As filed with the Securities and Exchange Commission on September 21, 1998
Registration No. 333-55753
================================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Baron Capital Properties, L.P.
(Exact name of registrant as specified in its charter)
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Delaware 6798 31-1574856
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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Baron Capital Trust
(Exact name of registrant as specified in its charter)
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Delaware 6798 31-1584691
State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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7826 Cooper Road
Cincinnati, Ohio 45242
(513) 984-5001
(Address, including ZIP Code and telephone number, including
area code, of registrants' principal executive offices)
Gregory K. McGrath
7826 Cooper Road
Cincinnati, Ohio 45242
(513) 984-5001
(Name, address, including ZIP Code, and telephone
number, including area code, of agent for service)
Copies to:
Dennis P. Spates, Esq.
Schoeman, Marsh & Updike, LLP
60 East 42nd Street, 39th Floor
New York, New York 10165
(212) 661-5030
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the Registration Statement becomes
effective.
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CALCULATION OF REGISTRATION FEE
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Title of each class of Dollar amount to be Proposed maximum Proposed maximum Amount of
securities to registered offering price aggregate registration fee
be registered per unit offering price (1)
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2,500,000 Units of Limited
Partnership Interest $25,000,000 $10.00 $25,000,000 $7,576.00
2,500,000 Common Shares of
Beneficial Interest in
Baron Capital Trust into which
the registered Units will
be exchangeable N/A N/A N/A N/A
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(1) Previously paid.
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The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
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Location or Heading in
Item Number Caption Prospectus
- ----------- ------- ----------
Item 1 Forepart of Registration Statement and
Outside Front Cover Page of Prospectus Outside Front Cover
Item 2 Inside Front and Outside Back Inside Front Cover; Outside Back Cover, Additional
Cover Pages of Prospectus Information; Summary of Declaration of Trust - Quarterly and
Annual Reports
Item 3 Risk Factors, Ratio of Earnings to Outside Front Cover; Summary of the Trust and the Operating
Fixed Charges and Other Information Partnership; Summary of Risk Factors; Risk Factors;
Tax Status; Selected Financial Data.
Item 4 Terms of the Transaction Summary of the Trust and the Operating Partnership; The
Exchange Transaction; The Trust and the Operating
Partnership; Investment Objectives and Policies; Initial
Real Estate Investments; Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership
Units and Trust Common Shares
Item 5 Pro Forma Financial Information Not Applicable
Item 6 Material Contacts with the
Company Being Acquired The Trust and the Operating Partnership; Summary of the Operating
Partnership Agreement
Item 7 Additional Information Required for Reoffering
by Persons and Parties
Deemed to be Underwriters Not Applicable
Item 8 Interests of Named Experts and Counsel Outside Front Cover; Summary of the Trust and the Operating
Partnership; The Exchange Offering; Experts; Legal Matters
Item 9 Disclosure of Commission Position on
Indemnification of Securities Act Liabilities Summary of Declaration of Trust - Liability and
Indemnification
Item 10 Information with Respect to S-3 Registrants Not Applicable
Item 11 Incorporation of Certain
Information by Reference Not Applicable
Item 12 Information with Respect to S-2 or
S-3 Registrants Not Applicable
Item 13 Incorporation of Certain Information
by Reference Not Applicable
Item 14 Information with Respect to Registrants
Other than S-2 or S-3 Registrants Summary of the Trust and the Operating Partnership; The Exchange
Offering; Initial Real Estate Investments; Litigation; Exhibits
C, D and E.
Item 15 Information with Respect to S-3 Companies Not Applicable
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Item 16 Information with Respect to S-2 or S-3
Companies Not Applicable
Item 17 Information with Respect to Companies
Other than S-2 or S-3 Companies Not Applicable
Item 18 Information if Proxies, Consents or
Authorizations are to be Solicited Not Applicable
Item 19 Information if Proxies, Consents or
Authorizations are not to be
Solicited or in an Exchange Offer Summary of the Trust and the Operating Partnership; The Exchange
Offering; Management; The Trust and the Operating Partnership --
Formation Transactions
Item 20 Indemnification of Directors and Officers Summary of Declaration of Trust -- Liability and Indemnification;
Part II of Registration Statement
Item 21 Exhibits and Financial Statement Schedules Part II of Registration Statement
Item 22 Undertakings Part II of Registration Statement
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PART I
INFORMATION REQUIRED IN PROSPECTUS
Date of Issuance: ________________, 1998
Subject to Completion:
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with
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.
PROSPECTUS
BARON CAPITAL PROPERTIES, L.P.
a Delaware limited partnership
2,500,000 Units of Limited Partnership Interest
Exchange Partnerships
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Baron Strategic Investment Fund II, Ltd. Florida Income Appreciation Fund I, Ltd.
Central Florida Income Appreciation Fund, Ltd. Florida Income Growth Fund V, Ltd.
Florida Capital Income Fund, Ltd. Florida Opportunity Income Partners, Ltd.
Florida Capital Income Fund II, Ltd. GSU Stadium Student Apartments, Ltd.
Florida Capital Income Fund III, Ltd. Lamplight Court of Bellefontaine Apartments, Ltd.
Florida Capital Income Fund IV, Ltd. Midwest Income Growth Fund VI, Ltd.
Florida Income Advantage Fund I, Ltd. Realty Opportunity Income Fund VIII, Ltd.
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This Prospectus constitutes the prospectus for the exchange offering (the
"Exchange Offering") being conducted by Baron Capital Properties, L. P. (the
"Operating Partnership"), a newly formed Delaware limited partnership. In the
Exchange Offering, the Operating Partnership will acquire indirect interests in
residential apartment properties by offering to issue units of limited
partnership interest in the Operating Partnership ("Operating Partnership Units"
or "Units") in exchange for limited partnership interests held by individual
limited partners in limited partnerships which hold a direct or indirect equity
or mortgage interest in such properties. This Prospectus and the accompanying
transmittal letter and election form are first being sent to Offerees in
connection with initial transactions under the Exchange Offering on or about
October __, 1998. Offerees who elect to accept the Exchange Offering are
required to indicate their acceptance in the space provided on the enclosed
election form and sign and return it to the Operating Partnership by __________,
1998 [the thirtieth day following the date of mailing of Prospectus]. See "THE
EXCHANGE OFFERING."
The Operating Partnership and its general partner, Baron Capital Trust (the
"Trust" or the "General Partner"), a newly formed Delaware business trust,
constitute a self-administered and self-managed real estate company which has
been organized to acquire equity interests in existing residential apartment
properties located in the United States and to provide or acquire debt financing
secured by mortgages on such types of property. The Trust, indirectly through
the Operating Partnership, intends to acquire, own, operate, manage and improve
residential apartment properties for long-term ownership, and thereby to seek to
maximize current and long-term income and the value of its assets. See "SUMMARY
OF THE TRUST AND OPERATING PARTNERSHIP,"
1
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"THE TRUST AND THE OPERATING PARTNERSHIP," and "INVESTMENT OBJECTIVES AND
POLICIES" below. The management of the Trust has been involved in the
residential property business for over 10 years.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all direct or indirect property interests acquired. The
Trust, as the sole General Partner of the Operating Partnership, will control
the activities of the Operating Partnership. As described below, the Trust will
also acquire an equity interest in the Operating Partnership with the net
proceeds of the Trust's ongoing $25,000,000 cash offering (the "Cash Offering")
of Common Shares of beneficial interest ("Trust Common Shares" or "Common
Shares"). As of the date of this Prospectus, the Trust has sold _____ Common
Shares (gross proceeds of $________) and has acquired _____ Units in the
Operating Partnership. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Trust Common Shares into which Units issued in the Exchange Offering
will be exchangeable.
For purposes of the Exchange Offering, Operating Partnership Units have
been assigned an arbitrary initial value of $10.00 per Unit, which corresponds
to the Trust's offering price per Common Share. The value of Operating
Partnership Units and Trust Common Shares is substantially identical since
holders of Units ("Unitholders") may elect at any time and from time to time to
exchange all or a portion of their Units into an equivalent number of Common
Shares, so long as the exchange would not cause the exchanging party to own
(taking into account certain ownership attribution rules) in excess of 5% of the
then outstanding Shares in the Trust, subject to certain exceptions. See "THE
TRUST AND THE OPERATING PARTNERSHIP." To facilitate such exchanges of Operating
Partnership Units into Trust Common Shares, 2,500,000 Trust Common Shares (in
addition to the 2,500,000 Trust Common Shares being offered by the Trust in the
Cash Offering) have been registered with the Commission.
The Trust and the Operating Partnership intend to make regular quarterly
distributions to their Shareholders and Unitholders, respectively, of net income
generated from investments in property interests. The Trust intends to operate
as a real estate investment trust (a "REIT") for federal income tax purposes,
provided, however, that if the Managing Shareholder of the Trust determines,
with the affirmative vote of a Majority of the Trust's Shareholders entitled to
vote on such matter approving the Managing Shareholder's determination, that it
is no longer in the best interests of the Trust to continue to qualify as a
REIT, the Managing Shareholder may revoke or otherwise terminate the Trust's
REIT election pursuant to applicable federal tax law. See "TAX STATUS" and
"FEDERAL INCOME TAX CONSIDERATIONS."
The Managing Shareholder of the Trust is Baron Advisors, Inc. ("Baron
Advisors"), a Delaware corporation which will manage the operations of the Trust
and the Operating Partnership. The Trust and the Managing Shareholder are
Affiliates of each other, and each of them is an Affiliate of the Operating
Partnership. The Board of the Trust, a majority of whose members are Independent
Trustees, will have general supervisory authority over the activities of the
Trust and the Operating Partnership and prior approval authority in respect of
certain actions of the Trust and the Operating Partnership specified in the
Declaration of Trust for the Trust. See "MANAGEMENT" and "SUMMARY OF DECLARATION
OF TRUST - Control of Operations."
As its initial investment targets in the Exchange Offering, the Operating
Partnership is offering to acquire an equity interest (and, in one case, also a
subordinated mortgage interest) in 14 residential apartment properties (the
"Exchange Properties") directly or indirectly owned by 14 real estate limited
partnerships managed by Affiliates of the Managing Shareholder (collectively,
the "Exchange Partnerships" and individually, an "Exchange Partnership"). In the
Exchange Offering, the Operating Partnership will acquire property interests by
offering to issue registered Units in exchange for limited partnership interests
held by individual limited partners in the Exchange Partnerships (individually,
an "Exchange Limited Partner" and collectively, the "Exchange Limited
Partners"). Each Exchange Partnership is a real estate investment program which
owns directly or indirectly either all or a portion of the record title to (and,
in one case, also a subordinated mortgage interest in) residential apartment
property or all or a portion of limited partnership interest or beneficial
interest in a limited partnership or other entity which owns record title to
(and, in one case, also a subordinated mortgage interest in) such property. The
targeted properties consist of an aggregate of 849 residential units (comprised
of studio and one, two, three and four-bedroom units). Ten of the properties are
located in Florida, two properties in Ohio and one property each in Georgia and
Indiana.
2
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Such property interests are described in further detail at "INITIAL REAL ESTATE
INVESTMENTS" and in Exhibit B hereto.
The organizational chart set forth on page 16 indicates the relationship of
the Trust, the Operating Partnership, the Managing Shareholder, the Exchange
Partnerships managed by affiliates of the Managing Shareholder which will
participate in the Exchange Offering and other real estate limited partnerships
managed by affiliates of the Managing Shareholder which will not participate in
the offering.
Any Offeree who is a limited partner of an Exchange Partnership and does
not desire to participate in the Exchange Offering will be entitled to retain
his limited partnership interest in his respective Exchange Partnership on
substantially the same terms and conditions as those of his original investment.
The Operating Partnership will not complete the Exchange Offering in respect of
any particular Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests in the partnership affirmatively elect not to
accept the offering. In addition, the Operating Partnership will not complete
any transaction in the offering whatsoever unless a sufficient number of
Offerees accept the offering such that the offering involves the issuance of
Operating Partnership Units with an initial assigned value of at least
$6,000,000.
See "THE EXCHANGE OFFERING," "INITIAL REAL ESTATE INVESTMENTS," "SELECTED
FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE EXCHANGE PROPERTIES" and "COMPARISON OF RIGHTS
OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS AND TRUST
COMMON SHARES."
The Trust intends to investigate other investment opportunities to exchange
the balance of the registered Units for property interests in other Exchange
Offering transactions, including interests held in additional properties by
unaffiliated third parties as well as by other limited partnerships managed by
Affiliates of the Managing Shareholder. See "PRIOR PERFORMANCE BY AFFILIATES OF
MANAGING SHAREHOLDER."
The Trust and the Operating Partnership intend to investigate making an
additional public or private offering of Common Shares and/or Units within the
12-month period following the commencement of the Exchange Offering if the
Managing Shareholder determines that suitable property acquisition opportunities
which fulfill the Trust's investment criteria are available and such an offering
would fulfill its cost of funds requirements. The issuance by the Trust and the
Operating Partnership of additional Shares and Units subsequent to the
completion of the Cash Offering and the Exchange Offering could have a dilutive
effect on Unitholders of the Operating Partnership and Shareholders of the
Trust, including Offerees who acquire Units in the Exchange Offering.
THE MATERIAL RISKS INVOLVED IN THE EXCHANGE OFFERING AND THE OWNERSHIP OF
OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES INCLUDE THE FOLLOWING:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Trust Common Shares (into
which Units are exchangeable), if listed on a national securities
exchange, will trade at a lower price.
o The terms of the Exchange Offering were determined by the founders of
the Trust and the Operating Partnership with no separate counsel or
advisor for the Exchange Limited Partners.
o Offerees may not have an opportunity prior to their decision to accept
the Exchange Offering to evaluate a significant number of properties
in which the Trust and the Operating Partnership may acquire an
interest, and they will not have the benefit of knowing in advance of
deciding whether to accept the offering the extent of the Operating
Partnership's investment in respect of properties involved in the
offering until the offering is completed.
3
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o The Original Investors (described below under "Compensation") and
affiliates have significant influence over the operation of the Trust
and the Operating Partnership and the Exchange Offering involves
transactions among them which involve conflicts of interest which may
result in decisions that do not fully represent the interests of all
Shareholders of the Trust and Unitholders in the Operating
Partnership. Exchange Limited Partners who acquire Units in the
Exchange Offering will pay a higher price per Unit than the
consideration the Original Investors paid for Units issued to them in
connection with the formation of the Trust and the Operating
Partnership.
o Offerees who accept the offering may not experience returns comparable
to or in excess of those experienced by Limited Partners in the
Exchange Partnerships.
o The current returns of the Exchange Partnerships may not be achieved
by the Trust and the Operating Partnership after completion of the
offering and may be higher than the current returns of other
partnerships which participate in the offering, although such other
partnerships may offer higher future growth potential than the
Exchange Partnerships.
o Real estate investment risks exist such as the effect of economic and
other conditions on cash flows from real estate interests acquired by
the Trust and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability
of the Trust and the Operating Partnership to incur additional debt,
the need to refinance current indebtedness at various maturities, and
the effect of any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering.
o No public market for the sale of Units is expected to ever develop,
and, although Common Shares (into which Units are exchangeable) are
expected to eventually be listed on AMEX, it is possible that no
public market for the Common Shares will ever develop or be
maintained.
o The Trust will be taxed as a corporation if it fails to qualify as a
REIT.
SEE "SUMMARY OF RISK FACTORS" AND "RISK FACTORS" ON PAGES 28 THROUGH 31 AND
PAGES 44 THROUGH 65, RESPECTIVELY, FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN OPERATING
PARTNERSHIP UNITS AND TRUST COMMON SHARES, INCLUDING THE FOREGOING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The address and telephone and fax numbers of the principal office of the
Trust and the Operating Partnership are:
Baron Capital Trust
Baron Capital Properties, L.P.
7826 Cooper Road
Cincinnati, Ohio 45242
(513) 984-5001 (Telephone)
(513) 984-4550 (Fax)
4
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TABLE OF CONTENTS
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SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP...................................... 13
Summary of the Trust and the Operating Partnership................................. 13
Background and Reasons for the Exchange Offering.................................. 19
Summary of Use of Proceeds of Trust's Cash Offering................................ 20
Summary of Fees and Reimbursable Expenses.......................................... 22
DESCRIPTION OF EXCHANGE PARTNERSHIPS.................................................... 24
Baron Strategic Investment Fund II, Ltd............................................ 24
Central Florida Income Appreciation Fund, Ltd...................................... 24
Florida Capital Income Fund, Ltd................................................... 24
Florida Capital Income Fund II, Ltd................................................ 24
Florida Capital Income Fund III, Ltd............................................... 25
Florida Capital Income Fund IV, Ltd................................................ 25
Florida Income Advantage Fund I, Ltd............................................... 25
Florida Income Appreciation Fund I, Ltd............................................ 25
Florida Income Growth Fund V, Ltd.................................................. 25
Florida Opportunity Income Partners, Ltd........................................... 26
GSU Stadium Student Apartments, Ltd................................................ 26
Lamplight Court of Bellefontaine Apartments, Ltd................................... 26
Midwest Income Growth Fund VI, Ltd................................................. 26
Realty Opportunity Income Fund VIII, Ltd........................................... 26
SUMMARY OF RISK FACTORS................................................................. 28
TAX STATUS ............................................................................. 32
The Operating Partnership.......................................................... 32
Exchange of Exchange Partnership Units for Operating Partnership Units............. 33
The Trust.......................................................................... 33
COMPENSATION OF THE MANAGING SHAREHOLDER AND AFFILIATES................................. 34
CONFLICTS OF INTEREST.......................................................... ........ 40
FIDUCIARY RESPONSIBILITY................................................................ 42
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS....................................... 44
RISK FACTORS............................................................................ 44
Arbitrary Offering Price........................................................... 44
No Separate Representation of Offerees............................................. 44
Offerees May Not Have Information Available to Evaluate Properties Prior to
Decision Whether to Accept the Exchange Offering................................ 45
Possible Adverse Influence of Original Investors................................... 46
Conflicts of Interest.............................................................. 46
No Assurance of Successful Performance of Properties to be Acquired
in Exchange Offering............................................................ 47
Potential Loss of Future Appreciation on Exchange Properties....................... 47
Investors in Successful Exchange Properties Could Lose Advantage
by Combining with Less Successful Exchange Properties........................... 47
Several Factors Could Have Possible Adverse Effects on Operation of Properties..... 48
No Assurance of Avoiding Operating Losses.......................................... 49
Several Factors Could Have Possible Adverse Effects on Distributions
to Shareholders and Unitholders................................................. 49
Distributions to Shareholders and Unitholders Adversely Affected by Poor
Operating Results of Operating Partnership...................................... 50
Competition........................................................................ 51
Lack of Liquidity of Real Estate................................................... 51
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5
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Cash Distributions Could be Reduced by Cost of Capital Improvements................ 52
Real Estate Investments May Fail to Perform to Expected Level...................... 52
Debt Service Obligations Could Adversely Affect Cash Flow.......................... 52
Adverse Affects of Under-performing Mortgage Investments........................... 53
Possible Adverse Effects as a Result of Loss of Key Management..................... 54
Uncertainty of Successful Completion of Cash Offering and Exchange Offering........ 54
Limited Marketability of Units and Common Shares................................... 55
Possible Adverse Effect on Market Price as a Result of Availability
of Units and Common Shares for Future Sale...................................... 55
Possible Adverse Effect of Market Interest Rates on Common Share Prices............ 56
Potential Adverse Tax Consequences................................................. 56
Taxation of the Trust as a Corporation if It Fails to Qualify as a REIT....... 56
Taxation of the Operating Partnership as a Corporation if It Fails to be
Classified as a Partnership................................................... 57
Deferral of Gain from Exchange Offering Subject to Certain Exceptions......... 57
Investors Liable for State and Local Taxes.................................... 58
Non-participating Exchange Limited Partners in Participating Exchange
Partnerships Will Have Significant Influence over
Certain Actions of the Partnerships........................................... 58
Possible Dilution as a Result of Issuance of Additional Securities................. 59
Limits on Ownership and Transfers of Common Shares and Units Which May Delay
or Prevent a Takeover Offering a Premium Price.................................. 60
Lack of Liquidity of Retained Interest in an Exchange Partnership Following
the Exchange Offering........................................................... 61
No Operating History............................................................... 61
Limited Participation Rights of Shareholders and Unitholders in Management......... 61
Regulatory Non-compliance Could Result in Fines or Judgments....................... 61
Fair Housing Amendments Act of 1988........................................... 61
Americans with Disabilities Act............................................... 61
Compliance with Environmental Laws............................................ 62
Shareholders and Unitholders Could be Adversely Affected by
Limited Liability and Indemnification of the Managing Persons................... 62
No Assurance of Shareholder Limited Liability for Activities
of Delaware Business Trust...................................................... 63
No Assurance of Profitable Sale of Trust and Operating Partnership Property........ 63
Property Losses May Not be Insurable............................................... 63
Possible Lack of Independent Assessment of Prior Operating Results
of Acquired Property Interests.................................................... 63
Initial Value Assigned to Operating Partnership Units Offered in Exchange for
Interests in Exchange Properties Exceeds Current Book Value of Properties....... 64
Changes in Laws Could Increase Operating Expenses.................................. 64
No Rights of Dissent............................................................... 64
Possible Lack of Diversification in Property Investments........................... 64
Other Participants May Fail to Fulfill Obligations................................. 64
Extended and Uncertain Investing Period Could Adversely Affect Returns............. 65
Possible "Year 2000" Problems...................................................... 65
THE EXCHANGE OFFERING................................................................... 66
General Accounting Treatment....................................................... 68
Background of the Exchange Offering................................................ 68
Effects of the Formation Transactions and Cash Offering and Exchange Offering...... 70
Exchange Property Appraisals....................................................... 71
Election Procedure and Exchange of Certificates.................................... 74
Expenses of the Exchange Offering.................................................. 75
PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER ................................ 76
MANAGEMENT.............................................................................. 85
Managing Shareholder............................................................... 85
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Trust Management Agreement......................................................... 87
Officers of the Trust and the Operating Partnership................................ 87
The Board of the Trust, Committees and Trustees.................................... 89
The Board of the Trust........................................................ 89
Independent Trustees.......................................................... 90
Corporate Trustee............................................................. 91
THE TRUST AND THE OPERATING PARTNERSHIP................................................. 93
The Operating Partnership.......................................................... 93
Formation Transactions............................................................. 95
Ownership of the Trust and the Operating Partnership............................... 96
Regulations........................................................................ 99
General....................................................................... 99
Fair Housing Amendments of 1988............................................... 99
Americans with Disabilities Act ("ADA")....................................... 100
Environmental Regulations..................................................... 100
Rent Control Legislation...................................................... 100
Employees.......................................................................... 100
INVESTMENT OBJECTIVES AND POLICIES...................................................... 100
General............................................................................ 100
Trust Policies with Respect to Certain Activities.................................. 102
Investment Policies........................................................... 102
Disposition Policies.......................................................... 103
Financing Policies............................................................ 104
Conflicts of Interest Policies................................................ 104
INITIAL REAL ESTATE INVESTMENTS......................................................... 105
The Acquired Properties............................................................ 105
The Exchange Properties............................................................ 108
Property Description.......................................................... 112
Lease Agreements.............................................................. 112
Competition................................................................... 112
Insurance..................................................................... 112
Property Management........................................................... 112
SELECTED FINANCIAL DATA................................................................. 113
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE EXCHANGE PROPERTIES...................... 116
Overview........................................................................... 116
Results of Operations.............................................................. 116
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1997.... 116
Liquidity and Capital Resources.................................................... 117
Year 2000.......................................................................... 118
FEDERAL INCOME TAX CONSIDERATIONS....................................................... 119
Classification as a Partnership.................................................... 119
Exchange of Exchange Partnership Units for Operating Partnership Units............. 120
Relief from Liabilities/Deemed Cash Distribution................................... 122
Disguised Sale Regulations......................................................... 123
Effect of Assumption of Liabilities Under the Disguised Sale Regulations...... 123
Effect of Cash Distributions Under the Disguised Sale Regulations............. 124
Effect of Right to Convert to a Share of the Trust............................ 124
Effect of Disguised Sale Characterization..................................... 125
Section 465(E) Recapture........................................................... 125
Transfer to an Investment Company.................................................. 126
Withholding........................................................................ 127
Tax Treatment of Unitholders Who Hold Operating Partnership Units
After the Exchange.............................................................. 127
Income and Deductions in General.............................................. 127
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Treatment of Partnership Distributions........................................ 127
Initial Basis of Operating Partnership Units.................................. 127
Allocations of Partnership Income, Gain, Loss and Deductions.................. 128
Effect of the Exchange on Depreciation........................................ 128
Tax Allocations with Respect to Book-Tax Difference on Contributed Properties. 129
Dissolution of Partnership.................................................... 129
Limitations on Deductibility of Losses: Treatment of
Passive Activities and Portfolio Income..................................... 129
Section 754 Election.......................................................... 130
Disposition of Operating Partnership Units by Unitholders..................... 130
Tax Treatment of Conversion Right............................................. 130
Constructive Termination...................................................... 130
Tax-Exempt Organizations and Certain Other Investors............................... 131
Partnership Income Tax Information Returns and Partnership Audit Procedures........ 131
Registration as a Tax Shelter...................................................... 132
Organizational and Syndication Fees................................................ 133
Anti-Abuse Regulations............................................................. 133
Alternative Minimum Tax on Items of Tax Preference................................. 134
State and Local Taxes.............................................................. 134
Income Tax Considerations with Respect to the Trust................................ 134
Taxation of the Trust.............................................................. 135
General....................................................................... 135
Stock Ownership Tests......................................................... 135
Asset Tests................................................................... 136
Gross Income Tests............................................................ 136
The 75% Test............................................................. 136
The 95% Test............................................................. 137
The 30% Test............................................................. 138
Annual Distribution Requirements.............................................. 138
Failure to Qualify............................................................ 138
Tax Aspects of the Trust's Investment in the Operating Partnership................. 139
Entity Classification......................................................... 139
Tax Allocations with Respect to Trust Properties.............................. 139
Sale of Trust Properties...................................................... 139
Taxation of Shareholders........................................................... 139
Taxation of Taxable Domestic Shareholders..................................... 139
Backup Withholding............................................................ 140
Taxation of Tax-Exempt Shareholders........................................... 140
Taxation of Foreign Shareholders.............................................. 141
Other Tax Considerations........................................................... 141
Possible Legislative or Other Actions Affecting Tax Consequences.............. 141
State and Local Taxes......................................................... 142
SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT.......................................... 143
SUMMARY OF DECLARATION OF TRUST......................................................... 143
Term............................................................................... 143
Control of Operations.............................................................. 143
Liability and Indemnification...................................................... 147
Distributions...................................................................... 148
Quarterly and Annual Reports....................................................... 149
Accounting......................................................................... 149
Books and Records; Tax Information................................................. 149
Governing Law...................................................................... 149
Amendments and Voting Rights....................................................... 149
Dissolution of Trust............................................................... 150
Removal and Resignation of the Managing Shareholder................................ 150
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Transferability of Shareholders' Interest.......................................... 150
Independent Activities............................................................. 150
Power of Attorney.................................................................. 150
Meetings and Voting Rights......................................................... 151
Additional Offerings of Shares..................................................... 151
Temporary Investments.............................................................. 151
REPORTS TO UNITHOLDERS AND SHAREHOLDERS................................................. 152
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS,
OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES................................. 154
Issuance of Additional Securities.................................................. 155
Term of Existence.................................................................. 156
Management Control................................................................. 157
Economic Interest.................................................................. 157
Property Investments and Anticipated Holding Period................................ 159
Restrictions on Transfers of Securities............................................ 160
Tax Status......................................................................... 160
Pre-emptive Rights................................................................. 161
Managing Entity Removal and Resignation Rights..................................... 161
Reporting Rights................................................................... 162
Assessments........................................................................ 163
Amendments of Governing Agreements................................................. 163
Liability and Indemnification...................................................... 165
Compensation of Managing Persons and Affiliates.................................... 166
Meetings and Voting Rights......................................................... 166
Accounting Method and Period....................................................... 168
CAPITAL STOCK OF THE TRUST.............................................................. 168
General............................................................................ 168
Transfer Agent..................................................................... 168
Restrictions on Ownership and Transfer............................................. 168
CAPITALIZATION.......................................................................... 170
TERMS OF THE CASH OFFERING.............................................................. 171
AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS....................... 173
OTHER INFORMATION....................................................................... 180
General............................................................................ 180
Authorized Sales Material.......................................................... 181
Financial Statements.............................................................. 181
LITIGATION.............................................................................. 181
EXPERTS................................................................................. 181
LEGAL MATTERS........................................................................... 182
EXPENSES OF THE EXCHANGE OFFERING....................................................... 182
ADDITIONAL INFORMATION.................................................................. 183
GLOSSARY................................................................................ 184
TABLES
Organizational Table.......................................................... 16
Use of Proceeds of Trust's Cash Offering...................................... 20
Fees and Reimbursable Expenses Table.......................................... 22
Appraisal Table............................................................... 27
Compensation of Managing Shareholder and Affiliates........................... 35
Property Information for Exchange Properties.................................. 110
Mortgage Information for Exchange Properties.................................. 111
Combined Statement of Revenues and Certain Expenses for Exchange Properties... 113
</TABLE>
9
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Estimated Taxable Operating Results of Exchange Properties.................... 114
Combined Statement of Revenues and Certain Expenses for Acquired Properties... 115
Estimated Taxable Operating Results of Acquired Properties ................... 115
EXHIBITS
A Prior Performance of Affiliates of Managing Shareholder............................
B Summary of Exchange Property and Exchange Partnership Information..................
C Financial Statements of the Trust, the Operating Partnership and the
Managing Shareholder.............................................................
D Financial Statements of the Exchange Properties....................................
E Financial Statements of the Acquired Properties....................................
F Exchange Property Appraisal Values under Three Appraisal Methods...................
</TABLE>
10
<PAGE>
EVEN THOUGH, AS DESCRIBED HEREIN, THE TRUST BELIEVES THAT IT WILL BE TREATED AS
A REAL ESTATE INVESTMENT TRUST (A "REIT") FOR FEDERAL INCOME TAX PURPOSES, THE
TRUST HAS NOT OBTAINED, AND DOES NOT INTEND TO REQUEST, A RULING FROM THE
INTERNAL REVENUE SERVICE ("IRS") THAT IT WILL BE TREATED AS A REIT. ALTHOUGH THE
TRUST DOES NOT INTEND TO REQUEST SUCH A RULING FROM THE IRS, THE TRUST HAS
OBTAINED THE OPINION OF ITS SPECIAL TAX COUNSEL THAT, BASED ON THE ORGANIZATION
AND PROPOSED OPERATION OF THE TRUST AND THE OPERATING PARTNERSHIP AND BASED ON
CERTAIN OTHER ASSUMPTIONS AND REPRESENTATIONS, IT WILL QUALIFY AS A REIT. THE
OPINION IS NOT BINDING ON THE IRS OR ANY COURT.
THE MANAGING SHAREHOLDER HAS AGREED TO PROVIDE, DURING THE OFFERING PERIOD, TO
EACH OFFEREE IN THE EXCHANGE OFFERING (OR HIS REPRESENTATIVE(S) OR BOTH) THE
OPPORTUNITY TO ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, THE MANAGING
SHAREHOLDER OR ANY PERSON ACTING ON ITS BEHALF CONCERNING THE TERMS AND
CONDITIONS OF THIS EXCHANGE OFFERING AND THE CASH OFFERING AND TO OBTAIN ANY
ADDITIONAL INFORMATION, TO THE EXTENT IT POSSESSES SUCH INFORMATION OR CAN
ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE
ACCURACY OF THE INFORMATION SET FORTH HEREIN. REQUESTS FOR FURTHER INFORMATION
SHOULD BE MADE TO THE TRUST AND SUCH INFORMATION SHOULD BE RELIED UPON ONLY WHEN
FURNISHED IN WRITTEN FORM AND SIGNED ON BEHALF OF THE TRUST. OFFEREES ARE NOT TO
CONSTRUE THE CONTENTS OF THIS PROSPECTUS (OR ANY PRIOR OR SUBSEQUENT
COMMUNICATION FROM THE MANAGING SHAREHOLDER, AFFILIATES OR EMPLOYEES OR ANY
PROFESSIONAL ASSOCIATED WITH THIS EXCHANGE OFFERING) AS LEGAL OR TAX ADVICE.
EACH OFFEREE SHOULD CONSULT HIS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISERS AS TO
LEGAL, TAX, ECONOMIC AND RELATED MATTERS CONCERNING THE INVESTMENT DESCRIBED
HEREIN AND ITS SUITABILITY FOR HIM.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN ANY
STATE OR IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT
AUTHORIZED.
NO BROKER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN RESPECT OF THIS EXCHANGE OFFERING
OR THE CASH OFFERING, OTHER THAN THOSE CONTAINED HEREIN (OR INFORMATION
REQUESTED BY AN OFFEREE AND FURNISHED TO SUCH OFFEREE IN WRITTEN FORM, SIGNED ON
BEHALF OF THE TRUST OR THE OPERATING PARTNERSHIP) AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE TRUST, THE OPERATING PARTNERSHIP OR ANY OTHER PERSON. ANY OTHER
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. EXCEPT AS OTHERWISE
INDICATED, THIS PROSPECTUS SPEAKS AS OF THE DATE ON THE COVER PAGE. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY CONSUMMATION OF AN EXCHANGE OFFERING MADE
HEREUNDER SHALL CREATE ANY INFERENCE THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE TRUST OR THE OPERATING PARTNERSHIP SINCE THE RESPECTIVE DATES AT
WHICH THE INFORMATION IS GIVEN HEREIN OR THE DATE HEREOF.
CERTAIN DEFINED TERMS MAY BE FOUND AT "GLOSSARY."
INVESTMENT IN SMALL BUSINESSES INVOLVES A HIGH DEGREE OF RISK, AND OFFEREES
SHOULD NOT ACCEPT THIS EXCHANGE OFFERING AND THEREBY INVEST IN OPERATING
PARTNERSHIP UNITS (OR TRUST COMMON SHARES, IF THE HOLDER OF SUCH UNITS EXCHANGES
THEM INTO COMMON SHARES) UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" FOR THE RISK FACTORS THAT MANAGEMENT
11
<PAGE>
BELIEVES PRESENT THE MOST SUBSTANTIAL RISKS TO AN OFFEREE IN THIS EXCHANGE
OFFERING AND AN INVESTMENT IN OPERATING PARTNERSHIP UNITS AND TRUST COMMON
SHARES.
IN MAKING AN INVESTMENT DECISION, OFFEREES MUST RELY ON THEIR OWN EXAMINATION OF
THE ISSUER AND THE TERMS OF THE EXCHANGE OFFERING, INCLUDING THE MERITS AND
RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY
FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
12
<PAGE>
SUMMARY OF THE TRUST AND OPERATING PARTNERSHIP
The following summary of this Prospectus is for the convenience of Offerees
and does not fully reflect all of the terms of the Exchange Offering. This
Prospectus describes in detail the numerous aspects of the transaction which are
material to Offerees, including those summarized below. This Prospectus and
accompanying Exhibits and supporting documents referred to herein should be read
in their entirety by each Offeree and his advisors before accepting the Exchange
Offering. The following summary is qualified in its entirety by reference to the
full text of this Prospectus and the documents referred to herein. Unless the
context otherwise requires, the term "Trust" as used in this Prospectus shall
refer to Baron Capital Trust, the General Partner of the Operating Partnership
and issuer of the Common Shares being offered in the Cash Offering, and its
affiliate, Baron Capital Properties, L.P., the Operating Partnership, which is
the issuer of Units being offered in this Exchange Offering and will conduct the
real estate operations of the Trust and hold its property interests.
Summary of the Trust and the Operating Partnership
This Prospectus constitutes the prospectus for the Exchange Offering being
conducted by Operating Partnership, under which it is offering to issue
registered Units in exchange for limited partnership interests held by
individual limited partners in limited partnerships which own a direct or
indirect interest in residential apartment properties. The Operating Partnership
will not receive any cash proceeds in connection with this Exchange Offering.
Holders of Operating Partnership Units may elect at any time and from time to
time to exchange all or a portion of their Units into an equivalent number of
Common Shares in the Trust so long as the exchange would not cause the
exchanging party to own (taking into account certain ownership attribution
rules) in excess of 5.0% of the then outstanding Shares in the Trust, subject to
certain exceptions.
This Prospectus and the accompanying transmittal letter and election form
are first being sent to Offerees in connection with initial transactions under
the Exchange Offering on or about October __, 1998. Offerees who elect to accept
the Exchange Offering are required to indicate their acceptance of the offering
in the space provided on the election form and sign and return it to the
Operating Partnership by _____________, 1998. As soon as practicable after the
closing date of a transaction in connection with the Exchange Offering, the
stock transfer agent will send transmittal instructions to each Offeree who
accepts the Exchange Offering describing the procedures for surrendering their
existing limited partnership units for certificates of Operating Partnership
Units. See "THE EXCHANGE OFFERING - Election Procedure and Exchange of
Certificates."
