Contributor on the Closing Date
shall be subject to satisfaction of the following conditions (all or any of
which may be waived, in whole or in part, by Contributor):
(a) The representations and warranties made by the
Operating Partnership and the Company herein shall be true and correct in all
material respects with the same force and effect as though such representations
and warranties had been made on and as of the Closing Date; provided, however,
that a failure of any representations or warranties to be true and correct in
all material respects shall not give rise to a claim or right of termination by
Contributor hereunder so long as such matters do not have a material adverse
effect on the transactions contemplated herein.
(b) The Operating Partnership and the Company shall have
executed and delivered to Contributor all of the items and documents provided
herein for said delivery.
(c) The Operating Partnership and the Company shall have
performed all covenants and obligations undertaken by the Operating Partnership
and the Company herein in all material respects and materially complied with
all conditions required by this Agreement to be performed or complied with by
them on or before the Closing Date.
Section 9.2 Conditions to Obligations of Palace. The obligations
of the Operating Partnership to accept title to the Property and the Operating
Partnership's and the Company's obligation to perform the other covenants and
obligations to be performed by the Operating Partnership and the Company on the
Closing Date shall be subject to satisfaction of the following conditions (all
or any of which may be waived, in whole or in part, by the Operating
Partnership or
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the Company):
(a) The representations and warranties made by
Contributor herein shall be true and correct in all material respects with the
same force and effect as though such representations and warranties had been
made on and as of the Closing Date; provided, however, that a failure of a
representation or warranty to be true and correct in all material respects
shall not give rise to a claim or right of termination by the Operating
Partnership or the Company hereunder so long as such matters do not have a
material adverse effect on the transactions contemplated herein.
(b) Contributor shall have delivered to the Operating
Partnership in form, substance and quantity satisfactory to the Operating
Partnership, (i) Tenant Estoppel Certificates, a form of which is attached
hereto as Schedule 9.2-A, from a sufficient number of tenants so that
certificates have been received for tenants occupying 70% of the occupied
rentable square footage at the Property (including all tenants leasing over 10%
of the occupied rentable square footage), or (ii) a Building Tenants
Certificate completed by Ralph Engelstad, a form of which is attached hereto as
Schedule 9.2-B.
(c) Contributor shall have executed and delivered to the
Operating Partnership and the Company all of the items and documents provided
herein for said delivery.
(d) Contributor shall have performed all covenants and
obligations undertaken by Contributor herein in all material respects,
including, without limitation, the covenants set forth in Section 6.1(h), and
materially complied with all conditions required by this Agreement to be
performed or complied with by it on or before the Closing Date.
(e) The closing of the Offering upon terms and conditions
satisfactory to Palace, including, without limitation, pricing and timing,
shall occur simultaneously with Closing under this Agreement.
(f) The Title Company shall have delivered or committed
to deliver the Title Policy in the form and on the terms required by this
Agreement.
(g) The Real Property shall be in substantially the same
condition and repair on the Closing Date as existed on the Effective Date,
reasonable wear and tear excepted.
ARTICLE 10. ASSIGNMENT.
No party may assign this Agreement or any interest therein to any
other person without the prior written consent of the other parties hereto.
ARTICLE 11. BROKERS/COMMISSIONS.
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Contributor and Palace covenant and agree one with the other that no
real estate commissions, finders' fees or brokers' fees have been or will be
incurred in connection with this Agreement or the transaction contemplated
hereby. Contributor and Palace shall indemnify, defend and hold each other
harmless from and against any claims, liabilities, obligations or damages for
commissions, finders' or brokers' fees resulting from or arising out of
Palace's acquisition of the Property hereunder asserted against either party by
any broker or other person claiming by, through or under the indemnifying party
or whose claim is based on the indemnifying party's acts or omissions. The
provisions of this Article 11 shall survive the Closing or other termination of
this Agreement.
ARTICLE 12. CASUALTY LOSS.
Section 12.1 Maintenance of Insurance Policies. Contributor
shall continue to maintain, in all material respects, the fire and extended
coverage insurance policies with respect to the Property which are currently in
effect, through the Closing Date.
Section 12.2 Risk of Loss.
(a) The risk of any damage or loss to the Property prior
to Closing shall remain with Contributor. If at any time prior to the Closing
Date all or any portion of the Property is destroyed or damaged as a result of
fire or any other casualty (a "CASUALTY"), Contributor shall promptly give
written notice ("CASUALTY NOTICE") thereof to Palace. If the estimated cost to
repair or restore the Property following such Casualty equals or exceeds Fifty
Thousand and no/100 Dollars ($50,000.00), such Casualty is herein called a
"MAJOR CASUALTY." Upon the occurrence of a Major Casualty, Palace may, at its
option, either (i) terminate this Agreement only by written notice to
Contributor within twenty (20) days after receipt of the Casualty Notice, or
(ii) acquire the Property without in any manner affecting the consideration
payable to Contributor hereunder, provided, (A) the proceeds of any applicable
insurance policy together with a cash adjustment at Closing in an amount equal
to the deductible under such insurance policy shall be paid to the Operating
Partnership at Closing, or (B) if such proceeds have not yet been collected, all
unpaid claims and other rights in connection with the Casualty shall be assigned
to the Operating Partnership at Closing.
(b) If the Property is the subject of a Casualty but
Palace either is not entitled to or does not terminate this Agreement pursuant
to the provisions of this Article 12, then Contributor shall prior to the
Closing Date cause all temporary repairs to be made to the Property as shall be
required to prevent further deterioration and damage to the Property and to
protect public health and safety.
(c) If the Property is the subject of a Casualty which is
not a Major Casualty, this Agreement shall continue in full force and effect,
and (a) the proceeds of any applicable insurance policy, together with a credit
equal to the deductible under such insurance policy, shall be paid to
21
<PAGE> 28
the Operating Partnership at Closing, and (b) all unpaid claims and rights in
connection with the Casualty shall be assigned to the Operating Partnership at
Closing without in any manner affecting the consideration payable to
Contributor hereunder.
ARTICLE 13. CONDEMNATION.
In the event of a Material Taking of the Property, Palace shall have
the right, at its sole option, to either (a) terminate this Agreement by giving
Contributor written notice to such effect within fifteen (15) days after its
receipt of written notification of any such occurrence or (b) accept title to
the Property without reduction of any consideration to be given to Contributor
hereunder. In the event that Palace elects not to terminate this Agreement
under this Article 13, Contributor shall assign all proceeds of such taking to
the Operating Partnership, and same shall be the Operating Partnership's sole
property, and the Operating Partnership shall have the sole right to settle any
claim in connection with the Property. The term "MATERIAL TAKING" as to the
Property or any portion thereof shall be defined to mean the institution or
threatened institution of any proceedings, judicial, administrative or
otherwise which Palace in the exercise of its sole discretion determines (a)
causes access to the Real Property to be taken or materially diminished (i.e.,
following such taking the Real Property no longer has access to a publicly
dedicated street or traffic flow from and to the Real Property is materially
impaired), (b) results in parking no longer being in compliance with applicable
zoning laws; (c) results in a taking of any portion of any buildings
constituting the Improvements; or (d) materially and adversely impacts the use
or value of the Property.
ARTICLE 14. DEFAULT/REMEDIES.
Section 14.1 Termination by Palace. If any condition set forth
herein for the benefit of Palace cannot or will not be satisfied prior to
Closing, or upon the occurrence of any other event that would entitle Palace to
terminate this Agreement and its obligations hereunder, and Contributor fails
to cure any such matter within ten (10) days after notice thereof from Palace,
Palace at its option, may elect either (a) to terminate this Agreement, and all
rights and obligations of Contributor and Palace hereunder shall terminate
immediately, (b) to enforce specific performance or (c) to waive its right to
terminate (but without waiving any breach or default on the part of
Contributor) and, instead, to proceed to Closing.
Section 14.2 Termination by Contributor. If any condition set
forth herein for the benefit of Contributor (other than a default by Palace)
cannot or will not be satisfied prior to Closing, and Palace fails to cure any
such matter within ten (10) days after notice thereof from Contributor,
Contributor may, at its option, elect either (a) to terminate this Agreement,
in which event the rights and obligations of Contributor and Palace hereunder
shall terminate immediately, or (b) to waive its right to terminate, and
instead, to proceed to Closing. If, prior to Closing, Palace defaults in
performing any of its obligations under this Agreement (including its
obligation to purchase the Property), and Palace fails to cure any such default
within ten (10) days after notice thereof from Contributor, Contributor's sole
and exclusive remedy for such default shall be to terminate this
22
<PAGE> 29
Agreement, whereupon Palace shall pay to Contributor as liquidated damages the
sum of $1,000.00, said sum being established by agreement of the parties as a
reasonable estimate of the amount of damages incurred by Contributor in that
event as the actual amount of such damages would be difficult or impossible to
determine, and neither Palace nor Contributor shall have any further rights,
liabilities or obligations hereunder. Except as otherwise provided in the
immediately preceding sentence, Contributor waives any claims for damages,
whether actual, consequential, punitive or otherwise, that it may possess
against Palace arising out of or resulting from any such default by Palace
hereunder.
23
<PAGE> 30
ARTICLE 15. TAX MATTERS.
Section 15.1 Payment of Taxes by Contributor. Contributor will pay
or provide for payment of all Taxes due and payable on or after the Closing and
will file all returns and reports required to be filed on or after the Closing
with respect to Taxes imposed in connection with the ownership and operation of
the Property for all taxable periods (or portions thereof) ending on or prior
to the Closing for which the Operating Partnership could be held liable on a
claim made against the Operating Partnership.
Section 15.2 Definition of Taxes. "TAXES" mean all federal, state,
county, local, foreign and other taxes of any kind whatsoever (including,
without limitation, income, profits, premium, estimated, excise, sales, use,
occupancy, gross receipts, franchise, ad valorem, severance, capital levy,
production, transfer, license, stamp, environmental, withholding, employment,
unemployment compensation, payroll related and property taxes, import duties
and other governmental charges or assessments), whether or not measured in
whole or in part by net income, and including deficiencies, interest, additions
to tax or interest, and penalties with respect thereto, and including expenses
associated with contesting any proposed adjustment related to any of the
foregoing.
Section 15.3 Allocation Method. The Operating Partnership and its
affiliates will use the "traditional method with curative allocations" (as
defined in Treas. Reg. Section 1.704-3(b)) of allocating income, gain, loss
and deduction to account for the variation between the fair market value and
adjusted basis of the Property for federal income tax purposes with respect to
(i) the contribution of the Property, and (ii) any revaluation of the Property
in accordance with the provisions of Treas. Reg. Sections
1.704-1(b)(2)(iv)(f), 1.704-1(b)(2)(iv)(g) and 1.704-3(a)(6).
Section 15.4 Seller Reliance. Seller acknowledges that it has
relied upon its own tax advisors to determine the impact of federal, state and
local income tax laws on the transaction contemplated by this Agreement, and
that Palace has made no representations to it in this regard.
Section 15.5 Survival. The provisions of this Article 15 shall
survive the Closing Date.
ARTICLE 16. NOTICE.