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and/or to provide or acquire debt financing secured by mortgages on such
types of property. The Trust, indirectly through the Operating Partnership,
intends to acquire, own, operate, manage and improve residential apartment
properties for long-term ownership, and thereby to seek to maximize current and
long-term income and the value of its assets. The management of the Trust and
the Operating Partnership has been involved in the residential property business
for over 10 years. See "MANAGEMENT," "THE TRUST AND THE OPERATING PARTNERSHIP"
and "INVESTMENT OBJECTIVES AND POLICIES."
The Trust and the Operating Partnership intend to make regular quarterly
pro rata distributions to their Shareholders and Unitholders, respectively, of
net income generated from investments in property interests. The initial
distribution by the Operating Partnership is expected to be made by _________,
1998. The Trust intends to operate as a REIT for federal income tax purposes,
provided, however, that if the Managing Shareholder of the Trust determines,
with the affirmative vote of a Majority of Shareholders entitled to vote on such
matter approving the Managing Shareholder's determination, that it is no longer
in the best interests of the Trust to continue to qualify as a REIT, the
Managing Shareholder may revoke or otherwise terminate the Trust's REIT election
pursuant to applicable federal tax law. See "TAX STATUS" and "FEDERAL INCOME TAX
CONSIDERATIONS" below.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all direct or indirect property interests acquired. The
Operating Partnership will own record title to properties or limited partnership
interests or other equity interests in limited partnerships and other entities
which own direct or indirect interests in properties. The Trust is the sole
general partner of the Operating Partnership, and, in such capacity, the
13
<PAGE>
Trust will control the activities of the Operating Partnership. See "THE TRUST
AND THE OPERATING PARTNERSHIP." The operations of the Trust will be carried on
through the Operating Partnership (and any other subsidiaries the Trust may have
in the future), among other reasons, in order to (i) enhance the ability of the
Trust to qualify and maintain its status as a REIT for federal income tax
purposes, and (ii) enable the Trust to indirectly acquire interests in
residential apartment properties in exchange transactions, such as this Exchange
Offering, that involve the exchange of Operating Partnership Units for such
property interests and thereby provide the opportunity for deferral until a
later date of any tax liabilities that sellers of property interests otherwise
would incur if they received cash or Trust Common Shares in connection
therewith. See "FEDERAL INCOME TAX CONSIDERATIONS." The Operating Partnership
will be responsible for, and pay when due, its share of all administrative and
operating expenses of properties in which it acquires an interest. See "THE
TRUST AND THE OPERATING PARTNERSHIP."
The Managing Shareholder of the Trust is Baron Advisors, Inc. ("Baron
Advisors"), a Delaware corporation which will manage the operations of the Trust
and the Operating Partnership. The Trust and the Managing Shareholder are
Affiliates of each other, and each of them is an Affiliate of the Operating
Partnership. The Board of the Trust, a majority of whose members are comprised
of Independent Trustees, will have general supervisory authority over the
activities of the Trust and the Operating Partnership and prior approval
authority in respect of certain actions of the Trust and Operating Partnership
specified in the Declaration of Trust for the Trust. Investment decisions for
the Trust and the Operating Partnership will be made by Gregory K. McGrath, a
founder of the Trust and the Operating Partnership and the Chief Executive
Officer of the Trust, the Operating Partnership and the Managing Shareholder and
the sole shareholder and sole director of the Managing Shareholder, and Robert
S. Geiger, a founder of the Trust and the Operating Partnership and the Chief
Operating Officer of the Trust, the Operating Partnership and the Managing
Shareholder (together, the "Original Investors"), and James H. Bownas and Peter
M. Dickson, the initial Independent Trustees of the Trust. The Original
Investors and Affiliates, including certain real estate limited partnerships
whose limited partners will be offered the opportunity to participate in the
Exchange Offering, have significant influence over the operation of the Trust
and the Operating Partnership, and the Exchange Offering involves transactions
among them which involve conflicts of interest which may result in decisions
that do not fully represent the interests of all Shareholders of the Trust and
Unitholders in the Operating Partnership. See "CONFLICTS OF INTEREST,"
"MANAGEMENT" and "SUMMARY OF DECLARATION OF TRUST - Control of Operations."
All of the Operating Partnership Units being offered pursuant to this
Prospectus are being offered in connection with the Exchange Offering by the
Operating Partnership. In the Exchange Offering, the Operating Partnership will
offer to issue Operating Partnership Units to individual limited partners in
limited partnerships which own direct or indirect interests in residential
apartment properties, including the Exchange Partnerships, in exchange for such
limited partnership interests. The Operating Partnership will not complete the
Exchange Offering in respect of any particular Exchange Partnership if limited
partners holding more than 10% of the limited partnership interests in the
partnership affirmatively elect not to accept the offering. In addition, the
Operating Partnership will not complete any transaction in the offering
whatsoever unless a sufficient number of offerees accept the offering such that
the offering involves the issuance of Operating Partnership Units with an
initial assigned value of at least $6,000,000.
The number of Operating Partnership Units being offered in exchange for the
limited partnership interests owned by Offerees will be based on appraisals
prepared by a qualified and licensed independent appraisal firm for each
residential apartment property involved in the Exchange Offering. For purposes
of the Exchange Offering, each Operating Partnership Unit has been arbitrarily
assigned an intial value of $10 per Unit, which corresponds to the offering
price of each Trust Common Share being offered in the Cash Offering. The value
of Units and Common Shares is substantially identical since Unitholders,
including recipients of Units in the Exchange Offering, will be entitled to
exchange all or a portion of such units at any time and from time to time for an
equivalent number of Trust Common Shares, so long as the exchange would not
cause the exchanging party to own (taking into account certain ownership
attribution rules) in excess of 5.0% of the then outstanding Shares in the
Trust, subject to certain exceptions. To facilitate such exchanges of Operating
Partnership Units into Trust Common Shares, 2,500,000 Trust Common Shares (in
addition to the 2,500,000 Trust Common Shares being offered by the Trust in the
Cash Offering) have been registered with the Commission.
14
<PAGE>
The net cash proceeds from the sale of Common Shares in the Cash Offering
(approximately $_____ gross proceeds raised as of the date of this Prospectus)
and the net cash proceeds of any subsequent issuance of Common Shares will be
contributed by the Trust to the Operating Partnership in exchange for an
equivalent number of Units in the Operating Partnership. The Trust and the
Operating Partnership will use the net cash proceeds of the Cash Offering,
unissued Units and Shares or a combination of net cash proceeds and unissued
Units and Shares (i) to acquire interests in residential apartment properties or
interests in other partnerships substantially all of whose assets consist of
residential apartment property interests, (ii) for capital improvements which
may be required on properties in which the Trust and the Operating Partnership
acquire an interest and (iii) for working capital purposes. The Trust will apply
for listing on the American Stock Exchange (the "AMEX") of the Trust Common
Shares being offered in the Cash Offering and the Trust Common Shares into which
Operating Partnership Units issued in the Exchange Offering will be
exchangeable.
The organizational chart set forth below indicates the relationship of the
Trust, the Operating Partnership, the Managing Shareholder, the Exchange
Partnerships managed by corporate general partners (the "Corporate General
Partners") which are affiliates of the Managing Shareholder which will
participate in the Exchange Offering and other real estate limited partnerships
managed by corporate general partners which are affiliates of the Managing
Shareholder which will not participate in the offering.
Although this Prospectus has been prepared in connection with the offering
of Operating Partnership Units in the Exchange Offering, this Prospectus also
describes the material terms of the Cash Offering and an investment in Trust
Common Shares since Operating Partnership Units are exchangeable into an
identical number of Trust Common Shares at any time (subject to certain
restrictions) and the economic interests represented by Operating Partnership
Units and Trust Common Shares are substantially identical.
The Trust and the Operating Partnership intend to investigate making an
additional public or private offering of Trust Common Shares and/or Operating
Partnership Units within the 12-month period following the commencement of the
Exchange Offering if the Managing Shareholder determines that suitable property
acquisition opportunities which fulfill the Trust's investment criteria are
available and such an offering would fulfill its cost of funds requirements. The
issuance by the Trust and the Operating Partnership of additional Shares and
Units subsequent to the completion of the Cash Offering and the Exchange
Offering could have a dilutive effect on Shareholders who acquire Common Shares
in the Cash Offering and Unitholders who receive Units in the Exchange Offering.
The address and telephone and fax numbers for the Managing Shareholder are
as follows:
Baron Advisors, Inc.
7826 Cooper Road
Cincinnati, Ohio 45242
Phone: (513) 984-5001
Fax: (513) 984-4550
The term of the Trust will end on the earliest to occur of (a) December 31,
2098, (b) the determination of the holders of at least a majority of the Shares
then outstanding to dissolve the Trust; (c) the sale of all or substantially all
of the Trust's Property, (d) the withdrawal of the Cash Offering by the Managing
Shareholder prior to the Termination Date of the Cash Offering, and (e) the
occurrence of any other event which, by law, would require the Trust to
terminate. See "SUMMARY OF DECLARATION OF TRUST - Term." The Operating
Partnership will terminate on December 31, 2098 unless terminated earlier in
connection with a merger or a sale of all or substantially all of its assets,
upon a vote of its partners or upon the occurrence of various other events. See
"THE TRUST AND THE OPERATING PARTNERSHIP."
As described below in this Prospectus, the Managing Shareholder, certain of
its Affiliates, the Independent Trustees, and others will receive substantial
commissions, compensation or expense reimbursements from the Trust and the
Operating Partnership in connection with the Cash Offering and the Exchange
Offering, the operation of the
15
<PAGE>
ORGANIZATIONAL CHART
<TABLE>
<S> <C> <C>
CASH OFFERING
-----------------------------------
Public Shareholders
:-):-):-):-):-):-):-):-):-):-):-):-):-):-)
:-):-):-):-):-):-):-):-):-):-):-):-):-):-)
-----------------------------------
Common
Shares $
-----------------------------------
Board of the REIT:
Baron Capital Trust (REIT) - 2 Independent Trustees
(managed by Board of Managing - Managing Shareholder (an
Shareholder and Independent affiliate of Mr. McGrath, a
Trustees) founder of the Trust and the
Operating Partnership)
-----------------------------------
EXCHANGE OFFERING OP Units $
- ---------------------------------- ----------------------------------- -----------------------------
Exchange Baron Capital $ and other
Participating LP Units Properties, L.P. consideration
Exchange Partnerships* ________ (Operating Partnership) _________ Original Investors
(managed by affiliates of ________ (GP is REIT; LPs are Original _________ (Gregory K. McGrath
Managing Shareholder) Investors and Exchange Limited and Robert S. Geiger)
OP Units Partners who elect to accept) OP Units
- ---------------------------------- ----------------------------------- -----------------------------
/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\
\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/
-----------------------------------
Non-participating
Real Estate Limited Partnerships
(managed by affiliates of
Managing Shareholder)
-----------------------------------
</TABLE>
- ------------------
* Each Exchange Partnership is a real estate investment program which owns
directly or indirectly either all or a portion of the record title to (and, in
one case, also a subordinated mortgage interest in) residential apartment
property or all or a portion of the limited partnership interest or beneficial
interest in a limited partnership or other entity which owns such an interest.
16
<PAGE>
Trust and the Operating Partnership and the acquisition, ownership, operation,
improvement and disposition of property of the Trust and the Operating
Partnership. See "COMPENSATION OF THE MANAGING SHAREHOLDER AND AFFILIATES," "THE
TRUST AND THE OPERATING PARTNERSHIP" and "TERMS OF THE CASH OFFERING."
As its initial investment targets in the Exchange Offering, the Operating
Partnership is offering to acquire an equity interest (and, in one case, also a
subordinated mortgage interest) in 14 Exchange Properties directly or indirectly
owned by 14 Exchange Partnerships managed by affiliates of the Managing
Shareholder. The Operating Partnership will acquire interests in a particular
property by acquiring from Exchange Limited Partners their units of limited
partnership interests in the respective partnership (the "Exchange Partnership
Units"). Each Exchange Partnership is a real estate investment program which
owns directly or indirectly either all or a portion of the record title to (and,
in one case, also a subordinated mortgage interest in) residential apartment
property or all or a portion of the limited partnership interest or beneficial
interest in a limited partnership or other entity which owns record title to
(and, in one case, also a subordinated mortgage interest in) such property. The
14 targeted Exchange Properties consist of an aggregate of 849 residential units
(comprised of studio, one, two, three and four-bedroom units). Ten of the
properties are located in Florida, two properties in Ohio and one property each
in Georgia and Indiana. The Exchange Properties are described in further detail
at "INITIAL REAL ESTATE INVESTMENTS" and Exhibit B hereto.
Any Offeree who is a limited partner of an Exchange Partnership and does
not desire to participate in the Exchange Offering will be entitled to retain
his limited partnership interest in his respective Exchange Partnership on terms
substantially the same as those of his original investment. Offerees who elect
not to accept the offering will not have dissenters' or appraisal rights.
The current book value of the 14 Exchange Properties is approximately
__[$13,316,000]__. If acquisitions are consummated in respect of all 14 Exchange
Properties in the Exchange Offering, the property interests will have a deemed
purchase price totaling approximately $33,638,991, comprised of Operating
Partnership Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the properties are subject. The properties to be acquired
with the balance of the Operating Partnership Units to be offered in the
Exchange Offering (with an initial value of approximately $10,982,920) have not
yet been finally determined.
In June and July 1998, the Operating Partnership acquired beneficial
ownership of a 67-unit residential apartment property located in Orlando,
Florida and an 80-unit property located in Lakeland, Florida. The acquisitions,
which had a total cash purchase price of $1,586,293, were paid out of the net
proceeds of the Cash Offering and represent the Operating Partnership's initial
investments. In July 1998, the Operating Partnership also made capital
contributions in the range of $8,000 to $14,000 (aggregate amount approximately
$200,000) to certain real estate partnerships managed by affiliates of the
Managing Shareholder, including each of the Exchange Partnerships, in exchange
for a special non-voting limited partnership interest in such partnerships. In
September 1998, the Trust entered into an agreement to acquire two luxury
residential apartment properties (total of 652 units) upon the completion of
construction for an aggregate purchase price in the range of approximately
$41,000,000 to $43,000,000. See "INITIAL REAL ESTATE INVESTMENTS."
Other than as described above, the available net cash proceeds of the Cash
Offering (approximately $______ as of the date of this Prospectus) and future
proceeds of the offering have not yet been committed to specific properties.
Offerees will not have any vote in the selection of property investments after
they accept the Exchange Offering. Therefore, Offerees who elect to accept the
Exchange Offering may not have available any information on additional
properties to be acquired in the Exchange Offering and properties to be acquired
with a portion of the net proceeds of the Cash Offering, in which case they will
be required to rely on management's judgment regarding those purchases.
In connection with the completion of the Exchange Offering in respect of
each Participating Exchange Partnership, (i) Gregory K. McGrath, a founder of
the Trust and the Operating Partnership, the Chief Executive Officer of the
Trust, the Operating Partnership and the Managing Shareholder, and the sole
stockholder, director and executive officer of the Corporate General Partner of
each of the Exchange, will either grant the Board of the Trust
17
<PAGE>
a management proxy coupled with an interest to vote the shares of the Corporate
General Partner of the Exchange Partnership or contract to assign all of the
stock in the Corporate General Partner to the Trust for nominal consideration;
(ii) the Corporate General Partner will assign to the Operating Partnership all
of its residual economic interest in the partnership; and (iii) Mr. McGrath will
cause the Corporate General Partner to waive its right to receive from the
partnership any ongoing fees, effective at the time of exchange.
As of the date of this Prospectus, the Trust has applied $________ of the
net proceeds of the Cash Offering to acquire _____ Units in the Operating
Partnership. The Units acquired and to be acquired by the Trust with the net
proceeds of the Cash Offering are in addition to the 2,500,000 Units that are
available for issuance in connection with the Exchange Offering. Assuming the
Trust sells all 2,500,000 Common Shares being offered in the Cash Offering, the
Trust will contribute the net proceeds of the Cash Offering ($22,500,000, after
payment of selling commissions and reimbursable offering expenses) to the
Operating Partnership in exchange for 2,500,000 Units. In that case, assuming
that no transactions have been completed in the Exchange Offering, the Trust
would own approximately 80.2% of the then outstanding Units and the Original
Investors would own the remaining approximately 18.8%. The Original Investors
received the Units in exchange for their initial capitalization of the Operating
Partnership and other consideration and such Units have been deposited into a
security escrow account for a period of six to nine years, subject to earlier
release under certain conditions. See "THE TRUST AND THE OPERATING PARTNERSHIP -
Formation Transactions" and " - Ownership of the Trust and the Operating
Partnership."
The Trust has authority under the Declaration of Trust to issue an
aggregate of up to 25,000,000 Shares (consisting of Common Shares and Preferred
Shares). The Operating Partnership has authority under the Operating Partnership
Agreement to issue any number of Units as may be determined by the Trust in its
sole discretion. However, because outstanding Units are exchangeable into an
equivalent number of Trust Common Shares, the Operating Partnership may not
issue more than 25,000,000 Units, absent an appropriate amendment of the
Declaration of Trust and the Operating Partnership Agreement. Assuming the Cash
Offering and the Exchange Offering are completed in full under the terms
currently contemplated and no other transactions have taken place (including,
without limitation, any additional issuances of Common Shares or Units, any
exchange of Units into Common Shares or any exercise of Common Share purchase
warrants to be issued to the Dealer Manager and participating broker-dealers in
connection with the Cash Offering), immediately upon the completion of the
offerings, the Trust would have 2,625,000 Common Shares outstanding and the
Operating Partnership would have 6,264,808 Units outstanding. On a fully diluted
basis assuming that all then outstanding Units (other than those owned by the
Trust) have been exchanged into an equivalent number of Common Shares, all
participants in the offerings would beneficially own an aggregate of 6,327,160
Common Shares of the Trust (i.e., have the right to vote or dispose of such
Common Shares or to acquire ownership of Common Shares in exchange for Units).
Of those Common Shares, purchasers of Common Shares in the Cash Offering as a
group would beneficially own 2,500,000 Common Shares (39.5%) and recipients of
Units in the Exchange Offering as a group would beneficially own the same number
and percentage. The remaining Common Shares would be beneficially owned by the
Original Investors (approximately 19%) and broker-dealers who earn Common Shares
as commissions in exchange for their services in the Exchange Offering
(approximately 2%). See "THE TRUST AND THE OPERATING PARTNERSHIP - Formation
Transactions" and " - Ownership of the Trust and the Operating Partnership."
The Trust intends to investigate other investment opportunities for the
Exchange Offering, including interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by Affiliates of
the Managing Shareholder. See also "PRIOR PERFORMANCE BY AFFILIATES OF MANAGING
SHAREHOLDER."
Properties in which the Operating Partnership will acquire an interest are
expected to use the straight-line method of depreciation over 27-1/2 years.
Among other investment policies described below at "INVESTMENT OBJECTIVES AND
POLICIES," the Operating Partnership will not make an equity investment in
respect of any property where the amount invested by it plus the amount of any
existing indebtedness or refinancing indebtedness in respect of such property
exceeds the appraised value of the property. In addition, the Trust and the
Operating Partnership will not acquire or provide debt financing in respect of
any property where the amount invested by the Trust and the Operating
Partnership plus the amount of any existing indebtedness in respect of such
property exceeds 80% of the estimated replacement cost of the property as
determined by the Managing Shareholder unless substantial justification exists.
Each Offeree who is a limited partner in an Exchange Partnership will
receive a copy of a Supplement to this Prospectus which describes the Exchange
Offering, the Cash Offering and certain aspects of the business of his
particular Exchange Partnership, the Operating Partnership and the Trust. The
Supplement is part of, and should be read in conjunction with, this Prospectus.
Unless specifically requested, Exchange Limited Partners will not receive a copy
of the various other supplements which contain information concerning other
Exchange Partnerships, the Operating Partnership and the Trust and which have
been distributed to their limited partners. Certain information concerning each
of the Exchange Partnerships and their property investments is included in this
Prospectus in this "SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP" section
and at "INITIAL REAL ESTATE INVESTMENTS," in certain tables herein indexed in
the table of contents, and in Exhibits A, B and E. Upon receipt of a written
request by any Exchange Limited Partner or his representative who has been so
designated in writing, the Operating Partnership will promptly deliver, without
charge, copies of other supplements to be delivered to limited partners in other
Exchange Partnerships. Limited Partners may make such request in writing to the
Operating Partnership at its principal executive office at the following
address: Baron Capital Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio
45242, telephone 513-984-5001. Such request should be made to the attention of
Sharon Studt.
18
<PAGE>
See "THE EXCHANGE OFFERING," "INITIAL REAL ESTATE INVESTMENTS," "SELECTED
FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE EXCHANGE PROPERTIES" and "COMPARISON OF RIGHTS
OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS AND TRUST
COMMON SHARES." For the definition of certain terms used in this Prospectus, see
"GLOSSARY."
Background and Reasons for the Exchange Offering
In the first quarter of 1997, the Original Investors determined that a
single self-managed structure of ownership by the Exchange Partnerships and
administration of the property interests controlled by them and projected to be
acquired by future affiliated programs would be far more efficient, cost
effective and advantageous for operations and for the various program investors.
In anticipation of its growth and change in structure, the organization
developed by the Original Investors has been able to attract highly experienced
management and financial personnel capable of managing a substantially larger
real estate portfolio. See "MANAGEMENT - Officers of the Trust and the Operating
Partnership."
The Corporate General Partners of the Exchange Partnerships considered
various alternatives to the Exchange Offering including continuation of the
partnerships in accordance with their existing business plans and sale or
liquidation of the partnership interest or assets held. In the case of each
Exchange Partnership, the Corporate General Partner has determined that the
Exchange Offering provides equal or greater value to the Exchange Limited
Partners compared with any other considered alternative.
Continuation of the Exchange Partnerships has been determined by their
Corporate General Partners to be disadvantageous for their respective limited
partners compared with the opportunity to participate in the Exchange Offering.
Each of the Exchange Partnerships is a "stand-alone" entity with an interest in
residential apartment property. As a result, the Exchange Partnerships have
higher personnel and other operating and financing expenses on a per-unit basis
than the combined enterprise will have. In addition, the combined enterprise
will afford the Exchange Partnerships highly experienced management and
financial personnel that, for the individual partnerships acting alone, would
not be cost effective. Moreover, no market exists for the limited partnership
interests of the Exchange Limited Partners, and therefore such interests are not
currently liquid.
Liquidation has been determined by the Corporate General Partners of the
Exchange Partnerships to be impractical and disadvantageous for their respective
limited partners. In the case of each Exchange Partnership, the Corporate
General Partner has either explored the sale of the partnership assets or has
determined that such a sale would be premature as it would not maximize investor
value.
The Original Investors initiated the Exchange Offering and the Corporate
General Partners participated in the structuring of the offering. The Corporate
General Partner of each Exchange Partnership believes that the Exchange Offering
is fair to the Exchange Limited Partners regardless of whether the offering is
completed with less than all Exchange Partnerships and recommends that they
accept the Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnerships' property interests and reflect a value greater than the
original investments of the Exchange Limited Partners.
o The Exchange Offering has been structured to permit each Exchange
Limited Partner, if desired, to elect not to accept the offering and
instead retain his existing interest in his current partnership on
substantially the same terms and conditions as those of his original
investment.
19
<PAGE>
o The Exchange Offering will provide each Exchange Limited Partner with
a significantly more diversified interest in income producing real
property with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnerships with a lower
operating cost per residential unit and as a consequence increase
operating performance. The annual cost savings resulting from the
combined administration of the 14 Exchange Partnerships is expected to
be at least $225,000, compared to the cost of the Exchange Offering,
estimated to be approximately $440,000. The cost savings are expected
to increase as the number of property interests acquired increases.
o The Corporate General Partners believe that a single self-managed
structure of ownership by the Exchange Partnerships and administration
of the property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Exchange Limited
Partners who accept the offering the benefit of a deferral of any
recognition of taxable gain until they exercise their right to
exchange the Units received in the offering for an equivalent number
of Common Shares of the Trust. The exchange into Common Shares may be
made at any time at the sole discretion of each Exchange Limited
Partner.
o The Corporate General Partners considered various alternatives to the
Exchange Offering, including continuation of the Exchange
Partnerships' existing business plan and sale or liquidation of the
partnership assets held, and have determined that the Exchange
Offering provides equal or greater value to the Exchange Limited
Partners compared with any other considered alternative.
Summary of Use of Proceeds of Cash Offering
Set forth below is the estimated application of proceeds of the Trust's
Cash Offering. See also "COMPENSATION OF THE MANAGING SHAREHOLDER AND
AFFILIATES" and "TERMS OF THE CASH OFFERING." The Trust has exceeded the
$500,000 minimum offering amount, having sold _____ Units (gross proceeds of
$__________) as of the date of this Prospectus. Therefore, the table below
provides information based only on the $25,000,000 maximum offering amount of
the Cash Offering.
Maximum
Offering
Amount Percent
----------- -----------
Gross Offering Proceeds: $25,000,000 100%
Cash Offering Expenses:
Underwriting Commissions (1): 2,000,000 8%
Distribution, Due Diligence and
Organizational Expenses (2): 250,000 1%
Legal and Consulting Expenses (3): 250,000 1%
----------- -----------
Amount Available for Investment and
Trust Operations: $22,500,000 90%
=========== ===========
Investment Expenses (4): 1,000,000 4%
Proceeds to be Used to Acquire
Limited Partnership Interest in the
Operating Partnership 21,500,000 86%
Cash Offering Expenses: 2,500,000 10%
----------- -----------
Total Application of Proceeds: $25,000,000 100%
=========== ===========
20
<PAGE>
Footnotes:
1. The Trust will pay the Dealer Manager of the Cash Offering, selling
commissions in an amount equal to 8% of the gross proceeds received from
its sales of Common Shares in the offering from which it will pay any
broker-dealers that the Trust or the Dealer Manager selects to participate
in the sale of Common Shares. All or a portion of the commissions payable
may be reallocated to participating broker-dealers. The Trust has also
granted the Dealer Manager a five-year warrant, exercisable beginning on
the first anniversary of the commencement of the offering and ending on the
fifth such anniversary, to acquire a number of Common Shares in an amount
equal to 8.5% of the number of Common Shares sold by it in the offering at
an exercise price of $13.00 per Common Share.
2. The Trust will reimburse the Managing Shareholder for distribution, due
diligence and organizational expenses incurred in connection with the
formation of the Trust and the Operating Partnership and with the Cash
Offering in an amount not to exceed 1% of the gross proceeds from sales of
Common Shares in the offering ($250,000 maximum).
3. The Trust will reimburse the Managing Shareholder for legal, accounting and
consulting fees and printing, filing, recording, postage and other
miscellaneous expenses incurred in connection with the Cash Offering in an
amount not to exceed 1% of gross proceeds from sales of Common Shares in
the offering ($250,000 maximum). The reimbursements described in footnote 2
and this footnote 3 will be payable out of the net proceeds of the
offering. To the extent which the distribution, due diligence and
organizational expenses or the legal, accounting and consulting fees and
printing, filing, recording, postage and other miscellaneous expenses
exceed 1% of the gross proceeds from the offering, those expenses will not
be reimbursed to the Managing Shareholder.
4. The Trust will reimburse the Managing Shareholder for expenses incurred
prior to and during the Cash Offering for investigating and evaluating
investment opportunities for the Trust and the Operating Partnership and
for assisting them in consummating their investments, in an amount not to
exceed 4% of the gross proceeds from sales of Common Shares in the offering
(maximum $1,000,000) (reimbursable expenses paid in connection with
investment activities plus other acquisition fees and expenses may not
exceed 6% of the contract purchase price for acquisitions unless the
Independent Trustees determine that the transaction is commercially
reasonable). Such reimbursement will be payable from available net proceeds
of the Cash Offering or as cash flow permits as determined by the Board of
the Trust.
21
<PAGE>
Summary of Fees and Reimbursable Expenses
Set forth below is a summary of fees and reimbursable expenses payable in
connection with the Cash Offering and the Exchange Offering and the operation of
the Trust and the Operating Partnership:
Type and Amount of Fees
Recipient and Reimbursable Expenses
- --------- -------------------------
Broker-Dealers Participating in
Cash Offering Selling commission in an amount equal to
8% of the subscription price of all
Common Shares sold in the Cash Offering
($2,000,000 maximum). As additional
compensation, the Dealer Manager and the
participating broker-dealers will be
entitled to receive a five-year Warrant
to acquire a number of Common Shares in
an amount equal to 8.5% of the number of
Common Shares sold in the Cash Offering
by the Dealer Manager or participating
broker-dealers, at a purchase price
equal to $13.00 per Common Share. See
"TERMS OF THE CASH OFFERING."
Managing Shareholder Reimbursement for distribution, due
diligence and organizational expenses
incurred in connection with the
formation of the Trust and the Operating
Partnership and with the Cash Offering,
in an amount not to exceed 1% of gross
offering proceeds ($250,000 maximum).
Managing Shareholder Reimbursement for legal, accounting and
consulting fees and printing, filing,
recording, postage and other
miscellaneous expenses incurred in
connection with the Cash Offering, in an
amount not to exceed 1% of gross
Offering proceeds ($250,000 maximum).
Managing Shareholder Reimbursement for expenses incurred
prior to and during the Cash Offering
for investigating, evaluating and
consummating investments of the Trust
and the Operating Partnership to be
acquired from unaffiliated parties with
net proceeds of the Cash Offering, in an
amount not to exceed 4% of gross
offering proceeds; payable from
available net proceeds of the Cash
Offering or as cash flow permits as
determined by the Board of the Trust.
Gregory K. McGrath, a founder
of the Trust and the Operating
Partnership and Chief Executive
Officer of the Trust, the
Operating Partnership and the
Managing Shareholder Initial annual compensation payable in
the form of Common Shares or other
securities of the Trust or the Operating
Partnership in an amount not to exceed
25,000 shares to be determined by the
Executive Compensation Committee of the
Board of the Trust, plus health
benefits. Thereafter, his compensation
and benefits will be determined by the
committee. In exchange for an initial
cash capital contribution to the
Operating Partnership and other
consideration, Mr. McGrath has been
issued Units which are exchangeable
(subject to certain escrow restrictions)
into 9.5% of the Common Shares
outstanding after the completion of the
Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that
all then outstanding Units (other than
those owned by the Trust) have been
exchanged into an equivalent number of
Common Shares. See "THE TRUST AND THE
OPERATING PARTNERSHIP - Formation
Transactions."
Robert S. Geiger, a founder of
the Trust and the Operating
Partnership and Chief Operating
Officer of the Trust, the
Operating Partnership and the
Managing Shareholder Initial annual compensation of $100,000,
plus health benefits and eligibility to
participate in any option plan and bonus
incentive plan which may be implemented
by the Executive Compensation Committee
22
<PAGE>
of the Board of the Trust. In exchange
for an initial cash capital contribution
to the Operating Partnership and other
consideration, Mr. Geiger has been
issued Units which are exchangeable
(subject to certain escrow restrictions)
into 9.5% of the Common Shares
outstanding after the completion of the
Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that
all then outstanding Units (other than
those owned by the Trust) have been
exchanged into an equivalent number of
Common Shares. See "THE TRUST AND THE
OPERATING PARTNERSHIP Formation
Transactions."
Robert L. Astorino, President -
Property of the Operating
Partnership Initial annual salary of $150,000, plus
health benefits and eligibility to
participate in any option plan and bonus
incentive plan which may be implemented
by the Executive Compensation Committee
of the Board of the Trust.
David E. Williams, Chief Financial
Officer of the Operating
Partnership Initial annual salary of $150,000, plus
health benefits and eligibility to
participate in any option plan and bonus
incentive plan which may be implemented
by the Executive Compensation Committee
of the Board of the Trust.
Mary E. Keane, Vice President -
Accounting and Strategic Planning
of the Operating Partnership and
Secretary of the Trust Initial annual salary of $130,000, plus
health benefits and eligibility to
participate in any option plan and bonus
incentive plan which may be implemented
by the Executive Compensation Committee
of the Board of the Trust.
Independent Trustees Annual fee of $6,000.
Managing Shareholder Annual payment under the Trust
Management Agreement, in an amount equal
to up to 1% of gross proceeds from the
Cash Offering plus 1% of initial
assigned value of Units issued in
Exchange Offering, to reimburse the
Managing Shareholder for its operating
expenses relating to the business of the
Trust and the Operating Partnership.
Broker-Dealers Participating in
Exchange Offering Commission payable to broker-dealers who
assist in the Exchange Offering,
consisting of a number of unregistered
Common Shares equal to 5% of Units
exchanged in the Exchange Offering as a
result of their efforts.
23
<PAGE>
DESCRIPTION OF EXCHANGE PARTNERSHIPS
As its initial acquisition candidates in connection with the Exchange
Offering, the Operating Partnership will offer to acquire limited partnership
interests owned by partners in 14 Exchange Partnerships. The Operating
Partnership intends to investigate other investment opportunities to exchange
the balance of the Units for property interests in other Exchange Offering
transactions, including property interests held by unaffiliated and interests
held by other limited partnerships managed by Affiliates of the Managing
Shareholder. Set forth below is a summary of certain information relating to
each of the Exchange Partnerships. Each of the partnerships was formed with the
objectives to generate current cash flow for distribution to partners from the
rental of residential apartments and to provide the opportunity for capital
appreciation from the future sale of the residential apartment property. The
Corporate General Partners of the Exchange Properties believe these objectives
have been substantially achieved. None of the Exchange Partnerships was
organized as a tax credit program. The rights and obligations of the limited
partners and the Corporate General Partner of each of the Exchange Partnerships
under the respective limited partnership agreement is summarized below at
"COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING
PARTNERSHIP UNITS AND TRUST COMMON SHARES." For additional information
concerning the Exchange Partnerships and their respective property interests,
see "SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP" and "INITIAL REAL
ESTATE INVESTMENTS," the tables herein indexed in the table of contents and
Exhibits A, B and D.
Baron Strategic Investment Fund II, Ltd.
Baron Strategic Investment Fund II, Ltd. was organized as a Florida limited
partnership in April 1996. In May 1996, Baron Capital XXXI, Inc., the general
partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 1,600 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in October 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 72-unit residential apartment property referred to as the Steeplechase
Apartment Property located in Anderson, Indiana.
Central Florida Income Appreciation Fund, Ltd.
Central Florida Income Appreciation Fund, Ltd. was organized as a Florida
limited partnership in April 1993. In July 1994, Baron Capital of Florida, Inc.
(formerly named Sigma Financial Capital, Inc.), the general partner of the
partnership and an affiliate of the Managing Shareholder, sponsored a private
offering of 2,100 units of limited partner interest in the partnership at a
purchase price of $500 per unit (gross proceeds of $1,050,000). The offering was
fully subscribed and closed in October 1995. The partnership invested the net
proceeds of its offering to acquire all of the limited partnership interests in
a limited partnership which holds a fee simple interest in a 56-unit residential
apartment property referred to as the Grove Hamlet Apartment Property located in
Deland, Florida.
Florida Capital Income Fund, Ltd.
Florida Capital Income Fund, Ltd. was organized as a Florida limited
partnership in August 1994. In November 1994, Baron Capital II, Inc., the
general partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 1,614 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $807,000).
The offering was fully subscribed and closed in June 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 77-unit residential apartment property referred to as the Eagle Lake
Apartment Property located in Port Orange, Florida.
Florida Capital Income Fund II, Ltd.
Florida Capital Income Fund II, Ltd. was organized as a Florida limited
partnership in April 1993. In May 1995, Baron Capital IV, Inc., an affiliate of
the Managing Shareholder, became general partner of the partnership, which in
the first half of 1994 commenced a private offering of 1,840 units of limited
partner interest in the partnership at a purchase price of $500 per unit (gross
proceeds of $920,000). (The partnership also issued 160 units to four investors
in exchange for property interests acquired by them in an unrelated program
which was
24
<PAGE>
terminated.) The offering was fully subscribed and closed in July 1995. The
partnership invested the net proceeds of its offering to acquire all of the
limited partnership interests in a limited partnership which holds a beneficial
interest in an unrecorded land trust which holds a fee simple interest in a
52-unit residential apartment property referred to as the Forest Glen Apartment
Property (Phase I) located in Daytona Beach, Florida.
Florida Capital Income Fund III, Ltd.
Florida Capital Income Fund III, Ltd. was organized as a Florida limited
partnership in April 1995. In May 1995, Baron Capital VII, Inc., the general
partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 1,600 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in November 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 48-unit residential apartment property referred to as the Bridge Point
Apartment Property located in Jacksonville, Florida.
Florida Capital Income Fund IV, Ltd.
Florida Capital Income Fund IV, Ltd. was organized as a Florida limited
partnership in August 1995. In August 1995, Baron Capital V, Inc., the general
partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 3,640 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $1,820,000).
The offering was fully subscribed and closed in June 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 144-unit residential apartment property referred to as the Glen Lake
Apartment Property located in St. Petersburg, Florida.
Florida Income Advantage Fund I, Ltd.
Florida Income Advantage Fund I, Ltd. was organized as a Florida limited
partnership in September 1993. In January 1995, Baron Capital IV, Inc., an
affiliate of the Managing Shareholder, became general partner of the
partnership, which in February 1994 commenced a private offering of 940 units of
limited partner interest in the partnership at a purchase price of $1,000 per
unit (gross proceeds of $940,000). The offering was fully subscribed and closed
in June 1995. The partnership invested the net proceeds of its offering to
acquire all of the limited partnership interests in a limited partnership which
holds a beneficial interest in an unrecorded land trust which holds a fee simple
interest in a 26-unit residential apartment property referred to as the Forest
Glen Apartment Property (Phase III) located in Daytona Beach, Florida.
Florida Income Appreciation Fund I, Ltd.
Florida Income Appreciation Fund I, Ltd. was organized as a Florida limited
partnership in September 1993. In January 1995, Baron Capital IV, Inc., an
affiliate of the Managing Shareholder, became the general partner of the
partnership, which in February 1994 commenced a private offering of 205 units of
limited partner interest in the partnership at a purchase price of $1,000 per
unit (gross proceeds of $205,000). The offering was fully subscribed and closed
in September 1994. The partnership invested the net proceeds of its offering to
acquire all of the limited partnership interests in a limited partnership which
holds a beneficial interest in an unrecorded land trust which holds a fee simple
interest in an 8-unit residential apartment property referred to as the Forest
Glen Apartment Property (Phase IV) located in Daytona Beach, Florida.
Florida Income Growth Fund V, Ltd.
Florida Income Growth Fund V, Ltd. was organized as a Florida limited
partnership in June 1995. In November 1995, Baron Capital XI, Inc., the general
partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 2,300 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $1,150,000).
The offering was fully subscribed and closed in February 1997. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a
25
<PAGE>
limited partnership which holds a fee simple interest in a 70-unit residential
apartment property referred to as the Blossom Corners Apartment Property (Phase
I) located in Orlando, Florida.
Florida Opportunity Income Partners, Ltd.
Florida Opportunity Income Partners, Ltd. was organized as a Florida
limited partnership in December 1994. In May 1995, Baron Capital III, Inc., the
general partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 800 units of limited partner interest in the
partnership at a purchase price of $1,000 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in December 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 60-unit residential apartment property referred to as the Camellia Court
Apartment Property located in Daytona Beach, Florida.
GSU Stadium Student Apartments, Ltd.
GSU Stadium Student Apartments, Ltd. was organized as a Florida limited
partnership in June 1995. In September 1995, Baron Capital X, Inc., the general
partner of the partnership and an affiliate of the Managing Shareholder,
sponsored a private offering of 2,000 units of limited partner interest in the
partnership at a purchase price of $500 per unit (gross proceeds of $1,000,000).
The offering was fully subscribed and closed in February 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 60-unit residential apartment property referred to as the Stadium Club
Apartment Property located in Statesboro, Georgia.
Lamplight Court of Bellefontaine Apartments, Ltd.
Lamplight Court of Bellefontaine Apartments, Ltd. was organized as a
Florida limited partnership in February 1996. In March 1996, Baron Capital IX,
Inc., the general partner of the partnership and an affiliate of the Managing
Shareholder, sponsored a private offering of 700 units of limited partner
interest in the partnership at a purchase price of $1,000 per unit (gross
proceeds of $700,000). The offering was fully subscribed and closed in November
1996. The partnership invested the net proceeds of its offering to acquire all
of the limited partnership interest in a limited partnership which holds a fee
simple interest in a 80-unit residential apartment property referred to as the
Lamplight Court Apartment Property located in Bellefontaine, Ohio and an
unrecorded second mortgage interest in the property.
Midwest Income Growth Fund VI, Ltd.
Midwest Income Growth Fund VI, Ltd. was organized as a Michigan limited
partnership in March 1996. In March 1996, Baron Capital of Ohio III, Inc.
(formerly named Sigma Financial Capital VI, Inc.), the general partner of the
partnership and an affiliate of the Managing Shareholder, sponsored a private
offering of 600 units of limited partner interest in the partnership at a
purchase price of $500 per unit (gross proceeds of $300,000). The offering was
fully subscribed and closed in October 1996. The partnership invested the net
proceeds of its offering to acquire all of the limited partnership interests in
a limited partnership which holds a fee simple interest in a 66-unit residential
apartment property referred to as the Brookwood Way Apartment Property located
in Mansfield, Ohio.
Realty Opportunity Income Fund VIII, Ltd.
Realty Opportunity Income Fund VIII, Ltd. was organized as a Florida
limited partnership in April 1993. In January 1995, Baron Capital IV, Inc., an
affiliate of the Managing Shareholder, became general partner of the
partnership, which in February 1994 commenced a private offering of 944 units of
limited partner interest in the partnership at a purchase price of $1,000 per
unit (gross proceeds of $944,000). The offering was fully subscribed and closed
in June 1994. The partnership invested the net proceeds of its offering to
acquire all of the limited partnership interests in a limited partnership which
holds a beneficial interest in an unrecorded land trust which
26
<PAGE>
holds a fee simple interest in a 30-unit residential apartment property referred
to as the Forest Glen Apartment Property (Phase II) located in Daytona Beach,
Florida.
APPRAISAL TABLE
<TABLE>
<CAPTION>
Residential Number
Apartment of
Partnership General Partner Property Investors
- ----------- --------------- -------- ---------
<S> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd. Baron Capital XXXI, Inc. Steeplechase 16
Central Florida Income Appreciation Fund, Baron Capital of Florida, Grove Hamlet 51
Ltd. Inc.
Florida Capital Income Fund, Ltd. Baron Capital II, Inc. Eagle Lake 31
Florida Capital Income Fund II, Ltd. Baron Capital IV, Inc. Forest Glen I 38
Florida Capital Income Fund III, Ltd. Baron Capital VII, Inc. Bridge Point 32
Florida Capital Income Fund IV, Ltd. Baron Capital V, Inc. Glen Lake 60
Florida Income Advantage Fund I, Ltd. Baron Capital IV, Inc. Forest Glen III 46
Florida Income Appreciation Fund I, Ltd. Baron Capital IV, Inc. Forest Glen IV 13
Florida Income Growth Fund V, Ltd. Baron Capital XI, Inc. Blossom Corners I 49
Florida Opportunity Income Partners, Ltd. Baron Capital III, Inc. Camellia Court 29
GSU Stadium Student Apartments, Ltd. Baron Capital X, Inc. Stadium Club 38
Lamplight Court of Bellefontaine Baron Capital IX, Inc. Lamplight Court 27
Apartments, Ltd.
Midwest Income Growth Fund VI, Ltd. Baron Capital of Ohio Brookwood Way 7
III, Inc.
Realty Opportunity Income Fund VIII, Ltd. Baron Capital IV, Inc. Forest Glen II 45
----
Total: 482
<CAPTION>
Number of Units Offered
Aggregate Number to Each Limited Partner
Appraised of Units Offered to per $1,000 of
Value of All Limited Partners Original Investment
Partnership Property (initial dollar value)* (initial dollar value)*
- ----------- -------- ----------------------- -----------------------
<S> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd. $2,125,000 87,606 ($876,060) 110 ($1,100)
Central Florida Income Appreciation Fund, $2,575,887 125,275 ($1,252,750) 119 ($1,190)
Ltd.
Florida Capital Income Fund, Ltd. $2,530,000 88,689 ($886,890) 110 ($1,100)
Florida Capital Income Fund II, Ltd. $2,990,845 117,169 ($1,171,690) 117 ($1,170)
Florida Capital Income Fund III, Ltd. $1,610,000 88,503 ($885,030) 111 ($1,110)
Florida Capital Income Fund IV, Ltd. $6,483,079 227,060 ($2,270,600) 125 ($1,250)
Florida Income Advantage Fund I, Ltd. $1,940,339 109,434 ($1,094,340) 116 ($1,160)
Florida Income Appreciation Fund I, Ltd. $ 471,679 23,778 ($237,780) 116 ($1,160)
Florida Income Growth Fund V, Ltd. $2,195,000 125,475 ($1,254,750) 109 ($1,090)
Florida Opportunity Income Partners, Ltd. $1,833,000 84,000 ($840,000) 105 ($1,050)
GSU Stadium Student Apartments, Ltd. $2,800,000 105,000 ($1,050,000) 117 ($1,170)
Lamplight Court of Bellefontaine $2,147,000 78,098 ($780,980) 112 ($1,120)
Apartments, Ltd.
Midwest Income Growth Fund VI, Ltd. $1,764,000 30,513 ($305,130) 102 ($1,020)
Realty Opportunity Income Fund VIII, Ltd. $2,173,162 111,108 ($1,111,080) 118 ($1,180)
----------- ---------------------
Total: $33,638,991 1,401,708 ($14,017,080)
</TABLE>
- ----------------------------
* Value of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit has an initial assigned value of $10.00. See "THE EXCHANGE
OFFERING."
27
<PAGE>
SUMMARY OF RISK FACTORS
The following is a summary of the material risk factors applicable to the
Exchange Offering and an investment in Units and Common Shares and the proposed
operations of the Trust and the Operating Partnership. For a more detailed
description of the risk factors relating to the Exchange Offering and the
proposed activities of the Trust and the Operating Partnership, including those
set forth below, see "RISK FACTORS" below.
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of the Trust (into
which the Units are exchangeable), if listed on a national securities
exchange, will trade at a lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership with no separate counsel or advisor for
the Offerees. Each Offeree is advised to seek independent advice and
counsel before deciding whether to accept the Exchange Offering.
o If the Operating Partnership consummates investments in respect of all 14
Exchange Properties initially targeted for investment in the Exchange
Offering, the properties will have a deemed purchase price totaling
approximately $33,638,991, comprised of Operating Partnership Units to be
issued with an initial assigned value of approximately $14,017,080 plus
first mortgage and other indebtedness of approximately $19,424,161 to which
the properties are subject. The properties to be acquired with the balance
of the Operating Partnership Units to be offered in the Exchange Offering
(with an initial assigned value of approximately $10,982,920) have not yet
been finally determined. In addition, the Operating Partnership has
acquired two properties for cash, entered into an agreement to acquire two
properties under development and invested in other real estate limited
partnerships as of the date of this Prospectus, but has not committed the
available net cash proceeds raised to date or to be raised in the future to
any additional specific properties. Therefore, Offerees who elect to accept
the Exchange Offering may not have available any information on additional
properties to be acquired, in which case they will be required to rely on
management's judgment regarding those purchases. In addition, Offerees will
not have the benefit of knowing in advance of deciding whether to accept
the offering the extent of the Operating Partnership's investment in
respect of properties involved in the offering until the offering is
completed.
o The Original Investors in the Operating Partnership serve as executive
officers of the Trust, the Operating Partnership and the Managing
Shareholder and collectively own an amount of Operating Partnership Units
which are exchangeable (subject to escrow restrictions described below)
into 19% of the Trust Common Shares outstanding after the completion of the
Cash Offering and the Exchange Offering, on a fully diluted basis assuming
that all then outstanding Units (other than those owned by the Trust) have
been exchanged into an equivalent number of Common Shares. (The Original
Investors received the Units in exchange for their initial capitalization
of the Operating Partnership and other consideration and such Units have
been deposited into a security escrow account for a period of six to nine
years, subject to earlier release under certain conditions described at
"THE TRUST AND THE OPERATING PARTNERSHIP - Formation Transactions.)
Accordingly, the Original Investors and affiliates have significant
influence over the affairs of the Trust and the Operating Partnership and
the Exchange Offering involves transactions among them which may result in
decisions that do not fully represent the interests of all Shareholders of
the Trust and Unitholders in the Operating Partnership. In addition,
Offerees who acquire Operating Partnership Units in the Exchange Offering
will pay a higher price per unit than the Original Investors paid for their
Operating Partnership Units. See "MANAGEMENT" and "THE TRUST AND THE
OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership of the
Trust and the Operating Partnership."
o Although the Trust has adopted certain policies designed to eliminate or
minimize their effect, potential conflicts of interest may arise among the
Trust, the Operating Partnership, the Managing Shareholder, the Original
Investors and their respective Affiliates, including certain Affiliates
which have sponsored and/or managed, or may in the future sponsor, real
estate investment programs which may seek to acquire interests in
properties similar to those which the Trust and
28
<PAGE>
the Operating Partnership will seek to acquire. The Trust and the Operating
Partnership may be restricted from investing in certain properties since
Affiliates of the Managing Shareholder may have other investment vehicles
investing in similar properties. In addition, there will be competing
demands for management resources of the Managing Shareholder, the Trust and
the Operating Partnership and transactions are expected to be completed by
the Trust and the Operating Partnership with Affiliates of the Managing
Shareholder. See "CONFLICTS OF INTEREST" and "INVESTMENT OBJECTIVES AND
POLICIES - Conflict of Interest Policies."
o Offerees who accept the Exchange Offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnerships.
o The current returns of the Exchange Partnerships may not be achieved by the
Trust and the Operating Partnership after completion of the Exchange
Offering and may be higher than the current returns of other partnerships
which participate in the offering, although such other partnerships may
offer higher future growth potential than the Exchange Partnerships.
o Real estate investment considerations, individually or in the aggregate,
may negatively impact the ability of the Trust and Operating Partnership to
make distributions to Shareholders and Unitholders, including without
limitation the effect of national and local economic and other conditions
on residential apartment property values, the general lack of liquidity of
investments in real estate, the risks associated with investments in
mortgages, the ability of tenants to pay rents, the possibility that rental
units may not be occupied or may be occupied on terms unfavorable to the
Trust and the Operating Partnership, the frequent need for capital
improvements, the possibility that (including the effects of depreciation
and interest) certain properties may have experienced recurring losses for
financial reporting purposes, the possibility of uninsured losses, the
ability of the property investments of the Trust and the Operating
Partnership to generate sufficient cash flow to meet expenses, including
debt service requirements, or to be sold on favorable terms, if at all, the
availability of capital for investment, and competition in seeking
properties for acquisition and in seeking tenants.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the
potential inability to refinance any mortgage indebtedness of the Trust and
the Operating Partnership upon maturity, risks associated with possible
investments in loans secured by Junior Mortgages on property which may or
may not be recorded, and the risk of higher interest rates on any
adjustable interest rate debt or debt incurred to refinance indebtedness.
o The Trust and the Operating Partnership will each be permitted to incur
indebtedness in an aggregate amount up to 300% of their respective net
assets (subject to certain exceptions described at "INVESTMENT OBJECTIVES
AND POLICIES - Trust Policies with respect to Certain Activities Financing
Policies"), which could result in the Trust and the Operating Partnership
becoming highly leveraged, which in turn could adversely affect the ability
of the Trust and the Operating Partnership to make distributions to
Shareholders and Unitholders and increase the risk of default under their
respective indebtedness
o The distribution requirements for REITs under federal income tax laws may
limit the Trust's ability to finance acquisitions and improvements of
property without additional debt or equity financing and may limit cash
available for distribution to Shareholders and Unitholders. See "TAX
STATUS" and "FEDERAL INCOME TAX CONSIDERATIONS."
o The successful operation of the Trust and the Operating Partnership is
dependent on key management. In addition, each of the Original Investors,
Mr. McGrath and Mr. Geiger, have other business interests and neither will
devote full business time to the Trust, the Operating Partnership or the
Managing Shareholder. See "MANAGEMENT."
o There can be no assurance of the successful completion of the Exchange
Offering and the Cash Offering and it is unlikely that the cash proceeds
from the sale in the Cash Offering of only a minimum number of Common
Shares will be sufficient to meet the investment objectives of the Trust
and the Operating Partnership.
29
<PAGE>
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on AMEX, it is possible that no public market for the
Common Shares will ever develop or be maintained, resulting in lack of
liquidity of the Common Shares..
o The Trust will be taxed as a corporation if it fails to qualify as a REIT
for federal income tax purposes. In that event, the Trust will be liable
for certain federal, state and local income taxes and cash available for
distribution to Shareholders and Unitholders will decrease. Even if the
Trust qualifies for taxation as a REIT, the Trust may be subject to certain
Federal, state and local taxes on its income and property. See "FEDERAL
INCOME TAX CONSIDERATIONS."
o Under certain circumstances described at "FEDERAL INCOME TAX CONSIDERATIONS
- Exchange of Exchange Partnership Units for Operating Partnership Units,"
an Exchange Limited Partner may recognize tax upon the exchange of Exchange
Partnership Units for Operating Partnership Units.
o The possible issuance by the Trust and the Operating Partnership of
additional Shares and Units subsequent to the completion of the Exchange
Offering and the Cash Offering, which may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and effect the then prevailing market price of Common Shares.
o Certain provisions in the Declaration of Trust for the Trust and other
statutory provisions have the potential to delay or prevent a takeover of
the Trust or other transaction in which the holders of some, or a majority,
of the outstanding Common Shares might receive a premium on their Common
Shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interest. Such provisions generally
limit the actual or constructive ownership by any one person or entity
(other than the Original Investors) of equity securities in the Trust to 5%
of the outstanding Shares.
o As a result of certain amendments which will be made to the partnership
agreement of each Participating Exchange Partnership with one or more
Offerees who elect not to accept the Exchange Offering (the
"Non-participating Limited Partners") following the Exchange Offering, such
Non-participating Limited Partners, voting as a class, will have the
ability to veto certain actions of the partnership, such as the sale of the
partnership's property, which might be in the best interest of the
partnership, the Operating Partnership, the Trust or the holders of
securities of the Trust and the Operating Partnership. There can be no
assurance that Non-participating Limited Partners will not use such voting
power in a manner which may have an adverse effect on the operations of the
Trust or the Operating Partnership.
o Following the Exchange Offering, the limited partnership interests of
Non-participating Limited Partners in Participating Exchange Partners are
likely to remain extremely illiquid because they will represent a small
minority interest in the partnership and because of the uncertainty whether
the property would be sold in the near future due to the REIT and other
provisions of the Code which would penalize the Trust and possibly limited
partners in the partnership who accept the offering if the Operating
Partnership sells the property interest in the short term.
o The potential liability of the Trust and the Operating Partnership for
unknown or future environmental liabilities and the costs of compliance
with the Americans with Disabilities Act and other governmental
regulations, which may negatively impact the financial condition and
results of operations of the Trust and the Operating Partnership and cash
available to them for distribution to Shareholders and Unitholders.
o The [$13,316,000] aggregate book value of the 14 Exchange Properties
initially targeted for investment in the Exchange Offering is less than the
$33,638,991 total of the initial value assigned to the Operating
Partnership Units being offered for interests in the Exchange Properties
plus first mortgage and other indebtedness to which the properties are
subject, due to depreciation taken against the original price of the
properties paid by the Exchange Partnerships and the appreciation of the
properties since such purchase. As a result, the return on investment of
the Exchange Properties based on the initial assigned value of the Units
30
<PAGE>
offered for such property interests will be less than the return on
investment of the properties based on the Exchange Partnerships' book
value.
o Any Offeree who is a limited partner of an Exchange Partnership and does
not desire to participate in the Exchange Offering will be entitled to
retain his limited partnership interest in his respective Exchange
Partnership on substantially the same terms and conditions as his original
investment. Neither applicable law nor the limited partnership agreement
relating to any Exchange Partnership provides any rights of dissent or
appraisal to Offerees who do not elect to accept the Exchange Offering.
o The use of Units being offered in the Exchange Offering and the net
proceeds of the Cash Offering to acquire interests in one or more existing
residential apartment properties may occur over an extended period during
which the Trust and the Operating Partnership will face risks of changes in
interest rates and adverse changes in the real estate market. Similarly,
during periods in which proceeds are invested in interim investments prior
to such application, the Trust and the Operating Partnership may be
affected by changes in prevailing interest rate levels. Such interim
investments would be expected to earn rates of return which are lower than
those earned on the real estate investments of the Trust and the Operating
Partnership.
31
<PAGE>
TAX STATUS
The Operating Partnership
No ruling has been or will be sought from the IRS as to the status of the
Operating Partnership as a partnership for federal income tax purposes. Instead,
the Operating Partnership has relied on the opinion of special tax counsel that,
based upon the Code, the Regulations thereunder, published revenue rulings and
court decisions, the Operating Partnership will be classified as a partnership
for federal income tax purposes. In rendering its opinion, Tax Counsel has
relied on the following factual representations made by the Operating
Partnership and the Trust, as its General Partner:
o The Operating Partnership has not, and will not, elect to be treated
as an association taxable as a corporation;
o The Operating Partnership has been and will continue to be operated in
accordance with (i) all applicable partnership statutes, (ii) the
Agreement of Limited Partnership of the Operating Partnership, and
(iii) the description in this Prospectus;
o At least 22% in value of all of the assets of the Operating
Partnership shall always consist of assets other than those described
in Section 351(e)(1) of the Code; and
o The Operating Partnership will be operated so as to avoid treatment as
a publicly-traded partnership as set forth in Section 7704 of the Code
and applicable Regulations thereunder.
Under Section 7704 of the Code, certain "publicly-traded" partnerships are
treated as corporations for federal tax purposes. A partnership is a
publicly-traded partnership when interests in the partnership are traded on an
established securities market or are readily tradable on a secondary market or
the substantial equivalent thereof. Under Code Section 7704(c), a
publicly-traded partnership will nevertheless be treated as a partnership for
tax purposes if 90% or more of its gross income consists of passive-type income,
such as interest, dividends, real property rents and gain from the sale or other
disposition of real property, and the partnership would not be treated as a
regulated investment company were it a domestic corporation. A domestic
corporation generally will be treated as a regulated investment company only if
it is required to be registered under the Investment Company Act of 1940 (the
"1940 Act").
Under Regulation Section 1.7704-1, interests in a partnership are generally
considered readily tradable on a secondary market or the substantial equivalent
thereof if (a) such interests are regularly quoted by any person, such as a
broker or dealer, making a market in the interests, (b) any person makes
available to the public bid or offer quotes with respect to such interests and
stands ready to effect, buy or sell transactions at the quoted prices for itself
or on behalf of others, (c) the holder of an interest has a readily available,
regular and on-going opportunity to dispose of his interest through a public
means of obtaining or providing information of offers to buy, sell or exchange
such interests, or (d) prospective buyers and sellers have the opportunity to
buy, sell or exchange interests in a time frame and with the regularity and
continuity that the existence of a secondary market would provide.
The Operating Partnership and the Trust have represented to special tax
counsel that the Units of the Operating Partnership will not be traded on an
established securities market. Additionally, the Operating Partnership and the
Trust have further represented that, at all times throughout the existence of
the Operating Partnership, at least 90% or more of the Operating Partnership's
gross income will consist of passive-type income, and the Operating Partnership
will not be required to register under the 1940 Act. Special tax counsel has
relied on such representations in rendering its opinion that the Operating
Partnership will be classified as a partnership for federal income tax purposes.
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to the Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%.
32
<PAGE>
In addition, any distribution made to a Unitholder would be treated as either
taxable dividend income at a rate currently ranging to a maximum of 39.6% (to
the extent of the Operating Partnership's current or accumulated earnings and
profits) or (in the absence of earnings and profits) a non-taxable return of
capital (to the extent of the Unitholder's tax basis in his or her Units) or
taxable capital gain (after the Unitholder's tax basis in the Units has been
reduced to zero). Accordingly, treatment of the Operating Partnership as an
association taxable as a corporation would result in a material reduction in a
Unitholder's cash flow and after-tax return and thus would likely result in a
substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by an Exchange
Limited Partner of a limited partnership interest ("Exchange Partnership Units")
to the Operating Partnership in exchange for Operating Partnership Units (the
"Exchange") will not result in the recognition of taxable gain at the time of
the Exchange so long as the Exchange Limited Partner does not receive in
connection with the Exchange a cash distribution (or a deemed cash distribution
resulting from relief from liabilities) that exceeds such Exchange Limited
Partner's aggregate adjusted basis in his Exchange Partnership Units at the time
of the Exchange and provided that none of the exceptions to non-recognition of
gain described at "FEDERAL INCOME TAX CONSIDERATIONS - Exchange of Exchange
Partnership Units for Operating Partnership Units" apply. Special tax counsel is
unable to issue an opinion as to whether or not a particular Exchange Limited
Partner will defer recognition of gain upon the Exchange due to the number of
factors that must be considered with respect to each Exchange Limited Partner.
The Offerees will not receive any cash distributions in connection with the
Exchange Offering. Whether a particular Exchange Limited Partner will receive a
deemed cash distribution attributable to relief from liabilities in connection
with the Exchange that exceeds his adjusted basis in his Exchange Partnership
Units at the time of the Exchange will depend on a number of variables,
including such Exchange Limited Partner's adjusted tax basis in his partnership
interest at such time, the assets that the Exchange Limited Partner originally
contributed to the partnership in exchange for such Exchange Partnership Units,
the indebtedness, if any, of the Exchange Partnership in which the Exchange
Limited Partner owns an interest at the time of the Exchange, the tax basis of
any such contributed assets in the hands of the Exchange Partnership at the time
of the Exchange, the Exchange Limited Partner's share of the "unrealized gain"
with respect to the Exchange Partnership's assets at the time of the Exchange,
and the extent to which the Exchange Limited Partner includes in his basis for
his Exchange Partnership Units a share of the Exchange Partnership's recourse
liabilities by reason of indemnification or "deficit restoration" obligations
that will be eliminated by reason of the Exchange. See "FEDERAL INCOME TAX
CONSIDERATIONS - Exchange of Exchange Partnership Units for Operating
Partnership Units."
The Trust
The Trust intends to elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ending December 31, 1998. To maintain REIT status, an
entity must meet a number of organizational and operational requirements,
including a requirement that it currently distribute to its Shareholders at
least 95% of its REIT taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). For taxable years beginning
after August 5, 1997, the Taxpayer Relief Bill of 1997 (the "1997 Act") (1)
expands the class of excess noncash items that are excluded from the
distribution requirement to include income from the cancellation of indebtedness
and (2) extends the treatment of original issue discount and coupon interest as
excess noncash items to REITs, like the Trust, that use an accrual method of
accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See "RISK FACTORS - Adverse Consequences of Failure to
Qualify as a REIT" and the Cash Offering Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS." Even if the Trust qualifies for taxation as a REIT, the Trust
may be subject to certain federal, state and local taxes on its income and
property.
33
<PAGE>
COMPENSATION OF MANAGING PERSONS AND AFFILIATES
The Trust is not entitled to receive any compensation for services
performed in its capacity as General Partner of the Operating Partnership. The
Trust, however, is entitled to be reimbursed on a monthly basis for expenses
incurred on behalf of the Operating Partnership. The Trust will contribute all
net proceeds from the sale of Common Shares in the Cash Offering to the
Operating Partnership in exchange for an equivalent number of Units, and as the
owner of such Units will have the same economic rights and other rights as other
Unitholders. See "THE TRUST AND THE OPERATING PARTNERSHIP - The Operating
Partnership." The Agreement of Limited Partnership authorizes the Trust to cause
the Operating Partnership to issue additional Units to the Unitholders or to
third parties or the Trust which have designations, preferences or other special
rights that are senior to those of the Unitholders.
No special fees or commissions were or will be paid to the Managing
Shareholder or any affiliates, in connection with the Exchange Offering.
Broker-dealers who assist the Operating Partnership in consummating the Exchange
Offering with individual Offerees who accept the Exchange Offering will be paid
as a commission a number of unregistered Common Shares of the Trust equal to 5%
of the Units exchanged in the particular transactions as a result of their
efforts.
The following table describes all material fees, compensation, reimbursable
expenses and other payments that may be received by the Managing Shareholder,
the Independent Trustees and executive officers of the Trust, the Operating
Partnership and the Managing Shareholder in exchange for their respective
services and expenses incurred in connection with the Cash Offering and
preparation of the Prospectus relating thereto, the operation of the Trust and
the Operating Partnership and investments investigated, evaluated and
consummated by the Trust and the Operating Partnership. The determination of the
type and amount of such compensation and payments was not the result of
arms'-length negotiation. See "CONFLICTS OF INTEREST."
The Independent Trustees must determine that organizational and offering
expenses payable by the Trust and the Operating Partnership in connection with
the formation of the Trust and the Operating Partnership and any offerings of
Shares or Units is reasonable and in no event exceeds an amount equal to 15% of
the gross proceeds of the particular offering. (See Section 1.9(g) of the
Declaration of Trust.)
The Independent Trustees must determine that the total amount of
acquisition fees and expenses payable by the Trust or the Operating Partnership
in connection with acquiring its investments is reasonable and in no event
exceeds an amount equal to 6% of the purchase price of the subject property, or
in the case of a mortgage loan made or acquired by the Trust or the Operating
Partnership, 6% of the funds advanced, unless a majority of the disinterested
members of the Board of the Trust and a majority of the disinterested
Independent Trustees approve payment of an acquisition fee in excess of such
amounts based upon their determination that such fee is commercially
competitive, fair and reasonable to the Trust and the Operating Partnership.
(See Section 1.9(h) of the Declaration of Trust.)
The total operating expenses (less certain items, including capital raising
expenses, interest payments, taxes, non-cash expenditures such as depreciation,
and acquisition fees and expenses) of each of the Trust and the Operating
Partnership in any fiscal year may not exceed the greater of (i) 2% of the
aggregate book value of their respective investments, or (ii) 25% of their
respective net income for such year unless the Independent Trustees make a
finding that, based on such unusual and non-recurring factors which they deem
sufficient, a higher level of such operating expenses is justified for such
year. (See the ________ bullet point on page _____ of this Prospectus and
Section 1.9(i) of the Declaration of Trust.)
The payment by the Trust and the Operating Partnership of an interest in
the gain from the sale of their respective assets, for which full consideration
is not paid in cash or property of equivalent value, is allowed provided the
amount or percentage of such interest is reasonable. Such an interest is
considered reasonable if it does not exceed 15% of the balance of such net
proceeds remaining after payment to Shareholders or Unitholders (as applicable),
in the aggregate, of an amount equal to 100% of the original issue price of
their Shares or Units, plus an amount equal to 6% of the original issue price of
their Shares or Units, per annum cumulative. For purposes of this
34
<PAGE>
calculation, the original issue price of Shares and Units may be reduced by
prior cash distributions to Shareholders and Unitholders, as applicable. (See
Section 1.9(ee) of the Declaration of Trust.)
Additional fees that are not described in this Prospectus which may become
payable to affiliated parties for goods and services that may be provided to the
Trust or the Operating Partnership in the future will require the approval of a
majority of the Independent Trustees.
<TABLE>
OFFERING AND ORGANIZATIONAL STAGE
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Managing Shareholder (Baron Advisors) Reimbursement for distribution, due diligence and Not to exceed $250,000
organizational expenses incurred in connection with the
formation of the Trust and the Operating Partnership and
with the Cash Offering in an amount not to exceed 1% of
gross proceeds from the Cash Offering.
Managing Shareholder Reimbursement for legal, accounting and consulting fees Not to exceed $250,000
and filing, recording, printing, postage and other
miscellaneous expenses incurred in connection with the
Cash Offering in an amount not to exceed 1% of gross
proceeds from the Cash Offering.
Baron Capital Properties, Inc. (the No compensation will be payable to the Corporate Trustee Reimbursable expenses are
Corporate Trustee of the Trust) for performing services on behalf of the Trust at the expected to be limited to the
direction of the Managing Shareholder; however, expense of operating an office in
reimbursement will be made for reasonable expenses Delaware (approximately $1,500
incurred on behalf of the Trust which are approved in per year initially) as required
advance by the Managing Shareholder. by the Delaware Act - see
"MANAGEMENT - Corporate Trustee."
Managing Shareholder The Managing Shareholder and certain Affiliates are Amount of reimbursable expenses
and Affiliates entitled to be reimbursed by the Trust and the Operating incurred on behalf of the Trust
Partnership for all reasonable direct expenses incurred and the Operating Partnership.
on behalf of the Trust and the Operating Partnership, as
the case may be, including but not limited to legal,
accounting and consulting fees and other expenses, to
the extent those expenses were incurred by them in
carrying out responsibilities assigned to them under the
Declaration of Trust and the Operating Partnership
Agreement and do not constitute payment for activities
for which they already receive a fee, compensation and
reimbursement as described herein.
</TABLE>
35
<PAGE>
<TABLE>
ACQUISITION AND OPERATING STAGE
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Managing Shareholder Reimbursement for expenses incurred prior to and during Not to exceed $1,000,000;
the Cash Offering for investigating and evaluating (reimbursable expenses paid in
investment opportunities for the Trust and the Operating connection with investment
Partnership (other than the Exchange Properties) and for activities plus other acquisition
assisting them in consummating their investments, in an fees and expenses may not exceed
amount not to exceed 4% of gross proceeds from the Cash 6% of the contract purchase price
Offering; payable from available net proceeds of the for acquisitions unless the
Cash Offering or as cash flow permits as determined by Independent Trustees determine
the Board of the Trust. that the transaction is
commercially reasonable).
Managing Shareholder Annual payment under the Trust Management Agreement to Not to exceed $500,000 per year;
reimburse it for its operating expenses relating to the payable on a monthly basis during
business of the Trust and the Operating Partnership, in the term of the agreement
an amount not to exceed 1% of gross proceeds of the Cash beginning June 1, 1998; at its
Offering plus 1% of the initial assigned value of Units option the Managing Shareholder
issued in connection with the Exchange Offering. may elect to be paid in Common
Shares with an equivalent value.
Gregory K. McGrath, a founder of Initial annual compensation Payable in the form of Common
the Trust and the Operating Shares or other securities of the
Partnership and Chief Executive Trust or the Operating
Officer of the Trust, the Operating Partnership in an amount not to
Partnership and the Managing exceed 25,000 shares in the
Shareholder initial year of operations to be
determined by the Executive
Compensation Committee of the
Board of the Trust, plus health
benefits; thereafter, his
compensation and benefits will be
determined by the committee. In
exchange for an initial cash
capital contribution and other
consideration, Mr. McGrath has
been issued Units which are
exchangeable (subject to certain
escrow restrictions) into 9.5% of
the Common Shares outstanding
after the completion of the Cash
Offering and the Exchange
Offering, on a fully diluted
basis assuming that all then
outstanding
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
Units (other than those owned by
the Trust) have been exchanged
into an equivalent number of
Common Shares. See "The Trust -
Formation Transactions."
<CAPTION>
ACQUISITION AND OPERATING STAGE (cont'd)
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Robert S. Geiger, a founder of the Initial annual compensation $100,000, plus health benefits
Trust and the Operating Partnership and eligibility to participate in
and Chief Operating Officer of the any option plan and bonus
Trust, the Operating Partnership incentive plan which may be
and the Managing Shareholder implemented by the Executive
Compensation Committee of the
Board of the Trust. In exchange
for an initial cash capital
contribution and other
consideration, Mr. Geiger has
been issued Units which are
exchangeable (subject to certain
escrow restrictions) into 9.5% of
the Common Shares outstanding
after the completion of the Cash
Offering and the Exchange
Offering, on a fully diluted
basis assuming that all then
outstanding Units (other than
those owned by the Trust) have
been exchanged into an equivalent
number of Common Shares. See "The
Trust - Formation Transactions."
Robert L. Astorino, President - Initial annual salary $150,000, plus health benefits
Properties of the Operating and eligibility to participate in
Partnership any option plan and bonus
incentive plan which may be
implemented by the Executive
Compensation Committee of the
Board of the Trust.
David E. Williams, Chief Financial Initial annual salary $150,000, plus health benefits
Officer of the Operating and eligibility to participate in
Partnership any option plan and bonus
incentive plan which may be
implemented by the Executive
Compensation Committee of the
Board of the Trust.
Mary E. Keane, Vice President - Initial annual salary $130,000, plus health benefits
Accounting and eligibility to participate in
any
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C>
Accounting and Strategic Planning any option plan and bonus
of the Operating Partnership incentive plan which may be
implemented by the Executive
Compensation Committee of the
Board of the Trust.
Independent Trustees Annual fee $6,000
<CAPTION>
ACQUISITION AND OPERATING STAGE (cont'd)
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Baron Capital Properties, Inc. (the No compensation will be paid for performing services on Reimbursable expenses are
Corporate Trustee of the Trust) behalf of the Trust at the direction of the Managing expected to be limited to the
Shareholder; however, reimbursement will be made for expense of operating an office in
reasonable expenses incurred on behalf of the Trust Delaware (approximately $1,500
which are approved in advance by the Managing per year initially) as required
Shareholder. by the Delaware Act - see
"MANAGEMENT - Corporate Trustee."