All notices, demands, requests, or other writings in this Agreement
provided to be given, made or sent, or which may be given, made or sent, by
either party hereto to the other, shall be in writing and shall be delivered by
depositing the same with any nationally recognized overnight delivery service,
or by telecopy or fax machine, in either event with all transmittal fees
prepaid, properly addressed, and sent to the following addresses:
If to Contributor: [to come]
24
<PAGE> 31
with a copy to: Nitz, Walton & Heaton, Ltd.
514 S. Third Street
Las Vegas, Nevada 89101
Attention: W. Owen Nitz
Fax: (702) 384-3011
If to the Operating Partnership 3535 Las Vegas Blvd. South
or the Company: Las Vegas, Nevada 89109
Attention: Dave Merker
Fax: (702) 731-2123
with a copy to: Liddell, Sapp, Zivley,
Hill & LaBoon, L.L.P.
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Attention: Stephen Sapp
Fax: (214) 849-5599
or to such other address as either party may from time to time designate by
written notice to the other. Notices given by (i) overnight delivery service
as aforesaid shall be deemed received and effective on the first business day
following such dispatch and (ii) telecopy or fax machine shall be deemed given
at the time and on the date of machine transmittal provided same is sent prior
to 5:00 p.m., central time, on a business day (if sent later, then notice shall
be deemed given on the next business day) and if the sending party receives a
written send confirmation on its machine and forwards a copy thereof by
overnight delivery service accompanied by such notice or communication.
Notices may be given by counsel for the parties described above, and such
notices shall be deemed given by said party, for all purposes hereunder.
ARTICLE 17. MISCELLANEOUS.
Section 17.1 Survival of Representation and Warranties. The
representations and warranties made by Contributor in Article 4 and by Palace
in Article 5 shall survive the Closing.
Section 17.2 Entire Agreement; No Third-Party Rights. This
Agreement constitutes the entire agreement between the parties and incorporates
and supersedes all prior negotiations and discussions between the parties.
This Agreement shall be binding upon and inure solely to the benefit of each
party hereto and their successors and assigns, and nothing in the Agreement,
express or implied, is intended to confer upon any other person any rights or
remedies of any nature whatsoever under or by reason of this Agreement.
Section 17.3 Amendment. This Agreement cannot be amended, waived
or terminated
25
<PAGE> 32
orally, but only by an agreement in writing signed by each party hereto.
Section 17.4 Governing Law. This Agreement shall be interpreted and
governed by the laws of the State of Texas, without regard to its rules of
conflicts of laws and shall be binding upon the parties hereto and their
respective successors and assigns.
Section 17.5 Section Headings. The caption headings in this
Agreement are for convenience only and are not intended to be part of this
Agreement and shall not be construed to modify, explain or alter any of the
terms, covenants or conditions herein contained.
Section 17.6 Severability. If any term, covenant or condition of
this Agreement is held to be invalid, illegal or unenforceable in any respect,
this Agreement shall be construed without such provision.
Section 17.7 No Other Rights or Obligations. Nothing contained in
this Agreement shall be deemed to create any rights or obligations of
partnership, joint venture or similar association between Contributor and the
Company.
Section 17.8 Counterparts. This Agreement may be executed by the
parties hereto in counterparts, all of which together shall constitute a single
Agreement.
Section 17.9 Construction. All references herein to any Section, or
Exhibit shall be to the Sections of this Agreement and to the Exhibits annexed
hereto unless the context clearly dictates otherwise. All of the Exhibits
annexed hereto are, by this reference, incorporated herein.
Section 17.10 Attorneys' Fees. In the event of any litigation or
alternative dispute resolution between the Operating Partnership or the
Company, on the one hand, and Contributor, on the other hand, in connection
with this Agreement or the transactions contemplated herein, the non-prevailing
party in such litigation or alternative dispute resolution shall be responsible
for payment of all expenses and reasonable attorneys' fees incurred by the
prevailing party. The provisions of this Section 17.10 shall survive the
Closing.
Section 17.11 Interpretation. Whenever used herein, the singular
number shall include the plural, the plural shall include the singular, and the
use of any gender shall be applicable to all genders.
Section 17.12 Exclusivity. In consideration for the significant time
and expense that Palace will devote to consummation of this Agreement and the
Offering, and in order to facilitate consummation of this transaction,
Contributor agrees that until termination of this Agreement, it will not, and
will not permit any of its affiliates or anyone acting on its behalf to, (i)
solicit, encourage, negotiate, act upon, conclude or entertain in any way any
offer from any person or entity other than Palace to (1) purchase or acquire
any interest in the Property, or (2) consolidate or combine any of
26
<PAGE> 33
such person's or entity's assets with the Property, or (ii) furnish any
information with respect to Contributor or the Property to any person or
entity, other than Palace. Contributor agrees to immediately notify the
Company of its receipt of any unsolicited offer (written or oral) in respect of
such a transaction and the proposed terms of the offer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
SELLER:
------------------------------------------
a
----------------------------------------
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
COMPANY:
PALACE REIT,
a Texas real estate investment trust
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
OPERATING PARTNERSHIP:
PALACE OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership
By: Palace REIT, a Texas real estate
investment trust, Sole General Partner
27
<PAGE> 34
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
SIGNATURE PAGE TO
CONTRIBUTION AND EXCHANGE AGREEMENT
<PAGE> 1
EXHIBIT 10.6
PURCHASE AND SALE AGREEMENT
by and among
[SELLER]
and
Palace Operating Partnership, L.P., a
Delaware limited partnership
as
the Operating Partnership
and
PALACE REIT, a
Texas real estate investment trust
as
the Company
Dated as of ___________, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE 1. SUBJECT OF CONVEYANCE...........................................................................1
Section 1.1 Conveyance of the Property...................................................1
Section 1.2 Excluded Assets..............................................................2
ARTICLE 2. VALUE AND PAYMENT TERMS.........................................................................2
Section 2.1 Consideration................................................................2
ARTICLE 3. TITLE...........................................................................................3
Section 3.1 Independent Contract Consideration...........................................3
Section 3.2 Inspection Materials.........................................................3
Section 3.3 Title Commitment and Survey..................................................3
Section 3.4 Title Policy.................................................................4
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER
...............................................................................................4
Section 4.1 Seller's Representations and Warranties......................................4
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE OPERATING
PARTNERSHIP AND THE COMPANY....................................................................10
Section 5.1 Palace's Representations and Warranties......................................10
ARTICLE 6. COVENANTS......................................................................................11
Section 6.1 Covenants of Seller.........................................................11
Section 6.2 Confidentiality.............................................................12
Section 6.3 Cooperation.................................................................13
Section 6.4 Time of Closing.............................................................13
ARTICLE 7. CLOSING........................................................................................13
Section 7.1 The Closing.................................................................13
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 7.2 Deliveries at the Closing by Seller.........................................13
Section 7.3 Deliveries at the Closing by Palace.........................................15
Section 7.4 Fees and Expenses...........................................................15
ARTICLE 8. ADJUSTMENTS....................................................................................15
Section 8.1 Adjustments at the Closing Date.............................................15
Section 8.2 Adjustments for Assessments.................................................16
Section 8.3 Other Adjustments...........................................................16
Section 8.4 Errors in Calculations......................................................17
Section 8.5 Survival....................................................................17
ARTICLE 9. CONDITIONS PRECEDENT TO CLOSING................................................................17
Section 9.1 Conditions to Obligations of Seller.........................................17
Section 9.2 Conditions to Obligations of Palace ........................................17
ARTICLE 10. ASSIGNMENT.....................................................................................18
ARTICLE 11. BROKERS/COMMISSIONS............................................................................18
ARTICLE 12. CASUALTY LOSS..................................................................................18
Section 12.1 Maintenance of Insurance Policies...........................................18
Section 12.2 Risk of Loss................................................................18
ARTICLE 13. CONDEMNATION...................................................................................19
ARTICLE 14. DEFAULT/REMEDIES...............................................................................19
Section 14.1 Termination by Palace........................................................19
Section 14.2 Termination by Seller ......................................................20
ARTICLE 15. TAX MATTERS....................................................................................20
Section 15.1 Payment of Taxes by Seller..................................................20
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 15.2 Definition of Taxes.........................................................20
Section 15.3 Allocation Method...........................................................21
Section 15.4 Seller Reliance.............................................................21
Section 15.5 Survival....................................................................21
ARTICLE 16. NOTICE................................................................................22
ARTICLE 17. MISCELLANEOUS.........................................................................22
Section 17.1 Survival of Representation and Warranties...................................22
Section 17.2 Entire Agreement; No Third-Party Rights.....................................22
Section 17.3 Amendment...................................................................22
Section 17.4 Governing Law...............................................................22
Section 17.5 Section Headings............................................................22
Section 17.6 Severability................................................................22
Section 17.7 No Other Rights or Obligations..............................................22
Section 17.8 Counterparts................................................................22
Section 17.9 Construction................................................................22
Section 17.10 Attorneys' Fees.............................................................22
Section 17.11 Interpretation..............................................................23
Section 17.12 Exclusivity.................................................................23
</TABLE>
(iii)
<PAGE> 5
SCHEDULES
Schedule 1.1(a) Land
Schedule 1.1(d) Leases
Schedule 1.1(e) Service Contracts
Schedule 1.2 Excluded Assets
<PAGE> 6
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "AGREEMENT") dated as of
_______________________, 1998 (the "EFFECTIVE DATE") is made and entered by and
among _____________________________ (the "SELLER"), PALACE REIT, a Texas real
estate investment trust (the "COMPANY"), and PALACE OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership (the "OPERATING PARTNERSHIP"). The Company and
the Operating Partnership are sometimes hereinafter collectively referred to as
"PALACE".
RECITALS
A. Seller owns certain improved real property.
B. The Operating Partnership desires to acquire such real
property from Seller in exchange for cash. Closing hereunder will be contingent
on and concurrent with the closing of the initial public offering of the shares
of common stock of the Company (the "OFFERING").
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto, intending to be legally
bound hereby, do hereby agree as follows:
ARTICLE 1. SUBJECT OF CONVEYANCE.