Managing Shareholder Subject to operational limitations on REITs for federal The compensation, price or fee
and Affiliates income tax purposes, the Trust is authorized to contract payable must be comparable to and
with the Managing Shareholder and Affiliates to provide competitive with that charged by
goods and services other than those specified herein, a third party rendering
but no such contract is contemplated at this time. Any comparable goods and services
such contract would require, among other things, which could reasonably be made
that such persons be previously engaged in the available to the Trust.
business of providing such goods or services as an
ongoing business and that the compensation, price or fee
does not exceed that specified in the third column.
Managing Shareholder The Managing Shareholder and certain Affiliates are Amount of reimbursable expenses
and Affiliates entitled to be reimbursed by the Trust and the Operating incurred on behalf of the Trust
Partnership for all reasonable direct expenses incurred and the Operating Partnership.
on behalf of the Trust or the Operating Partnership, as
the case may be, including but not limited to legal,
accounting and consulting fees and other expenses, to
the extent those expenses were incurred by them in
carrying out responsibilities assigned to them under the
Declaration of Trust and the Operating Partnership
Agreement and do not constitute payment
</TABLE>
38
<PAGE>
<TABLE>
<S> <C> <C>
for activities for which they already receive a fee,
compensation or reimbursement as described herein.
</TABLE>
39
<PAGE>
CONFLICTS OF INTEREST
The Managing Shareholder will use its best efforts to conduct the affairs
of the Trust and the Operating Partnership for the benefit of the Shareholders
and Unitholders, respectively. However, the Trust and the Operating Partnership
are subject to various conflicts of interest arising out of their relationship
with the Managing Shareholder, Affiliates of the Managing Shareholder, the
Original Investors, the Shareholders and the Unitholders, including but not
limited to those described below.
The Managing Shareholder was formed for the sole purpose of serving as the
Managing Shareholder of the Trust. Certain Affiliates of the Managing
Shareholder, however, have formed, manage or participate in other partnerships
or entities which engage in real estate activities and may acquire and/or
develop real estate for their own accounts. Affiliates of the Managing
Shareholder are corporate general partners of 48 other Delaware or Florida real
estate limited partnerships that were previously organized to invest in separate
residential apartment properties and single-family housing and retail projects
located in southeastern and mid-western portions of the United States. Of such
partnerships, 19 have invested in record title to residential apartment
properties or in limited partnership interests in limited partnerships which own
a direct or indirect interest in such type of property, 19 have provided or
acquired mortgage loans secured by such type of property, five have invested in
second mortgage loans to developers of single-family homes, five have invested
in second mortgage loans to developers of condominium projects, two have
invested in second mortgage loans to shopping center developers and one has
invested in a second mortgage for land for development. Generally, each such
program has a separate general partner and involves separate projects or phases
of projects which have been separately financed and operated on a "stand-alone"
basis. See "MANAGEMENT" and "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING
SHAREHOLDER." It is expected that Affiliates of the Managing Shareholder will
organize similar programs in the future.
Certain Affiliates of the Managing Shareholder have sponsored or may
sponsor real estate investment limited partnerships which may seek to acquire
interests in properties similar to those which the Trust may seek to acquire. In
addition, the Trust may attempt to acquire interests in properties from certain
partnerships managed by Affiliates of the Managing Shareholder that directly or
indirectly own interests in properties or from investors in such partnerships.
Furthermore, the Original Investors, Mr. McGrath and Mr. Geiger, serve as
executive officers of the Trust, the Operating Partnership and the Managing
Shareholder and are principal Unitholders in the Operating Partnership.
Therefore, individually and collectively they have significant influence over
the affairs of the Trust and the Operating Partnership which may result in
decisions that do not fully represent the interests of all Shareholders and
Unitholders. Mr. McGrath is also the sole principal of the corporate general
partners of the real estate investment limited partnerships described above,
including the Exchange Partnerships, certain of which own interests in
residential apartment properties in which the Trust and the Operating
Partnership may acquire an interest. The Original Investors also have other
business interests, including other real estate investments, and will not devote
all of their business time to the operations of the Trust and the Operating
Partnership.
In order to eliminate or minimize conflicts of interest among the Trust,
the Operating Partnership, the Managing Shareholder, the Original Investors and
their respective Affiliates which may arise in such situations, the Trust has
adopted provisions in the Declaration which require that at least a majority of
the members of the Board be Independent Trustees and that a majority of the
Board, and, in certain cases, a majority of the Independent Trustees, approve
transactions between the Trust and the Managing Shareholder, a Trustee, any
other member of the Board or any of their respective Affiliates. See "SUMMARY OF
DECLARATION OF TRUST - Control of Operations."
In addition, the Board of the Trust has adopted a policy designed to
eliminate or minimize potential conflicts of interests which may arise in
respect of investment opportunities which may be presented to the Managing
Shareholder, an Independent Trustee, any other member of the Board, an Original
Investor or any of their respective affiliates. Under the policy, such parties
may pursue for their own account a residential apartment property investment
opportunity which may be suitable for the Trust and the Operating Partnership,
in accordance
40
<PAGE>
with the purposes for which they were organized, only upon fulfillment of the
following conditions. First, the requesting party(ies) must deliver to the Board
of the Trust, at least 60 days prior to the consummation of any such
transaction, a written investment proposal identifying the parties to be
involved in such transaction, specifying in reasonable detail the proposed terms
and conditions of the particular investment opportunity intended to be pursued
and granting the Trust and the Operating Partnership a right of first refusal,
exercisable within 30 days following the delivery of such proposal, to
participate in the proposed transaction in the place of the requesting
party(ies), on the terms and conditions specified in the written proposal. In
addition, the requesting party(ies) either (i) must receive written notice from
a majority of the disinterested members of the Board (i.e., those persons who
have no other interest in any such transaction beyond their role on the Board),
or an authorized representative acting on their behalf, which specifies that the
Trust and the Operating Partnership have determined not to participate in the
proposed transaction or (y) must have not received from the disinterested
members of the Board, or an authorized representative acting on their behalf,
written notice, within 30 days following the receipt of such written proposal,
which notifies the requesting party(ies) that the Trust and the Operating
Partnership elect to exercise their right of first refusal to participate in the
proposed transaction on the terms and conditions specified in the written
proposal. The Board of the Trust and the Independent Trustees are responsible
for overseeing the policy under the circumstances described above to insure that
it is applied fairly to the Trust. However, there can be no assurance that the
policies of the Trust and the Operating Partnership will always be successful in
eliminating or minimizing the influence of such conflicts, and, if they are not
successful, decisions could be made that might fail to reflect fully the
interests of all Shareholders and Unitholders.
In most cases, the management of the Managing Shareholder and its
Affiliates is identical. For example, the Chief Executive Officer, sole
stockholder and sole director of the Managing Shareholder is Gregory K. McGrath,
who is also the President, sole director and sole shareholder of each of the
corporate general partners of the investment programs referred to in the second
paragraph of this section. See "MANAGEMENT." As a result, the activities of
other investment programs organized by Affiliates of the Managing Shareholder
may also result in conflicting demands upon the time and effort of the
management of the Managing Shareholder in the performance of its duties to the
Trust and the Operating Partnership. However, the Managing Shareholder will
devote as much attention to the activities of the Trust and the Operating
Partnership as is reasonably necessary to manage the m.
In the event that any dispute arises in which the interests of the Trust or
the Operating Partnership and any other programs sponsored by the Affiliates of
the Managing Shareholder diverge, the Trust, if necessary, intends to retain
separate counsel for each party with an adverse interest.
The Managing Shareholder, the Original Investors and certain Affiliates are
entitled under the Declaration of Trust and other agreements to receive
compensation, payments and reimbursements discussed in this Prospectus. Such
compensation generally was not determined through a process of arm's length
bargaining. The amounts payable and terms of such transactions may not
necessarily be determined by reference to costs to the Managing Shareholder, the
Original Investors or such Affiliates, independent appraisals or comparable
third party transactions. As a result, the compensation or terms may not reflect
the fair market value of the services rendered or to be rendered to the Trust or
the Operating Partnership by the Managing Shareholder, the Original Investors or
Affiliates or the value of the property acquired or disposed of.
In addition, the level of reimbursable expenses payable to the Managing
Shareholder or its Affiliates in connection with the organization and operation
of the Trust may be greater or less than compensation or reimbursable expenses
payable in connection with the organization and operation of the other
investment programs sponsored by such Affiliates.
The interests of the Shareholders and Unitholders may be inconsistent in
some respects with the interests of the Managing Shareholder. The Managing
Shareholder and certain of its Affiliates, by reasons of their interests in the
Trust and their receipt of compensation and reimbursable expenses from the
Trust, have and will have potential conflicts of interest in connection with
their performance of certain activities. For example, a transaction such as a
sale of the property of the Trust or the Operating Partnership may produce an
economic benefit for the Managing Shareholder and/or an Affiliate but adverse
tax consequences for the Shareholders and Unitholders. Also, circumstances may
arise where termination of business by the Trust or the Operating Partnership
may be
41
<PAGE>
advantageous to the Managing Shareholder and/or Affiliates, while continuation
of the Trust and/or the Operating Partnership might be advantageous to the
Shareholders and the Unitholders.
The Declaration of Trust and the Operating Partnership Agreement provide
that the Trust and the Operating Partnership will indemnify the Managing
Shareholder, Independent Trustees, other members of the Board of the Trust and
each of their respective Affiliates and their respective officers, directors,
shareholders, partners, agents and employees against certain liabilities, and
the availability of such indemnification could affect the actions of such
indemnified parties. See "SUMMARY OF DECLARATION OF TRUST - Liability and
Indemnification" and "COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP
UNITS, OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES - Liability and
Indemnification."
The Managing Shareholder intends to utilize the services of certain
suppliers of goods and services for the Trust and the Operating Partnership that
have previously provided goods or services to prior investment programs
organized by Affiliates of the Managing Shareholder. While such providers of
goods and services are unaffiliated with the Managing Shareholder, the existence
of previous business relationships may affect the ability of the Managing
Shareholder to independently represent the interests of the Trust and the
Operating Partnership with respect to such providers of goods and services in
light of such other business relationships. While the Managing Shareholder
believes that it has represented and will continue to represent the interests of
the Trust and the Operating Partnership and believes that there are benefits to
utilizing the services of parties with whom the Managing Shareholder has
previous experience, Offerees who are concerned about such potential conflicts
are advised to request further information from the Managing Shareholder and to
independently evaluate such relationships.
No independent representation has been provided to Offerees to negotiate
the terms of the Exchange Offering on behalf of the Offerees, and each Offeree
should seek independent advice and counsel before deciding whether to accept the
Exchange Offering. However, independent appraisal firms prepared appraisals of
each Exchange Property, and the exchange value being offered by the Operating
Partnership for each limited partnership interest to be acquired in the Exchange
Offering will be based on such appraisals. In addition, the Trust has
incorporated into the Declaration of Trust substantially all of the guidelines
of the Statement of Policy Regarding Real Estate Investment Trusts of the North
American Securities Administrators Association, Inc. Such guidelines have been
adopted by the securities administrators of numerous states in which the Cash
Offering and the Exchange Offering are being made and are designed to protect
individual investors in REITs. The provisions of the Declaration of Trust which
conform to such guidelines set forth certain guidelines, limitations and
restrictions on the Cash Offering and the Exchange Offering and the operations
of the Trust and the Operating Partnership. See "SUMMARY OF DECLARATION OF TRUST
- - Control of Operations."
While potential conflicts of interest, including those described herein,
may not be entirely eliminated, the Trust believes that any actual conflicts
that may arise will not materially affect the obligation of the Managing
Shareholder, the Independent Trustees, and any other members of the Board to act
in the best interests of the Trust and the Operating Partnership and their
Shareholders and Unitholders. See "FIDUCIARY RESPONSIBILITY" and "RISK FACTORS."
FIDUCIARY RESPONSIBILITY
The Managing Shareholder, the Trustees and other members of the Board of
the Trust are deemed to be in a fiduciary relationship to the Trust and the
Operating Partnership and their Shareholders and Unitholders, respectively, and
consequently must exercise good faith and integrity in handling the affairs of
the Trust and the Operating Partnership. The Trustees and other members of the
Board of the Trust also have a fiduciary duty to the Shareholders and
Unitholders to supervise the relationship of the Trust and the Operating
Partnership with the Managing Shareholder. Where the question has arisen, courts
have held that a limited partner may institute legal action on behalf of himself
and all other similarly situated limited partners (i.e., class action) to
recover damages for a breach by a general partner of its fiduciary duty, or on
behalf of the partnership (i.e., partnership derivative action) to recover
damages from third parties. Certain recent cases decided by the Federal courts
may also be construed to
42
<PAGE>
support the right of a limited partner to bring such actions under Rule 10b-5
issued under the Securities Act of 1933, as amended, for the recovery of damages
(including losses incurred in connection with the purchase or sale of a
partnership interest) resulting from a breach by a managing entity of its
fiduciary duty.
The foregoing summary is based on statutes, rules and decisions as of the
date of this Prospectus and involves a rapidly developing and changing area of
the law. Investors who believe that a breach of fiduciary duty by the Managing
Shareholder, an Independent Trustee or any other member of the Board has
occurred or who have questions concerning the duties of such persons should
consult with their own counsel.
The Declaration of Trust and the Operating Partnership Agreement provides
that the Trust and the Operating Partnership, respectively, will indemnify the
Managing Shareholder, the Independent Trustees, other members of the Board and
their respective Affiliates and their respective officers, directors,
shareholders, partners, agents and employees against liability arising out of
the management of the Trust and the Operating Partnership within the scope of
the Declaration of Trust and the Operating Partnership Agreement, as the case
may be, unless negligence or misconduct is involved. As a result of these
indemnification arrangements, Offerees who accept the Exchange Offering and
Shareholders of the Trust have more limited rights of action than they would
have absent the limitations in the Declaration of Trust and the Operating
Partnership Agreement. The exculpatory provisions do not include indemnification
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), unless (i) there has been a successful adjudication on the
merits of each claim involving alleged securities law violations as to the
particular indemnitee, (ii) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular indemnitee,
or (iii) a court of competent jurisdiction approves a settlement of the claims
against the particular indemnitee and finds that indemnification of the
settlement and the related costs should be made. In addition, the exculpatory
provisions do not include indemnification for liabilities arising from or out of
intentional or criminal wrongdoing. See Section 3.7(b) of the Declaration of
Trust. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to the Managing Shareholder, the Independent Trustees,
other members of the Board and their respective Affiliates and their respective
officers, directors, shareholders, partners, agents and employees pursuant to
the foregoing provisions, or otherwise, the Trust 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. See "SUMMARY OF DECLARATION OF TRUST - Liability and
Indemnification."
The Managing Shareholder is not permitted to commingle any funds of the
Trust or the Operating Partnership with its own funds or the funds of any other
person. The Trust and the Operating Partnership are expressly prohibited from
making any loans to the Managing Shareholder. The Trust and the Operating
Partnership may borrow money from the Managing Shareholder, but only on terms
which are competitive with those offered by unrelated lending institutions.
43
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements, including
statements regarding, among other items: (i) the anticipated business strategies
of the Trust and the Operating Partnership and (ii) the intention of the Trust
and the Operating Partnership to acquire property interests in exchange for cash
proceeds the Trust receives from the Cash Offering and contributes to the
Operating Partnership, Common Shares or Preferred Shares of the Trust, loan
proceeds from any debt financings they may effect, any available net operating
revenue of the Operating Partnership, and Units of the Operating Partnership in
connection with the Exchange Offering and other possible transactions. Actual
results could differ materially from those projected in the forward-looking
statements as a result of any number of factors discussed elsewhere in this
Prospectus, including, without limitation, under the captions "SUMMARY OF THE
TRUST AND THE OPERATING PARTNERSHIP," "SUMMARY OF RISK FACTORS," "RISK FACTORS,"
"TAX STATUS," "CONFLICTS OF INTEREST," "THE EXCHANGE OFFERING," "MANAGEMENT,"
"THE TRUST AND THE OPERATING PARTNERSHIP," "INVESTMENT OBJECTIVES AND POLICIES,"
"INITIAL REAL ESTATE INVESTMENTS," "FEDERAL INCOME TAX CONSIDERATIONS," "SUMMARY
OF DECLARATION OF TRUST," and "TERMS OF THE OFFERING." When used in this
Prospectus the words "anticipate," "expect," "estimate," "intend," "believe,"
"project," and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, expected, estimated, intended, believed or
projected. Among the key factors that may have a direct bearing on the business,
financial condition and results of operations of the Trust and the Operating
Partnership are the effects of risks associated with (i) changes in the
competitive marketplace for acquisitions of interests in residential apartment
properties, (ii) changes in the performance of the operations of properties in
which the Trust and the Operating Partnership acquire an interest, and (iii) the
volatility of the trading market for the Common Shares and general economic
conditions. The Trust and the Operating Partnership assume no obligation to
update such forward-looking statements or to advise of changes in the
assumptions and factors on which they are based. Given these uncertainties,
offerees are cautioned not to place undue reliance on such forward-looking
statements.
RISK FACTORS
Offerees should carefully consider the following material risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the Exchange Offering, an investment in the Units being offered hereby and
Common Shares in the Trust and the proposed operations of the Trust and the
Operating Partnership. See also "SUMMARY OF RISK FACTORS" above.
Unless the context otherwise requires, the term "Trust" as used herein
shall collectively refer to Baron Capital Trust and its affiliate, Baron Capital
Properties, L.P., which is making the Exchange Offering pursuant to this
Prospectus and which will conduct the real estate operations of the Trust and
hold its property interests.
Arbitrary Offering Price
The offering price of $10.00 per Common Share and the equivalent initial
value given to each Unit to be issued in the Exchange Offering have been
arbitrarily established by the Trust, and do not necessarily represent a price
at which the Common Shares or Units could be resold, if at all. See " - Limited
Marketability of Units and Common Shares."
No Separate Representation of Offerees
The terms of the Exchange Offering were determined by the Trust and the
Operating Partnership with no separate counsel or advisor for the Offerees. Each
Offeree is advised to seek independent advice
44
<PAGE>
and counsel before deciding whether to accept the Exchange Offering. As
described herein at "THE EXCHANGE OFFERING - Exchange Property Appraisals,"
appraisals of the fair market value of each of the Exchange Properties to be
involved in the initial transactions of the Exchange Offering have been prepared
by qualified independent appraisal firms. Offerees should note, however, that
appraisals are only opinions of value and cannot be relied upon as measures of
realizable value. The amount that a beneficial owner of an Exchange Property
might realize from a sale thereof may be more or less than estimates of the
value considered by the appraiser, depending upon condition of the property,
current and anticipated uses and zoning, financial, economic, market and other
considerations that may affect a property's value.
Offerees May Not Have Information Available to Evaluate
Properties Prior to Decision Whether to Accept the Exchange Offering
In the Exchange Offering, the Operating Partnership will offer to issue
registered Operating Partnership Units in exchange for limited partnership
interests in limited partnerships which own direct or indirect interests in
residential apartment properties. If acquisitions are consummated in respect of
all 14 Exchange Properties initially targeted for acquisition in the Exchange
Offering, the properties will have a purchase price totaling approximately
$33,638,991, comprised of Units to be issued with an initial assigned value of
approximately $14,017,080 plus first mortgage and other indebtedness of
approximately $19,424,161 to which the properties are subject. The properties to
be acquired with the balance of the Units to be offered in the Exchange Offering
(with an initial assigned value of approximately $10,982,920) have not yet been
finally determined. The Trust intends to investigate other investment
opportunities for the Exchange Offering, including property interests held by
unaffiliated owners and certain other limited partnerships managed by Affiliates
of the Managing Shareholder.
The Operating Partnership will use a significant portion of the net cash
proceeds of the Trust's Cash Offering to acquire interests in residential
apartment properties or interests in other partnerships substantially all of
whose assets consist of direct or indirect interests in residential apartment
property. As of the date of this Prospectus, $_____ of the net cash proceeds of
the Cash Offering (out of gross proceeds of approximately $___________) have
been used to acquire beneficial ownership of two properties. For a description
of the acquired property interests, see "INITIAL REAL PROPERTY INVESTMENTS - The
Acquired Properties." None of the remaining net proceeds and future net proceeds
have been committed to specific properties. Although the Operating Partnership
has several investment opportunities under review for the application of such
proceeds, none of such potential opportunities has developed beyond the
negotiating stage. The Operating Partnership may direct a substantial portion of
the proceeds to investment opportunities that have not been designated in this
Prospectus, as it may be amended or supplemented from time to time, and the
Operating Partnership may be unable to or may decline to apply the proceeds to
any specific investments that may be described in this Prospectus or any
amendments or supplements thereto.
As a result of the foregoing, prior to deciding whether to accept the
Exchange Offering, Offerees may not have available sufficient information to
evaluate property acquisitions by the Operating Partnership using Units or
available net cash proceeds of the Cash Offering. In addition, Offerees will not
have any vote in the selection of property investments by the Trust or the
Operating Partnership after they accept the Exchange Offering. Consequently,
Offerees will be relying upon the judgment of the management of the Trust and
the Operating Partnership for such decisions. The actual number of properties in
which the Operating Partnership will acquire an interest will depend upon the
number of suitable investment opportunities available, the amount of net
proceeds from the Cash Offering the Operating Partnership has available to
invest, the willingness of Offerees in the Exchange Offering to accept Operating
Partnership Units in exchange for their property interests, and the amount of
funds and number of Units required for each investment opportunity. See "RISK
FACTORS," "MANAGEMENT," "THE TRUST AND THE OPERATING PARTNERSHIP," "INVESTMENT
OBJECTIVES AND POLICIES" and "INITIAL REAL ESTATE INVESTMENTS."
45
<PAGE>
Possible Adverse Influence of Original Investors
Following the completion of the Cash Offering and the Exchange Offering,
regardless of the level of sales of Common Shares in the Cash Offering or the
level of acceptance of the Exchange Offering, Mr. McGrath and Mr. Geiger, the
Original Investors in the Operating Partnership, will each own an amount of
Operating Partnership Units which are exchangeable (with certain escrow
restrictions described at "THE TRUST AND THE OPERATING PARTNERSHIP Formation
Transactions") into 9.5% of the Common Shares outstanding after the completion
of the offerings (601,080 Common Shares out of total maximum outstanding of
6,327,160 Common Shares), on a fully diluted basis assuming that all then
outstanding Units (other than those owned by the Trust) have been exchanged into
an equivalent number of Common Shares. Under the Declaration of Trust, no other
Shareholder or Unitholder may hold more than 5.0% of the beneficial interest in
the Trust. Although a majority of the members of the Board of the Trust will be
unaffiliated Independent Trustees as required under the Declaration of Trust,
Mr. McGrath serves as the Chief Executive Officer of the Trust and the Operating
Partnership and is the Chief Executive Officer, sole stockholder and sole
director of the Managing Shareholder, and Mr. Geiger serves as Chief Operating
Officer of the Trust, the Operating Partnership and the Managing Shareholder.
See "MANAGEMENT." Although there is no agreement, understanding or arrangement
for such individuals to act together in any manner, they are in a position to
exercise significant influence over the affairs of the Trust, the Operating
Partnership and the Managing Shareholder if they were to act together in the
future. Accordingly, the Original Investors have significant influence over the
affairs of the Trust, the Operating Partnership and the Managing Shareholder
which may result in decisions that do not fully represent the interests of all
Shareholders and Unitholders. See "INVESTMENT OBJECTIVES AND POLICIES - Trust
Policies with Respect to Certain Activities Conflict of Interest Policies."
Conflicts of Interest
The Operating Partnership is subject to conflicts of interest arising out
of its relationship to the Trust, the Managing Shareholder, Affiliates of the
Managing Shareholder, the Original Investors, Shareholders, the Exchange
Partnerships and Offerees in the Exchange Offering and other sellers of property
interests who receive Units in exchange for their property interests. For
example, Mr. McGrath, a founder of the Trust and the Operating Partnership, is
also the sole principal of the Corporate General Partners of numerous real
estate investment limited partnerships, including the Exchange Partnerships
involved in the Exchange Offering which own interests in residential apartment
properties in which the Trust and the Operating Partnership may acquire an
interest. In addition, certain Affiliates of the Managing Shareholder controlled
by Mr. McGrath have sponsored and/or managed, or may in the future sponsor
and/or manage, real estate investment programs which may seek to acquire
interests in properties similar to those which the Trust and the Operating
Partnership may seek to acquire. The Trust and the Operating Partnership may be
restricted from investing in certain properties since Affiliates of the Managing
Shareholder may have other investment vehicles investing in similar properties.
In addition, the Trust and the Operating Partnership may attempt to acquire
interests in properties from certain other partnerships managed by Affiliates of
the Managing Shareholder that directly or indirectly own interests in properties
or from investors in such partnerships.
Furthermore, as described above at " - Possible Adverse Influence of
Original Investors," the Original Investors, Mr. McGrath and Mr. Geiger, serve
as executive officers of the Trust, the Operating Partnership and the Managing
Shareholder and have acquired for cash and other consideration a significant
number of Units in the Operating Partnership in connection with the formation of
the Trust and the Operating Partnership. Therefore, individually and
collectively they will have significant influence over the affairs of the Trust,
the Operating Partnership and the Managing Shareholder which may result in
decisions that do not fully represent the interests of all Shareholders and
Unitholders. Limited Partners who acquire Units in the Exchange Offering will
pay a higher price per Unit than the consideration the Original Investors paid
for Units issued to them.
The Trust has adopted certain policies designed to eliminate or minimize
conflicts of interest. These policies include provisions in the Declaration of
Trust which require that (i) at least a majority of the members of the Board of
the Trust be Independent Trustees and (ii) a majority of the Board, and, in
certain cases, a majority of the Independent Trustees, approve transactions
between the Trust or the Operating
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Partnership and the Managing Shareholder, any other member of the Board of the
Trust, or any of their respective Affiliates, including the Exchange
Partnerships. In addition, the Board of the Trust has adopted a policy which
restricts the Managing Shareholder, an Independent Trustee, any other member of
the Board, an Original Investor or any of their respective affiliates from
pursuing for their own account any residential apartment property investment
opportunity which may be suitable for the Trust and the Operating Partnership
unless the Trust and the Operating Partnership have first been given a right of
first refusal to participate in the opportunity. See "INVESTMENT OBJECTIVES AND
POLICIES - Trust Policies with Respect to Certain Activities - Investment
Policies" and " -Conflict of Interest Policies." However, there can be no
assurance that these policies will always be successful in eliminating the
influence of such conflicts, and, if they are not successful, decisions could be
made that might fail to reflect fully the interests of all Shareholders and
Unitholders. While the conflicts of interest cannot be eliminated, the Trust and
the Operating Partnership believe that any actual conflicts will not materially
affect the obligation of the Managing Shareholder, the Board and the Independent
Trustees to act in the best interests of the Trust, Shareholders, the Operating
Partnership and Unitholders. See "CONFLICTS OF INTEREST."
No Assurance of Successful Performance of
Properties to be Acquired in Exchange Offering
The annual rate of return on investment for 1997 and for the first half of
1998 generated by the Exchange Properties, which are the initial acquisition
candidates involved the Exchange Offering ranged between zero and ten percent.
The annual rate of return on investment for those periods generated by other
residential apartment properties owned by other limited partnerships managed by
Affiliates of the Managing Shareholder ranged between zero and twelve percent.
Distributions were not made during these periods by certain of the Exchange
Partnerships because (i) certain apartment units were withdrawn from the rental
market, and net available cash flow was applied, to prepare them for sale as
individual condominium units (which plan was later abandoned) or to convert them
from long-term rentals to short-term corporate rentals or (ii) net available
cash flow was applied to pay certain expenses in connection with the Cash
Offering and the Exchange Offering. There can be no assurance that future
operations of the Exchange Properties or any other properties in which the
Operating Partnership or the Trust acquires a limited partnership or other
interest in connection with the Exchange Offering or other transactions will be
profitable or that Shareholders who acquire Common Shares in the Cash Offering
and Offerees who accept the Exchange Offering will experience returns, if any,
comparable to or in excess of those experienced by investors in certain of the
Exchange Partnerships or in certain other real estate limited partnerships
managed by Affiliates of the Managing Shareholder. There is also no assurance
that the current returns of the Exchange Partnerships will be achieved by the
Operating Partnership after completion of the Exchange Offering or will be
higher than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnerships.
Potential Loss of Future Appreciation on Exchange Properties
In the absence of the consummation of the Exchange Offering, one or more of
the Exchange Properties might appreciate in value and might be able to be sold
at a later date for more consideration in favor of the Exchange Limited Partners
than they would receive under the terms and conditions of the Exchange Offering.
Investors in Successful Exchange Properties Could Lose
Advantage by Combining with Less Successful Exchange Properties
In connection with the Exchange Offering, Exchange Limited Partners are
being offered to exchange their existing limited partnership units in their
respective Exchange Partnership for Operating Partnership Units. The number of
Operating Partnership Units being offered for an interest in a particular
Exchange Partnership has an initial assigned value in the range of 102% to 125%
of the amount of an Offeree's original investment in his Exchange Partnership.
For purposes of the Exchange Offering, the
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Units have been assigned an initial value of $10 per unit, which is the price at
which the Trust is currently offering Common Shares in its Cash Offering. The
value of Units and Common Shares is linked since holders of Operating
Partnership Units may exchange their Units into an equivalent number of Common
Shares at any time, subject to certain conditions.
The number of Operating Partnership Units being offered in respect of each
property differs based upon a number of factors, including, among others, the
estimated appraised market value and operating history of the property, the
amount of distributed cash flow generated by the property, the period of time
that the property has been held by the underlying Exchange Partnership and the
property's overall condition. Therefore, by accepting the Exchange Offering,
Exchange Limited Partners in Participating Exchange Partnerships whose
properties are performing relatively better than other properties would lose any
such advantage while Exchange Limited Partners in Participating Exchange
Partnerships whose properties are performing relatively poorer than the average
would correspondingly benefit.
Several Factors Could Have Possible Adverse Effects on Operation of Properties
The results of operations of the Trust and the Operating Partnership will
depend, among other things, upon the quality of opportunities available for
investment. It is possible that the properties in which the Trust and the
Operating Partnership invest will generate income and capital appreciation, if
any, at rates lower than those anticipated or available through investment in
comparable real estate or other investments. The performance of an investment in
the Trust and the Operating Partnership will depend on many factors over which
the Trust and the Operating Partnership may have no control, including without
limitation the continuation of certain advantageous provisions of federal tax
laws, adverse changes in national and local economic conditions, increases in
operating costs, adverse local conditions such as decreases in employment or
changes in real estate zoning laws and other characteristics of the geographical
location of investments of the Trust and the Operating Partnership, which may
reduce the desirability of real estate in the area, excessive building, changes
in interest rates, the availability of long-term mortgage funds, changes in
federal, state or local government laws, regulations, or policies, changes in
tax laws, the ability of tenants to pay rents, the possibility that rental units
may not be occupied or may be occupied on terms unfavorable to the Trust or the
Operating Partnership, the frequent need for capital improvements, the
possibility that (including the effects of depreciation and interest) certain
properties may have experienced recurring losses for financial reporting
purposes, various uninsurable risks, liabilities in tort (which may exceed
insurance coverage), acts of God and other catastrophes, hazardous substances
and other environmental problems in respect of investments of the Trust and the
Operating Partnership, the availability of financing for operating or capital
needs and the management capabilities of the management of the Trust, the
Operating Partnership, the Managing Shareholder, the Independent Trustees and
other members of the Board of the Trust and their respective Affiliates and
developers, borrowers and property managers.
The above factors may also adversely affect the ability of a borrower to
meet its repayment obligations to the Trust or the Operating Partnership in
connection with Mortgage Loans that may be provided or acquired by them. In the
event of a default under such an obligation, the Trust or the Operating
Partnership, as the case may be, may experience substantial delays in enforcing
its rights as mortgagee and may incur substantial costs associated with
protecting its investment. In certain cases, the Trust or the Operating
Partnership may be required to acquire title to a property and thereafter to
make substantial improvements or repairs in order to maximize the property's
investment potential. In such circumstances, the Trust or the Operating
Partnership may be required to attempt to borrow or raise additional funds and
may not be able ultimately to recover its investment.
The Trust or the Operating Partnership may provide or acquire Mortgage
Loans which provide for the repayment of principal, in whole or in part, in
lump-sum "balloon" payments. The borrower's ability to make such payments may
depend upon its ability to obtain refinancing or sell a particular property
securing the loan. There is no assurance that either replacement financing or a
sale can be obtained or completed by the borrower. The borrower's ability to
refinance or sell its property will depend on general economic
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conditions, the value of the property and, in the case of a refinancing, upon
the financial strength of the borrower. In the event the borrower fails to make
any necessary payment upon maturity or scheduled payments as they become due,
the Trust or the Operating Partnership may be compelled to institute foreclosure
proceedings.
Each of the Trust and the Operating Partnership expects that Mortgage Loans
it provides or acquires which are secured by residential apartment properties
would generally be made on a non-recourse basis under which the other
participants in respect of the property would not be responsible for the debt
and it would be able to look only to the unencumbered assets of the property for
repayment. In some cases, the Trust or the Operating Partnership is expected to
be secured by a Junior Mortgage that is subordinated to a Senior Mortgage. In
that case, in the event of a default on the Senior Mortgage, the Trust or the
Operating Partnership may find it necessary to make payments to prevent
foreclosure on the Senior Mortgage, without necessarily improving its position
with respect to the underlying real property. Failure to make such payments
could result in foreclosure on the Senior Mortgage and the extinguishment of the
Junior Mortgage in favor of the Trust or the Operating Partnership. In such
event, the entire investment of the Trust or the Operating Partnership in the
property could be lost. In addition, non-payment of any Junior Mortgage Loan
that may be provided or acquired by the Trust or the Operating Partnership may
constitute an event of default to a borrower under the underlying Senior
Mortgage Loan(s), and such Senior Mortgage Loan(s) may have to be repaid by the
borrower before Shareholders and Unitholders will receive any return on their
investment in Common Shares and Units, respectively. Furthermore, Mortgage Loans
will not be insured or guaranteed by governmental agencies or otherwise.
If the Trust or the Operating Partnership owns real property directly, it
may be on a pari passu basis with other investors. In the event of a default
under such an investment, its remedies may be limited by the size of its
investment relative to that of other participants.
No Assurance of Avoiding Operating Losses
There can be no assurance that the Trust or the Operating Partnership will
be able to avoid operating losses in the future in respect of properties in
which it acquires an interest or that a Shareholder's investment in the Trust or
a Unitholder's investment in the Operating Partnership will be recovered. In
order for the Trust and the Operating Partnership to make cash distributions to
Shareholders and Unitholders from revenue generated by acquired residential
apartment properties, certain occupancy percentages and rental rates will need
to be achieved and expense levels maintained. No assurance can be given that
these percentages, rates or expenses can be achieved or maintained. If the
properties do not achieve and maintain such occupancy percentages at such rates,
the ability to make cash distributions to Shareholders and Unitholders may be
eliminated. No assurance can be given that rental increases can be instituted
while maintaining acceptable occupancy levels. If the Trust or the Operating
Partnership fails to generate sufficient gross income, it may find it necessary
to attempt to borrow funds for operating capital or other purposes. The
availability of additional financing to the Trust or the Operating Partnership
is partially dependent upon general economic conditions, the value of property
interests and the financial strength of the Trust and the Operating Partnership.
See " - Debt Service Obligations Could Adversely Affect Cash Flow."
Several Factors Could Have Possible Adverse
Effects on Distributions to Shareholders and Unitholders
Distributions to Shareholders and Unitholders will be based principally on
cash available for distributions from properties in which the Trust and the
Operating Partnership invest. Increases in rents under leases of properties
acquired will increase the cash available for distribution to Shareholders and
Unitholders. In contrast, the amount available to make distributions may
decrease if rental rates are lowered or if properties acquired yield lower than
expected returns. See also "Several Factors Could Have Possible Adverse Effects
on Operations of Properties."
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The distribution requirements for REITs under federal income tax laws may
limit the ability of the Trust and the Operating Partnership to finance future
acquisitions and capital improvements of properties without additional debt or
equity financing. If the Trust or the Operating Partnership incurs indebtedness
in the future, it will require additional funds to service such indebtedness
and, as a result, amounts available to make distributions may decrease.
Distributions by the Trust and the Operating Partnership will also be dependent
on a number of other factors, including the financial condition of the Trust and
the Operating Partnership, any decision to reinvest funds rather than to
distribute such funds, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code, and such other factors as
the Trust deems relevant. In addition, the Trust and the Operating Partnership
may issue from time to time additional Common Shares, Preferred Shares, Units or
debt securities in connection with the acquisition of property interests or in
certain other circumstances. No prediction can be made as to the number of such
securities which may be issued, if any, and, if issued, the effect on cash
available for distribution, on a per Share or per Unit basis, to Shareholders
and Unitholders, respectively. Such issuances, if any, could have a dilutive
effect on cash available for distribution on a per Share and per Unit basis to
Shareholders and Unitholders.