Section 1.1 Conveyance of the Property. In accordance with the terms
and conditions of this Agreement and subject to Palace's performance and
satisfaction of the conditions, covenants and obligations contained herein,
Seller shall sell to the Operating Partnership all of its right, title and
interest in and to the following assets:
(a) the real property described on Schedule 1.1(a) (the
"LAND") and all the buildings, structures, parking areas, landscaping and
improvements located on the Land and all fixtures and other property affixed
thereto (the "IMPROVEMENTS");
(b) (i) any and all rights, titles, power, privileges, grants,
easements, licenses, rights-of-way and interests appurtenant to the Land and the
Improvements, including, without limitation, air rights, water and water rights,
sanitary sewer rights and capacities, development rights, and rights and
interests in and to minerals, oil and gas and other hydro carbons; (ii) any and
all rights, titles, power, privileges, grants, easements, licenses, easements,
rights-of-way and interests of Seller, either at law or in equity in possession
or in expectancy, in and to any real estate lying in the streets, highways,
roads, alleys, rights-of-way or sidewalks, open or proposed, in front of, above,
over, under, through or adjoining the Land and in and to any strips or gores of
real estate adjoining the Land; and (iii) all of Seller's right, title, claim
and interest, if any, in and to any and all rights, titles, power, privileges,
grants, easements, licenses, rights-of-way and interest appurtenant to or
incident to any of the foregoing (the Land and the Improvements and all of the
foregoing are sometimes referred to herein as the "REAL PROPERTY");
<PAGE> 7
(c) all personal property, fixtures, equipment, inventory and
computer programming and software owned or licensed by Seller and located on any
of the Real Property (collectively, the "PERSONAL PROPERTY");
(d) all leases and other agreements with respect to the use
and occupancy of the Real Property described in the rent roll attached as
Schedule 1.1(d), together with all amendments and modifications thereto and any
guaranties provided thereunder (the "LEASES"), and rents, additional rents,
reimbursements, profits, income, receipts and the amount deposited (the
"SECURITY DEPOSITS") under the Leases in the nature of refundable security for
the obligations of the performance of those parties occupying space at the Real
Property (the "LESSEES") under such Lease;
(e) (i) all permits, licenses, certificates of occupancy,
approvals, dedications, subdivision maps or plats and entitlements issued,
approved or granted by any applicable governmental authority in connection with
the construction, development, ownership, use or operation of the Real Property,
and all other certificates, guaranties and warranties relating to the Real
Property (collectively, the "PERMITS AND LICENSES") and (ii) all of Seller's
right, title and interest in and to those contracts and agreements described in
Schedule 1.1(e) for the servicing, maintenance and operation of the Real
Property (the "SERVICE CONTRACTS"); (the Permits and Licenses and the Service
Contracts are herein collectively called the "INTANGIBLE PROPERTY");
(f) all books, records, promotional materials, tenant data,
leasing material and forms, past and current rent rolls, files, statements, tax
returns, market studies, keys, plans, specifications, reports, tests and other
materials of any kind owned by Seller that are or may be used by Seller in the
use and operation of the Real Property or the Personal Property (collectively,
the "BOOKS AND RECORDS");
(g) any and all structural reviews, architectural drawings,
engineering, environmental, soils, seismic, geological and architectural
reports, studies and certificates and all plans, specifications and drawings of
the Improvements or any portion thereof (collectively, the "TESTS AND PLANS");
(h) all Seller's right, title, claim and interest, if any, in
and to all trademarks, trade names or symbols under which the Real Property (or
any part thereof) is operated; and
(i) all other rights, privileges and appurtenances owned by
Seller and in any way related to the rights and interests described above in
this Section 1.1.
The Real Property, the Personal Property, the Leases, the Security
Deposits, the Intangible Property, the Books and Records, the Tests and Plans
and the other property interests being transferred hereunder are hereinafter
collectively referred to as the "PROPERTY."
Section 1.2 Excluded Assets. In addition to such other property, rights
and interests of Seller which are excluded from the sale contemplated by this
Agreement through separate, specific reference elsewhere in this Agreement, all
of Seller's right, title and interest in and to the items
2
<PAGE> 8
described in Schedule 1.2 are expressly retained by Seller and excluded from any
sale otherwise contemplated by this Agreement.
ARTICLE 2. VALUE AND PAYMENT TERMS.
Section 2.1 Consideration. At the Closing, the Operating Partnership
shall pay Seller in cash an amount equal to _______________ percent (_____%) of
the proceeds received by the Operating Partnership from the Offering less
underwriters' fees, offering expenses, including, but not limited to, SEC fees,
NASD fees, printing and engraving expenses, accounting fees and expenses, legal
fees and expenses, blue sky fees, NASDAQ listing fees, transfer agent and
registrar fees and miscellaneous expenses, and $50,000.00 working capital for
the Operating Partnership (the "CASH CONSIDERATION").
ARTICLE 3. TITLE.
Section 3.1 Independent Contract Consideration. Contemporaneously with
the execution and delivery of this Agreement, the Operating Partnership has
delivered to Seller, and Seller hereby acknowledges the receipt of, a check in
the amount of One Hundred Dollars ($100.00) ("INDEPENDENT CONTRACT
CONSIDERATION"), which amount the parties bargained for and agreed to as
consideration for the Operating Partnership's exclusive right to purchase the
Property pursuant to this Agreement and for Seller's execution, delivery and
performance of this Agreement. The Independent Contract Consideration is in
addition to and independent of any other consideration or payment provided in
this Agreement, is nonrefundable, and it is fully earned and shall be retained
by Seller notwithstanding any other provision of this Agreement.
Section 3.2 Inspection Materials. The Seller shall allow the Operating
Partnership and its representatives access to all financial and other
information relating to the Property sufficient to enable them to prepare
audited financial statements in conformity with Regulation S-X of the Securities
and Exchange Commission and such other information as may be necessary in
connection with any filings or other disclosures under applicable stock exchange
rules or securities laws.
Section 3.3 Title Commitment and Survey. As soon as practicable after
the Effective Date, Seller shall obtain and deliver to the Operating
Partnership, at Seller's sole cost and expense, the following as to the
Property:
(a) Title Commitment. A Commitment for Title Insurance (the
"TITLE COMMITMENT") issued by National Title Company, 1094 E. Sahara, Las Vegas,
Nevada 89104, Attention: C.H. Bouchard, Telephone No. (702) 737-3366 (the "TITLE
COMPANY") for a title insurance underwriter acceptable to the Operating
Partnership, for the most recent form of ALTA owner's policy, covering the Land
and Improvements, in an amount designated by the Operating Partnership and
providing for such endorsements as the Operating Partnership may reasonably
require, setting forth the current status of the title to the Land and
Improvements, showing all liens, claims, encumbrances, easements, rights of way,
encroachments, reservations, restrictions, and any other matters affecting the
Land and Improvements, and pursuant to which the Title Company agrees to issue
to the Operating Partnership at Closing an Owner's Policy of Title Insurance
(the "TITLE POLICY") on the most recent form of ALTA comprehensive coverage
owner's policy endorsed as the Operating Partnership may reasonably require. The
Title Commitment shall be accompanied by a true, complete, and legible copy of
all documents and instruments (as recorded, where applicable)
3
<PAGE> 9
(the "SUPPORTING DOCUMENTS") referred to or identified in the Title Commitment,
including, but not limited to, all deeds and other conveyance documents
evidencing transfer of title into Seller, lien instruments, leases, plats,
surveys, reservations, restrictions and easements.
(b) UCC Search. Current written reports (the "UCC SEARCHES")
from the Office of the Secretary of State of the State where the Property is
located and the deed recording offices of the county where the Property is
located reflecting the results of current searches of the Uniform Commercial
Code Records maintained by such offices, said UCC Searches to be made under the
name of Seller.
(c) Survey. An "as built" survey (the "SURVEY"), of the Land
and Improvements made on the ground and certified by a professional land
surveyor licensed in the State in which the Property is located and approved by
the Title Company and Operating Partnership (the "SURVEYOR"). If different from
the description contained in Schedule 1.1(a) attached to this Agreement, the
legal description of the Land contained in the Survey (once the correctness
thereof has been confirmed by Seller, the Operating Partnership and the Title
Company) shall be substituted for the description of the Land contained in said
Schedule 1.1(a). Such description, if available, shall be used in the Title
Policy and the Deed to be delivered at Closing.
(d) Procedure for Objections to Title Commitment and Survey.
The Operating Partnership shall have ten (10) days after receipt of the last of
the Title Commitment together with complete and legible copies of all Supporting
Documents and the Survey to notify Seller in writing (the "OBJECTION NOTICE") of
any objections the Operating Partnership may have to matters reflected in or
relating to the Title Commitment, the Supporting Documents or the Survey. If
Seller has not cured or undertaken in writing to cure prior to Closing any
objection set forth in the Objection Notice to the Operating Partnership's
reasonable satisfaction by Closing, the Operating Partnership shall be entitled
to terminate this Agreement by written notice given by Closing. If the Operating
Partnership shall terminate this Agreement under this Section 3.3(d), neither
Palace nor Seller shall have any further right or obligation hereunder except
for rights or obligations which survive termination of this Agreement. If the
Operating Partnership has not terminated this Agreement as provided in this
Section 3.3(d), any objection reflected in the Title Commitment which Seller has
failed to cure shall be a Permitted Encumbrance, unless Seller shall have
undertaken in writing to cure such objection prior to Closing. As used in this
Agreement, the term "PERMITTED ENCUMBRANCE" shall mean any title exception
reflected in the Title Commitment as to which the Operating Partnership either
did not object in accordance with Section 3.3(d) or any such title exception as
to which the Operating Partnership did object that is not cured prior to Closing
in accordance with Section 3.3(d).
Section 3.4 Title Policy. At the Closing, Seller shall provide to the
Operating Partnership, at Seller's sole cost and expense, as to the Property,
the Title Policy issued pursuant to the Title Commitment, dated as of the
Closing Date, in an amount designated by the Operating Partnership and insuring
that the Operating Partnership has good and marketable title to the Property in
fee simple subject to no exceptions other than the Permitted Encumbrances. The
Title Policy shall be in the form required by Section 3.3(a).
4
<PAGE> 10
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Section 4.1 Seller's Representations and Warranties. In order to induce
the Company and the Operating Partnership to enter into this Agreement and to
perform their respective obligations hereunder, Seller hereby warrants and
represents the following, with respect to itself and to the Property:
(a) Organization, Good Standing and Power. Seller is duly
organized, validly existing and in good standing, under the laws of the
jurisdiction in which it was organized, is duly authorized to transact business
under the laws of each state in which the character of the properties owned or
leased by it therein or in which the transaction of its business makes such
qualification necessary, and has all requisite power and authority to execute
and deliver this Agreement and all other documents and instruments to be
executed and delivered by it hereunder and to perform its obligations hereunder
and thereunder in accordance with the terms and conditions hereof and thereof.
(b) Authorization; No Violation. Assuming the due and valid
authorization, execution and delivery of this Agreement by Palace, this
Agreement, and the other agreements and documents to be executed by Seller
hereunder, will be the legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, moratorium or similar laws relating to
creditors' rights and general principles of equity. The performance by Seller of
its duties and obligations under this Agreement and the documents and
instruments to be executed and delivered by it hereunder will not (i) conflict
with, or result in a breach of, or default under, any provision of any of the
Organizational Documents (hereinafter defined) of Seller or any agreement,
instrument, decree, judgment, injunction, order, writ, law, rule or regulation,
or any determination or award of any court or arbitrator, to which Seller is a
party or by which its assets are or may be bound (a "LEGAL REQUIREMENT") or (ii)
require any consent, approval or authorization of, declaration, filing or
registration with, or notice to, any federal, state or local governmental or
regulatory authority having jurisdiction over the Property or Seller (a
"GOVERNMENTAL AUTHORITY") or any other person or entity or (iii) result in the
creation of any lien or other encumbrance on the Property. As used herein, the
term "ORGANIZATIONAL DOCUMENTS" means as to any entity, its articles or
certificate of incorporation and its bylaws as each of the foregoing may have
been or may hereafter be amended from time to time.
(c) No Right to Acquire Property. No person has any right or
option to acquire all or any portion of the Property or any interest therein.
(d) Title to Property. Seller has, and on the Closing Date
will convey to the Operating Partnership, good and marketable title to the
Property, free and clear of any and all liens and encumbrances.
(e) Organizational Documents. The Organizational Documents of
Seller are in full force and effect and have not been amended except pursuant to
written instrument delivered to Palace. No default has occurred and is
continuing under any such Organizational Document, and
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no fact or circumstance has occurred which in and of itself, or with the giving
of notice or the passage of time, or both, would constitute such a default.
(f) Work on Real Property; Liens. No work has been performed
on any Real Property that would require an amendment to the certificate of
occupancy for such Real Property for which an amendment has not been obtained,
and, to Seller's knowledge, any and all work performed at the Real Property as
of the Effective Date has been, and to the Closing Date will be, performed in
all material respects in accordance with all Legal Requirements of all
applicable Governmental Authorities. Except for items being paid by Seller at
Closing or prorated at Closing, there are no outstanding accounts payable or
unpaid debts relating to the Property that are binding on Seller or would be
binding on the Operating Partnership or the Property, including, without
limitation, any unpaid charges, debts, liabilities, claims or obligations
arising from the construction, occupancy, ownership, use or operation of the
Property, which could give rise to any mechanic's or materialmens' or other
statutory liens against any portion of the Property.
(g) Validity of Service Contracts and Leases. There are no
service contracts, management or maintenance agreements, leases or other
agreements affecting the use or occupancy of the Real Property or other
agreements otherwise affecting the Property or the operation thereof other than
the Service Contracts and the Leases. All of the Service Contracts and the
Leases are, and as of the Effective Date and on the Closing Date will be, in
full force and effect without any material default or claim of material default
by any party thereto. To Seller's knowledge, all sums presently due and payable
by Seller under the Service Contracts have been fully paid, and all sums which
become due and payable thereunder between the Effective Date and the Closing
Date shall be fully paid by Seller within the time periods required thereby. All
agreements with respect to the Property, including, without limitation, all
Leases and Service Contracts, heretofore delivered by Seller to the Operating
Partnership or its representatives for examination, are true, correct, and
complete copies thereof, and have not been amended except as evidenced by
amendments similarly delivered. Seller has not entered into any agreement
regarding, nor is the Property or any part thereof subject to, any rights to
acquire or to lease the Property or any part thereof, or to otherwise obtain any
interest therein, and there are no outstanding rights of first refusal, rights
of reverter, purchase options or rights of first offer relating to the Property
or any interest therein.
(h) Litigation. There is no litigation, claim, audit, action,
or proceeding pending or, to Seller's knowledge, threatened before or by any
Governmental Authority or by Seller or by any other person or entity in any
manner adversely affecting the Property, or the ability of Seller to perform any
of its obligations hereunder, and also including, without limitation, any matter
seeking to (i) enjoin, restrain, prohibit or affect the transaction contemplated
hereby, (ii) increase significantly any ad valorem taxes previously assessed or
to be assessed in connection with the Property, (iii) enjoin a violation of the
Property concerning any Legal Requirement or (iv) attach any portion of the
Property.
(i) No Actions Relating to Property. Seller has not received
any notice of, nor to Seller's knowledge are there any facts or circumstances
which could give rise to, any pending liens or special assessments or taxes
against any portion of the Property by any Governmental Authority. There is no
pending, or to Seller's knowledge, threatened, condemnation, environmental,
zoning or
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other land-use regulation proceeding against the Property or any portion
thereof, nor does Seller have any knowledge of any public request, plans,
proceedings or proposals for changes in road grade, access, road widening,
realignment or other modification or other municipal improvements or other
matters that may materially affect the Property or (i) result in a tax, levy or
assessment against the Property, or (ii) that could cause a change or
modification of the zoning classification or of any other Legal Requirements
applicable to the Property or any part thereof or applicable to any property
adjacent to the Property, or (iii) otherwise detrimentally affect the use,
zoning, operation or value of the Property.
(j) Compliance With Legal Requirements.
(i) Violations. The Property, as improved by
the Improvements, and the use and operation thereof, do not violate any Legal
Requirement of any applicable Governmental Authority or any easement or
restriction affecting the Property, and Seller has not received any notice that
any building or other improvement not included in any part of the Property
relies on any part of the Property to fulfill any Legal Requirement applicable
to the Property.
(ii) Licenses. Permanent certificates of
occupancy and all licenses, permits, authorizations and approvals required from
all Governmental Authorities and local boards of fire underwriters (or similar
body) have been issued and are in effect for each building or structure
constituting a portion of the Improvements and have been paid for in full and
are in full force and effect.
(iii) No Agreements. There are no agreements
with or commitments to any Governmental Authorities, agencies, utilities or
quasi-governmental entities or other third parties with respect to the Property
which would bind the Property or the Operating Partnership following the Closing
Date, including, without limitation, any agreements or commitments which will
impose an obligation upon the Operating Partnership or its successors or assigns
to make any contribution or dedication of money or land or to construct, install
or maintain any improvements of a public or private nature on or off the
Property, except those agreements which are identified in the Title Commitment
and disclosed by Survey. To Seller's knowledge, no governmental authority has
imposed any requirement that any owner or developer of the Property pay directly
or indirectly any special fees or contributions or incur any expenses or
obligations in connection with any development of the Property or any portion
thereof.
(iv) Access/Improvements. The Real Property has
access to and from dedicated streets. Seller has no knowledge of any pending or
threatened governmental proceeding or any other fact or condition which would
purport to limit or would result in the termination of such access to and from
public roads.
(k) Environmental Matters. With respect to environmental
matters affecting the Property:
(i) No Violation of Laws. The Property is not
in violation of any Environmental Laws. Neither Seller, nor to Seller's
knowledge any third party, has or is engaged
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in any operations or activities upon, or any use or occupancy of the Property,
or any portion thereof, for the purpose of or in any way involving the handling,
manufacture, treatment, storage, use, generation, release, discharge, refining,
dumping or disposal of any Hazardous Materials, accidental or intentional, on,
under or in the Property, or transported any Hazardous Materials to, from or
across the Property, except in compliance with Environmental Laws.
(ii) No Hazardous Materials. No Hazardous
Materials have been constructed, deposited, placed, discharged, stored, or
otherwise located on, under or in the Property by Seller or to its knowledge any
third party, except in compliance with Environmental Laws. To Seller's
knowledge, (a) the Property has not previously been used as a landfill or as a
dump for garbage or refuse, (b) no Hazardous Materials have been released into
the environment or discharged at, on, from or under the Property, and (c) no
portion of the Property contains any Hazardous Materials, including, without
limitation, any asbestos or asbestos containing materials, polychlorinated
biphenyls and radon, except to the extent that any or all of the foregoing have
been done in compliance with Environmental Laws.
(iii) Notice. Seller has not received written
notice nor is Seller aware of (a) the migration of Hazardous Materials from
other properties to the Property (above or below ground), (b) the current or
past use for the disposal, storage, treatment, processing, manufacturing or
other handling of Hazardous Materials on any property adjoining the Property,
and (c) any property adjoining the Property which contains Hazardous Materials.
(iv) Underground Storage Tanks. There are no
underground storage tanks at the Property.
(v) Legal Proceedings and Notices. No
administrative order or notice, consent order, agreement, litigation or
settlement with respect to any Hazardous Materials is in existence with respect
to the Property or, to Seller's knowledge, proposed, threatened or anticipated,
nor has Seller received any notice of any such action or proceeding regarding
the Property or any property adjacent to the Property. To Seller's knowledge, no
investigation with respect to Hazardous Materials is proposed, threatened or
anticipated in respect to the Property, and Seller has received no communication
from or on behalf of any Governmental Authority or any other person or entity
indicating that any applicable Legal Requirements relating to Hazardous
Materials have been or may have been violated with respect to the Property. The
Property is not currently on and, to Seller's knowledge has never been on, any
federal or state "Superfund," or "Superlien" list, and Seller is not aware that
the Property is anticipated or threatened to be placed on any such list. Seller
has received no notice of any third party claims regarding damage to property or
persons resulting from any Hazardous Materials affecting the Property or any
adjacent property.
The term "ENVIRONMENTAL LAWS" shall mean the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
42 U.S.C. Sections 9601, et seq., the Resource Conservation and Recovery Act of
1976, 42 U.S.C. Sections 6901 et seq., the Toxic Substances Control Act, 15
U.S.C. Sections 2601 et. seq., the Hazardous Materials Transportation Act, 49
U.S.C. 1801 et seq., the Clean Water Act, 33 U.S.C. Sections 1251 et seq., as
said laws have been supplemented or amended to date, the regulations promulgated
pursuant to
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said laws and any other administrative, federal, state or local law, statute,
rule, regulation or ordinance which regulates or proscribes the use, storage,
disposal, presence, cleanup, transportation or release or threatened release
into the environment of Hazardous Materials. The term "HAZARDOUS MATERIALS"
shall mean any substance, chemical, waste or other material which is listed,
defined or otherwise identified as "hazardous" or "toxic" under any of the
Environmental Laws, and including, without limitation, formaldehyde, urea,
polychlorinated biphenyls, petroleum, petroleum product or by-product, crude
oil, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas
usable for fuel or mixture thereof, radon, asbestos and any by-product of same.
(l) Solvency. Seller is solvent, and has not made a general
assignment for the benefit of creditors or a transfer in fraud of creditors, or
been adjudicated a bankrupt or insolvent, nor has a receiver, liquidator,
custodian, or trustee of any of them or any of its properties (including the
Property) been appointed or taken possession of any of its respective
properties, or a petition filed by or against any of them for bankruptcy,
composition, rearrangement, extension, reorganization, or arrangement pursuant
to the Federal Bankruptcy Act or any similar present or future federal or state
insolvency or bankruptcy law or statute, or any proceeding instituted for the
dissolution or liquidation of any of them.
(m) Utilities. To Seller's knowledge, all utilities and
services necessary for operation of the Improvements (including, without
limitation, road access, gas, water, storm and sanitary sewers, electricity and
telephone), are available at the boundary of the Real Property, may be used or
tapped into by Seller, and, to Seller's knowledge, after Closing by the
Operating Partnership, will be connected with valid permits, are of sufficient
capacity to meet adequately all needs and requirements necessary for the use of
the Real Property for its intended purposes. To Seller's knowledge, the Real
Property is legally entitled to be served by such utilities without further
action by Seller. To Seller's knowledge, such utilities and services are
properly and fully installed and operating and comply with all Legal
Requirements. To Seller's knowledge (i) no fact, condition or proceeding exists
which would result in the termination or impairment of the furnishing of such
utilities to the Real Property, and (ii) no material, latent defects exist in
the plumbing, electrical, mechanical, heating, ventilating or air-conditioning
system or other systems in the Real Property and the same are in good operating
order and repair. To Seller's knowledge, all utility lines servicing the Real
Property are located either within the boundaries of the Real Property, or
within lands dedicated to the public use, or within recorded easements for such
purpose and are serviced and maintained by the appropriate public or
quasi-public entity.
(n) Property Condition. To Seller's knowledge, (i) there is no
condition or defect of the Property not disclosed in writing to the Operating
Partnership that would, if known, cause a reasonable and prudent person to
decide not to purchase the Property, (ii) the Improvements are free from
material defects in design and construction, (iii) there is no adverse
geological or soil condition affecting the Property, and (iv) there are no
material, latent defects in the roof or other structural components of the
Property. Seller has not altered the appearance of the Property in any way that
would cause a normal inspection of the Property to not accurately reveal its
present condition and general state of repair. Seller has not received written
notice of any outstanding requirements or recommendations by (1) the insurance
company(s) currently insuring the Property, or (2) any board
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of fire underwriters or other body exercising similar functions, which in any
case require or recommend any repairs or work to be done on the Property of a
material nature.