To obtain the favorable tax treatment associated with REITs, the Trust
generally will be required to distribute to its Shareholders at least 95% of its
taxable income (determined without regard to the dividends paid deduction and by
excluding net capital gains) each year. For taxable years beginning after August
5, 1997, the 1997 Act (1) expands the class of excess noncash items that are
excluded from the distribution requirement to include income from the
cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting. In addition, the Trust will be subject
to tax at regular corporate rates to the extent that it distributes less than
100% of its taxable income (including net capital gains). The Trust will also be
subject to a 4% non-deductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year, are less
than the sum of 85% of its ordinary income, 95% of its capital gain net income,
and 100% of its undistributed income from prior years. Pursuant to the 1997 Act,
the Trust may elect to retain rather than distribute its net long-term capital
gains. The effect of such election is that (i) the Trust is required to pay the
tax on such gains, (ii) Shareholders, while required to include their
proportionate share of the undistributed long-term capital gains in income, will
receive a credit or refund for their share of the tax paid by the Trust, and
(iii) the tax basis of a Shareholder's Shares would be increased by the amount
of undistributed long-term capital gains (less the amount of capital gains tax
paid by the Trust) included in the Shareholder's long-term capital gains.
The Trust intends to make distributions to its Shareholders to comply with
the distribution requirements of the Code and to reduce exposure to federal
income taxes and the non-deductible excise tax. Differences in the timing
between the receipt of income and the payment of expenses in arriving at taxable
income and the effect of required debt amortization payments, could require the
Trust to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT. See Section 1.9 of the Declaration of Trust.
Distributions to Shareholders and Unitholders Adversely
Affected by Poor Operating Results of Operating Partnership
Net cash proceeds from the issuance of Common Shares by the Trust in
connection with the Cash Offering and net cash proceeds of any subsequent
issuance of Common Shares will be contributed by the Trust to the Operating
Partnership in exchange for an equivalent number of Units. The Trust's ownership
of Units in the Operating Partnership will entitle it to share in cash
distributions from, and in the profits and losses of, the Operating Partnership
in proportion to its percentage ownership of Units. The Trust in turn will
distribute such cash distributions to the Shareholders of the Trust. The other
Unitholders of the Operating Partnership, including the Original Investors and
offerees in the Exchange Offering who elect to receive Units in exchange for
their respective limited partnership interests in real estate limited
partnerships, will own the remaining economic interest in the Operating
Partnership (other than the Trust's 1% interest as General Partner of the
Operating Partnership).
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Distributions of available cash flow to Shareholders of the Trust and
Unitholders of the Operating Partnership will be dependent upon the operating
profits generated by the Operating Partnership. Assuming the Cash Offering and
the Exchange Offering are completed in full under the terms currently
contemplated and no other transactions have taken place (including, without
limitation, any additional issuances of Common Shares or Units, any conversion
of Units into Common Shares or any exercise of Common Share purchase warrants
issued by the Trust to the Dealer Manager and participating broker-dealers in
the Cash Offering), immediately upon the completion of the offerings, the
Shareholders (including Shareholders who acquire Common Shares in the Cash
Offering and certain broker-dealers who effect transactions in connection with
the Exchange Offering and receive unregistered Common Shares as commissions)
would receive approximately 41.5% of any distributions made by the Operating
Partnership; the Unitholders (including Offerees who accept the Exchange
Offering and the Original Investors) would receive the remaining approximately
58.5% of such distributions. The actual percentage allocation of any cash
distributions between the Shareholders and the Unitholders will be dependent
upon the number of Common Shares and Units outstanding as of the date of the
particular cash distribution, which in turn will be dependent upon (i) the
actual mix of the number of Common Shares which are issued in the Cash Offering
and the number of Units which are issued in the Exchange Offering and (ii) the
number of issued Units which have been exchanged by their holders into Common
Shares as of the date of the particular cash distribution. See "THE TRUST AND
THE OPERATING PARTNERSHIP - Ownership of the Trust and the Operating
Partnership."
Competition
The Trust and the Operating Partnership will be competing for suitable
investments with other financial institutions such as banks, insurance
companies, savings and loan associations, mortgage bankers, pension funds, real
estate investment trusts and other real estate developers, managers, owners, and
investment vehicles, which may have investment objectives similar to those of
the Trust and the Operating Partnership. See "INVESTMENT OBJECTIVES AND
POLICIES." Many of these competitors will have greater resources than the Trust
and the Operating Partnership and some may have, or may have access to, more
extensive real estate and financial experience than do the Managing Shareholder,
the Independent Trustees, any other members of the Board of the Trust, and
executive officers of the Trust, the Operating Partnership and the Managing
Shareholder.
It is expected that all properties in which the Trust and the Operating
Partnership will invest will be located in developed areas that include other
residential apartment properties. Certain of these competitive apartment
properties may be owned by limited partnerships managed by Affiliates of the
Managing Shareholder. The number of competitive apartment properties in a
particular area could have a material effect on the ability of the Trust and
Operating Partnership to lease apartment units to tenants at such properties and
on the rents charged. The Trust and the Operating Partnership may be competing
for tenants with others that have greater resources than the Trust and the
Operating Partnership and whose officers and directors have more experience than
the officers of the Trust and the Operating Partnership and members of the Board
of the Trust, including the Managing Shareholder and the Independent Trustees.
In addition, other forms of multifamily residential properties provide housing
alternatives to potential tenants of residential apartment properties.
Lack of Liquidity of Real Estate
Real estate investments are relatively illiquid, and, therefore, the Trust
and the Operating Partnership will have limited ability to vary their portfolio
quickly in response to changes in economic or other conditions. In addition, the
prohibitions in the Code and related regulations on a REIT holding property for
sale may affect the ability of the Trust and the Operating Partnership to sell
properties without adversely affecting distributions to the Shareholders and
Unitholders. See "FEDERAL INCOME TAX CONSIDERATIONS - Taxation of the Trust -
Gross Income Tests."
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Cash Distributions Could be Reduced by Cost of Capital Improvements
Properties in which the Trust and the Operating Partnership may invest will
vary in age and require capital improvements regularly. The cost of such capital
improvements (including capital improvements that may be required in respect of
properties in which the Trust and the Operating Partnership intend to acquire an
interest from real estate limited partnerships managed by Affiliates of the
Managing Shareholder in connection with the Exchange Offering) may be funded out
of the net proceeds of the Cash Offering and other securities offerings,
available cash flow of the Trust and the Operating Partnership or borrowed
funds. If the costs of improvement, whether required to attract and maintain
tenants or to comply with governmental requirements, substantially increases,
cash available for distribution to Shareholders and Unitholders could be
reduced.
Real Estate Investments May Fail to Perform to Expected Level
The Trust and the Operating Partnership intend to actively seek to acquire
interests in residential apartment properties to the extent they can be acquired
on advantageous terms and meet their investment criteria. See "INVESTMENT
OBJECTIVES AND POLICIES." Acquisitions in respect of such properties entail
risks that investments will fail to perform in accordance with expectations.
Estimates of the costs of improvements to bring acquired property up to
standards established for the market position intended for that property may
prove inaccurate. In addition, there are general investment risks associated
with any real estate investment.
The Trust and the Operating Partnership will acquire property interests
from time to time in exchange for cash or unissued Units, Common Shares or other
securities. They will obtain appraisals with respect to the market value of any
property interest that they acquire or an opinion as to the fairness of the
allocation of Units in the Operating Partnership or other consideration payable
to sellers of property interests. Appraisals and fairness opinions are only
estimates of value and should not be relied upon as precise measures of true
worth or realizable value. There can be no assurance that the value of the
aggregate percentage interests in the Operating Partnership paid to persons
contributing assets to it in exchange for Units is equivalent to the value the
Trust and the Operating Partnership will realize from those contributions, that
the initial public offering price of the Cash Offering will reflect the fair
market value of the Common Shares purchased in the Cash Offering or that the
cash price for any property interests acquired by the Trust and the Operating
Partnership is fair and reasonable.
Subject to the REIT provisions of the Code and regulations issued
thereunder and certain limitations set forth in Section 1.9 of the Declaration
of Trust, the Trust and the Operating Partnership will also be authorized to
invest in raw land, stocks, bonds, notes, partnership interests and other
securities, and thus will be dependent to a lesser extent upon the satisfactory
performance of such assets and securities. See "FEDERAL INCOME TAX
CONSIDERATIONS" for a description of the REIT provisions of the Code and
regulations issued thereunder and Section 7.4 of the Declaration of Trust
regarding such permitted investments.
Debt Service Obligations Could Adversely Affect Cash Flow
The Trust and the Operating Partnership will be subject to the risks
normally associated with debt financing, including the risks that cash flow will
be insufficient to meet required payments of principal and interest on any
indebtedness, the risk that the interest rates on any adjustable interest rate
indebtedness will increase, the risk that indebtedness secured by properties in
which the Trust or the Operating Partnership own an interest will not be
refinanced at maturity or that the terms of such refinancing will not be as
favorable as the terms of such indebtedness. If the Trust or the Operating
Partnership were unable to refinance its indebtedness on acceptable terms, if at
all, it might be forced to dispose of one or more of its properties upon
disadvantageous terms, which might result in losses to it and might adversely
affect the cash available for distribution to Shareholders and Unitholders. If
prevailing interest rates or other factors at the time of the refinancing result
in higher interest rates on refinancings, the interest expense of the Trust
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or the Operating Partnership, as the case may be, would increase, which would
adversely affect its cash flow and its ability to pay distributions to
Shareholders and Unitholders. Further, if a property is mortgaged to secure
payment of indebtedness, and the Trust or the Operating Partnership is not able
to meet mortgage payments, or is in default under the related mortgage or deed
of trust, such property could be transferred to the mortgagee, the mortgagee
could foreclose upon the property, appoint a receiver and receive an assignment
of rents and leases, or pursue other remedies, all with the consequence of loss
of income and asset value to the Trust or the Operating Partnership.
Foreclosures could also create taxable income without accompanying cash
proceeds, thereby hindering the Trust's ability to meet the REIT distribution
requirements of the Code.
In connection with the acquisition by the Trust or the Operating
Partnership of an equity interest in a given property, it may assume the
seller's obligations under any underlying Mortgage Loan or obtain Mortgage
financing in connection with the acquisition. Any such loan would be secured by
the property acquired and may require a "balloon" payment upon the maturity of
its term. The ability of the Trust or the Operating Partnership to repay such
obligation may be dependent on its ability to obtain adequate long-term
refinancing or equity financing or to sell the property at or prior to the
maturity date. There is no assurance that either replacement debt or equity
financing or a sale could be obtained, and the Trust or the Operating
Partnership could suffer a complete loss of its investment if neither a sale nor
such replacement financing could be obtained. The ability to obtain refinancing
will be dependent upon general economic conditions, the value of the property
and the financial strength of the Trust and the Operating Partnership. There is
no assurance that any such property could be refinanced upon the maturity of any
replacement debt. Failure to obtain the refinancing necessary to make the
foregoing payment when due, or to make any scheduled payments due with respect
to any obligation secured in whole or in part by the property, could result in a
foreclosure and loss of the property, and the Trust or the Operating Partnership
could suffer a complete loss of its investment in the property. See "THE TRUST
AND THE OPERATING PARTNERSHIP" and "INVESTMENT OBJECTIVES AND POLICIES."
Under the Declaration of Trust, the Trust and the Operating Partnership may
incur aggregate borrowings in an amount up to 300% of the amount of their
respective net assets, except where the Trust determines that a higher level of
borrowing is appropriate. Therefore, the Trust and the Operating Partnership
could become highly leveraged, increasing the risks of leverage as described
above. There can be no assurance that the ratio of debt to any measure of asset
value of the Trust and the Operating Partnership will maximize the level of
distributions to Shareholders and Unitholders.
Adverse Affects of Under-performing Mortgage Investments
The Trust and the Operating Partnership may invest in mortgages, either by
providing mortgage financing or acquiring mortgages. Mortgage investments are
subject to the risk that borrowers may not be able to make debt service payments
or pay principal when due, the risk that the value of the mortgaged property may
be less than the amounts owed, and the risk that interest rates payable to the
Trust or the Operating Partnership on the mortgages may be lower than its cost
of funds. If the Trust or the Operating Partnership invested in mortgages and if
any of the above occurred, the ability to make distributions to Shareholders and
Unitholders could be adversely affected.
Any subordinated Mortgage Loan the Trust or the Operating Partnership may
provide or acquire may or may not be recorded. If any particular Mortgage is not
recorded, the security interest of the Trust or the Operating Partnership, as
the case may be, in such Mortgage would not be perfected and it would be pari
passu (i.e., on an equal basis) with all other unsecured creditors of the
borrower, provided, however, the security instrument which will be entered into
in connection with any Mortgage Loan proposed to be provided or acquired by the
Trust or the Operating Partnership will generally restrict the borrower's
ability to enter into a subsequent loan arrangement with third parties which
would be senior to or pari passu with the Mortgage to be held by it.
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Possible Adverse Effects as a Result of Loss of Key Management
The Trust and the Operating Partnership will be dependent upon the efforts
of management of the Trust, the Operating Partnership and the Managing
Shareholder (primarily Gregory K. McGrath, Robert S. Geiger, Robert L. Astorino,
David E. Williams and Mary E. Keane) and other members of management (including,
without limitation, the Independent Trustees and any other members of the Board
of the Trust). While the Trust believes that it could find replacements for such
management, the loss of their services could have an adverse effect on the
business, financial condition and operating results of the Trust and the
Operating Partnership. In addition, each of Mr. McGrath and Mr. Geiger has other
business interests and neither will devote full business time to the Trust, the
Operating Partnership or the Managing Shareholder.
Uncertainty of Successful Completion of Cash Offering and Exchange Offering
In the Cash Offering the Trust is offering for sale to the public 2,500,000
Common Shares at $10 per share (maximum gross proceeds of $25,000,000). In the
Exchange Offering, the Operating Partnership will offer to issue registered
Units in exchange for limited partnership interests in limited partnerships
which own direct or indirect interests in residential apartment properties. To
facilitate the Exchange Offering, the Operating Partnership has registered with
the Commission 2,500,000 Units, and the Trust has registered an additional
2,500,000 Common Shares into which holders of Units may exchange such Units,
subject to certain conditions.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold title to property interests acquired. The Trust will
contribute to the Operating Partnership the net cash proceeds from the sale of
Common Shares in the Cash Offering in exchange for an equivalent number of
Units. The Operating Partnership will use a portion of the net cash proceeds of
the Cash Offering, unissued Units or a combination of net cash proceeds and
unissued Units (i) to acquire interests in residential apartment properties or
interests in other partnerships substantially all of whose assets consist of
residential apartment property interests, (ii) for capital improvements which
may be required on properties in which the Trust or the Operating Partnership
acquires an interest and (iii) for working capital purposes. Therefore, the
successful performance of the Operating Partnership will be largely dependent
upon the successful completion of the Cash Offering.
It is unlikely that the cash proceeds from the sale in the Cash Offering of
only a minimum number of Common Shares will be sufficient to meet the investment
objectives of the Trust. In addition, during the period of the Cash Offering and
the Exchange Offering there may be ongoing unregistered private offerings by
real estate limited partnerships sponsored and managed by Affiliates of the
Managing Shareholder. Therefore, despite the different nature and scope of
proposed activities of the Trust and such partnerships, the Trust will be
competing with such unregistered offerings to sell investment securities to
prospective Investors with the possible adverse effect that the Trust will sell
fewer Common Shares in the Cash Offering than otherwise might be the case absent
such unregistered offerings. See " - Conflicts of Interest."
As a Unitholder, the Trust will have an economic interest in the Operating
Partnership which will entitle it to share in cash distributions from, and in
the profits and losses of, the Operating Partnership. The Trust in turn will
distribute such cash distributions to the Shareholders of the Trust. Thus, the
performance of an investment in Common Shares will depend in large part upon
successful completion of the Exchange Offering and profitable operating results
of the properties in which the Operating Partnership acquires an interest.
In addition, the Operating Partnership will not complete the Exchange
Offering in respect of any particular Exchange Partnership if limited partners
holding more than 10% of the limited partnership interests in the partnership
affirmatively elect not to accept the offering. Moreover, the Operating
Partnership will not complete any transaction in the offering whatsoever unless
a sufficient number of offerees accept the offering such that the offering
involves the acquisition of Exchange Partnership Units with an initial assigned
value of at least $6,000,000. As a result, there can be no assurance that a
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significant number of Offerees will accept the terms of the Exchange Offering or
that any properties acquired in the Exchange Offering will generate operating
profits sufficient to permit the Trust and the Operating Partnership to make
cash distributions to Shareholders and Unitholders. See " - Several Factors
Could Have Possible Adverse Effects on Operation of Properties," " - Real Estate
Investments May Fail to Perform to Expected Level" and " - No Assurance of
Avoiding Operating Losses."
In addition, the Trust and the Operating Partnership will incur significant
operating expenses. Among such expenses is total annual cash compensation
payable to the executive officers of the Trust and the Operating Partnership of
$536,000. The amount of executive compensation and other payroll expenses will
remain significant in relation to the net asset value and operating cash flow of
the Operating Partnership until the Trust sells a substantial portion of the
Common Shares being offered in the Cash Offering and the Exchange Partnership
completes transactions in the Exchange Offering in respect of a substantial
number of properties. Furthermore, regardless of the operating results of the
Trust and the Operating Partnership, the Managing Shareholder will be entitled
to be reimbursed up to $1,000,000 (an amount not to exceed 4% of gross offering
proceeds in the Cash Offering) for expenses incurred prior to and during the
Cash Offering for investigating, evaluating and consummating investments and up
to $500,000 (an amount not to exceed 1% of gross proceeds in the Cash Offering
plus 1% of initial assigned value of Units issued in the Exchange Offering) for
expenses incurred each year relating to the operations of the Trust and the
Operating Partnership. The ability of the Trust and the Operating Partnership to
continue to cover operating expenses will be dependent upon the success of the
Cash Offering and the Exchange Offering and the performance of properties
interests acquired.
Limited Marketability of Units and Common Shares
Although Operating Partnership Units to be issued in the Exchange Offering
and Trust Common Shares issued and to be issued in the Cash Offering have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and will be freely transferable (subject to certain restrictions described
below), a public market is not expected to develop for such Units, and such
Common Shares have not yet been registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or listed on a stock exchange. The Trust
will apply for listing on the American Stock Exchange ("AMEX") of Common Shares
to be issued in connection with the Cash Offering and Common Shares into which
Units issued in the Exchange Offering will be exchangeable, and anticipates it
will qualify for listing prior to the end of the second quarter of 1999.
However, there can be no assurance that the Common Shares will qualify for such
listing on AMEX or any other stock exchange and, if so, of the timing of the
effectiveness of any such listing. Thus, there can be no assurance that an
active trading market will develop after the offerings.
Accordingly, an Offeree should participate in the Exchange Offering only as
a long-term investment and should be prepared to remain a Unitholder or
Shareholder indefinitely. In addition, to facilitate the Trust's continued
compliance with federal tax laws and regulations governing REIT's, the
Declaration of Trust contains significant restrictions relating to the ownership
and transfer of Shares. See " - Limits on Ownership and Transfers of Shares,"
"CAPITAL STOCK OF THE TRUST - Restrictions on Ownership and Transfer," and
Article 2A of the Declaration of Trust.
Furthermore, the initial public offering price of Common Shares being
offered in the Cash Offering and the initial assigned value of the Units to be
issued in the Exchange Offering may not be indicative of the market price for
Common Shares after completion of the Cash Offering and the Exchange Offering.
Possible Adverse Effect on Market Price as a Result of
Availability of Units and Common Shares for Future Sale
Future sales or issuances of a substantial number of Common Shares and/or
Units following the completion of the Cash Offering and the Exchange Offering,
or the perception that such sales or issuances
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could occur, could adversely affect then prevailing market prices for Common
Shares. In addition to up to 2,500,000 Common Shares to be issued in the Cash
Offering, up to approximately 1,200,000 Units (exchangeable into an equivalent
number of Common Shares subject to conditions described at "THE TRUST AND THE
OPERATING PARTNERSHIP- Formation Transactions") have been issued to the Original
Investors in the Operating Partnership in connection with its initial
capitalization. The Original Investors have deposited their Units into a
security escrow account for a period of six to nine years following the date of
the Cash Offering Prospectus (May 15, 1998), subject to earlier release if the
Trust achieves certain operating results described at "THE TRUST AND THE
OPERATING PARTNERSHIP- Formation Transactions." The practical effect of such
escrow arrangement is that the Original Investors may not exchange such Units
for an equivalent number of Common Shares and then sell such Common Shares while
the Units are subject to such arrangement.
In addition, up to 2,500,000 Units (exchangeable into an equivalent number
of Common Shares) may be issued in the Exchange Offering to owners of limited
partnership interests in limited partnerships which own direct or indirect
interests in residential apartment properties, in exchange for such partnership
interests. The Executive Compensation Committee of the Board of the Trust may
also vote to reserve additional Common Shares or Units for issuance in
connection with employee and management option plans that may be adopted by the
committee. See "MANAGEMENT - Option Plan" and "THE TRUST AND THE OPERATING
PARTNERSHIP - Ownership of the Trust and the Operating Partnership."
Possible Adverse Effect of Market Interest Rates on Common Share Prices
One of the factors that may influence the price of the Common Shares in
public markets will be the annual yield from dividend distributions made by the
Trust and the Operating Partnership to Shareholders and Unitholders,
respectively. Thus, following the completion of the Cash Offering and the
Exchange Offering, an increase in market interest rates may lead future
purchasers of Common Shares to demand a higher annual yield, which could
adversely affect the market price of the Common Shares.
Potential Adverse Tax Consequences
Unfavorable resolution of any of a number of tax issues could adversely
affect Unitholders and Shareholders. The following is a summary of the principal
tax risks of an investment in the Operating Partnership and the Trust,
respectively. For a more detailed description of the Federal income tax
consequences and the tax-related risks of an investment in the Operating
Partnership and the Trust, respectively, see "FEDERAL INCOME TAX
CONSIDERATIONS." Neither the Trust nor the Operating Partnership has obtained or
expects to request a letter ruling from the IRS as to the classification and
treatment of the Operating Partnership and the Trust, respectively, for federal
tax considerations described herein, or any other tax matters. The Trust has
obtained the opinion of its special Tax Counsel that, based on the organization
and proposed operation of the Trust and based on certain other assumptions and
representations, it will qualify as a REIT for federal income tax purposes. The
Operating Partnership has obtained the opinion of its special Tax Counsel that,
based on the organization and proposed operation of the Operating Partnership
and based on certain other assumptions and representations, it will be
classified as a partnership for federal income tax purposes. Neither of these
opinions is binding on the IRS or on any court. Offerees are advised to consult
with and rely upon their own legal, tax and investment advisor regarding how an
investment in the Operating Partnership and the Trust will affect them.
Taxation of the Trust as a Corporation if It Fails to Qualify as a REIT
The Trust intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1998. Although the Managing
Shareholder believes that the Trust will be organized and will operate in such a
manner, no assurance can be given that the Trust will be organized or will be
able to operate in a manner so as to qualify or remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements (some
on an annual and others on a quarterly basis) established under highly technical
and complex Code provisions of which there are only limited judicial
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and administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Trust's control. For
example, in order to qualify as a REIT, at least 95% of the Trust's gross income
in any year must be derived from qualifying sources and the Trust must pay
distributions to Shareholders aggregating annually at least 95% of its REIT
taxable income (determined without regard to the dividends paid deduction and by
excluding net capital gains). The complexity of these provisions and the
applicable Treasury Regulations that have been promulgated under the Code is
greater in the case of a REIT that holds its assets in partnership form (as the
Trust will do). No assurance can be given that legislation, new regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. The Trust has been advised by special Tax
Counsel regarding various issues affecting the Trust's ability to qualify, and
continue to qualify, as a REIT. See "FEDERAL INCOME TAX CONSIDERATIONS -
Taxation of the Trust" and "LEGAL MATTERS." No assurance can be given that
actual operating results will meet the REIT requirements.
If the Trust fails to qualify for taxation as a REIT in any taxable year
and no relief provisions apply, the Trust will be subject to tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. Distributions to Shareholders in any such year will not be deductible by
the Trust nor will they be required to be made. In such event, to the extent of
current or accumulated earnings and profits, all distributions to Shareholders
will be taxed as ordinary income. Moreover, unless entitled to relief under
certain statutory provisions, the Trust also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the Trust
available for investment or distribution to Shareholders because of the
additional tax liability to the Trust for the years involved. In addition,
distributions to Shareholders would no longer be required to be made. "FEDERAL
INCOME TAX CONSIDERATIONS - Taxation of the Trust."
Taxation of the Operating Partnership as a Corporation if It Fails to be
Classified as a Partnership
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to the Unitholders, and it net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his Units) or taxable capital gain (after the Unitholder's tax basis in the
Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Deferral of Gain from Exchange Offering Subject to Certain Exceptions
Deferral of recognition of gain upon the contribution to the Operating
Partnership of Exchange Partnership Units by an Exchange Limited Partner in
exchange for Operating Partnership Units (the "Exchange") will not apply in all
circumstances. If any of the following circumstances apply, gain will be
recognized currently rather than being deferred:
1. Any decrease in an Exchange Limited Partner's share of liabilities of an
Exchange Partnership, if not offset by a corresponding increase in the
Exchange Limited Partner's share of Operating Partnership liabilities,
could cause the Exchange Limited Partner to recognize taxable gain as a
result of the Exchange Limited Partner being deemed to have received a cash
distribution from the Exchange Limited Partnership. This recognition of
gain could occur even if the decrease arose in connection with a
contribution or distribution that would otherwise qualify for tax-free
treatment under Section 721 or Section 731 of the Code. A decrease in an
Exchange Limited Partner's
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share of Operating Partnership liabilities (and the resulting deemed cash
distribution) might occur upon a repayment of part or all of the
liabilities of an Exchange Partnership following the Exchange.
2. A contribution of Exchange Partnership Units that is treated in whole or in
part as a "disguised sale" of the contributed property under the Code.
3. A distribution of "marketable securities" under Section 731(c) of the Code.
4. Recapture under Section 465(e) of the Code.
5. A contribution of Exchange Partnership Units if the Operating Partnership
would be treated as an investment company (within the meaning of Section
351) if the Operating Partnership were incorporated.
See "FEDERAL INCOME TAX CONSIDERATIONS - Exchange of Exchange Partnership Units
for Operating Partnership Units."
Investors Liable for State and Local Taxes
Each Investor will also be liable for state and local income taxes payable
in the state or locality in which the Investor is a resident or doing business
or in a state or locality in which the Trust or the Operating Partnership
conducts or is deemed to conduct business. Depending upon the state in question,
an Investor who pays such taxes in a foreign state may be entitled to receive a
credit for all or a portion of such amount paid against any income taxes payable
in his state of residence. Thus each Investor will likely be required to file
multiple state income tax returns as a result of his investment in the Trust or
the Operating Partnership.
EACH OFFEREE IS URGED AND EXPECTED TO CONSULT WITH HIS PERSONAL TAX ADVISOR
WITH RESPECT TO THE TAX CONSEQUENCES RELATED TO AN INVESTMENT IN THE TRUST
AND THE OPERATING PARTNERSHIP.
Non-participating Limited Partners in Participating Exchange Partnerships
Will Have Significant Influence over Certain Actions of the Partnerships
Following the completion of the Exchange Offering, each Exchange Limited
Partner in a Participating Exchange Partnership who elects not to accept the
Exchange Offering ("Non-participating Limited Partner") will retain his existing
interest in the partnership. The Non-participating Partners will retain all of
their economic and voting rights, rights to receive reports and other rights as
set forth in their respective partnership agreement. See "COMPARISON OF RIGHTS
OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS AND TRUST
COMMON SHARES." Although Non-participating Limited Partners in any particular
Participating Exchange Partnership together will hold no more than 10% of the
limited partnership interest in the partnership, they will have significant
influence over certain activities of the partnership and the Operating
Partnership by virtue of certain partnership agreement amendments in favor of
the Non-participating Limited Partners which will be made upon completion of the
Exchange Offering. The purpose of the amendments is to permit Non-participating
Limited Partners in Participating Exchange Partnerships the opportunity to vote
as a class whether to approve certain actions which the Operating Partnership
might otherwise unilaterally cause a particular Participating Exchange
Partnership to take by exercising the Operating Partnership's voting rights in
its capacity as a likely large minority holder or majority holder of limited
partnership interests in the partnership following the Exchange Offering.
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As described in further detail in this Prospectus at "Amendments to
Partnership Agreements of Participating Exchange Partnerships with
Non-participating Limited Partners," the partnership agreement of each
Participating Exchange Partnership which has one or more Non-participating
Limited Partners will be amended so that such partners will be entitled to vote
as a class in respect of all matters as to which limited partners are entitled
to vote under the partnership agreement relating to the partnership prior to the
completion of the Exchange Offering, with certain exceptions. In addition, the
Trust and the Operating Partnership have agreed that in respect of certain
proposed actions, the Participating Exchange Partnership must obtain the prior
approval of Non-participating Limited Partners holding a majority of the limited
partnership interests held by all Non-participating Limited Partners in the
partnership. For example, the partnership may not sell its existing property
interest, acquire any additional property interests or cease to exist without
such approval.
As a result of such amendments, Non-participating Limited Partners in a
Participating Exchange Partnership will have the ability to veto certain actions
of the partnership, such as the sale of the partnership's property, which might
be in the best interest of the partnership, the Operating Partnership, the Trust
or the holders of securities of the Trust and the Operating Partnership. There
can be no assurance that Non-participating Limited Partners will not use such
voting power in a manner which may have an adverse effect on the operations of
the Trust or the Operating Partnership.
Possible Dilution as a Result of Issuance of Additional Securities
The Trust and the Operating Partnership have authority to offer authorized
but unissued Shares (which may be comprised of Common Shares and/or Preferred
Shares in the discretion of the Trust), debt securities and Units in exchange
for property, cash or otherwise. In order to facilitate the Exchange Offering,
the Operating Partnership has registered with the Commission 2,500,000 Units and
the Trust has registered an additional 2,500,000 Common Shares into which such
Units are exchangeable by their holders, subject to certain restrictions. In
addition, the Trust intends to investigate making an additional public or
private offering of Common Shares and/or Units within the 12-month period
following the commencement of the Cash Offering (May 18, 1998) if management
determines that suitable property acquisition opportunities are available at
attractive prices and such an offering would fulfill its cost of funds
requirements. Offerees who acquire Operating Partnership Units in connection
with the Exchange Offering will have no preemptive rights to acquire any such
additional Shares, debt securities or Units, and could suffer dilution as a
result of subsequent issuances of securities. See Article 2 of the Declaration
of Trust and Section 4.2 of the Operating Partnership Agreement.
In addition, in connection with the formation of the Trust and the
Operating Partnership, each of Mr. McGrath and Mr. Geiger, the Original
Investors, has received an amount of Units in the Operating Partnership which
are exchangeable (subject to escrow restrictions described at "THE TRUST AND THE
OPERATING PARTNERSHIP - Formation Transactions") into 9.5% of the Common Shares
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those owned by the Trust) have been exchanged into an equivalent number of
Common Shares. The Original Investors received the Units in exchange for their
initial capitalization of the Operating Partnership and other consideration.
Purchasers of Common Shares in the Cash Offering and Offerees who accept the
Exchange Offering will pay a higher price per Common Share and Unit than the
Original Investors paid for their Units. As a result of the issuance of such
Units to the Original Investors and the use of a portion of the gross proceeds
of the Cash Offering to cover expenses of the Cash Offering and the Exchange
Offering and to reimburse the Managing Shareholder for reimbursable expenses
incurred prior to and during the Cash Offering for investigating, evaluating and
consummating investments of the Trust and the Operating Partnership, purchasers
of Common Shares in the Cash Offering and Offerees who accept the Exchange
Offering will experience immediate dilution in their investment in the Trust and
the Operating Partnership, respectively.
To the extent that the Trust and the Operating Partnership issue additional
securities in the future (including, without limitation, Common Shares purchased
by broker-dealers who exercise warrants to
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purchase Common Shares received as partial compensation for their services in
connection with the Cash Offering), there will be further dilution. See "THE
TRUST AND THE OPERATING PARTNERSHIP - Ownership of the Trust and the Operating
Partnership." In addition, the Exchange Properties involved in the initial
transactions of the Exchange Offering have not previously been put on the market
for sale by the Exchange Partnerships, and the acquisition of beneficial
ownership of such properties by the Operating Partnership at their estimated
appraised value may result in the properties being carried at a value above or
below what may be obtainable in the market. Moreover, any acquisition of
property interests in the Exchange Offering above their carrying value would
result in deferred gains to the sellers and could reduce the potential returns
on investment results for the Operating Partnership.
Limits on Ownership and Transfers of Common Shares and Units
Which May Delay or Prevent a Takeover Offering a Premium Price
In order for the Trust to maintain its qualification as a REIT, not more
than 50% in value of the outstanding Shares and Units may be owned, actually or
constructively, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which the election to be treated as a REIT has been made). Furthermore,
after the first taxable year for which a REIT election is made, the Trust's
Shares must be held by a minimum of 100 persons for at least 335 days of a
12-month taxable year (or a proportionate part of a short tax year). In
addition, if the Trust, or an owner of 10% or more of the Trust, actually or
constructively, owns 10% or more of a tenant of the Trust (or a tenant of any
partnership in which the Trust is a partner), the rent received by the Trust
(either directly or indirectly through any such partnership) from such tenant
will not be qualifying income for purposes of the REIT gross income tests of the
Code. See "FEDERAL INCOME TAX CONSIDERATIONS - Taxation of the Trust." In order
to protect the Trust against the risk of losing REIT status due to a
concentration of ownership among Shareholders and Unitholders, the Declaration
of Trust limits actual or constructive ownership of Shares and Units by any
single Shareholder (other than the Original Investors) to 5% (the "Limit") of
the then outstanding Shares. See "CAPITAL STOCK OF THE TRUST - Restrictions on
Ownership and Transfer." The Managing Shareholder (upon receipt of a ruling from
the Internal Revenue Service (the "Service") or an opinion of counsel or other
evidence satisfactory to the Managing Shareholder and upon such other conditions
as the Managing Shareholder may require) may in its discretion waive the Limit
depending on the then existing facts and circumstances surrounding the proposed
transfer, including without limitation, the identity of the party requesting
such waiver, the number and extent of Share ownership of other Shareholders, the
aggregate number of outstanding Shares and the extent of any contractual
restrictions (other than that contained in the Declaration of Trust) on any
Shareholders relating to transfer of their Shares. See Section 2A.12 of the
Declaration of Trust. The Managing Shareholder will waive the Limit with respect
to a particular Shareholder if it is satisfied, based upon the foregoing, that
ownership by such Shareholder in excess of the Limit would not jeopardize the
Trust's status as a REIT and the Managing Shareholder otherwise decided that
such action would be in the best interests of the Trust.
Actual or constructive ownership of Shares in excess of the Limit, or with
the consent of the Managing Shareholder, such other limit, will cause the
violative transfer or ownership to be void with respect to the transferee or
owner as to that number of Shares in excess of the Limit, or, with the consent
of the Managing Shareholder, such other limit, as applicable. Such purported
transferee or owner would have no right to vote such Shares or be entitled to
dividends or other distributions with respect to such Shares. See "CAPITAL STOCK
OF THE TRUST - Restrictions on Ownership and Transfer" and Article 2A of the
Declaration of Trust for additional information regarding the Limit.
The foregoing ownership limitations could have the effect of delaying,
deferring or preventing a takeover or other transaction in which holders of
some, or a majority, of the Common Shares might receive a premium for their
Common Shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interest. See "CAPITAL STOCK OF THE TRUST
- - Restrictions on Ownership and Transfer" and Article 2A of the Declaration of
Trust for additional information regarding the ownership limitations.
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Lack of Liquidity of Retained Interest in an
Exchange Partnership Following the Exchange Offering
Exchange Limited Partners who elect not to accept the Exchange Offering
will retain their limited partnership interest in their respective Exchange
Partnership with substantially the same rights they had prior to the offering.
Following the Exchange Offering, limited partnership interests retained in any
Participating Exchange Partnership by Non-participating Limited Partners are
likely to remain extremely illiquid because such interests will represent a
small minority interest (10% or less) in the partnership and because of the
uncertainty whether the property would be sold in the near future due to the
REIT and other provisions of the Code which would penalize the Trust and
possibly Exchange Limited Partners in such partnership who accept the Exchange
Offering if the Trust sold a property interest in the short term.