(o) Flood Hazard Area. Except as shown on the Surveys, no
portion of the Property is located within any flood plain or flood prone area.
(p) Taxes. Seller has paid all Taxes due and payable prior to
the Closing and timely filed all returns and reports required to be filed prior
to the Closing with respect to the ownership and operation of the Real Property
(by it or any predecessor entity) for which the Operating Partnership could be
held liable or a claim made against the Real Property. There are no audits or
other proceedings by any Governmental Authority pending or threatened with
respect to Taxes resulting from the ownership and operation of the Real Property
(by it or any predecessor entities) for which the Operating Partnership could be
held liable or a claim made against the Real Property, and no agreement
extending the period for assessment and collection has been executed with
respect thereto.
(q) Property Reports. Seller has delivered to the Operating
Partnership true and complete copies of all environmental, asbestos, soil,
substrata and geotechnical reports regarding the Property and surrounding land
in its possession or control.
(r) Insurance. All insurance coverage with respect to the
Property is in full force and effect, insures the Property in reasonably
sufficient amount against all risks usually insured against by persons operating
similar businesses or properties of similar size in the localities where such
businesses or properties are located, provides coverage as may be required by
applicable regulation and by any and all contracts to which Seller is a party
and has been issued by insurers of recognized responsibility. There is no
default under any such coverage nor has there been any failure to give notice or
present any claim under any such coverage in a due and timely fashion. There are
no outstanding unpaid premiums except in the ordinary course of business and no
notice of cancellation or nonrenewal of any such coverage has been received. No
insurer has advised Seller that it intends to reduce coverage, increase premiums
or fail to renew any existing policy or binder.
(s) Seller Not a Foreign Person. Seller is not a "foreign
person" which would subject the Operating Partnership to the withholding tax
provisions of Section 1445 of the Internal Revenue Code of 1986, as amended.
(t) Material Facts. No representation or warranty by Seller
herein, nor any certificate or other writing furnished or to be furnished by
Seller to the Operating Partnership pursuant hereto or in connection with the
transaction contemplated hereby, contains any untrue statement of a material
fact, or omits or will omit to state a material fact necessary to make the
statements contained herein or therein not misleading. Seller has no information
or knowledge of any change contemplated in any applicable governmental
requirement or any judicial administrative action or any action by any adjacent
landowners or any natural or artificial conditions upon the Property or any
significant adverse fact or condition relating to the Property or its continued
use by the Operating Partnership which has not been disclosed in writing to the
Operating Partnership by
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Seller or which would prevent, limit, impede or render materially more costly
the Operating Partnership's continued use of the Property.
ARTICLE 5. REPRESENTATIONS AND WARRANTIES OF THE OPERATING
PARTNERSHIP AND THE COMPANY.
Section 5.1 Palace's Representations and Warranties. In order to induce
Seller to enter into this Agreement and to perform its respective obligations
hereunder, the Operating Partnership and the Company hereby jointly and
severally warrant and represent the following:
(a) Organization, Good Standing and Power of the Company. The
Company is a real estate investment trust duly organized, validly existing and
in good standing under the laws of the State of Texas, is duly authorized to
transact business under the laws of any state in which the character of the
properties owned or leased by it therein or in which the transaction of its
business makes such qualification necessary and has all requisite corporate
power and authority to execute and deliver this Agreement and all other
documents and instruments to be executed and delivered by it hereunder and to
perform its obligations hereunder and thereunder in accordance with the terms
and conditions hereof and thereof.
(b) Organization, Valid Existence and Partnership Power of the
Operating Partnership. The Operating Partnership is a limited partnership duly
formed and validly existing under the laws of the State of Delaware, is duly
authorized to transact business under the laws of any state in which the
character of the properties owned or leased by it therein or in which the
transaction of its business makes such qualification necessary has all requisite
partnership power and authority to execute and deliver this Agreement and all
other documents and instruments to be executed and delivered by it hereunder and
to perform its obligations hereunder and thereunder in accordance with the terms
and conditions hereof and thereof.
(c) Authorization; No Violation. Assuming the due and valid
authorization, execution and delivery of this Agreement by Seller, this
Agreement and the other agreements and documents to be executed and delivered by
each of the Operating Partnership and the Company hereunder, when duly executed
and delivered, will be the legal, valid and binding obligation of each of the
Operating Partnership and the Company, enforceable against the Operating
Partnership and the Company in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, moratorium or similar laws relating to
creditors' rights and general principles of equity. The performance by each of
the Operating Partnership and the Company of its respective duties and
obligations under this Agreement and the documents and instruments to be
executed and delivered by each of them hereunder will not (i) conflict with, or
result in a breach of, or default under, any provision of any of the
organizational documents of either of the Operating Partnership or the Company
or any agreements, instruments or Legal Requirements to which either of the
Operating Partnership or the Company is a party or by which the assets of either
are or may be bound, or (ii) require any consent, approval or authorization of,
or declaration, filing or registration with, or notice to, any Governmental
Authority.
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(d) Litigation. There is no pending or, to Palace's knowledge,
threatened litigation against the Operating Partnership or the Company that if
adversely determined would have a material adverse effect on Palace or its
ability to perform its obligations under this Agreement in a timely manner.
ARTICLE 6. COVENANTS.
Section 6.1 Covenants of Seller. Seller covenants and agrees that
between the Effective Date and the Closing Date, unless Palace has consented in
writing to any other act or omission, it shall perform or observe the following:
(a) Seller will use commercially reasonable efforts to obtain
Tenant Estoppel Certificates from all tenants at the Property;
(b) Seller will keep and maintain the Property in good order
and condition, in compliance with all Legal Requirements and will cause all
necessary repairs, renewals and replacements to be made promptly. Seller will
not manage or maintain the Property differently due to the transaction
contemplated by this Agreement.
(c) Seller will continue to operate the Property in the usual
and customary manner and will not enter into any new Service Contract or Lease
or extend, renew, amend, cancel or terminate any existing Service Contract or
Lease.
(d) If Seller discovers any defect, error or omission in any
representation or warranty made in Section 4.1, Seller will give the Operating
Partnership prompt written notice thereof accompanied by information in detail
reasonably required to correct such defect, error or omission.
(e) Seller will make all required payments under any
indebtedness secured by a lien on its Real Property (other than payments due at
stated maturity) within any applicable grace period. Seller shall also comply
with all other material terms, covenants and conditions of any such
indebtedness.
(f) Except for the Permitted Encumbrances, Seller will not
cause or permit the Property, or any interest therein, to be sold, transferred,
alienated, mortgaged, licensed, encumbered or otherwise be transferred.
(g) Seller will maintain and keep in full force and effect the
hazard, liability and casualty insurance policies it is currently maintaining
with respect to the Property.
(h) Seller shall promptly give the Operating Partnership
written notice of, and promptly deliver to the Operating Partnership, a true and
complete copy of any written notice Seller may receive, on or before the Closing
Date, from any Governmental Authority, concerning a violation of any applicable
Legal Requirement pertaining to the Property.
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(i) Seller shall cooperate in the preparation by the Company
of a registration statement on Form S-11 to be filed with the Securities and
Exchange Commission ("SEC") under the 1933 Act in connection with the Offering.
Seller shall provide the Company with all such financial and other information
relating to the Property and in such form which would be sufficient to enable
the Company to prepare financial statements in conformity with Regulation S-X of
the SEC and such other information as may be necessary in connection with any
filings or other disclosures under applicable stock exchange rules or securities
laws.
Section 6.2 Confidentiality. Except as hereinafter provided, from and
after the execution of this Agreement, Palace and Seller shall keep the terms,
conditions and provisions of this Agreement confidential and neither shall make
any public announcements hereof unless the other first approves of same in
writing, nor shall either disclose the terms, conditions and provisions hereof,
except to their respective attorneys, accountants, engineers, surveyors,
financiers and bankers. Notwithstanding the foregoing, in connection with the
Offering, Palace will have the absolute right to market the Shares and prepare
and file all necessary or required registration statements and other papers,
documents and instruments necessary or required in Palace's judgment and that of
the attorneys and underwriters to file a registration statement with respect to
the Shares with the SEC and/or similar state authorities and to cause same to
become effective and to disclose therein and thus to its underwriters, to the
SEC and/or to similar state authorities and to the public all of the terms,
conditions and provisions of this Agreement. The obligations of this Section 6.3
shall survive any termination of this Agreement.
Section 6.3 Cooperation. Subject to the terms and conditions herein
provided, the parties to this Agreement shall (a) use their best efforts to
cooperate with each other in (i) determining which filings are required to be
made prior to the Closing Date with, and which consents, approvals, permits or
authorizations are required to be obtained prior to the Closing Date from,
Governmental Authorities or third parties in connection with the execution and
delivery of this Agreement and the transactions contemplated hereby and (ii)
timely making all such filings and timely seeking all such consents, approvals,
permits or authorizations; (b) use their best efforts to obtain in writing any
consents required from third parties necessary to effectuate the transactions
contemplated hereby; and (c) use their best efforts to take, or cause to be
taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the Closing
Date, any further action is necessary or desirable to carry out the purpose of
this Agreement, the proper officers and directors and other duly authorized
representatives of the parties shall take all such necessary action.
Section 6.4 Time of Closing. Each of the parties hereto shall use its
best efforts to consummate the transactions contemplated hereby on or prior to
the Closing Date.
ARTICLE 7. CLOSING.
Section 7.1 The Closing. The consummation of the transactions
contemplated hereunder (the "CLOSING") shall take place on the date of closing
(the "CLOSING DATE") of the Offering or September 30, 1998, whichever occurs
earlier, at such place as the parties hereto shall mutually agree.
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Section 7.2 Deliveries at the Closing by Seller. At the Closing, Seller
will deliver or cause to be delivered to the Operating Partnership the following
and, where appropriate, duly executed on behalf of all necessary parties thereto
other than the Operating Partnership and the Company:
(a) A current schedule of all Leases and the Tenant Estoppel
Certificates or Building Tenants certificate, as required by Section 9.2(b)
hereof;
(b) With respect to the Property conveyed to the Operating
Partnership by Seller as contemplated in Section 1.1 hereof, (i) a special
warranty deed, or the equivalent in the jurisdiction in which the Real Property
is situated (the "DEED"), duly executed by Seller in proper form for recording
so as to convey to the Operating Partnership good and marketable title to its
Real Property, free and clear of all liens and encumbrances, except the
Permitted Encumbrances and (ii) a bill of sale and assignment (the "BILL OF
SALE") duly executed by Seller conveying to the Operating Partnership all of
Seller's right, title and interest in and to the Personal Property, the Leases,
the Intangible Property, the Books and Records, and the Tests and Plans
pertaining to its Real Property, and whereby the Operating Partnership will
assume and agree to perform all of Seller's duties and obligations under the
foregoing assigned documents from and after the Closing Date.
(c) All original Leases and all other documents pertaining
thereto or copies of same where Seller, using its best efforts, is unable to
deliver originals and an updated rent roll.
(d) All other original documents or instruments referred to
herein, including, without limitation, the Service Contracts, Licenses and
Permits, and Tests and Plans or copies of same where Seller, using its best
efforts, is unable to deliver originals; and keys to the Improvements.
(e) Any affidavits and such other documents or instruments
required by the Title Company to consummate the transactions contemplated
hereby.
(f) Affidavits and other instruments, including but not
limited to all organizational documents of Seller, including bylaws, articles of
incorporation and certificates of good standing and/or existence reasonably
requested by Palace or the Title Company evidencing the power and authority of
such entity to enter into and perform this Agreement and any documents to be
delivered hereunder.
(g) A certificate executed by a duly authorized representative
of Seller stating that the representations and warranties made by Seller in this
Agreement are true and correct in all material respects as of the Closing Date
and that Seller has performed all of its covenants and other obligations under
this Agreement.
(h) All proper instruments as shall be reasonably required for
the conveyance to the Operating Partnership of all right, title and interest, if
any, of Seller in and to any award or payment made, or to be made, (i) for any
taking in condemnation, eminent domain or agreement in
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lieu thereof of land adjoining all or any part of the Real Property, (ii) for
damage to the Land or the Improvements or any part thereof by reason of change
of grade or closing of any such street, road, highway or avenue, and (z) for any
taking in condemnation or eminent domain of any part of the Land or the
Improvements.
(i) In order to avoid the imposition of the withholding tax
payment pursuant to Section 1445 of the Code, a certificate signed by a duly
authorized representative of Seller to the effect that Seller is not a "foreign
person" as that term is defined in section 1445(f)(3) of the Code.
(j) All such transfer and other tax declarations and returns
and information returns, duly executed and sworn to by Seller to the extent
required by law in connection with the conveyance of the Property to the
Operating Partnership.
(k) Possession of the Property, subject only to the Leases,
and the Permitted Encumbrances.
(l) The Title Policy.
(m) Updated UCC Searches.
(n) The Survey.
(o) Such other documents as may be reasonably required or
appropriate to effectuate the consummation of the transactions contemplated by
this Agreement.
Section 7.3 Deliveries at the Closing by Palace. At the Closing, the
Operating Partnership and the Company shall deliver or cause to be delivered to
Seller the following and, where appropriate, duly executed by all necessary
parties thereto other than Seller:
(a) The Cash Consideration.
(b) A certificate executed by a duly authorized representative
of the Operating Partnership and the Company stating that the representations
and warranties made by the Operating Partnership and the Company in this
Agreement are true and correct in all material respects as of the Closing Date,
and that the Operating Partnership and the Company have performed their
respective covenants and other obligations under this Agreement.
(c) Affidavits and other instruments, including but not
limited to all organizational documents of the Operating Partnership and the
Company including limited partnership agreements, filed copies of limited
partnership certificates, articles of organization, and certificates of good
standing and existence, reasonably requested by Seller evidencing the power and
authority of the Operating Partnership and the Company to enter into and perform
this Agreement and any documents to be delivered hereunder.
15
<PAGE> 21
(d) Such other documents as may be reasonably required or
appropriate to effectuate the consummation of the transactions contemplated by
this Agreement.
Section 7.4 Fees and Expenses. Seller shall pay for preparation of each
Deed and the expense of recording each Deed, including, but not limited to,
transfer, indebtedness, intangible, sales, recordation and/or conveyance taxes,
whether at the local or state level. Subject to Section 17.10, each party shall
pay the fees and expenses of its own attorneys and accountants. Seller shall pay
for the Title Policy, Survey, UCC searches, documentary stamp taxes, revenue
stamps and filing fees, whether at the local or state level. The parties shall
share equally the Title Company's escrow closing expenses. The provisions of
this Section 7.4 shall survive the Closing.
ARTICLE 8. ADJUSTMENTS.
Section 8.1 Adjustments at the Closing Date. The following items shall
be apportioned as of midnight on the date preceding the Closing Date between
Seller and the Operating Partnership:
(a) Rents payable by Lessees as and when collected. All moneys
received from Lessees from and after the Closing shall belong to the Operating
Partnership and shall be applied by the Operating Partnership to current rents
and other charges under the Leases. After application of such moneys to current
rents and charges, the Operating Partnership shall remit to Seller any excess
amounts paid by a Lessee to the extent that such Lessee was in arrears in the
payment of rent prior to the Closing.
(b) At the Closing, Seller shall pay to the Operating
Partnership an amount equal to all Security Deposits and any prepaid rents.
(c) Utility charges payable by Seller, including, without
limitation, electricity, gas, water and sewer bills. If there are meters on the
Real Property, Seller will cause readings of all said meters to be performed not
more than ten (10) days prior to the Closing Date. To the extent said meters are
not read prior to Closing, the Operating Partnership will cause same to be read
promptly thereafter and a pro-rata adjustment shall be made upon said reading.
(d) Amounts payable under the Service Contracts.
(e) Real estate taxes due and payable for the calendar year.
If the Closing Date shall occur before the tax rate is fixed, the apportionment
of real estate taxes shall be upon the basis of the tax rate for the preceding
year applied to the latest assessed valuation. If subsequent to the Closing
Date, real estate taxes (by reason of change in either assessment or rate or for
any other reason) for the Real Property should be determined to be higher or
lower than those that are apportioned, a new computation shall be made, and
Seller agrees to pay the Operating Partnership any increase shown by such
recomputation and vice versa. All of the foregoing adjustments shall be made in
cash at Closing, with Seller making a cash payment to Palace of the net amount
due Palace or vice versa.
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<PAGE> 22
(f) All other items of revenue and expense, such that Seller
shall be entitled to all revenues and shall be responsible for all expenses
derived from or related to the Property up to but not including the Closing
Date, and the Operating Partnership shall be entitled to all revenues and shall
be responsible for all expenses derived from or related to the Property from and
after the Closing Date.
Section 8.2 Adjustments for Assessments. If, on the Closing Date, the
Real Property or any part thereof shall be or shall have been affected by an
assessment or assessments which are or may become payable in annual
installments, all the unpaid installments of any such assessment due and payable
on or prior to the Closing Date shall be paid and discharged by Seller on the
Closing Date. The Operating Partnership shall pay and discharge all such
installments of such assessments due and payable after the Closing Date.
Section 8.3 Other Adjustments. Except as otherwise provided in this
Agreement, all other adjustments and prorations shall be made in accordance with
the customs in respect to title closings in the State where the Real Property is
located.
Section 8.4 Errors in Calculations. Any errors in calculations or
adjustments shall be corrected or adjusted within one hundred twenty (120) days
after the Closing.
Section 8.5 Survival. The provisions of this Article 8 shall survive
the Closing Date.
ARTICLE 9. CONDITIONS PRECEDENT TO CLOSING.
Section 9.1 Conditions to Obligations of Seller. The obligations of
Seller to sell the Property and to perform the other covenants and obligations
to be performed by Seller on the Closing Date shall be subject to satisfaction
of the following conditions (all or any of which may be waived, in whole or in
part, by Seller):
(a) The representations and warranties made by the Operating
Partnership and the Company herein shall be true and correct in all material
respects with the same force and effect as though such representations and
warranties had been made on and as of the Closing Date; provided, however, that
a failure of any representations or warranties to be true and correct in all
material respects shall not give rise to a claim or right of termination by
Seller hereunder so long as such matters do not have a material adverse effect
on the transactions contemplated herein.
(b) The Operating Partnership and the Company shall have
executed and delivered to Seller all of the items and documents provided herein
for said delivery.
(c) The Operating Partnership and the Company shall have
performed all covenants and obligations undertaken by the Operating Partnership
and the Company herein in all material respects and materially complied with all
conditions required by this Agreement to be performed or complied with by them
on or before the Closing Date.
17
<PAGE> 23
Section 9.2 Conditions to Obligations of Palace. The obligations of the
Operating Partnership to acquire title to the Property and the Operating
Partnership's and the Company's obligation to perform the other covenants and
obligations to be performed by the Operating Partnership and the Company on the
Closing Date shall be subject to satisfaction of the following conditions (all
or any of which may be waived, in whole or in part, by the Operating Partnership
or the Company):
(a) The representations and warranties made by Seller herein
shall be true and correct in all material respects with the same force and
effect as though such representations and warranties had been made on and as of
the Closing Date; provided, however, that a failure of a representation or
warranty to be true and correct in all material respects shall not give rise to
a claim or right of termination by the Operating Partnership or the Company
hereunder so long as such matters do not have a material adverse effect on the
transactions contemplated herein.
(b) Seller shall have delivered to the Operating Partnership
in form, substance and quantity satisfactory to the Operating Partnership, (i)
Tenant Estoppel Certificates, a form of which is attached hereto as Schedule
9.2-A, from a sufficient number of tenants so that certificates have been
received for tenants occupying 70% of the occupied rentable square footage at
the Property (including all tenants leasing over 10% of the occupied rentable
square footage), or (ii) a Building Tenants Certificate completed by Ralph
Engelstad, a form of which is attached hereto as Schedule 9.2-B.
(c) Seller shall have executed and delivered to the Operating
Partnership and the Company all of the items and documents provided herein for
said delivery.
(d) Seller shall have performed all covenants and obligations
undertaken by Seller herein in all material respects, including, without
limitation, the covenants set forth in Section 6.1(h), and materially complied
with all conditions required by this Agreement to be performed or complied with
by it on or before the Closing Date.
(e) The closing of the Offering upon terms and conditions
satisfactory to Palace, including, without limitation, pricing and timing, shall
occur simultaneously with Closing under this Agreement.
(f) The Title Company shall have delivered or committed to
deliver the Title Policy in the form and on the terms required by this
Agreement.
(g) The Real Property shall be in substantially the same
condition and repair on the Closing Date as existed on the Effective Date,
reasonable wear and tear excepted.
ARTICLE 10. ASSIGNMENT.
No party may assign this Agreement or any interest therein to any other
person without the prior written consent of the other parties hereto.
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<PAGE> 24
ARTICLE 11. BROKERS/COMMISSIONS.
Seller and Palace covenant and agree one with the other that no real
estate commissions, finders' fees or brokers' fees have been or will be incurred
in connection with this Agreement or the transaction contemplated hereby. Seller
and Palace shall indemnify, defend and hold each other harmless from and against
any claims, liabilities, obligations or damages for commissions, finders' or
brokers' fees resulting from or arising out of Palace's acquisition of the
Property hereunder asserted against either party by any broker or other person
claiming by, through or under the indemnifying party or whose claim is based on
the indemnifying party's acts or omissions. The provisions of this Article 11
shall survive the Closing or other termination of this Agreement.
ARTICLE 12. CASUALTY LOSS.
Section 12.1 Maintenance of Insurance Policies. Seller shall continue
to maintain, in all material respects, the fire and extended coverage insurance
policies with respect to the Property which are currently in effect, through the
Closing Date.
Section 12.2 Risk of Loss.
(a) The risk of any damage or loss to the Property prior to
Closing shall remain with Seller. If at any time prior to the Closing Date all
or any portion of the Property is destroyed or damaged as a result of fire or
any other casualty (a "CASUALTY"), Seller shall promptly give written notice
("CASUALTY NOTICE") thereof to Palace. If the estimated cost to repair or
restore the Property following such Casualty equals or exceeds Fifty Thousand
and no/100 Dollars ($50,000.00), such Casualty is herein called a "MAJOR
CASUALTY." Upon the occurrence of a Major Casualty, Palace may, at its option,
either (i) terminate this Agreement only by written notice to Seller within
twenty (20) days after receipt of the Casualty Notice, or (ii) acquire the
Property without in any manner affecting the consideration payable to Seller
hereunder, provided, (A) the proceeds of any applicable insurance policy
together with a cash adjustment at Closing in an amount equal to the deductible
under such insurance policy shall be paid to the Operating Partnership at
Closing, or (B) if such proceeds have not yet been collected, all unpaid claims
and other rights in connection with the Casualty shall be assigned to the
Operating Partnership at Closing.