No Operating History
Operating Partnership Units being offered in the Exchange Offering and
Trust Common Shares into which such Units are exchangeable must be considered
speculative investments, and there can be no assurance that the Trust will
fulfill its investment objectives. The Trust, the Operating Partnership and the
Managing Shareholder have no significant operating history. In addition, the
assets of the Trust and the Operating Partnership will consist primarily of
direct or indirect equity or debt investments they may make in respect of
particular residential apartment properties and thus will be largely dependent
upon the successful operation of such properties. Management of the Trust, the
Operating Partnership and the Managing Shareholder, however, has substantial
prior experience in and knowledge of the residential apartment property market
and its financing, and has significant experience in the management of
investment programs.
Limited Participation Rights of Shareholders and Unitholders in Management
Management of the Trust and the Operating Partnership is vested in the
Managing Shareholder, subject to the general supervision and review by the
Independent Trustees and the Managing Shareholder acting together as the Board
of the Trust and subject to prior approval of the Board and the Independent
Trustees in respect of certain activities of the Trust and the Operating
Partnership. Shareholders and Unitholders will generally not have the right to
participate in the management of the Trust and the Operating Partnership and
their property interests or in the decisions of management relating to their
investments. See Sections 1.9, 6.1 and 7.1 of the Declaration of Trust. Although
the members of the Board of the Trust owe fiduciary duties to the Trust, their
failure to enforce the material terms of any agreements entered into by the
Trust and the Operating Partnership, particularly the indemnification provisions
and remedy provisions for breaches of representations and warranties, could
result in a substantial monetary loss to the Trust and the Operating
Partnership.
Regulatory Non-compliance Could Result in Fines or Judgments
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of
1988 (the "FHA") requires residential apartment properties first occupied after
March 13, 1990 to be accessible to the handicapped. Non-compliance with the FHA
could result in the imposition of fines or an award of damages to private
litigants. Each of the Trust and the Operating Partnership will use its best
efforts to ensure that properties subject to the FHA in which it acquires an
interest will be in compliance with such law.
Americans with Disabilities Act. Properties in which the Trust or the
Operating Partnership acquire an interest must comply with Title III of the
Americans with Disabilities Act (the "ADA") to the extent that such properties
are "public accommodations" and/or "commercial facilities" as defined by the
ADA. Compliance with the ADA regulations requires that public accommodations
"reasonably accommodate" individuals with disabilities, which includes removal
of structural barriers to handicapped
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access in certain public areas of the properties of the Trust and the Operating
Partnership, where such removal is readily achievable and that new construction
or alterations made to "commercial facilities" conform to accessibility
guidelines unless "structurally impracticable" for new construction, or exceeds
20% of the cost of the alteration for existing structures. The ADA does not,
however, consider residential properties, such as residential apartment
properties, to be public accommodation or commercial facilities except to the
extent portions of such facilities, such as a leasing office, are open to the
public. Each of the Trust and the Operating Partnership will use its best
efforts to ensure that its properties comply with all present requirements under
the ADA and applicable state laws. Noncompliance with the ADA could result in
imposition of injunctive relief, fines or an award of damages.
Compliance with Environmental Laws. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may
become liable for the costs of removal or remediation of certain hazardous
substances released on or in its property. Such laws often impose such liability
without regard to whether the owner or operator knew of, or was responsible for,
the release of such hazardous substances. The presence of such substances, or
the failure to properly remediate such substances, when released, may adversely
affect the owner's ability to sell such real estate or to borrow such real
estate as collateral.
In order to address these issues, the Trust intends, where necessary, to
retain an unaffiliated consultant to conduct a Phase I environmental audit of
any property in which it or the Operating Partnership intends to acquire an
interest. The Phase I audit generally consists of an on-site inspection of the
land and improvements; a review of the building plans and specifications to
determine the construction materials and procedures used; a review of EPA and
other governmental agency files to determine if the subject property or any
other properties in its vicinity have been the subject of any investigations,
reports or classifications that would indicate potential environmental risks;
and a review of the chain of title of the subject property to determine the
ownership history of the property. Phase I audits do not include soil sampling
or subsurface investigations. Thus, a Phase I audit is not comprehensive or
exhaustive and will not identify all possible hazardous substances. The Trust
and the Operating Partnership will obtain Phase II environmental audits where
matters disclosed in the Phase I audit warrant further investigation. No
assurances can be given, however, that the environmental studies undertaken with
respect to any particular property will reveal all potential environmental
liabilities, that any prior owner of a property did not create any material
environmental conditions not known to the Trust or the Operating Partnership, or
that a material environmental condition does not otherwise exist as to any
particular property in which the Trust or the Operating Partnership acquires an
interest. If it is ever determined that hazardous substances are present, the
Trust or the Operating Partnership could be required to pay all costs of any
necessary clean-up work, although under certain circumstances claims against
other responsible parties could be made it.
Shareholders and Unitholders Could be Adversely Affected by
Limited Liability and Indemnification of the Managing Persons
Although the Managing Shareholder, Independent Trustees and any other
members of the Board will be accountable to the Trust and the Operating
Partnership as fiduciaries and, consequently, will be required to exercise good
faith and integrity in handling the assets and affairs of the Trust and the
Operating Partnership, the Declaration of Trust and the Operating Partnership
Agreement provide that such persons and their respective officers, directors,
shareholders, partners, agents and employees will not be liable to the Trust,
the Operating Partnership or any of the Shareholders for errors in judgment or
for actions or omissions taken without negligence or bad faith, provided they
acted within the scope of the Declaration of Trust and the Operating Partnership
Agreement. Moreover, the Declaration of Trust and the Operating Partnership
Agreement provide that the Trust and the Operating Partnership will indemnify
the Managing Shareholder, Independent Trustees, other members of the Board and
such other persons against all liabilities, costs and expenses (including legal
fees and expenses) incurred by the Managing Shareholder or any such persons
arising out of or incidental to the Exchange Offering or the Cash Offering or
the operation of the Trust and the Operating Partnership on certain conditions.
See Section 3.7 of the Declaration of Trust and Section 7.7 of the Operating
Partnership Agreement. As a result, the Shareholders
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and Unitholders will have more limited rights against the Managing Shareholder
and such persons than they would have absent the limitations in the Declaration
of Trust and the Operating Partnership Agreement. See "FIDUCIARY RESPONSIBILITY"
and "SUMMARY OF DECLARATION OF TRUST - Liability and Indemnification."
No Assurance of Shareholder Limited
Liability for Activities of Delaware Business Trust
The Trust has been organized as a Delaware business trust having limited
liability of the Shareholders of the Trust. Many states have enacted legislation
recognizing the limited liability provisions of the Delaware business trust.
Other states have not enacted such legislation, although it is expected
(although not assured) that most of such states will also recognize the limited
liability of the Shareholders. Accordingly, there is a risk that Shareholders
will not have limited liability for activities of the Trust in any other state
in which the Trust may conduct activities which does not recognize the limited
liability of beneficiaries of a Delaware business trust. Such risk is
substantially mitigated by the Trust conducting its activities and holding its
interest in properties in the Operating Partnership.
No Assurance of Profitable Sale of Trust and Operating Partnership Property
The Trust will periodically review the portfolio of assets which the Trust
and the Operating Partnership may acquire. The Trust has no current intention to
dispose of any interest in properties to be acquired, although it reserves the
right to do so. There is no assurance as to the timing of any sales of property
or that if the Trust determines to attempt to sell a particular property it will
be able to do so on favorable terms, if at all. A successful sale of any
property will depend upon, among other things, the operating history of the
property and prospects for the property, the number of potential purchasers, the
economics of any bids made by such potential purchasers and the state of the
market for residential properties of the type sought to be sold. The management
of the Trust and the Operating Partnership will have full discretion to
determine whether the properties should be sold and the timing, price and other
terms of any such sales. In addition, the prohibitions in the Code and related
regulations on a REIT holding property for sale may affect the Trust's ability
to sell properties without adversely affecting distributions to Shareholders and
Unitholders. See "FEDERAL INCOME TAX CONSIDERATIONS - Taxation of the Trust."
Property Losses May Not be Insurable
Properties in which the Trust and the Operating Partnership invest are
expected to be covered by adequate comprehensive liability and all-risk
insurance provided by reputable companies and with commercially reasonable
deductibles, limits and policy specifications customarily carried for similar
properties. Certain types of losses, however, may be either uninsurable or not
economically insurable, such as losses due to earthquakes, floods, riots or acts
of war, or may be insured subject to certain limitations including large
deductibles or co-payments. Should an uninsured loss or a loss in excess of
insured limits occur, the Trust or the Operating Partnership could lose its
investment in and anticipated profit and cash flow from a property and would
continue to be obligated on any mortgage indebtedness or other obligations
related to such properties. Any such loss would adversely affect the Trust and
the Operating Partnership and their ability to make distributions to
Shareholders and Unitholders.
Possible Lack of Independent Assessment of Prior
Operating Results of Acquired Property Interests
In making an investment decision in respect of any given property, the
Trust and the Operating Partnership may rely on financial statements covering
the operations of the property which may have been prepared by the current owner
or property manager of the property and which may have not been compiled,
reviewed or audited by independent public accountants or reviewed by counsel to
the Trust, the Operating Partnership or the Managing Shareholder. In any such
case, therefore, there will not have been
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any independent assessment of any of such financial statements and accordingly
the Trust and the Operating Partnership would be subject to the risk that such
financial statements do not properly reflect the prior operation of the
property.
Initial Value Assigned to Operating Partnership Units Offered in Exchange
for Interests in Exchange Properties Exceeds Current Book Value of Properties
The [$13,316] aggregate book value of the 14 Exchange Properties initially
targeted for acquisition in the Exchange Offering is less than the $33,638,991
total of the initial value assigned to the Operating Partnership Units being
offered for the Exchange Properties plus first mortgage and other indebtedness
to which the properties are subject, due to depreciation taken against the
original price of the properties paid by the Exchange Partnerships and the
appreciation of the properties since such purchase. As a result, the return on
investment of the properties based on the initial value assigned to Units
offered for the properties in connection with the Exchange Offering will be less
than the return on investment of the properties based on the Exchange
Partnerships' book value.
Changes in Laws Could Increase Operating Expenses
Increased costs resulting from changes in real estate taxes or other
governmental requirements may generally not be passed directly through to
tenants, inhibiting the ability of the Trust and Operating Partnership to
recover such increased costs. An attempt to pass through any substantial
increases in such costs by increasing rental rates may affect tenants' ability
to pay rent, causing increased delinquency and vacancy. Similarly, increases in
income or transfer taxes generally are not passed through to tenants and may
adversely affect the ability of the Trust and the Operating Partnership to make
distributions to Shareholders and Unitholders. Changes in laws increasing
potential liability for environmental conditions or increasing the restrictions
on discharges or other conditions may result in significant unanticipated
expenditures, which would adversely affect the ability of the Trust and the
Operating Partnership to make distributions to Shareholders and Unitholders.
No Rights of Dissent
Offerees who elect not to accept the Exchange Offering will retain their
existing limited partnership interest in their respective Exchange Partnership
on substantially the same terms and conditions as their original investment.
Upon the completion of the Exchange Offering, the limited partnership interests
in each Participating Exchange Partnership will be owned by the Operating
Partnership and any Non-participating Limited Partners in the partnership.
Neither applicable law nor the limited partnership agreement relating to any
Exchange Partnership provides any rights of dissent or appraisal to Offerees who
do not elect to accept the Exchange Offering.
Possible Lack of Diversification in Property Investments
Although the Trust and the Operating Partnership are expected to invest in
several residential apartment properties, the number of properties in which they
ultimately invest may be insufficient to afford adequate diversification against
the risk that their investments will not be profitable or return their invested
capital. There can be no assurance that the properties invested in will earn a
return or that the returns on the properties will be sufficient to permit
distributions to Shareholders and Unitholders.
Other Participants May Fail to Fulfill Obligations
In certain cases, the Trust and the Operating Partnership will jointly
participate with one or more other entities in respect of their property
investments, including without limitation developers, property owners, and First
Mortgage lenders and other financing sources. If any such other participants
fail to fulfill their obligations or have divergent interests or are in a
position to take action contrary to the policies or objectives of the Trust or
the Operating Partnership, the interest of the Trust or the Operating
Partnership,
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as the case may be, in such project may be adversely affected. The successful
operation of certain property interests acquired will, to a certain extent, be
determined by the quality and performance of other participants.
Extended and Uncertain Investing Period Could Adversely Affect Returns
The use of the net proceeds of the Cash Offering and Units in the Operating
Partnership to acquire interests in one or more existing residential apartment
properties may occur over an extended period, including the offering period,
during which the Trust and the Operating Partnership will face risks of changes
in interest rates and adverse changes in the real estate market. Similarly,
during periods in which net proceeds of the Cash Offering are invested in
interim investments prior to such application, the Trust and the Operating
Partnership may be affected by changes in prevailing interest rate levels. Such
interim investments would be expected to earn rates of return which are lower
than those earned on real estate investments made.
Possible "Year 2000" Problems
Although the computer systems of the Trust and the Operating Partnership
have been tested for year 2000 problems and management believe that such systems
are year 2000 compatible, it is possible that certain computer systems or
software products of their suppliers may experience year 2000 problems and that
such problems could adversely affect their operations. The Trust is in the
process of inquiring as to the progress of the principal suppliers of the Trust
and the Operating Partnership in identifying and addressing problems that their
computer systems will face in correctly processing date information as the year
2000 approaches. However, there can be no assurance that the Trust and the
Operating Partnership will identify the future date-handling problems of their
suppliers in advance of the occurrence of such problems, or that such parties
will be able to successfully remedy any problems that are discovered. The
failure to identify and solve all year 2000 problems affecting them could have
an adverse effect on the business, financial condition and results of operations
of the Trust and the Operating Partnership.
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THE EXCHANGE OFFERING
All of the Operating Partnership Units being offered pursuant to this
Prospectus are being offered in connection with the Exchange Offering by the
Operating Partnership. In the Exchange Offering, the Operating Partnership is
offering to issue registered Units in exchange for limited partnership interests
owned by individual limited partners in limited partnerships which directly or
indirectly own equity or debt interests in residential apartment properties.
As its initial investment targets in the Exchange Offering, the Operating
Partnership is offering to acquire an equity interest (and, in one case, also a
subordinated mortgage interest) in 14 residential apartment properties (the
"Exchange Properties") directly or indirectly owned by 14 real estate limited
partnerships managed by Affiliates of the Managing Shareholder (collectively,
the "Exchange Partnerships" and individually, an "Exchange Partnership"). The
Exchange Properties consist of an aggregate of 849 residential units (comprised
of studio and one, two, three and four-bedroom units). Ten of the properties are
located in Florida, two properties in Ohio and one property each in Georgia and
Indiana. Such property interests are described in further detail at "INITIAL
REAL ESTATE INVESTMENTS" and in Exhibit B hereto. See also "SELECTED FINANCIAL
DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE EXCHANGE PROPERTIES" and "COMPARISON OF RIGHTS OF HOLDERS
OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS AND TRUST COMMON
SHARES."
Each Exchange Partnership is a real estate investment program which owns
directly or indirectly either all or a portion of the record title to (and, in
one case, also a subordinated mortgage interest in) an Exchange Property or all
or a portion of the limited partnership interest or beneficial interest in a
limited partnership or other entity which owns record title to (and, in one
case, also a subordinated mortgage interest in) such property. The Operating
Partnership will indirectly acquire interests in the Exchange Properties by
offering to issue registered Units in exchange for limited partnership interests
("Exchange Partnership Units") held by individual limited partners in the
Exchange Partnerships (individually, an "Exchange Limited Partner" and
collectively, the "Exchange Limited Partners"). The Original Investors
(comprised of Gregory K. McGrath and Robert S. Geiger) do not hold limited
partnership interests in any of the Exchange Partnerships. Mr. McGrath is the
sole stockholder, director and executive officer of each of the Corporate
General Partners of the Exchange Partnerships. See "MANAGEMENT."
Any Offeree who is a limited partner of an Exchange Partnership and does
not desire to participate in the Exchange Offering will be entitled to retain
his limited partnership interest in his respective Exchange Partnership on
substantially the same terms as his original investment. The Operating
Partnership will not complete the Exchange Offering in respect of any particular
Exchange Partnership if limited partners holding more than 10% of the limited
partnership interests in the partnership affirmatively elect not to accept the
offering. In addition, the Operating Partnership will not complete any
transaction in the offering whatsoever unless a sufficient number of Offerees
accept the offering such that the offering involves the issuance of Operating
Partnership Units with an initial assigned value of at least $6,000,000.
The current book value of the 14 Exchange Properties is approximately
[$13,316,000]. If investments are consummated in respect of all 14 Exchange
Properties in the Exchange Offering, the property interests will have a deemed
purchase price totaling approximately $33,638,991, comprised of Operating
Partnership Units to be issued with a deemed value of approximately $14,017,080
plus first mortgage and other indebtedness of approximately $19,424,161 to which
the properties are subject. The properties to be acquired with the balance of
the Operating Partnership Units to be offered in the Exchange Offering (with an
initial value of approximately $10,982,920) have not yet been finally
determined. The Trust intends to investigate other investment opportunities for
the Exchange Offering, including interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by Affiliates of
the Managing Shareholder. See also "PRIOR PERFORMANCE BY AFFILIATES OF MANAGING
SHAREHOLDER."
In June and July 1998, the Operating Partnership acquired beneficial
ownership of a 67-unit residential apartment property located in Orlando,
Florida and an 80-unit property located in Lakeland, Florida. The acquisitions,
which had a total cash purchase price of $1,586,293, were paid out of the net
proceeds of the Cash
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Offering and represent the Operating Partnership's initial investments. In July
1998, the Operating Partnership also made capital contributions in the range of
$8,000 to $14,000 (aggregate amount approximately $200,000) to certain real
estate partnerships managed by affiliates of the Managing Shareholder, including
each of the Exchange Partnerships, in exchange for a special non-voting limited
partnership interest in such partnerships. In September 1998, the Trust entered
into an agreement to acquire two luxury residential apartment properties (total
of 652 units) upon the completion of construction for an aggregate purchase
price in the range of $41,000,000 to $43,000,000. See "INITIAL REAL ESTATE
INVESTMENTS."
Other than as described above, the remaining net cash proceeds of the Cash
Offering (approximately $_________ as of the date of this Prospectus) and future
net proceeds from the offering have not yet been committed to specific
properties. Offerees will not have any vote in the selection of property
investments after they accept the Exchange Offering. Therefore, Offerees who
elect to accept the Exchange Offering may not have available any information on
additional properties to be acquired in the Exchange Offering and properties to
be acquired with net proceeds of the Cash Offering, in which case they will be
required to rely on management's judgment regarding those purchases.
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the Corporate General
Partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The Corporate General Partner of each Exchange Partnership recommends that
the Offerees elect to accept the Exchange Offering based on an analysis of the
benefits and disadvantages of the offering to Offerees and the Exchange
Partnerships and an analysis of possible alternative transactions. See below at
" - Background of the Exchange Offering" and " - Effects of Formation
Transactions and Cash Offering and Exchange Offering."
The number of Units being offered to each Exchange Limited Partner in a
given Exchange Partnership per $1,000 of his original investment is indicated on
the table set forth on page 27 of this Prospectus, on page 2 and at the bottom
of the table relating to such partnership set forth at Exhibit B to this
Prospectus. The number of Units being offered to each Exchange Limited Partner
in exchange for his interest in a given Exchange Partnership have been assigned
an initial value in the range of 102% to 125% of the amount of an Exchange
Limited Partner's original investment in the partnership. For purposes of the
Exchange Offering, each Unit has been arbitrarily valued at $10 per Unit, which
corresponds to offering price of each Trust Common Share offered in the Cash
Offering. The value of Units and Common Shares is substantially identical since
Unitholders, including recipients of Units in the Exchange Offering may exchange
their Units into an equivalent number of Common Shares at any time, subject to
certain conditions.
The number of Units being offered in respect of each Exchange Property was
determined by the Original Investors and differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property, the amount of distributed cash flow generated by the
property, the period of time that the property has been held by the underlying
Exchange Partnership and the property's overall condition. Each Exchange
Property in which the Operating Partnership intends to acquire an interest has
been appraised by a qualified and licensed independent appraisal firm and each
additional property in which it intends to acquire an interest will be appraised
in advance. See " - Exchange Property Appraisals."
In connection with the completion of the Exchange Offering in respect of
each Participating Exchange Partnership, (i) Gregory K. McGrath will either
grant the Board of the Trust a management proxy coupled with an interest to vote
the shares of the Corporate General Partner of the Exchange Partnership or
contract to assign all of the stock in the Corporate General Partner to the
Trust for nominal consideration; (ii) the Corporate General Partner will assign
to the Operating Partnership all of its residual economic interest in the
partnership; and (iii) Mr. McGrath
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will cause the Corporate General Partner to waive its right to receive from the
partnership any ongoing fees, effective at the time of exchange.
A description of certain differences between (i) the Exchange Partnership
Units currently owned by Exchange Limited Partners, (ii) the Operating
Partnership Units being offering in the Exchange Offering and (iii) the Trust
Common Shares into which the Operating Partnership Units are exchangeable, is
set forth under "COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS,
OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES."
As a Unitholder, each recipient of Units in the Exchange Offering will be
entitled to exchange all or a portion of his Units at any time and from time to
time for an equivalent number of Trust Common Shares, so long as the exchange
would not cause the exchanging party to own (taking into account certain
ownership attribution rules) in excess of 5.0% of the then outstanding Shares in
the Trust, subject to the Trust's right to cash out any holder of Units who
requests an exchange and subject to certain other exceptions. To facilitate such
exchanges of Units into Common Shares, 2,500,000 Common Shares (in addition to
the 2,500,000 Common Shares being offered by the Trust in the Cash Offering)
have been registered with the Commission. The Trust will apply for listing on
the American Stock Exchange (the "AMEX") of the Common Shares being offered in
the Cash Offering and the Common Shares into which Units issued in the Exchange
Offering will be exchangeable. There can be assurance that such securities will
qualify for listing or the timing of such listing. See "TERMS OF THE CASH
OFFERING."
The Trust and the Operating Partnership intend to investigate making an
additional public or private offering of Common Shares and/or Units within the
12-month period following the commencement of the Exchange Offering if the
Managing Shareholder determines that suitable property acquisition opportunities
are available to the Trust at attractive prices and that such an offering would
fulfill its cost of funds requirements. The issuance by the Trust and the
Operating Partnership of additional Shares and Units subsequent to the
completion of the Cash Offering and the Exchange Offering could have a dilutive
effect on Offerees who accept this Exchange Offering and Shareholders of the
Trust.
Accounting Treatment
Exchange Properties in which the Operating Partnership acquires beneficial
ownership under the Exchange Offering will be accounted for under the purchase
method.
Background of the Exchange Offering
In the first quarter of 1997, the Original Investors determined that a
single self-managed structure of ownership by the Exchange Partnerships and
administration of the property interests which were controlled by them and which
were projected to be acquired by future affiliated programs would be far more
efficient, cost effective and advantageous for operations and for the various
program investors. In anticipation of its growth and change in structure, the
organization developed by the Original Investors has been able to attract highly
experienced management and financial personnel capable of managing a
substantially larger real estate portfolio. See "MANAGEMENT - Officers of the
Trust and the Operating Partnership."
The Original Investors did not wish to exclude any investors in any of the
investment programs managed by affiliates of the Managing Shareholder, including
the Exchange Partnerships, which have been privately placed in the last four
years from the opportunity to diversify their real estate ownership interest by
an exchange of their existing limited partnership units for an ownership
interest in a publicly structured organization with the ultimate potential of
receiving the benefit of holding the interest in a marketable form of security.
At the same time, the Original Investors have structured the Exchange Offering
to afford each limited partner in the Exchange Partnerships the opportunity, if
desired, to continue with the investment as originally purchased and in an
entirely undisturbed manner. Moreover, if more than 10% of the limited partners
of any Exchange Partnership affirmatively elects not to accept the Exchange
Offering, the Operating Partnership will not acquire any limited partnership
interests in that partnership. In addition, the Operating Partnership will not
complete any transaction in the offering whatsoever unless a sufficient number
of Offerees accept the offering such that the offering involves the issuance of
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Units with an initial assigned value of at least $6,000,000. Following the
completion of the Exchange Offering, each Exchange Partnership will continue to
own and operate its respective Exchange Property interest without significant
modification.
The amount of capital raised from limited partners in each Exchange
Partnership private placement offering is set forth at "PRIOR PERFORMANCE OF
AFFILIATES OF MANAGING SHAREHOLDER" and in the respective table in Exhibit B to
this Prospectus. The entire net proceeds from each of the original offerings
have been invested in the property interest which the particular Exchange
Partnership currently holds. The funds were invested as planned. Each of the
partnerships was formed with the objectives to generate current cash flow for
distribution to partners from the rental of residential apartments and to
provide the opportunity for capital appreciation from the future sale of the
residential apartment property. The Corporate General Partners of the Exchange
Properties believe these objectives have been substantially achieved. Neither
the Corporate General Partners of the Exchange Partnerships nor any affiliated
person materially dependent upon its compensation arrangement with an Exchange
Partnership has experienced, since the most recently completed fiscal year, or
is likely to experience, any material adverse financial development.
The Corporate General Partners of the Exchange Partnerships considered
various alternatives to the Exchange Offering including continuation of the
partnerships in accordance with their existing business plans and sale or
liquidation of the partnership interest or assets held. In the case of each
Exchange Partnership, the Corporate General Partner has determined that the
Exchange Offering provides equal or greater value to the Exchange Limited
Partners compared with any other considered alternative. In the case of certain
affiliated income producing partnerships which are not included in the Exchange
Offering, the Corporate General Partner concluded otherwise, determining that
the Operating Partnership could not offer sufficient value for the exchange.
Continuation of the Exchange Partnerships has been determined by their
Corporate General Partners to be disadvantageous for their respective limited
partners compared with the opportunity to participate in the Exchange Offering.
Each of the Exchange Partnerships is a "stand-alone" entity with an interest in
residential apartment property. As a result, the Exchange Partnerships have
higher personnel and other operating and financing expenses on a per-unit basis
than the combined enterprise will have. In addition, the combined enterprise
will afford the Exchange Partnerships highly experienced management and
financial personnel that, for the individual partnerships acting alone, would
not be cost effective. Moreover, no market exists for the limited partnership
interests of the Exchange Limited Partners, and therefore such interests are not
currently liquid.
Liquidation has been determined by the Corporate General Partners of the
Exchange Partnerships to be impractical and disadvantageous for their respective
limited partners. In the case of each Exchange Partnership, the Corporate
General Partner has either explored the sale of the partnership assets or has
determined that such a sale would be premature as it would not maximize investor
value.
The Original Investors initiated the Exchange Offering, and the Corporate
General Partners of the Exchange Partnerships participated in the structuring of
the offering. The Corporate General Partner of each Exchange Partnership
believes that the Exchange Offering is fair to the Exchange Limited Partners
regardless of whether the offering is completed with less than all Exchange
Partnerships and recommends that they accept the Exchange Offering for the
following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
original investments of the Exchange Limited Partners in the
partnership.
o The Exchange Offering has been structured to permit each Exchange
Limited Partner, if desired, to elect not to accept the offering and
instead retain his existing interest in his current partnership on
substantially the same terms and conditions as those of his original
investment.
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o The Exchange Offering will provide each Exchange Limited Partner with
a significantly more diversified interest in income producing real
property with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance. The annual cost savings resulting from the
combined administration of the 14 Exchange Partnerships is expected to
be at least $225,000, compared to the cost of the Exchange Offering,
estimated to be approximately $440,000. The cost savings are expected
to increase as the number of property interests acquired increases.
o The Corporate General Partners believe that a single self-managed
structure of ownership by the Exchange Partnerships and administration
of the property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Exchange Limited
Partners who accept the offering the benefit of a deferral of any
recognition of taxable gain until they exercise their right to
exchange the Units received in the offering for an equivalent number
of Common Shares of the Trust. The exchange into Common Shares may be
made at any time at the sole discretion of each Exchange Limited
Partner.
o The Corporate General Partners considered various alternatives to the
Exchange Offering, including continuation of the Exchange
Partnerships' existing business plans and sale or liquidation of the
partnership assets held, and have determined that the Exchange
Offering provides equal or greater value to the Exchange Limited
Partners than any other considered alternative.
Effects of Formation Transactions and Cash Offering and Exchange Offering
The formation transactions, the Cash Offering and Exchange Offering will
have various beneficial effects on the operations of the Trust, the Operating
Partnership and the Participating Exchange Partnerships, including the operation
of the Exchange Properties and other properties to be acquired, but may have
certain disadvantages for the purchasers of Common Shares in the Cash Offering
and Offerees who accept the Exchange Offering.
The principal benefits include the following:
o The Exchange Limited Partners will be able to participate in a more
diversified investment in a more advantageous form of ownership with a
greater potential for marketability of the security.
o The Operating Partnership has been able to attract highly experienced
management and financial personnel capable of managing a substantially
larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The Corporate General Partners of
the Exchange Partnerships believe that a single self-managed structure
of ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors. The annual cost savings resulting from
the combined administration of the
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14 Exchange Partnerships is expected to be at least approximately
$225,000, compared to the cost of the Exchange Offering, estimated to
be approximately $440,000.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Operating Partnership and the Trust will have enhanced ability to
obtain more favorable terms for the financing of their assets
including, where appropriate, the Exchange Properties.
o The Exchange Offering has been designed to afford Exchange Limited
Partners who accept the offering the benefit of a deferral of any
recognition of taxable gain until they exercise their right to
exchange all or a portion of their Units for an equivalent number of
Common Shares of the Trust. The exchange to Common Shares may be made
at any time at the sole discretion of each Exchange Limited Partner.
o The Corporate General Partners of the Exchange Partnerships considered
various alternatives to the Exchange Offering, including continuation
of the Exchange Partnerships' existing business plans and sale or
liquidation of the partnership assets held, and have determined that
the Exchange Offering provides equal or greater value to the Exchange
Limited Partners than any other considered alternative. Liquidation
has been determined to be impractical and disadvantageous for the
Exchange Limited Partners. The Corporate General Partners have either
explored the sale of partnership assets or determined that such a sale
would be premature as it would not maximize investor value.
The principal disadvantages are as follows (see "RISK FACTORS"):
o Conflicts of interests between the Trust, the Operating Partnership
and the Original Investors with respect to the formation and future
operations of the Trust and the Operating Partnership.
o The significant influence of the Original Investors over the affairs
of the Trust and the Operating Partnership and by virtue of their
collective ownership of Operating Partnership Units.
o Purchasers of Common Shares in the Cash Offering and Offerees who
accept the Exchange Offering will pay greater consideration per Common
Share and per Operating Partnership Unit than the Original Investors
paid for their Operating Partnership Units.
Exchange Property Appraisals
In connection with the refinancing of first mortgage financing or to obtain
evidence of current valuation, the Corporate General Partners of the Exchange
Partnerships retained Consortium Appraisal, Inc. (ACAI@), Winter Park, Florida,
Consortium Appraisal and Consulting Services, Inc. ("CACSI"), Winter Park,
Florida, and Richards Appraisal Service, Inc. ("RAS"), Melbourne, Florida, to
prepare appraisal reports as to the fair market value of each of the Exchange
Properties proposed to be acquired by the Operating Partnership in connection
with the initial transactions of the Exchange Offering. CAI or its affiliate,
CACSI, prepared appraisal reports in respect of 10 of the Exchange Properties
and RAS prepared an appraisal report in respect of four of the properties. The
number of Operating Partnership Units which will be issued to each Offeree
elects to accept the Exchange Offering will be based on the appraisal relating
to the respective property. CAI, CACSI and RAS were retained based on their
experience in connection with preparing appraisals for resident apartment
properties, as well as their familiarity with the relevant property markets. In
addition, CAI and CACSI are familiar with the Exchange Properties they
appraised, having completed appraisals for previous acquisitions and/or
financings of such properties.
CAI, CACSI and RAS have delivered their written appraisals in respect of
each of the Exchange Properties to the effect that, as of the appraisal date and
based on the matters described therein, each Exchange Property has an estimated
fair market value stated therein. The appraised value of each Exchange Property
is set forth above and on
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the applicable table contained in Exhibit B to this Prospectus which sets forth
information relating to the property interest, first mortgage indebtedness
relating thereto and the limited partnership program which owns a direct or
indirect ownership interest in the property. The appraisal reports constitute
only the opinion of CAI, CACSI or RAS, as the case may be, as to the estimated
fair market values of the properties each of them appraised, and do not
constitute a recommendation as to whether or not an Exchange Limited Partner
should accept the Operating Partnership's Exchange Offering. Compensation paid
or payable to the appraisal firms is not contingent upon the completion or level
of acceptance of the Exchange Offering
The summary of the appraisal reports set forth in this Prospectus is
qualified in its entirety by reference to each report. The appraisals are
available for inspection and copying at the Trust's principal executive offices
during its regular business hours by any interested Offeree or his
representative who has been so designated in writing by the Offeree. A copy of
any appraisal report will be delivered by the Trust to any interested Offeree or
his authorized representative upon written request and payment by the requesting
Offeree of $25 to cover copying and administrative expenses relating thereto.
Offerees are urged to review such appraisal reports carefully and in their
entirety for a description of the procedures followed, the factors considered
and the assumptions made by CAI, CACSI and RAS.
The table in Exhibit F to this Prospectus sets forth the appraised value of
each Exchange Property determined by the respective appraisal firm and the value
of each property determined by it under the three traditional property valuation
methods described below.
CAI and CACSI
Consortium Appraisal, Inc. ("CAI") or its affiliate, Consortium Appraisal
and Consulting Services, Inc. ("CACSI"), prepared appraisal reports as to the
fair market value of 10 of the Exchange Properties of which the Operating
Partnership will offer to acquire beneficial ownership in connection with the
initial transactions of the Exchange Offering. The number of Operating
Partnership Units which will be issued to each Offeree which elects to accept
the Exchange Offering will be based on these appraisals. CAI and CACSI were
retained based on their experience in connection with preparing appraisals for
residential apartment properties, as well as their familiarity with the relevant
property markets, in general, and familiarity with the Exchange Properties
appraised, in specific, having completed appraisals for previous acquisitions
and/or financings of several of the Exchange Properties.
In connection with the preparation of its appraisal reports, CAI or CACSI,
as the case may be, among other things: (i) physically inspected each Exchange
Property (but did not inspect occupied units); (ii) reviewed a site and building
plan for each property; (iii) discussed with county planning, zoning and tax
officials the current zoning, future land use designation and real estate
assessments applicable to each property; (iv) reviewed the property appraiser's
records for the preceding five-year sales history of each property; (v) analyzed
the metropolitan area, market area and neighborhood in which each property is
located, including past and present development trends and current market
conditions; (vi) reviewed past sales and current listings involving similar
properties; and (vii) analyzed rental rates and terms for similar properties
located in each property's general market area, operating expenses of each
property compared to similar properties in its general market area, and the
property's historic operations. CAI and CACSI did not review sub-soil,
structural, mechanical or other engineering reports (and recommend that such
reports be obtained) relating to the current condition of any property, and
CAI's and CACSI's appraisals are based on there being no such conditions which
would materially adversely affect the value of any property.
According to CAI or CACSI, each Exchange Property appraised to date by it
is in generally good overall condition. In the appraisal reports relating to
certain of the properties, CAI and CACSI conditioned their market value estimate
on the completion of certain specified minor deferred maintenance items,
estimated at no more than $_________ in respect of any Exchange Property
appraised.
In preparing their appraisal reports, CAI and CACSI employed the three
traditional property valuation methods: the cost approach, the direct sales
comparison approach, and the income approach. The "cost approach" is based on
the principle that an informed purchaser would pay no more than the cost of
building a comparable
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property. This approach involves the estimation of the current market value of
the land and the replacement cost of improvements. Accrued depreciation of the
improvements is then calculated and deducted from such estimation to indicate
the value of the property. Generally, the land value is determined using the
direct sales comparison approach described below. The replacement cost of
improvements is estimated based on current prices for building materials, less
depreciation, after analyzing the disadvantages or deficiencies of the existing
building compared to a new building.
The "income approach" is based on the principle that value is created by
the expectation of economic benefits to be derived in the future. This approach
to valuation takes into account the amount of income a property is expected to
earn in the future and its present value. Under this approach, net income before
payment of debt service obligations is first estimated. That amount is then
converted into present value through a process called capitalization, which
involves dividing the net income by a capitalization rate. Factors such as risk,
time, interest on the capital investment and the recapture of the depreciating
assets are taken into account to determine the capitalization rate. The
selection of an appropriate capitalization rate is one of the most important
factors to be analyzed under the income approach of valuation. One important
method to determine the capitalization rate is to extract the rate based on
comparable residential apartment properties.