(b) If the Property is the subject of a Casualty but Palace
either is not entitled to or does not terminate this Agreement pursuant to the
provisions of this Article 12, then Seller shall prior to the Closing Date cause
all temporary repairs to be made to the Property as shall be required to prevent
further deterioration and damage to the Property and to protect public health
and safety.
(c) If the Property is the subject of a Casualty which is not
a Major Casualty, this Agreement shall continue in full force and effect, and
(a) the proceeds of any applicable insurance policy, together with a credit
equal to the deductible under such insurance policy, shall be paid to the
Operating Partnership at Closing, and (b) all unpaid claims and rights in
connection with the Casualty shall be assigned to the Operating Partnership at
Closing without in any manner affecting the consideration payable to Seller
hereunder.
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<PAGE> 25
ARTICLE 13. CONDEMNATION.
In the event of a Material Taking of the Property, Palace shall have
the right, at its sole option, to either (a) terminate this Agreement by giving
Seller written notice to such effect within fifteen (15) days after its receipt
of written notification of any such occurrence or (b) accept title to the
Property without reduction of any consideration to be given to Seller hereunder.
In the event that Palace elects not to terminate this Agreement under this
Article 13, Seller shall assign all proceeds of such taking to the Operating
Partnership, and same shall be the Operating Partnership's sole property, and
the Operating Partnership shall have the sole right to settle any claim in
connection with the Property. The term "MATERIAL TAKING" as to the Property or
any portion thereof shall be defined to mean the institution or threatened
institution of any proceedings, judicial, administrative or otherwise which
Palace in the exercise of its sole discretion determines (a) causes access to
the Real Property to be taken or materially diminished (i.e., following such
taking the Real Property no longer has access to a publicly dedicated street or
traffic flow from and to the Real Property is materially impaired), (b) results
in parking no longer being in compliance with applicable zoning laws; (c)
results in a taking of any portion of any buildings constituting the
Improvements; or (d) materially and adversely impacts the use or value of the
Property.
ARTICLE 14. DEFAULT/REMEDIES.
Section 14.1 Termination by Palace. If any condition set forth herein
for the benefit of Palace cannot or will not be satisfied prior to Closing, or
upon the occurrence of any other event that would entitle Palace to terminate
this Agreement and its obligations hereunder, and Seller fails to cure any such
matter within ten (10) days after notice thereof from Palace, Palace at its
option, may elect either (a) to terminate this Agreement, and all rights and
obligations of Seller and Palace hereunder shall terminate immediately, (b) to
enforce specific performance or (c) to waive its right to terminate (but without
waiving any breach or default on the part of Seller) and, instead, to proceed to
Closing.
Section 14.2 Termination by Seller. If any condition set forth herein
for the benefit of Seller (other than a default by Palace) cannot or will not be
satisfied prior to Closing, and Palace fails to cure any such matter within ten
(10) days after notice thereof from Seller, Seller may, at its option, elect
either (a) to terminate this Agreement, in which event the rights and
obligations of Seller and Palace hereunder shall terminate immediately, or (b)
to waive its right to terminate, and instead, to proceed to Closing. If, prior
to Closing, Palace defaults in performing any of its obligations under this
Agreement (including its obligation to purchase the Property), and Palace fails
to cure any such default within ten (10) days after notice thereof from Seller,
Seller's sole and exclusive remedy for such default shall be to terminate this
Agreement, whereupon Palace shall pay to Seller as liquidated damages the sum of
$1,000.00, said sum being established by agreement of the parties as a
reasonable estimate of the amount of damages incurred by Seller in that event as
the actual amount of such damages would be difficult or impossible to determine,
and neither Palace nor Seller shall have any further rights, liabilities or
obligations hereunder. Except as otherwise provided in the immediately preceding
sentence, Seller waives any claims for damages, whether actual,
20
<PAGE> 26
consequential, punitive or otherwise, that it may possess against Palace arising
out of or resulting from any such default by Palace hereunder.
ARTICLE 15. TAX MATTERS.
Section 15.1 Payment of Taxes by Seller. Seller will pay or provide for
payment of all Taxes due and payable on or after the Closing and will file all
returns and reports required to be filed on or after the Closing with respect to
Taxes imposed in connection with the ownership and operation of the Property for
all taxable periods (or portions thereof) ending on or prior to the Closing for
which the Operating Partnership could be held liable on a claim made against the
Operating Partnership.
Section 15.2 Definition of Taxes. "TAXES" mean all federal, state,
county, local, foreign and other taxes of any kind whatsoever (including,
without limitation, income, profits, premium, estimated, excise, sales, use,
occupancy, gross receipts, franchise, ad valorem, severance, capital levy,
production, transfer, license, stamp, environmental, withholding, employment,
unemployment compensation, payroll related and property taxes, import duties and
other governmental charges or assessments), whether or not measured in whole or
in part by net income, and including deficiencies, interest, additions to tax or
interest, and penalties with respect thereto, and including expenses associated
with contesting any proposed adjustment related to any of the foregoing.
Section 15.3 Allocation Method. The Operating Partnership and its
affiliates will use the "traditional method with curative allocations" (as
defined in Treas. Reg. Section 1.704-3(b)) of allocating income, gain, loss and
deduction to account for the variation between the fair market value and
adjusted basis of the Property for federal income tax purposes with respect to
(i) the contribution of the Property, and (ii) any revaluation of the Property
in accordance with the provisions of Treas. Reg. Sections 1.704-1(b)(2)(iv)(f),
1.704-1(b)(2)(iv)(g) and 1.704-3(a)(6).
Section 15.4 Seller Reliance. Seller acknowledges that it has relied
upon its own tax advisors to determine the impact of federal, state and local
income tax laws on the transaction contemplated by this Agreement, and that
Palace has made no representations to it in this regard.
Section 15.5 Survival. The provisions of this Article 15 shall
survive the Closing Date.
ARTICLE 16. NOTICE.
All notices, demands, requests, or other writings in this Agreement
provided to be given, made or sent, or which may be given, made or sent, by
either party hereto to the other, shall be in writing and shall be delivered by
depositing the same with any nationally recognized overnight delivery service,
or by telecopy or fax machine, in either event with all transmittal fees
prepaid, properly addressed, and sent to the following addresses:
21
<PAGE> 27
If to Seller: [to come]
with a copy to: Nitz, Walton & Heaton, Ltd.
514 S. Third Street
Las Vegas, Nevada 89101
Attention: W. Owen Nitz
Fax: (702) 384-3011
If to the Operating Partnership 3535 Las Vegas Blvd. South
or the Company: Las Vegas, Nevada 89109
Attention: Dave Merker
Fax: (702) 731-2123
with a copy to: Liddell, Sapp, Zivley,
Hill & LaBoon, L.L.P.
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Attention: Stephen Sapp
Fax: (214) 849-5599
or to such other address as either party may from time to time designate by
written notice to the other. Notices given by (i) overnight delivery service as
aforesaid shall be deemed received and effective on the first business day
following such dispatch and (ii) telecopy or fax machine shall be deemed given
at the time and on the date of machine transmittal provided same is sent prior
to 5:00 p.m., central time, on a business day (if sent later, then notice shall
be deemed given on the next business day) and if the sending party receives a
written send confirmation on its machine and forwards a copy thereof by
overnight delivery service accompanied by such notice or communication. Notices
may be given by counsel for the parties described above, and such notices shall
be deemed given by said party, for all purposes hereunder.
ARTICLE 17. MISCELLANEOUS.
Section 17.1 Survival of Representation and Warranties. The
representations and warranties made by Seller in Article 4 and by Palace in
Article 5 shall survive the Closing.
Section 17.2 Entire Agreement; No Third-Party Rights. This Agreement
constitutes the entire agreement between the parties and incorporates and
supersedes all prior negotiations and discussions between the parties. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto and their successors and assigns, and nothing in the Agreement, express
or implied, is intended to confer upon any other person any rights or remedies
of any nature whatsoever under or by reason of this Agreement.
Section 17.3 Amendment. This Agreement cannot be amended, waived or
terminated orally, but only by an agreement in writing signed by each party
hereto.
22
<PAGE> 28
Section 17.4 Governing Law. This Agreement shall be interpreted and
governed by the laws of the State of Texas, without regard to its rules of
conflicts of laws and shall be binding upon the parties hereto and their
respective successors and assigns.
Section 17.5 Section Headings. The caption headings in this Agreement
are for convenience only and are not intended to be part of this Agreement and
shall not be construed to modify, explain or alter any of the terms, covenants
or conditions herein contained.
Section 17.6 Severability. If any term, covenant or condition of this
Agreement is held to be invalid, illegal or unenforceable in any respect, this
Agreement shall be construed without such provision.
Section 17.7 No Other Rights or Obligations. Nothing contained in this
Agreement shall be deemed to create any rights or obligations of partnership,
joint venture or similar association between Seller and the Company.
Section 17.8 Counterparts. This Agreement may be executed by the
parties hereto in counterparts, all of which together shall constitute a single
Agreement.
Section 17.9 Construction. All references herein to any Section, or
Exhibit shall be to the Sections of this Agreement and to the Exhibits annexed
hereto unless the context clearly dictates otherwise. All of the Exhibits
annexed hereto are, by this reference, incorporated herein.
Section 17.10 Attorneys' Fees. In the event of any litigation or
alternative dispute resolution between the Operating Partnership or the Company,
on the one hand, and Seller, on the other hand, in connection with this
Agreement or the transactions contemplated herein, the non-prevailing party in
such litigation or alternative dispute resolution shall be responsible for
payment of all expenses and reasonable attorneys' fees incurred by the
prevailing party. The provisions of this Section 17.10 shall survive the
Closing.
Section 17.11 Interpretation. Whenever used herein, the singular number
shall include the plural, the plural shall include the singular, and the use of
any gender shall be applicable to all genders.
Section 17.12 Exclusivity. In consideration for the significant time
and expense that Palace will devote to consummation of this Agreement and the
Offering, and in order to facilitate consummation of this transaction, Seller
agrees that until termination of this Agreement, it will not, and will not
permit any of its affiliates or anyone acting on its behalf to, (i) solicit,
encourage, negotiate, act upon, conclude or entertain in any way any offer from
any person or entity other than Palace to (1) purchase or acquire any interest
in the Property, or (2) consolidate or combine any of such person's or entity's
assets with the Property, or (ii) furnish any information with respect to Seller
or the Property to any person or entity, other than Palace. Seller agrees to
immediately notify the Company of its receipt of any unsolicited offer (written
or oral) in respect of such a transaction and the proposed terms of the offer.