The "direct sales comparison" approach is based on the principle that an
informed purchaser will pay no more for a property than the cost of acquiring an
existing property with the same characteristics. The appraiser first gathers
data relating to sales of comparable properties and then analyzes the nature and
condition of each comparable sale, making adjustments for dissimilar
characteristics. To determine land value, the price per acre or price per unit
is the common denominator. For improvements, the common denominator may be price
per square foot, price per unit or room, or a gross rent multiplier (i.e., a
comprehensive unit of comparison based on the relationship between gross
potential rental income and value).
The final step in CAI's and CACSI's appraisal process is reconciling the
values estimated under the three approaches. CAI and CACSI consider the relative
applicability of each approach, examine the range between the estimated values
and emphasize the approach that appears to produce the most reliable estimate.
According to CAI and CACSI, the income and direct sales comparison approaches
are considered by most purchasers and sellers to be the most relevant when
valuing income-producing properties such as the Exchange Properties. CAI and
CACSI give the least consideration to the cost approach because purchasers and
sellers are more responsive to acquiring income-producing properties based on
attractive overall capitalization rates that incorporate favorable rates of
return.
CAI and CACSI are to be paid fees ranging from $3,000 to $4,000 by the
respective Exchange Partnership or the mortgage lender for each appraisal report
prepared in connection with the initial transactions of the Exchange Offering,
or a total of approximately $34,000. CAI or CACSI has completed or commenced
additional appraisal reports in connection with the acquisition and/or financing
of property interests by other real estate limited partnerships managed by
affiliates of the Managing Shareholder, several of which partnerships may be
involved in later stages of the Exchange Offering. It is anticipated that CAI
and CACSI will perform additional appraisal services for the Trust and its
affiliates in the future.
RAS
RAS prepared appraisal reports as to the fair market value of three
different configurations of four Exchange Properties, which consist of four
phases of a residential apartment community referred to as the Forest Glen
Apartments. RAS researched the subject market area and selected three recent
sales of properties which are similar and in close proximity to the subject
properties. RAS principally relied upon the direct sales comparison approach as
described above under " - CAI and CACSI." Its appraisal estimate was supported
by the cost approach and the income approach. An RAS representative inspected
the interior and exterior areas of each subject property and the exterior of the
three comparable properties. According to RAS, the subject property is in good
condition and there appears to be no adverse conditions on the site or in the
vicinity of the site. RAS has been paid a fee of $300 for its appraisal
services. It is not expected to provide appraisal reports for any additional
properties in connection with the Exchange Offering.
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Historical Cash Distributions and Corporate General Partner Compensation
On an aggregate basis, the limited partners in the Exchange Partnerships
have received the following approximate amount of cash distributions during the
periods indicated: 1994: $125,653, 1995: $473,975, 1996: $935,055, 1997:
$816,486, 1998 (through May 31st): $504,973, and all such periods: $2,939,142.
The Corporate General Partners have received compensation during such periods in
the aggregate amount of approximately [$83,000] (excluding commissions and fees
relating to the original private offering). If the compensation structure to be
in effect after each Participating Exchange Partnership's participation in the
Exchange Offering had been in effect during such period, the Corporate General
Partner of the partnership would not have been entitled to be paid any
compensation or cash distributions during such period.
Election Procedure and Exchange of Certificates
This Prospectus and the accompanying transmittal letter and election form
are first being sent to Offerees in connection with initial transactions under
the Exchange Offering on or about October __, 1998. Offerees who elect to accept
the Exchange Offering are required to indicate their acceptance of the offering
in the space provided on the election form and sign and return it to the
Operating Partnership by _____________, 1998. The Exchange Offering will remain
open for 30 days from the date the offer is first sent to Offerees. The election
forms will be tabulated effective the thirtieth day, subject to extension of
such date, as necessary or desirable in the sole discretion of the Trust. An
Offeree's election form bearing the latest date that is either post-marked on or
before the tabulation date or physically received by the Operating Partnership
on the close of business on the tabulation date will constitute the Offeree's
election. The Operating Partnership will extend the Exchange Offering for at
least 10 business days from the date it gives notice to Offerees that there has
been an increase or decrease in the percentage of the Exchange Partnership Units
of each Exchange Partnership being sought by the Operating Partnership, the
number of Operating Partnership Units or other consideration offered by the
Operating Partnership or the soliciting fee payable to participating
broker-dealers.
The Operating Partnership will not extend the length of the Exchange
Offering (except as provided in the immediately preceding paragraph) without
issuing a notice of such extension by press release or other public announcement
indicating the approximate number of Exchange Partnership Units in respect of
each Exchange Partnership which have been deposited to date. Such notice will be
issued no later than 9:00 a.m. Eastern time on the next business day after the
scheduled expiration date.
From and after the closing date of the relevant transactions of the
Exchange Offering, each Exchange Limited Partner in a Participating Exchange
Partnership who accepts the Exchange Offering will be entitled to receive the
number of Operating Partnership Units per $1,000 of his original investment
indicated on page 27 of this Prospectus, on page 2 of the Prospectus Supplement
relating to his partnership and on the bottom of the table of Exhibit B to this
Prospectus relating to his partnership. The closing dates of the initial
transactions of the Exchange Offering described in this Prospectus are expected
to occur in _______1998. As soon as practicable after each closing date, the
stock transfer agent of the Operating Partnership will mail transmittal
instructions and a form of transmittal letter to each Offeree in Participating
Exchange Partnerships who accepts the Exchange Offering. The transmittal
instructions will describe the procedures for surrendering certificates
representing Exchange Partnership Units ("Exchange Partnership Certificates") in
exchange for certificates representing Operating Partnership Units ("Operating
Partnership Certificates"). Offerees who accept the Exchange Offering should not
submit their Exchange Partnership Certificates for exchange unless and until
they have received the transmittal instructions and a form of letter of
transmittal from the stock transfer agent.
Offerees who accept the Exchange Offering will not be entitled to receive
any dividend or other distributions on the Operating Partnership Units until
they have exchanged their Exchange Partnership Certificates for Operating
Partnership Certificates. Subject to applicable laws, any such dividends and
distributions after the closing date of the particular transactions of the
Exchange Offering will be accumulated and, at the time the Exchange Partnership
Certificates are surrendered to the stock transfer agent, all such accrued and
unpaid dividends and distributions will be paid without interest. When a Offeree
delivers his Exchange Partnership Certificates to the
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stock transfer agent along with a properly executed letter of transmittal and
any other required documents, such Exchange Partnership Certificates will be
canceled and the Exchange Limited Partner will receive an Operating Partnership
Certificate representing the number of full Units to which the Exchange Limited
Partner is entitled under the Exchange Offering. The Operating Partnership will
not issue any fractional Units in connection with the Exchange Offering, and
neither the Trust or the Operating Partnership nor any of their respective
affiliates will be required to be make any cash or other payment in respect of
any fractional Units. From and after the respective closing date, the Operating
Partnership will be registered as the owner of all limited partnership interests
in the particular Participating Exchange Partnership owned prior to the
completion of the Exchange Offering in respect of such Exchange Partnership by
Exchange Limited Partners who accept the Exchange Offering.
If any Operating Partnership Certificate is to be issued in a name other
than that in which the corresponding Exchange Partnership Certificate is
registered, it is a condition to the exchange that the Exchange Limited Partner
involved comply with applicable transfer requirements and pay any applicable
transfer or other taxes.
Except as described herein, Offerees who elect not to accept the Exchange
Offering will retain their limited partnership interest in their respective
Exchange Partnership on substantially the same terms and conditions as their
original investment in the partnership. Upon the completion of the Exchange
Offering in respect of a Participating Exchange Partnership, the Offerees who
elect not to accept the Exchange Offering and the Operating Partnership will
constitute all the limited partners of such partnership. As described in further
detail in this Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS,"
assuming the Exchange Partnership is a Participating Exchange Partnership (as
defined above), following the Exchange Offering, the original partnership
agreement of the partnership will be amended to require the prior approval
(majority or unanimous, as the case may be) of Non-participating Partners voting
as a class in respect of matters as to which Limited Partners are entitled to
vote under the partnership agreement prior to the completion of the Exchange
Offering. The partnership agreement, as amended, will continue in full force and
effect after the completion of the offering as long as any Non-participating
Partners remain limited partners of the Exchange Partnership.
Expenses of the Exchange Offering
All legal, accounting, due diligence and other expenses incurred by each of
the Exchange Partnerships and the Operating Partnership incident to the Exchange
Offering will be paid by the party incurring such expense, except that all of
the expenses incurred in connection with the preparation, filing, printing and
distributing of the Registration Statement and the Prospectus, and completion of
the transactions described therein (estimated to be approximately $440,000) will
be paid by the Operating Partnership out of the net proceeds of the Trust's Cash
Offering and net available cash flow. No special fees or commissions were or
will be paid to the Managing Shareholder, any Corporate General Partner of an
Exchange Partnership, or any of their respective affiliates, in connection with
the Exchange Offer. As of the date of this Prospectus, in connection with the
Exchange Offering, each Exchange Partnership has paid out of available cash flow
an estimated amount in the range of $26,000 to $38,000 of expenses. The Exchange
Partnerships are not expected to incur any significant additional expenses
related to the offering.
Any broker-dealer who assists the Operating Partnership in consummating the
Exchange Offering with individual Offerees who accept the offering will be paid
a commission equal to a number of unregistered Common Shares of the Trust having
a value equal to 5% of the deemed value of Operating Partnership Units exchanged
in the particular transactions. See "EXPENSES OF THE EXCHANGE OFFERING."
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PRIOR PERFORMANCE OF
AFFILIATES OF MANAGING SHAREHOLDER
This section provides certain historical information regarding 48 private
limited partnerships sponsored and/or managed by Affiliates of the Managing
Shareholder of the Trust. Offerees should be aware that: (i) the inclusion of
the following information and information set forth in the tables which comprise
Exhibit A hereto does not imply that the Trust or the Operating Partnership will
experience results similar to those reflected below and in the tables or that an
Offeree who acquires Units in this Exchange Offering or any Shareholder in the
Trust (including without limitation any Unitholder who exchanges his Units for
Common Shares) will receive returns, if any, comparable to those experienced by
investors in such limited partnerships; (ii) except as otherwise described in
this Prospectus, Offerees who acquire Units in the Exchange Offering and
Shareholders of the Trust will not acquire any direct or indirect ownership
interest in any of the prior limited partnerships; and (iii) the following
information and information set forth in the tables is given solely to enable
Offerees to evaluate the experience of the Managing Shareholder and its
Affiliates and, in certain cases, to evaluate certain properties in which the
Operating Partnership may acquire an interest in connection with the Exchange
Offering.
Gregory K. McGrath, the President, sole director and sole stockholder of
the Managing Shareholder and the Chief Executive Officer of the Trust, has
substantial experience in the real estate industry. See "MANAGEMENT." Since
1994, Affiliates of the Managing Shareholder and of Mr. McGrath have sponsored
and/or managed 48 prior real estate investment limited partnership offerings,
certain of them with investment objectives similar to those of the Trust. The
limited partner interests in these prior partnerships were offered without
registration under the Securities Act of 1933, as amended, in reliance upon the
non-public offering exemption from registration. The first such offering
sponsored by an Affiliate of the Managing Shareholder commenced in September
1994. As of September 1, 1998, the prior partnerships had raised aggregate
capital contributions of approximately $41,799,500 from approximately 1,713
investors (including investors who have invested in two or more programs). The
annual rate of return on investment for 1997 and for the first half of 1998
generated by the residential apartment properties owned by the prior
partnerships ranged between zero and twelve percent. Distributions were not made
during these periods by certain of the partnerships because (i) certain
apartment units were withdrawn from the rental market, and net available cash
flow was applied, to prepare them for sale as individual condominium units
(which plan was later abandoned) or to convert them from long-term rentals to
short-term corporate rentals or (ii) net available cash flow was applied to pay
certain expenses in connection with this Exchange Offering and the Cash
Offering.
To date, the prior partnerships have acquired interests in 54 properties,
29 of which are located in Florida (Bartow, Brandon, Clearwater, Cocoa, Cocoa
Beach, Crystal River, Daytona Beach, Deland, Jacksonville, Kissimmee, Lakeland,
Melbourne, Orlando, Port Orange, St. Petersburg, Seminole, Tampa and
Titusville); one of which is located in Georgia (Statesboro); one in Indiana
(Anderson); 17 in Kentucky (Alexandria, Burlington, Independence and
Louisville); and six in Ohio (Bellefontaine, Cincinnati and Mansfield). All
acquisitions occurred within the last four years. The aggregate dollar amount of
property interests acquired and initial cash reserves held was approximately
$32,032,772. The property interests acquired have consisted of the following:
direct or indirect equity interests in 21 residential apartment properties
comprised of 1,311 units; mortgage financing interests in 17 residential
apartment properties comprised of 2,052 units; mortgage financing interests in
four residential condominium properties comprised of 578 units; mortgage
financing interests in six single-family housing developments relating to
approximately 981 homes; a mortgage financing interest in 8.2 acres of land for
development into a 195-unit condominium property; a mortgage financing interest
in 4.0 acres of land for development into a shopping center; and a mortgage
financing interest in respect of the conversion of a 144-unit residential
apartment property into an extended-stay hotel. Each of the properties is
subject to first mortgage financing. One property interest has been sold to
date. See the balance of this section and Exhibit A hereto for more detailed
information relating to the individual property interests owned by certain of
the prior partnerships. Additional information relating to the original
acquisitions of such property interests is included in Part II of the Form S-4
registration statement filed with the Commission by the Operating Partnership in
connection with the Exchange Offering. The Trust will provide such information
at no charge to any Offeree who requests it. Exhibit B
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hereto sets forth certain information concerning the Exchange Properties and the
Exchange Partnerships which will be involved in the initial transactions of the
Exchange Offering.
As its initial acquisition candidates in connection with the Exchange
Offering, the Operating Partnership will offer to acquire property interests
owned by partners in 14 of the prior partnerships. The Operating Partnership
intends to investigate other investment opportunities to exchange the balance of
the Units for property interests in other Exchange Offering transactions,
including property interests held by unaffiliated and interests held by other
limited partnerships managed by Affiliates of the Managing Shareholder, which
may include certain of the partnerships described below.
In July 1994, Baron Capital of Florida, Inc. (formerly named Sigma
Financial Capital, Inc.), at that time an Affiliate of Sigma Financial
Corporation, the Dealer Manager of the Cash Offering, sponsored an offering of
up to 2,100 units of limited partner interest in Central Florida Income
Appreciation Fund, Ltd., a Florida limited partnership, at a purchase price of
$500 per unit (maximum gross proceeds of $1,050,000). The offering was fully
subscribed and closed in October 1995. The partnership invested the net proceeds
of its offering to acquire all of the limited partnership interest in a limited
partnership which owns fee simple title to a 56-unit residential apartment
community located in Deland, Florida. In August 1998, Gregory K. McGrath
acquired all of the equity of the general partner of the partnership. As one of
its initial acquisition candidates in connection with the Exchange Offering, the
Operating Partnership will offer to acquire partnership interests in this
partnership owned by the partners thereof. Additional information relating to
the property interests owned by this partnership and to the Exchange Offering is
included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in
Exhibits A and B to this Prospectus.
In September 1994, Baron Capital I, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,050 units of limited partner
interest in Tampa Capital Income Fund, Ltd., a Florida limited partnership, at a
purchase price of $1,000 per unit (maximum gross proceeds of $1,050,000). The
offering was fully subscribed and closed in August 1995. The partnership
invested the net proceeds of its offering to acquire title to an 83-unit
residential apartment community located in Brandon, Florida. The partnership
sold the property in February 1997 in exchange for cash and a purchase money
mortgage taken back by the partnership.
In November 1994, Baron Capital II, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,614 units of limited partner
interest in Florida Capital Income Fund, Ltd., a Florida limited partnership, at
a purchase price of $500 per unit (maximum gross proceeds of $807,000). The
offering was fully subscribed and closed in April 1995. The partnership invested
the net proceeds of its offering to acquire title to a 77-unit residential
apartment community located in Port Orange, Florida. As one of its initial
acquisition candidates in connection with the Exchange Offering, the Operating
Partnership will offer to acquire partnership interests in this partnership
owned by the partners thereof. Additional information relating to the property
interests owned by this partnership and to the Exchange Offering is included at
"THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A
and B to this Prospectus.
In January 1995, Baron Capital IV, Inc., an Affiliate of the Managing
Shareholder, became general partner of Florida Income Appreciation Fund I, Ltd.,
a Florida limited partnership, which in the first half of 1994 sold 205 units of
limited partnership interest in the partnership (gross proceeds of $205,000) and
invested the net proceeds of its offering to acquire a beneficial interest in a
land trust owning title to an eight-unit residential apartment community located
in Daytona Beach, Florida. As one of its initial acquisition candidates in
connection with the Exchange Offering, the Operating Partnership will offer to
acquire partnership interests in this partnership owned by the partners thereof.
Additional information relating to the property interests owned by this
partnership and to the Exchange Offering is included at "THE EXCHANGE OFFERING"
and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this
Prospectus.
In January 1995, Baron Capital IV, Inc., an Affiliate of the Managing
Shareholder, became general partner of Florida Income Advantage Fund I, Ltd., a
Florida limited partnership, which in the first half of 1994 sold 940 units of
limited partnership interest in the partnership (gross proceeds of $940,000) and
invested the net proceeds of its offering to acquire a beneficial interest in a
land trust owning title to a 26-unit residential apartment community
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located in Daytona Beach, Florida. As one of its initial acquisition candidates
in connection with the Exchange Offering, the Operating Partnership will offer
to acquire partnership interests in this partnership owned by the partners
thereof. Additional information relating to the property interests owned by this
partnership and to the Exchange Offering is included at "THE EXCHANGE OFFERING"
and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this
Prospectus.
In January 1995, Baron Capital IV, Inc., an Affiliate of the Managing
Shareholder, became general partner of Realty Opportunity Income Fund VIII,
Ltd., a Florida limited partnership, which in the first half of 1994 sold 944
units of limited partnership interest in the partnership (gross proceeds of
$944,000) and invested the net proceeds of its offering to acquire a beneficial
interest in a land trust owning title to a 30-unit residential apartment
community located in Daytona Beach, Florida. As one of its initial acquisition
candidates in connection with the Exchange Offering, the Operating Partnership
will offer to acquire partnership interests in this partnership owned by the
partners thereof. Additional information relating to the property interests
owned by this partnership and to the Exchange Offering is included at "THE
EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B
to this Prospectus.
In January 1995, Baron Capital IV, Inc., an Affiliate of the Managing
Shareholder, became general partner of Florida Capital Income Fund II, Ltd., a
Florida limited partnership, which in the first half of 1994 sold 1,840 units of
limited partnership interest in the partnership (gross proceeds of $920,000) and
invested the net proceeds of its offering to acquire a beneficial interest in a
land trust owning title to a 52-unit residential apartment community located in
Daytona Beach, Florida. The partnership also issued 160 units (valued at
$80,000) to four investors in exchange for property interests acquired by them
in an earlier program which was terminated. As one of its initial acquisition
candidates in connection with the Exchange Offering, the Operating Partnership
will offer to acquire partnership interests in this partnership owned by the
partners thereof. Additional information relating to the property interests
owned by this partnership and to the Exchange Offering is included at "THE
EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B
to this Prospectus.
In April 1995, Baron Capital VI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 626 units of limited partner
interest in Florida Tax Credit Fund, Ltd., a Florida limited partnership, at a
purchase price of $1,000 per unit (maximum gross proceeds of $626,000). The
offering was fully subscribed and closed in May 1996. The partnership invested
the net proceeds of its offering to acquire an equity interest in a limited
partnership that owns title to a 78-unit residential apartment community located
in Tampa, Florida.
In May 1995, Baron Capital III, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 800 units of limited partner
interest in Florida Opportunity Income Partners, Ltd., a Florida limited
partnership, at a purchase price of $1,000 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in November 1995. The
partnership invested the net proceeds of its offering to acquire title to a
60-unit residential apartment community located in Daytona Beach, Florida. As
one of its initial acquisition candidates in connection with the Exchange
Offering, the Operating Partnership will offer to acquire partnership interests
in this partnership owned by the partners thereof. Additional information
relating to the property interests owned by this partnership and to the Exchange
Offering is included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE
INVESTMENTS" and in Exhibits A and B to this Prospectus.
In May 1995, Baron Capital VII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Florida Capital Income Fund III, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in November 1995. The
partnership invested the net proceeds of its offering to acquire title to a
48-unit residential apartment community located in Jacksonville, Florida. As one
of its initial acquisition candidates in connection with the Exchange Offering,
the Operating Partnership will offer to acquire partnership interests in this
partnership owned by the partners thereof. Additional information relating to
the property interests owned by this partnership and to the Exchange Offering is
included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in
Exhibits A and B to this Prospectus.
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In June 1995, Baron Capital VIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,000 units of limited partner
interest in Baron First Time Homebuyer Mortgage Fund, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$500,000). The offering was fully subscribed and closed in May 1996. The
partnership invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of approximately 200 single-family home sites
located in Louisville, Kentucky.
In August 1995, Baron Capital V, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 3,640 units of limited partner
interest in Florida Capital Income Fund IV, Ltd., a Florida limited partnership,
at a purchase price of $500 per unit (maximum gross proceeds of $1,820,000). The
offering was fully subscribed and closed in June 1996. The partnership invested
the net proceeds of its offering to acquire title to a 144-unit residential
apartment community located in St. Petersburg, Florida. As one of its initial
acquisition candidates in connection with the Exchange Offering, the Operating
Partnership will offer to acquire partnership interests in this partnership
owned by the partners thereof. Additional information relating to the property
interests owned by this partnership and to the Exchange Offering is included at
"THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A
and B to this Prospectus.
In September 1995, Baron Capital X, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in GSU Stadium Student Apartments, Ltd., a Florida limited partnership,
at a purchase price of $500 per unit (maximum gross proceeds of $1,000,000). The
offering was fully subscribed and closed in February 1996. The partnership
invested the net proceeds of its offering to acquire title to a 60-unit student
residential apartment community located in Statesboro, Georgia. As one of its
initial acquisition candidates in connection with the Exchange Offering, the
Operating Partnership will offer to acquire partnership interests in this
partnership owned by the partners thereof. Additional information relating to
the property interests owned by this partnership and to the Exchange Offering is
included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in
Exhibits A and B to this Prospectus.
In November 1995, Baron Capital XI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,300 units of limited partner
interest in Florida Income Growth Fund V, Ltd., a Florida limited partnership,
at a purchase price of $500 per unit (maximum gross proceeds of $1,150,000). The
offering was fully subscribed and closed in February 1997. The partnership
invested the net proceeds of its offering to acquire title to a 70-unit
residential apartment community located in Orlando, Florida. As one of its
initial acquisition candidates in connection with the Exchange Offering, the
Operating Partnership will offer to acquire partnership interests in this
partnership owned by the partners thereof. Additional information relating to
the property interests owned by this partnership and to the Exchange Offering is
included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in
Exhibits A and B to this Prospectus.
In December 1995, Baron Capital XII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 575 units of limited partner
interest in Brevard Mortgage, Ltd., a Florida limited partnership, at a purchase
price of $1,000 per unit (maximum gross proceeds of $575,000). The offering was
fully subscribed and closed in April 1996. The partnership invested the net
proceeds of its offering to acquire a second mortgage loan which is secured by a
64-unit residential apartment community located in Melbourne, Florida.
In December 1995, Baron Capital XV, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,000 units of limited partner
interest in Baron First Time Home Buyer Mortgage Fund II, Ltd., a Florida
limited partnership, at a purchase price of $500 per unit (maximum gross
proceeds of $500,000). The offering was fully subscribed and closed in July
1996. The partnership invested the net proceeds of its offering to make a
subordinated mortgage loan to the developer of 39 single-family home sites
located in Louisville, Kentucky.
In January 1996, Baron Capital XVI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,500 units of limited partner
interest in Clearwater First Time Home Buyer Program, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$750,000). The offering was fully subscribed and closed in September 1996. The
partnership invested the net proceeds of its offering to provide subordinated
mortgage financing to a developer for the acquisition of 8.2 acres of land
located in Clearwater, Florida for a 195-unit residential condominium
development.
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In March 1996, Baron Capital IX, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 700 units of limited partner
interest in Lamplight Court of Bellefontaine Apartments, Ltd., a Florida limited
partnership, at a purchase price of $1,000 per unit (maximum gross proceeds of
$700,000). The offering was fully subscribed and closed in September 1996. The
partnership invested the net proceeds of its offering to acquire debt and equity
interests in a limited partnership that owns title to an 80-unit residential
apartment community located in Bellefontaine, Ohio. As one of its initial
acquisition candidates in connection with the Exchange Offering, the Operating
Partnership will offer to acquire partnership interests in this partnership
owned by the partners thereof. Additional information relating to the property
interests owned by this partnership and to the Exchange Offering is included at
"THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A
and B to this Prospectus.
In April 1996, Baron Capital XXVI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,800 units of limited partner
interest in Baron Strategic Vulture Fund I, Ltd., a Florida limited partnership,
at a purchase price of $500 per unit (maximum gross proceeds of $900,000). The
offering was fully subscribed and closed in October 1996. The partnership
invested the net proceeds of its offering to acquire notes receivable associated
with an 81-unit residential apartment community located in Tampa, Florida.
In April 1996, Baron Capital XXVII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,000 units of limited partner
interest in Baron First Time Home Buyer Mortgage Fund III, Ltd., a Florida
limited partnership, at a purchase price of $500 per unit (maximum gross
proceeds of $500,000). The offering was fully subscribed and closed in September
1996. The partnership invested the net proceeds of its offering to make a
subordinated mortgage loan to the developer of approximately 100 condominium
units located in Independence, Kentucky.
In May 1996, Baron Capital XXVIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,000 units of limited partner
interest in Baron First Time Home Buyer Mortgage Fund IV, Ltd., a Florida
limited partnership, at a purchase price of $500 per unit (maximum gross
proceeds of $500,000). The offering was fully subscribed and closed in November
1996. The partnership invested the net proceeds of its offering to make a
subordinated mortgage loan to the developer of approximately 82 single-family
homes in Louisville, Kentucky.
In May 1996, Baron Capital XXIX, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,000 units of limited partner
interest in Baron First Time Home Buyer Mortgage Fund V, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$500,000). The offering was fully subscribed and closed in September 1996. The
partnership invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of the second phase of an 84-unit residential
condominium development in Independence, Kentucky.
In May 1996, Baron Capital XXXI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Baron Strategic Investment Fund II, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in October 1996. The
partnership invested the net proceeds of its offering to acquire an equity
interest in a 72-unit residential apartment community located in Anderson,
Indiana. As one of its initial acquisition candidates in connection with the
Exchange Offering, the Operating Partnership will offer to acquire partnership
interests in this partnership owned by the partners thereof. Additional
information relating to the property interests owned by this partnership and to
the Exchange Offering is included at "THE EXCHANGE OFFERING" and "INITIAL REAL
ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In May 1996, Baron Capital XXXII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was fully subscribed and closed in December 1996. The
partnership invested the net proceeds of its offering to acquire notes
receivable associated with a 68-unit residential apartment community located in
Orlando, Florida.
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In June 1996, Baron Capital XXIX, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,500 units of limited partner
interest in Baron Income Property Mortgage Fund VI, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$750,000). The offering was fully subscribed and closed in July 1997. The
partnership invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of a 150-unit apartment community located in
Independence, Kentucky.
In June 1996, Baron Capital of Ohio III, Inc. (formerly named Sigma
Financial Capital VI, Inc.), at that time an Affiliate of Sigma Financial
Corporation, the Dealer Manager of the Cash Offering, sponsored an offering of
up to 600 units of limited partner interest in Midwest Income Growth Fund VI,
Ltd., a Florida limited partnership, at a purchase price of $500 per unit
(maximum gross proceeds of $300,000). The offering was fully subscribed and
closed in October 1996. The partnership invested the net proceeds of its
offering to acquire all of the limited partnership interest in a limited
partnership which owns fee simple title to a 66-unit residential apartment
community located in Mansfield, Ohio. In August 1998, Gregory K. McGrath
acquired all of the equity of the general partner of the partnership. As one of
its initial acquisition candidates in connection with the Exchange Offering, the
Operating Partnership will offer to acquire partnership interests in this
partnership owned by the partners thereof. Additional information relating to
the property interests owned by this partnership and to the Exchange Offering is
included at "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in
Exhibits A and B to this Prospectus.
In July 1996, Baron Capital XXXIV, an Affiliate of the Managing
Shareholder, sponsored an offering of up to 620 units of limited partner
interest in Florida Tax Credit Fund II, Ltd., a Florida limited partnership, at
a purchase price of $500 per unit (maximum gross proceeds of $310,000). The
offering was fully subscribed and closed in May 1998. The partnership has
invested the net proceeds of its offering to acquire title to a 47-unit
residential apartment community located in Bartow, Florida.
In October 1996, Baron Capital XVII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Strategic Investment Fund IV, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering was fully subscribed and closed in March 1998. The
partnership has invested the net proceeds of its offering to acquire an equity
interest in a 73-unit residential apartment community in Tampa, Florida.
In October 1996, Baron Capital XXXVII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,400 units of limited partner
interest in Baron Mortgage Development Fund VII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$700,000). The offering was fully subscribed and closed in July 1997. The
partnership invested the net proceeds of its offering to make a second mortgage
loan to the developer of an 84-unit residential apartment community in
Alexandria, Kentucky.
In October 1996, Baron Capital XXXVIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,300 units of limited partner
interest in Baron Mortgage Development Fund VIII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$650,000). The offering was fully subscribed and closed in August 1998. The
partnership has invested the net proceeds of its offering to make a second
mortgage loan to the developer of a 114-unit residential apartment community
located in Louisville, Kentucky.
In October 1996, Baron Capital XL, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund V, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was fully subscribed and closed in June 1997. The
partnership invested the net proceeds of its offering to purchase receivables
associated with two properties comprising a total of 141 residential apartment
units located in Tampa and Titusville, Florida.
In November 1996, Baron Capital XXXI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund VI, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was
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fully subscribed and closed in April 1997. The partnership has invested the net
proceeds of its offering to make a subordinated mortgage loan secured by a
91-unit residential apartment community located in Orlando, Florida.
In November 1996, Baron Capital XLI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 3,800 units of limited partner
interest in Baron Strategic Investment Fund VII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,900,000). The offering was fully subscribed and closed in December 1997. The
partnership has invested the net proceeds of its offering to purchase
receivables associated with three properties comprising 145 residential
apartment units located in Cocoa Beach, Lakeland and Titusville, Florida.
In November 1996, Baron Capital XLIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Baron Mortgage Development Fund X, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in December 1997. The
partnership invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of 226 condominium units in Cincinnati, Ohio.
In December 1996, Baron Capital XLII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Baron Development Fund IX, Ltd., a Florida limited partnership, at a
purchase price of $500 per unit (maximum gross proceeds of $800,000). The
offering was fully subscribed and closed in September 1997. The partnership has
invested the net proceeds of its offering to make a subordinated mortgage loan
to the developer of a 320 single-family home site located in Louisville,
Kentucky.
In February 1997, Baron Capital XXXIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Baron Mortgage Development Fund XI, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in August 1997. The
partnership has invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of 168 residential condominium units in
Cincinnati, Ohio.
In February 1997, Baron Capital XLIV, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund VIII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was fully subscribed and closed in February 1998. The
partnership has invested the net proceeds of its offering to acquire notes
receivable associated with two residential apartment properties comprising a
total of 99 units located in Cocoa and Kissimmee, Florida and with a retail
shopping center located in Burlington, Kentucky.
In March 1997, Baron Capital XLVII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Mortgage Development Fund XIV, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000. The offering was fully subscribed and closed in March 1998. The
partnership has invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of a 396-unit luxury residential apartment
community in Cincinnati, Ohio.
In April 1997, Baron Capital XLVI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Mortgage Development Fund XII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering was fully subscribed and closed in August 1998. The
partnership has invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of a 111,000 square-foot shopping center located
in Burlington, Kentucky.
In May 1997, Baron Capital XLVIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,400 units of limited partner
interest in Baron Mortgage Development Fund XV, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$700,000). The offering was fully subscribed and closed in February 1998. The
partnership has invested the net proceeds of its offering to make a
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subordinated mortgage loan to the developer of an 88-unit residential apartment
community located in Alexandria, Kentucky.
In May 1997, Baron Capital LX, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron First Mortgage Development Fund XVI, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering was fully subscribed and closed in June 1998. The
partnership has invested the net proceeds of its offering to make a first
mortgage loan to the developer of approximately 200 entry-level single-family
homes in Cincinnati, Ohio.
In May 1997, Baron Capital LXI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron First Mortgage Development Fund XVII, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering has raised $840,500 as of September 1, 1998 and
continues in progress. The partnership has invested the net proceeds of its
offering to make a first mortgage loan to the developer of approximately 140
entry-level single-family homes in Crystal River, Florida.
In June 1997, Baron Capital LXII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund IX, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was fully subscribed and closed in May 1998. The
partnership has invested the net proceeds of its offering to acquire a limited
partnership interest in the limited partnership which owns a 72-unit residential
apartment property in Lakeland, Florida and to make a subordinated mortgage loan
in respect of the development of a separate residential apartment property.
In June 1997, Baron Capital LXIV, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,400 units of limited partner
interest in Baron Strategic Investment Fund X, Ltd., a Florida limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,200,000). The offering was fully subscribed and closed in March 1998. The
partnership has invested the net proceeds of its offering to acquire limited
partnership interests in two limited partnerships which own a 91-unit
residential apartment property located in Orlando, Florida and a 72-unit
residential apartment property located in Lakeland, Florida, respectively, and
to provide subordinated mortgage financing secured by a 41-unit residential
apartment property in Kissimmee, Florida.
In July 1997, Baron Capital LXV, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 1,600 units of limited partner
interest in Baron Mortgage Development Fund XVIII, L.P., a Delaware limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$800,000). The offering was fully subscribed and closed in November 1997. The
partnership has invested the net proceeds of its offering to make a subordinated
mortgage loan to the developer of a 150-unit residential apartment community in
Independence, Kentucky.
In September 1997, Baron Capital LXVI, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Mortgage Development Fund XIX, L.P., a Delaware limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering has raised $979,750 as of September 1, 1998 and
continues in progress. The partnership has invested the net proceeds of its
offering to make a subordinated mortgage loan to the developer of four
approximately one-acre out parcels of land adjacent to a shopping center
development to be constructed in Burlington, Kentucky.
In September 1997, Baron Capital LXVII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Mortgage Development Fund XX, L.P., a Delaware limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering was fully subscribed and closed in July 1998. The
partnership has invested the net proceeds of its offering to make a subordinated
mortgage loan to finance the conversion of a 144-unit residential apartment
community located in St. Petersburg, Florida into an extended-stay hotel.
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In November 1997, Baron Capital LXVIII, Inc., an Affiliate of the Managing
Shareholder, sponsored an offering of up to 2,000 units of limited partner
interest in Baron Mortgage Development Fund XXI, L.P., a Delaware limited
partnership, at a purchase price of $500 per unit (maximum gross proceeds of
$1,000,000). The offering has raised $852,250 as of September 1, 1998 and
continues in progress. The partnership has invested the net proceeds of its
offering to make a subordinated mortgage loan to a developer to finance land
acquisition, development and construction in respect of two phases of a 396-unit
luxury residential apartment community to be constructed in four phases in
Burlington, Kentucky, a suburb of Cincinnati, Ohio.
There have been no major adverse business developments or conditions
experienced to date by any of the prior limited partnerships that would be
material to Offerees who acquire Units in this Exchange Offering or any
Shareholder in the Trust (including without limitation any Unitholder who
exchanges his Units for Common Shares). Offerees should note that certain of the
prior limited partnerships described above and in the tables comprising Exhibit
A hereto were only recently organized, that certain partnerships have only
recently commenced operations, and that others are still in the development
stage. Accordingly, it would be premature to draw conclusions based upon the
current stages of operations or development of certain of the prior limited
partnerships.
Exhibit A sets forth certain historical information relating to the
offerings of 41 of such prior limited partnerships, compensation paid to the
general partners of such partnerships and their Affiliates in connection
therewith, operating results of such partnerships, sales of properties and
results of completed programs. Exhibit A is comprised of the following tables:
Table I Baron Advisors and Affiliates Experience in Raising and
Investing Funds
Table II Compensation to Baron Advisors Affiliates from Prior Funds
Table III Operating Results of Prior Programs
Table IV Results of Completed Programs
Table V Sales or Disposals of Properties
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MANAGEMENT
As Managing Shareholder of the Trust, Baron Advisors, Inc. ("Baron
Advisors") will have direct and exclusive discretion in management and control
of the affairs of the Trust and the Operating Partnership, subject to general
supervision and review by the Independent Trustees and the Managing Shareholder
acting together as the Board of the Trust and to prior approval authority of a
majority of the Board and a majority of the Independent Trustees in respect of
certain specified actions. The Corporate Trustee, Baron Properties (an Affiliate
of the Managing Shareholder), will act on the instructions of the Managing
Shareholder, and will not take independent discretionary action on behalf of the
Trust. The audited balance sheets of the Trust and the Operating Partnership as
of February 3, 1998 and the audited balance sheet of the Managing Shareholder as
of February 28, 1998 are included in this Prospectus at Exhibit C.