23
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
SELLER:
-----------------------------------------------
a
--------------------------
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
COMPANY:
PALACE REIT,
a Texas real estate investment trust
By:
---------------------------------------
Name:
---------------------------------------
Title:
---------------------------------------
OPERATING PARTNERSHIP:
PALACE OPERATING PARTNERSHIP, L.P.,
a Delaware limited partnership
By: Palace REIT, a Texas real estate
investment trust, Sole General Partner
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
SIGNATURE PAGE TO
PURCHASE AND SALE AGREEMENT
<PAGE> 1
EXHIBIT 10.7
RIGHT OF FIRST REFUSAL AGREEMENT
THIS RIGHT OF FIRST REFUSAL AGREEMENT is made and entered as of the
6th day of March, 1998, by and among Neva Properties, Ltd., Natex, Ltd., Ralph
Engelstad, Ltd., Anywhere, Ltd., Who, Ltd., Smith Tower, Ltd., and Las Vegas
Motor Speedway, Inc. (the "Seller"), PALACE REIT, a Texas real estate
investment trust (the "REIT") and PALACE OPERATING PARTNERSHIP, L.P., a
Delaware limited partnership (the "Partnership"). The REIT and the Partnership
are sometimes hereinafter collectively referred to as "Palace".
W I T N E S S E T H :
A. Seller owns certain improved real property being more
particularly described on Exhibit A attached hereto and made a
part hereof for all purposes (collectively, the "Property").
B. Seller desires to grant to Palace and its successors and
assigns a right of first refusal for the purchase of the
Property on the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual promises hereinafter
set forth and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound hereby, do hereby agree as follows:
1. RIGHT OF FIRST REFUSAL. Seller hereby grants Palace and its
successors and assigns a right of first refusal for the purchase of the
Property. Palace's right of first refusal for the Property shall be exercised
as follows:
a. In the event that on or prior to the date 90 days after the
date of closing by Palace of certain properties owned by affiliates of Seller,
Seller receives a bona fide offer (an "Offer") to purchase the Property, or any
portion thereof, from a purchaser unrelated to Seller, and if Seller is willing
to sell the property described in the Offer upon the terms set forth therein,
Palace shall have a right of first refusal to purchase the property set forth
in the Offer upon the identical terms set forth in the Offer, otherwise this
Right of First Refusal shall terminate at expiration of the ninety (90) day
period, unless extended in writing by Seller.
b. Upon Seller's receipt of an Offer that Seller wishes to
accept, Seller shall provide Palace with a copy of the Offer. Palace shall
have a period of thirty (30) days after receipt of an Offer to submit to Seller
a contract containing the same terms and conditions as the Offer, accompanied
by an earnest money deposit in the same amount as the deposit accompanying the
Offer.
c. In the event that (i) Palace elects not to submit a contract
for the purchase of the property described in the Offer, (ii) Seller accepts
the Offer, and (iii) Seller subsequently agrees to modify any material
provision of the Offer, such modification of the Offer term ("Modified Offer")
shall reactivate Palace's right of first refusal with respect to the Modified
Offer. Seller shall be required to submit the Modified Offer to Palace and
Palace shall have a period of thirty (30) days
<PAGE> 2
after receipt thereof to submit to Seller a contract containing the same terms
and conditions as the Modified Offer.
d. In the event that Palace elects not to submit a contract for
the purchase of the property described in the Offer or any Modified Offer
within thirty (30) days after receipt of such Offer or any Modified Offer from
Seller, Palace shall be deemed to have waived its right of first refusal with
respect to the Offer or Modified Offer, and provided that Seller closes with
the purchaser in accordance with the Offer or Modified Offer, Palace's right of
first refusal shall be terminated as to the portion of the Property sold and
conveyed in accordance with the Offer or Modified Offer.
e. In the event that (i) Palace elects not to submit a contract
for the purchase of the property described in the Offer within the thirty (30)
days period provided, (ii) Seller accepts the Offer, and (iii) Seller fails to
close on the sale of the property in accordance with the Offer, Palace shall
continue to have a right of first refusal with respect to the property
described in the Offer.
f. In the event that an Offer submitted to Seller, which Seller
wished to accept, includes as part of the purchase price consideration other
than cash (e.g. real estate or securities), and in the event that Palace wishes
to exercise its right to purchase in accordance with the Offer, Palace may pay
the non-cash portion of the consideration set forth in the Offer in cash.
g. In the event that Seller sells and conveys the Property or any
portion thereof to a purchaser other than an unrelated bona fide third party
purchaser, Palace shall continue to have a right of first refusal with respect
to the Property.
2. NOTICE. All notices, demands, requests, or other writings in
this Agreement provided to be given, made or sent, or which may be given, made
or sent, by either party hereto to the other, shall be in writing and shall be
delivered by depositing the same with any nationally recognized overnight
delivery service, or by telecopy or fax machine, in either event with all
transmittal fees prepaid, properly addressed, and sent to the following
addresses:
If to Seller: Ralph Englestad
3535 Las Vegas Blvd. South
Las Vegas, Nevada 89109
Fax: (702) 731-2123
with a copy to: Nitz, Walton & Heaton, Ltd.
514 S. Third Street
Las Vegas, Nevada 89101
Attention: W. Owen Nitz
Fax: (702) 384-3011
If to the Partnership 3535 Las Vegas Blvd. South
or the REIT: Las Vegas, Nevada 89109
Attention: David R. Merker
Fax: (702) 731-2123
<PAGE> 3
with a copy to: Liddell, Sapp, Zivley,
Hill & LaBoon, L.L.P.
2001 Ross Avenue, Suite 3000
Dallas, Texas 75201
Attention: Stephen Sapp
Fax: (214) 849-5599
or to such other address as either party may from time to time designate by
written notice to the other. Notices given by (i) overnight delivery service
as aforesaid shall be deemed received and effective on the first business day
following such dispatch and (ii) telecopy or fax machine shall be deemed given
at the time and on the date of machine transmittal provided same is sent prior
to 5:00 p.m., central time, on a business day (if sent later, then notice
shall be deemed given on the next business day) and if the sending party
receives a written send confirmation on its machine and forwards a copy thereof
by overnight delivery service accompanied by such notice or communication.
Notices may be given by counsel for the parties described above, and such
notices shall be deemed given by said party, for all purposes hereunder.
3. ENTIRE AGREEMENT; NO THIRD-PARTY RIGHTS. This Agreement
constitutes the entire agreement between the parties regarding the subject
matter hereof and incorporates and supersedes all prior negotiations and
discussions between the parties. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto and their successors and
assigns, and nothing in the Agreement, express or implied, is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Agreement.
4. AMENDMENT. This Agreement cannot be amended, waived or
terminated orally, but only by an agreement in writing signed by each party
hereto.
5. GOVERNING LAW. This Agreement shall be interpreted and
governed by the laws of the State of Nevada, without regard to its rules of
conflicts of laws and shall be binding upon the parties hereto and their
respective successors and assigns.
6. SECTION HEADINGS. The caption headings in this Agreement are
for convenience only and are not intended to be part of this Agreement and
shall not be construed to modify, explain or alter any of the terms, covenants
or conditions herein contained.
7. SEVERABILITY. If any term, covenant or condition of this
Agreement is held to be invalid, illegal or unenforceable in any respect, this
Agreement shall be construed without such provision.
8. NO OTHER RIGHTS OR OBLIGATIONS. Nothing contained in this
Agreement shall be deemed to create any rights or obligations of partnership,
joint venture or similar association between Seller and Palace.
9. COUNTERPARTS. This Agreement may be executed by the parties
hereto in counterparts, all of which together shall constitute a single
Agreement.
<PAGE> 4
10. CONSTRUCTION. All references herein to any Section, or
Exhibit, shall be to the Sections of this Agreement and to the Exhibits annexed
hereto unless the context clearly dictates otherwise. All of the Exhibits
annexed hereto are, by this reference, incorporated herein.
11. ATTORNEYS' FEES. In the event of any litigation or
alternative dispute resolution between the Partnership or the REIT, on the one
hand, and Seller, on the other hand, in connection with this Agreement or the
transactions contemplated herein, the non-prevailing party in such litigation
or alternative dispute resolution shall be responsible for payment of all
expenses and reasonable attorneys' fees incurred by the prevailing party.
12 INTERPRETATION. Whenever used herein, the singular number
shall include the plural, the plural shall include the singular, and the use of
any gender shall be applicable to all genders.
REMAINDER OF THIS PAGE
INTENTIONALLY LEFT BLANK
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
SELLERS: Neva Properties, Ltd., Natex,
Ltd., Ralph Engelstad, Ltd., Anywhere,
Ltd., Who, Ltd., Smith Tower, Ltd., and
Las Vegas Motor Speedway, Inc.
all Nevada Corporations
By: /s/ Ralph Engelstad
---------------------------------------
Ralph Engelstad
President of all the above listed
corporations
REIT:
PALACE REIT
a Texas real estate investment trust
By: /s/ David R. Merker
---------------------------------------
David R. Merker
Chairman and Chief Executive
Officer
PARTNERSHIP:
PALACE OPERATING PARTNERSHIP, L.P.
a Delaware limited partnership
By: Palace REIT
a Texas real estate investment trust
Sole General Partner
By: /s/ David R. Merker
---------------------------------------
David R. Merker
Chairman and Chief Executive
Officer
SIGNATURE PAGE TO
RIGHT OF FIRST REFUSAL AGREEMENT
<PAGE> 6
EXHIBIT "A"
<TABLE>
<CAPTION>
SELLER PROPERTY ADDRESS
- ------ -------- -------
<S> <C> <C>
Neva Properties, Ltd. 14-Story Office Building 300 S. Main
Approx. 220,000 Sq. Ft. Norfolk, Virginia
Natex, Ltd. 2-Story Office Complex 401 Front Street
Approx. 35,000 Sq. Ft. Tyler, Texas
Ralph Engelstad, Ltd. 6-Story Office Building 1734 E. 63rd
Approx. 85,000 Sq. Ft. Kansas City, Missouri
Anywhere, Ltd. 19-Story Office Building 200 N. Loraine
Approx. 190,000 Sq. Ft. Midland, Texas
Who, Ltd. 2-Story Office Building 3301 Desta Drive
Approx. 120,000 Sq. Ft. Midland, Texas
Smith Tower, Ltd. 6-Story Office Building 24 Smith Road
Approx. 80,000 Sq. Ft. Midland, Texas
Las Vegas Motor 27 Industrial Buildings 700 Las Vegas Blvd North
Speedway, Inc. Approx. 1,450,000 Sq. Ft. North Las Vegas, Nevada
</TABLE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the Effective Date.
SELLER(S): NEVA PROPERTIES, LTD., NATEX, LTD., RALPH ENGELSTAD, LTD.,
ANYWHERE, LTD., WHO, LTD., SMITH TOWER, LTD., AND LAS VEGAS MOTOR SPEEDWAY,
INC.
All Nevada Corporations
By: /s/ Ralph Engelstad
----------------------------
Ralph Engelstad
President of all the above listed Corporations
REIT: PALACE REIT
a Texas real estate investment trust
By: /s/ David R. Merker
----------------------------
David R. Merker, Chairman and
Chief Executive Officer
PARTNERSHIP: PALACE OPERATING PARTNERSHIP, L.P.
a Delaware limited partnership
By: Palace REIT
a Texas real estate investment trust
Sole General Partner
By: /s/ David R. Merker
----------------------------
David R. Merker, Chairman and
Chief Executive Officer
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Palace REIT on Form
S-11 of our reports related to Palace REIT dated February 28, 1998 and to
Palace Properties dated February 28, 1998, appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Las Vegas, Nevada
March 11, 1998