The Board of the Trust and the Independent Trustees will act only where
their consent and participation is required under the Declaration of the Trust.
See "SUMMARY OF DECLARATION OF TRUST - Control of Operations." The members of
the Board and the Independent Trustees are under a fiduciary duty similar to
that of corporation directors to act in the Trust's best interests and may
compel action by the Managing Shareholder to carry out that duty if necessary,
but ordinarily they have no duty to manage or direct the management of the Trust
outside their enumerated duties.
Although the Managing Shareholder will be in control of the Trust and the
Operating Partnership (subject to the powers and obligations of the Board and
the Independent Trustees), it will have no liability to the Trust, the Operating
Partnership, Shareholders or Unitholders for losses or liabilities except in
cases of its negligence, misconduct or breach of the Declaration. See "FIDUCIARY
RESPONSIBILITY."
Managing Shareholder
Baron Advisors, Inc., the Managing Shareholder of the Trust, was
incorporated in July 1997 as a Delaware corporation. The management of Baron
Advisors has substantial prior experience in and knowledge of the residential
apartment property and single-family housing market and its financing and
experience in the management of investment programs and in directing their
operations. The Chief Executive Officer, sole director and sole shareholder of
Baron Advisors is Gregory K. McGrath and its Chief Operating Officer is Robert
S. Geiger. The Trust will reimburse the Managing Shareholder on a monthly basis
during the term of the Trust Management Agreement for its operating expenses
relating to the business of the Trust and the Operating Partnership, in an
amount up to 1% of the gross proceeds of the Cash Offering plus 1% of the
initial value of Units issued in connection with the proposed Exchange Offering
(annual maximum $500,000). The Managing Shareholder in its sole discretion may
elect to receive payment for its services in the form of Common Shares with an
equivalent value.
Officers and employees of the Managing Shareholder who perform services on
behalf of the Trust will not be paid any additional compensation by the Trust.
Such officers and employees generally will serve in the same capacity for the
Trust and will be compensated by the Trust in amounts determined by the Managing
Shareholder, in the case of employees, and by the Executive Compensation
Committee described below, in the case of officers. See " - Trust Management
Agreement." Set forth below is certain information concerning Mr. McGrath and
Mr. Geiger.
Gregory K. McGrath, age 37, is the Chief Executive Officer, sole director
and sole shareholder of Baron Advisors and Chief Executive Officer of the Trust.
Mr. McGrath has over 10 years experience in all aspects of the real estate
industry, including site selection and acquisition, arrangement and closing of
mortgage financing, and property acquisition and management. Between January
1993 and June 1994, Mr. McGrath served as Senior Vice President of Realty
Capital, Inc., a Florida corporation which sponsored real estate limited
partnerships. Mr. McGrath is also the President, sole director and sole
shareholder of Baron Real Estate Services, Inc. ("Baron"), an Ohio corporation
headquartered in Cincinnati, Ohio, which he co-founded in 1989. Under Mr.
McGrath's leadership, Baron grew from the property manager of a single site in
Ohio to managing over 40 residential apartment properties containing over 3,000
units which have a current value in excess of $100 million, and
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commercial space. In January 1997, substantially all of Baron's property
management operations were sold to Affirmative Management, Inc., an Affiliate of
Affirmative Equities Company, L.P., a New York City-based owner, operator and
manager of multi-family residential apartment properties. Mr. McGrath is the
President, sole director and sole shareholder of Brentwood Management, LLP, an
Ohio limited liability company which may provide property management services in
respect of properties in which the Trust may invest. Mr. McGrath is also a
principal of The Baron Organization, Inc., a Delaware corporation which asset
manages an approximately $100 million real estate portfolio. In addition to the
affiliations described below, Mr. McGrath is also a principal in a number of
other related business entities which are involved in various aspects of the
real estate industry. Mr. McGrath attended Miami University.
Mr. McGrath is also the President, sole director and sole shareholder of
each of seven Delaware or Florida corporations which is the sole general partner
of one of seven separate real estate investment limited partnerships organized
in Delaware or Florida since 1994 to invest in real estate located in the
midwestern and southeastern portions of the United States. The name of each such
corporation and the limited partnership sponsored by it are listed on the last
page of Exhibit A hereto. Each of these limited partnerships is currently
offering limited partner interests in private securities offerings and/or has
not commenced significant operations yet. One of a group of 37 separate
Affiliates of the Managing Shareholder identified above in "PRIOR PERFORMANCE OF
AFFILIATES OF MANAGING SHAREHOLDER" (and in Table I at the beginning of Exhibit
A hereto ) is also the sole general partner of one of 41 additional real estate
investment limited partnerships formed in Florida or Delaware which have
commenced operations. Mr. McGrath is the President, sole director and sole
shareholder of each of such affiliated corporations. These partnerships have
provided financing in respect of residential apartment properties and other real
estate located in the midwestern and southeastern portions of the United States.
Each of the partnerships has completed its private placement offering and
invested the net proceeds thereof. Attached hereto at the beginning of Exhibit A
are five tables (Tables I through V) which summarize certain information about
such offerings, compensation paid to the general partners of such programs and
their Affiliates in connection therewith, operating results of such programs,
the application of net offering proceeds to real estate investments, and sales
of properties.
Robert S. Geiger, age 47, is one of the founders of the Trust and the
Operating Partnership and serves as the Chief Operating Officer of the Trust,
the Operating Partnership and the Managing Shareholder. Since August 1, 1998,
Mr. Geiger has been counsel with Atlas, Pearlman, Trop & Borkson P.A., a Fort
Lauderdale, Florida law firm which has a general practice. Between 1986 and July
1998, Mr. Geiger was managing director of the law firm of Geiger Kasdin Heller
Kuperstein Chames & Weil, P.A., a Miami, Florida law firm which had a general
practice, and its predecessor firms. Mr. Geiger's practice is concentrated in
complex commercial and real property transactions and litigation, financings and
business and banking law. He has served as general counsel for national,
regional and small business corporations engaged in a wide range of business
activities, including regulated industry matters. Mr. Geiger's firms have
performed and his current firm is expected to continue to perform legal services
for the Trust and Affiliates of the Managing Shareholder. Compensation received
by the firms for such services has not represented a material portion of the
revenues of the firms. Mr. Geiger will continue in his current law practice
after the Offering. Prior to 1986, Mr. Geiger practiced law at private law
firms. Mr. Geiger is a member of the Panel of Arbitrators, American Arbitration
Association, Dade County and American Bar Associations, The Florida Bar (member,
Corporation, Business and Banking Law), and the International Bar Association.
Mr. Geiger earned a law degree from the University of Florida in 1974 and a
Bachelor of Arts degree from Hobart College in 1972. Mr. Geiger maintains an
"av" rating, the highest recognized by the Martindale-Hubbell directory of
American lawyers.
Mr. McGrath and Mr. Geiger are the founders of the Trust and the Operating
Partnership. Each of them has contributed $50,000 for the initial capitalization
of the Operating Partnership and other consideration to the Operating
Partnership in exchange for an amount of Units which are exchangeable (subject
to escrow restrictions described below at "THE TRUST AND THE OPERATING
PARTNERSHIP - Formation Transactions") into 9.5% of the Common Shares
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. Such Units are exchangeable into an equivalent number of Common
Shares, subject to a security escrow agreement among Mr. McGrath, Mr. Geiger,
the Trust and an institutional escrow agent. See "THE TRUST AND THE OPERATING
PARTNERSHIP - Formation Transactions." Such Units and the Common Shares into
which they are exchangeable are in addition to the 2,500,000 Common Shares
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which the Trust is offering for sale in the Cash Offering and the 2,500,000
Units which the Operating Partnership will offer in connection with the Exchange
Offering (and the equivalent number of Common Shares into which such Units are
exhangeable). See "THE TRUST AND THE OPERATING PARTNERSHIP - Ownership of the
Trust and the Operating Partnership."
The holders of at least 10% of the Common Shares may propose the removal of
the Managing Shareholder, either by calling a meeting or soliciting consents in
accordance with the terms of the Declaration. Removal of the Managing
Shareholder requires either the affirmative vote of a majority of the Common
Shares (excluding Common Shares held by the Managing Shareholder which is the
subject of the vote or by its Affiliates) or the affirmative vote of a majority
of the Independent Trustees. The Shareholders entitled to vote thereon may
replace a removed Managing Shareholder or fill a vacancy by vote of a majority
in interest of such Shareholders. See "SUMMARY OF DECLARATION OF TRUST - Removal
and Resignation of the Managing Shareholder."
Trust Management Agreement
The Trust has entered into a Trust Management Agreement with the Managing
Shareholder under which the Managing Shareholder is obligated to provide
management, administrative and investment advisory services to the Trust from
the commencement of the Cash Offering. The Trust Management Agreement is subject
to approval by the Board of the Trust. The services to be rendered include,
among other things, communicating with and reporting to Investors, administering
accounts, providing to the Trust of office space, equipment and facilities and
other services necessary for the Trust's operation, and representing the Trust
in its relations with custodians, depositories, accountants, attorneys, brokers
and dealers, corporate fiduciaries, insurers, banks and others, as required. The
Managing Shareholder is also responsible for determining which real estate
investments and non-real estate investments (including the temporary investment
of the Trust's available funds prior to their commitment to particular real
estate investments) the Trust will make and for making divestment decisions,
subject to the provisions of the Declaration of Trust.
The Trust will reimburse the Managing Shareholder on a monthly basis during
the term of the Trust Management Agreement for its operating expenses relating
to the business of the Trust and the Operating Partnership, in an amount up to
1% of the gross proceeds of the Cash Offering plus 1% of the initial value of
Units issued in connection with the proposed Exchange Offering (annual maximum
$500,000). The Managing Shareholder in its sole discretion may elect to receive
payment for its services in the form of Common Shares with an equivalent value.
The Trust Management Agreement has an initial term of one year and may be
extended on a year-to-year basis on approval of (i) the Board or a Majority of
the Shareholders entitled to vote on such matter or (ii) a majority of the
Independent Trustees. The Independent Trustees have responsibility for
determining that compensation payable to the Managing Shareholder under the
Trust Management Agreement is reasonable. The agreement may be terminated
without cause or penalty at any time on 60 days' prior notice by a majority of
the Independent Trustees, by a Majority of the Shareholders entitled to vote on
such matter or by the Managing Shareholder. Amendment of the agreement requires
the approval of (i) a majority of the Trustees or a Majority of the Shareholders
entitled to vote on such matter and (ii) a majority of the Independent Trustees.
Shareholders entitled to vote on such matters will be entitled to vote whether
or not to amend or terminate the agreement or to extend it for an additional
one-year period only if such item is called for a Shareholder vote at the annual
meeting of Shareholders or a special meeting of Shareholders by either the
Managing Shareholder, a majority of the Independent Trustees, any officer of the
Trust or Shareholders who hold 10% or more of the Common Shares then
outstanding.
Officers of the Trust and the Operating Partnership
The Declaration provides that the Managing Shareholder will appoint
officers of the Trust who may act on behalf of the Trust and sign documents on
behalf of the Trust as authorized by the Managing Shareholder and who will have
the duties and powers usually applicable to similar officers of a Delaware
corporation in carrying out Trust business. Officers act under the supervision
and control of the Managing Shareholder, which can remove any officer at any
time for any or no reason. Unless otherwise specified by the Managing
Shareholder, the Chief
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Executive Officer of the Trust will have full power to act on behalf of the
Trust. Gregory K. McGrath, a founder of the Trust and the Operating Partnership,
serves as Chief Executive Officer of the Trust, the Operating Partnership and
the Managing Shareholder. He has agreed to serve as Chief Executive Officer for
the first year in exchange for compensation in the form of Common Shares in an
amount not to exceed 25,000 shares to be determined by the Executive
Compensation Committee based upon his performance.
Robert S. Geiger, the other founder of the Trust and the Operating
Partnership, serves as the Chief Operating Officer of the Trust, the Operating
Partnership and the Managing Shareholder. His initial annual salary has been set
at $100,000 (in addition to benefits, including without limitation health,
disability and life insurance, and eligibility for participation in any Common
Share option plan and bonus incentive compensation plan which may be implemented
by the Trust).
Officers and employees of the Managing Shareholder who perform services on
behalf of the Trust will not be paid any additional compensation by the Trust.
Such officers and employees may serve in the same capacity for the Trust and
will be compensated by the Trust in amounts determined by the Managing
Shareholder, in the case of employees, and by the Executive Compensation
Committee described below, in the case of officers.
Information concerning Mr. McGrath and Mr. Geiger is set forth above at
"-Managing Shareholder." Information concerning the other executive officers of
the Operating Partnership is set forth below.
Robert L. Astorino, age 52, has served as President - Property of the
Operating Partnership since May 25, 1998. From February 1998 through May 25,
1998, he served as President - Property of Strategic Management Inc., a real
estate management company affiliated with Mr. McGrath. From 1992 through January
1998, he served as President of The Housing Partnership, Inc., a Louisville,
Kentucky-based real estate investment and consulting company. Between 1991 and
1992, Mr. Astorino served as Assistant Vice President, Real Estate Operations at
Great Western Bank in Beverly Hills, California, where his responsibilities
included the operation and sale of residential and commercial real estate
obtained in foreclosure. Between 1986 and 1991, Mr. Astorino was employed by
Lexford, Inc. ("Lexford") (formerly Cardinal Realty Services, Inc. and prior to
that Cardinal Industries, Inc.), where he served first as the Regional Director
of Apartment Management and then as the Vice President of Operations. Lexford is
a publicly traded company headquartered in Reynoldsburg, Ohio which has
sponsored numerous real estate investment limited partnerships. Prior to 1986,
Mr. Astorino was employed by National Housing Partnership in Washington, D.C.
where he served as an Executive Vice President of NCHP Property Management and
then as Vice President of Property Management. He has also served as a Director
of the Housing Authority of Louisville and in various positions for other
municipal and rural real estate development programs. Mr. Astorino is a member
of the Kentucky Bar Association, the National Association of Realtors and the
National Association of Homebuilders. He is also a member of the Kentucky
Housing Association, where he served as president in 1982 and as a legislative
chairman in 1980, 1981 and 1983, and is a member of Louisville Housing Services,
where he served on the Board of Directors from 1984 through 1988. Mr. Astorino
received a law degree from the University of Louisville, a Masters degree in
Public Administration from Syracuse University and an undergraduate degree from
the University of Massachusetts, Amherst. He has also completed the Senior
Public Executive Program at Harvard University.
Mr. Astorino's initial annual salary has been set at $150,000, in addition
to benefits, including without limitation health, disability and life insurance,
and eligibility to participate in any option plan and bonus incentive plan which
may be implemented by the Executive Compensation Committee.
David E. Williams, age 51, has served as Chief Financial Officer of the
Operating Partnership since May 25, 1998. From January 1998 through May 25,
1998, he served as Chief Financial Officer of Strategic Management Inc., a real
estate management company affiliated with Mr. McGrath. From January 1996 through
December 1997, Mr. Williams served as President of The Williams Consulting Group
in Cincinnati, Ohio, where he provided real estate consulting services,
including strategic planning and property analysis. From 1991 to 1996, he served
as Vice President and then Executive Vice President, Real Estate Management for
Lexford, Inc. ("Lexford") (formerly Cardinal Realty Services, Inc. and prior to
that Cardinal Industries, Inc.). Lexford is a publicly traded company
headquartered in Reynoldsburg, Ohio which has sponsored numerous real estate
investment limited partnerships.
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At Lexford, Mr. Williams was responsible for the management of real estate
valued in excess of $1.5 billion. Between 1986 and 1990, he was employed by
Cardinal Apartment Management Group, Inc., where he served as Executive Vice
President, Chief Financial Officer - Partnerships in 1990 and as a Regional
Director from 1986 through 1989. Prior to 1986, he held various property
management positions. Mr. Williams has served in various capacities in The
United States Air Force, Strategic Air Command. He currently serves on the Board
of the Institute of Real Estate Management. Mr. Williams received his
undergraduate degree from the University of Cincinnati.
Mr. Williams' initial annual salary has been set at $150,000, in addition
to benefits, including without limitation health, disability and life insurance,
and eligibility to participate in any option plan and bonus incentive plan which
may be implemented by the Executive Compensation Committee.
Mary E. Keane, age 45, has served as Vice President - Accounting and
Strategic Planning for the Operating Partnership since May 25, 1998. She has
also served as Secretary of the Trust since May 15, 1998. From March 1998
through May 25, 1998, she served as Vice President - Accounting for Strategic
Management Inc., a real estate management company affiliated with Mr. McGrath.
From 1996 through February 1998, Ms. Keane served as Vice President, Finance -
Consumer Services Division for Blue Cross of California, a subsidiary of
WellPoint Health Networks, Inc., a Fortune 250 company. Her responsibilities
there included financial preparation, reporting and analysis for a $2 billion
annual revenue company. From 1992 through 1995, she served as Chief Financial
Officer for Steptoe & Johnson, a prominent international law firm headquartered
in Washington, D.C. From 1988 through 1992, Ms. Keane served as Assistant
Corporate Controller for Commodore International, Limited, at the time a $1
billion Canadian company which manufactured and marketed personal computers.
Prior to that, she was a business analyst for Johnson Matthey, PLC, a British
precious metals company, and a senior accountant for Mobil Oil Corporation, an
international energy company. Ms. Keane received a Bachelor of Science degree
from Boston College and a Masters of Business Administration degree from the
Wharton School at the University of Pennsylvania. She is also a certified
accountant.
Ms. Keane's initial annual salary has been set at $130,000, in addition to
benefits, including without limitation health, disability and life insurance,
and eligibility to participate in any option plan and bonus incentive plan which
may be implemented by the Executive Compensation Committee.
The Board of the Trust, Committees and Trustees
As Managing Shareholder of the Trust, Baron Advisors will have discretion
in management and control of the affairs of the Trust and the Operating
Partnership, subject to general supervision and review by the Independent
Trustees and the Managing Shareholder acting together as the Board of the Trust
and to prior approval authority of the Board and the Independent Trustees in
respect of certain actions specified in the Declaration and described at
"SUMMARY OF THE DECLARATION - Control of Operations."
The Board of the Trust
The Board of the Trust has continuing exclusive authority over the
management of the Trust, the conduct of its affairs and, with certain
limitations, the management and disposition of the Trust property. The Board of
the Trust has general supervisory authority over the activities of the Managing
Shareholder and prior approval authority in respect of certain actions under the
Declaration. A majority of the members of the Board must be Independent
Trustees. The initial Board of the Trust will be comprised of the Managing
Shareholder and two individuals described below who have agreed to serve as the
initial Independent Trustees upon the completion of the Cash Offering. Each
member of the Board must have adequate experience in the residential real estate
industry. The term of each member of the Board is one year. Each member of the
Board (other than the initial members and any member who is elected to fill the
unexpired term of another member no longer serving) must be elected by vote of
the Shareholders entitled to vote on such matter at the annual meeting of
Shareholders. Mid-term vacancies may be filled by a majority of the remaining
members of the Board. Each member may serve an unlimited number of terms.
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The Board may establish such committees as it deems appropriate, provided,
the majority of the members of any such committee are Independent Trustees. The
Board of the Trust has established an Audit Committee, Executive Compensation
Committee, and Nominating Committee. The members of the Audit Committee and the
Nominating Committee are the Managing Shareholders and the Independent Trustees.
The members of the Executive Compensation Committee are the Independent
Trustees. 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 internal accounting controls of the Trust
and the Operating Partnership. The Executive Compensation Committee will
determine compensation for the executive officers of the Trust and the Operating
Partnership and implement a Common Share option plan and bonus incentive
compensation plan for members of management and key employees of the Trust and
the Operating Partnership. The Nominating Committee will nominate the members of
the Board of the Trust to be presented to Shareholders for election at each
annual meeting beginning in 1999.
The Trust intends to pay its Independent Trustees an annual fee of $6,000.
The Executive Compensation Committee will consider from time to time adjustments
in the compensation payable to members of the Board and the possibility of
permitting the members of the Board to participate in any option plans which the
Trust may adopt. Mr. McGrath, the Chief Executive Officer of the Trust and the
President of the Managing Shareholder, will not be paid any fees for serving on
the Board on behalf of the Managing Shareholder. In addition, the Trust will
reimburse all members of the Board for expenses incurred in attending meetings.
The Board will meet at least annually, and, except to the extent
conflicting with the Delaware Act or the Declaration, the law of Delaware
governing meetings of directors of corporations shall govern such meetings,
voting and consents by the members of the Board. The Compensation Committee of
the Board may review the compensation payable to the Independent Trustees and
other members of the Board (other than the Managing Shareholder, which will not
be compensated for serving on the Board) annually and may increase or decrease
it as the committee deems reasonable. Any member of the Board may resign by
giving notice to the Trust, and may be removed (i) for cause by the action of at
least two-thirds of the remaining members of the Board or (ii) with or without
cause by action of the holders of at least a majority of the then outstanding
Shares entitled to vote thereon. Shares in the Trust owned by the Managing
Shareholder, the Trustees, other members of the Board of the Trust, the Original
Investors and any of their respective affiliates may not vote regarding the
removal of the Managing Shareholder, the Trustees or any other member of the
Board or any transaction between the Trust (or the Operating Partnership) and
any of them.
Independent Trustees
The Trust is required to have at least two Independent Trustees, and such
Independent Trustees must constitute a majority of the Board. To qualify to
serve the Trust as an Independent Trustee, a person may not be associated or
have been associated within the last two years with the Managing Shareholder (or
any successor advisor to the Trust). A person is deemed to be associated with
the Managing Shareholder if he (i) owns an interest in, is employed by, or is an
officer, director or trustee of the Managing Shareholder or any of its
Affiliates; (ii) performs services, other than as an Independent Trustee, for
the Trust; (iii) is a trustee for more than three REITs organized or advised by
the Managing Shareholder; or (iv) has any material business or professional
relationship with the Managing Shareholder or any of its Affiliates.
The term of each Independent Trustee is one year, and each Independent
Trustee (other than one who has been elected to fill the unexpired term of
another Independent Trustee who no longer serves in such capacity) must be
elected by a vote of the Shareholders. Mid-term vacancies may be filled by a
majority of the remaining members of the Board. Any person may serve an
unlimited number of terms. The Independent Trustees will nominate replacements
for vacancies created in the authorized number of Independent Trustees prior to
the end of a term. An Independent Trustee may resign by giving notice to the
Trust, and may be removed (i) for cause by the action of at least two-thirds of
the remaining members of the Board or (ii) with or without cause by action of
the holders of at least a majority of the then outstanding Shares entitled to
vote thereon. The Independent Trustees are not obligated
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to persons other than Shareholders for the obligations of the Trust. See
"SUMMARY OF DECLARATION OF TRUST - Liability and Indemnification."
James H. Bownas and Peter M. Dickson serve as the initial Independent
Trustees of the Trust. Set forth below is certain information concerning these
individuals, who are not otherwise affiliated with the Trust, the Operating
Partnership, the Managing Shareholder or any of their respective Affiliates. In
performing their responsibilities to the Trust, the Independent Trustees are
under a fiduciary duty and obligation to act in the best interests of the Trust.
In interpreting the scope of this obligation, the Independent Trustees will have
the responsibilities of, and will be entitled to, the defenses of directors of a
Delaware corporation.
James H. Bownas, age 49, is a principal in Gamble Hartshorn Alden Co. LPA,
a Columbus, Ohio law firm with a general practice. Mr. Bownas's practice is
concentrated in securities, real estate, taxation, corporate and estate
planning. Between 1989 and January 1996, Mr. Bownas served as General Counsel,
Vice President and Secretary of Cardinal Realty Services, Inc. ("Cardinal")
(formerly known as Cardinal Industries, Inc.), a publicly traded company
headquartered in Reynoldsburg, Ohio which has sponsored numerous real estate
investment limited partnerships. At Cardinal, Mr. Bownas developed significant
experience in the syndication of real estate investment limited partnerships,
negotiated the resolution of over $2 billion of creditors' claims in connection
with the bankruptcy reorganization of Cardinal Industries, Inc., and coordinated
the transition of Cardinal Industries, Inc. from a bankruptcy creditor to a
successful publicly traded company. Since 1995, Cardinal has engaged in several
arms-length transactions (none of which represented a material portion of
Cardinal's assets, liabilities, revenues or expenditures) with Affiliates of the
Managing Shareholder pursuant to which multi-family real estate was sold to,
purchased from and managed by and for such entities. Prior to 1989, Mr. Bownas
served as General Counsel and Vice President of Alliance Corporate Resources,
Inc., Dublin, Ohio, a third party equipment lessor, and practiced law at private
law firms. Mr. Bownas is a member of the American Bar Association, the Ohio
State Bar Association and the Columbus Bar Association. Mr. Bownas earned a law
degree from Harvard University in 1971 and a Bachelor of Science degree from
Xavier University in 1968. He resides in Columbus, Ohio.
Since 1991, Peter M. Dickson, age 47, has been managing director of the
Guardian Management Company Limited, a global financial services corporation
based in Bermuda. In addition, since 1994 Mr. Dickson has served as a director
to Grosvenor Trust Company Limited, another Bermuda-based financial services
corporation. Between 1985 and 1990, Mr. Dickson served as the Executive Vice
President of Finance for The Wraxall Group, Bermuda. Between 1979 and 1985, Mr.
Dickson held several positions with Peat, Marwick, Bermuda, beginning as a
Senior Accountant/Supervisor, before being promoted to Manager, then to Senior
Manager, and finally to Director of Accounting Services. Prior to 1979, Mr.
Dickson was a Senior Accountant with Deloitte, Haskin & Sells in Manchester,
with whom he was Articled. Mr. Dickson qualified as a Chartered Accountant in
1974 with the Institute of Chartered Accountants in England and Wales. Mr.
Dickson is a member of the Bermuda Institute of Chartered Accountants, Chartered
Institute of Marketing, and The Offshore Institute. He is a member of the
Institute of Chartered Accountants in England & Wales, Institute of Cost and
Executive Accountants, Association of Financial Controllers Managers and
Association of Business Executives. Mr. Dickson serves as Fellow of the
Institute of Chartered Accountants in England & Wales, Faculty of Corporate
Executive Secretaries, Institute of Directors, Faculty of Business Administrator
and Institute of Financial Accountants. Mr. Dickson earned his undergraduate
degree from Wrekin College, Shropshire, England in 1969.
Corporate Trustee
The Corporate Trustee of the Trust is Baron Capital Properties, Inc.
("Baron Properties"), a Delaware corporation formed in July 1997 and an
Affiliate of the Managing Shareholder. The primary duty of the Corporate Trustee
will be to operate an office in the State of Delaware as the Delaware Act
requires that at least one of the trustees of a Delaware business trust (such as
the Trust) have an office in Delaware. Legal title to Trust Property will be in
the name of the Trust if possible or Baron Properties as trustee. Baron
Properties, as Corporate Trustee of the Trust, will act only at the direction of
the Managing Shareholder, and will not take independent discretionary action on
behalf of the Trust. The Corporate Trustee will not be compensated for its
services, but will be reimbursed only for its reasonable out-of-pocket expenses
in serving in such capacity which are approved in advance by the Managing
Shareholder. Such expenses are expected to be limited to those incurred in
connection with the operation
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of its Delaware office. Baron Properties may be a trustee of other similar
entities that may organized by the Managing Shareholder, Baron Capital, Inc.,
and any of their Affiliates. The President, sole director and sole stockholder
of Baron Properties is Gregory K. McGrath. See " - Managing Shareholder." The
principal office of Baron Properties is at 1105 North Market Street, Suite 1300,
Wilmington, Delaware 19899. The Corporate Trustee is not obligated to persons
other than Shareholders for the obligations of the Trust. See "SUMMARY OF THE
DECLARATION."
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THE TRUST AND THE OPERATING PARTNERSHIP
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to indirectly acquire
equity interests in existing residential apartment properties located in the
United States and to provide or acquire debt financing secured by mortgages on
such types of property. The Trust intends to acquire, own, operate, manage and
improve residential apartment properties for long-term ownership, and thereby to
seek to maximize current and long-term income and the value of its assets. See
"INVESTMENT OBJECTIVES AND POLICIES" below. The management of the Trust has been
involved in the residential apartment business for over 10 years.
The Trust and the Operating Partnership intend to make regular quarterly
distributions to their Shareholders and Unitholders of net income generated from
its investments. The Trust intends to operate as a real estate investment trust
(a "REIT") for federal income tax purposes, provided, however, that if the
Managing Shareholder determines, with the affirmative vote of a Majority of
Shareholders entitled to vote on such matter approving the Managing
Shareholder's determination, that it is no longer in the best interests of the
Trust to continue to qualify as a REIT, the Managing Shareholder may revoke or
otherwise terminate the Trust's REIT election pursuant to applicable federal tax
law.
The Operating Partnership
The operations of the Trust will be carried on through the Operating
Partnership (and any other subsidiaries the Trust may have in the future), among
other reasons, in order to (i) enhance the ability of the Trust to qualify as a
REIT under the Code, (ii) enable the Trust to indirectly acquire interests in
residential apartment properties in exchange transactions, such as the Exchange
Offering, that involve the exchange of Units of limited partnership interest in
the Operating Partnership for such property interests and thereby provide an
opportunity for the deferral until a later date of any tax liabilities that
sellers of property interests otherwise would incur if they received cash or
Common Shares in connection therewith. See "FEDERAL INCOME TAX CONSIDERATIONS."
Substantially all of the Trust's assets (including the property interests
acquired) will be held by, and its operations conducted through, the Operating
Partnership. As its sole General Partner, the Trust will control the Operating
Partnership as well as hold Units representing an economic interest in the
Operating Partnership. The Operating Partnership will be responsible for, and
pay when due, its share of all administrative and operating expenses of
properties in which it acquires an interest.
The net cash proceeds from the issuance of Common Shares of the Trust in
connection with the Cash Offering and the net cash proceeds of any subsequent
issuance of Common Shares will be contributed by the Trust to the Operating
Partnership in exchange for an equivalent number of units of limited partnership
interest in the Operating Partnership ("Units"). The Operating Partnership will
use net cash proceeds of the Cash Offering, unissued Units or a combination of
net cash proceeds and unissued Units to acquire interests in residential
apartment properties or interests in other partnerships substantially all of
whose assets consist of residential apartment property interests. See
"-Ownership of the Trust and the Operating Partnership."
In the Exchange Offering, the Operating Partnership is offering to issue
Units in exchange for interests in residential apartment properties. As its
initial investment targets in the Exchange Offering, the Operating Partnership
will offer to acquire limited partnership interests owned by individual limited
partners in 14 real estate limited partnerships managed by Affiliates of the
Managing Shareholder which directly or indirectly equity or mortgage interests
in residential apartment properties. The properties consist of an aggregate of
849 residential units (comprised of studio and one, two, three and four-bedroom
units). Ten of the properties are located in Florida, two properties in Ohio and
one property each in Georgia and Indiana. The Exchange Properties are described
in further detail at "INITIAL REAL ESTATE INVESTMENTS" and Exhibit B hereto. If
property investments are consummated in respect of all 14 properties, the deemed
purchase price is expected to be approximately $33,600,000, comprised of Units
in the Operating Partnership to be issued with a deemed value of approximately
$14,000,000 plus first mortgage and other indebtedness of approximately
$19,400,000 to which the properties are subject. The Trust intends to
investigate other investment opportunities for the Exchange Offering, including
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property interests held by unaffiliated owners and certain other limited
partnerships managed by Affiliates of the Managing Shareholder and of the Dealer
Manager. See also "PRIOR PERFORMANCE BY AFFILIATES OF MANAGING SHAREHOLDER."
In the initial transactions of the Exchange Offering, the Operating
Partnership will offer to issue Operating Partnership Units to each individual
limited partner in an Exchange Partnership (individually, an "Exchange Limited
Partner" and collectively, the "Exchange Limited Partners") in exchange for his
respective limited partnership interest in the Exchange Partnership. The number
of Operating Partnership Units to be offered to each Exchange Limited Partner
for his interest in a given Exchange Partnership will have a deemed value in the
range of 102% to 125% of the amount of an Exchange Limited Partner's original
investment in the partnership. For such purpose, each Operating Partnership Unit
will be initially valued at $10, the same offering price of each Trust Common
Share offered in the Cash Offering. The value of Units and Common Shares is
substantially identical since holders of Operating Partnership Units may
exchange their Units into an equivalent number of Common Shares at any time,
subject to certain conditions. Any Exchange Limited Partner that does not desire
to participate in the Exchange Offering would be entitled to retain his limited
partnership interest in his partnership on substantially the same terms and
conditions as his original investment. As part of the transaction, the Operating
Partnership will either acquire the Corporate General Partner's equity interest
in each of the Exchange Partnerships involved or the Board of the Trust will
receive a management proxy. See "THE EXCHANGE OFFERING."
The number of Operating Partnership Units to be offered to the Exchange
Limited Partners in respect of each Exchange Property will differ based upon a
number of factors, including, among others, the estimated appraised market value
and the operating history of the property, the amount of distributed cash flow
generated by the property, the period of time that the property has been held by
the underlying Exchange Partnership and the property's overall condition. Each
Exchange Property in which the Operating Partnership intends to acquire an
interest has been appraised by a qualified and licensed independent appraisal
firm and each additional property in which it intends to acquire an interest
will be appraised in advance. See "THE EXCHANGE OFFERING - Exchange Property
Appraisals."
To facilitate the Exchange Offering, the Operating Partnership has
registered with the Commission 2,500,000 Units. Unitholders of the Operating
Partnership, including recipients of Units in the Exchange Offering, will be
entitled to exchange all or a portion of the Units held by them for an
equivalent number of Common Shares at any time and from time to time, so long as
the exchange would not cause the exchanging party to own (taking into account
certain ownership attribution rules) in excess of 5.0% of the then outstanding
Shares, subject to the Trust's right to cash out any holder of Units who
requests an exchange. Therefore, in conjunction with the registration of the
Common Shares being offered in the Cash Offering, the Trust has registered
2,500,000 Common Shares (in addition to the 2,500,000 Common Shares being
offered in the Cash Offering) for issuance to holders of Units who request the
Trust to exchange Units for Common Shares.
The Trust and the Operating Partnership intend to investigate making an
additional public or private offering of Common Shares and/or Units within the
12-month period following the commencement of the Exchange Offering if the
Managing Shareholder determines that suitable property acquisition opportunities
are available to the Trust at attractive prices and that such an offering would
fulfill its cost of funds requirements. The issuance by the Trust and the
Operating Partnership of additional Shares and Units subsequent to the
completion of the Cash Offering and the Exchange Offering could have a dilutive
effect on purchasers of Common Shares in the Cash Offering and Unitholders.
The Trust's ownership of Units in the Operating Partnership will entitle it
to share in cash distributions from, and in the profits and losses of, the
Operating Partnership. The Trust in turn will distribute such cash distributions
to the Shareholders of the Trust. The other Unitholders (i.e., other Limited
Partners) of the Operating Partnership, including the Original Investors and
recipients of Units in the Exchange Offering, will own the remaining economic
interest in the Operating Partnership. Subject to certain percentage limitations
on ownership, Units may be transferred by Limited Partners without restriction
(other than Original Investors who are subject to escrow restrictions described
below), although the transferee may only be admitted as a Unitholder with the
consent of the Trust as general partner. As described below at " - Formation
Transactions," the Original Investors have
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entered into a security escrow agreement with the Trust under which they have
deposited into an escrow account with an institutional escrow agent for a period
of six to nine years (subject to their earlier release if the Trust meets
certain specified operating criteria) all Units issued to them in connection
with the formation of the Trust and the Operating Partnership. The effect of the
escrow arrangement is that, as long as their Units are held in the escrow
account, the Original Investors will not be able to exchange their Units into
Common Shares and then sell any Common Shares. As Unitholders exchange their
Units for Common Shares, the Trust's percentage interest in the Operating
Partnership will increase.
The Trust will hold one Unit in the Operating Partnership for (i) each
Common Share that it sells in the Cash Offering, (ii) each Common Share that it
issues in exchange for a Unit at the request of a Unitholder, and (iii) each
Unit it elects to cash out in lieu of an exchange described in item (ii) above.
The net proceeds from the sale of Common Shares of the Trust in the Cash
Offering and of any other issuance of Common Shares will be contributed to the
Operating Partnership in exchange for an equivalent number of Units.
As the General Partner of the Operating Partnership, the Trust will have
the exclusive power under the Operating Partnership Agreement to manage and
conduct the business of the Operating Partnership. Baron Advisors, Inc., the
Managing Shareholder of the Trust, has complete discretion in the management and
control of the Trust and the Operating Partnership (subject to the general
supervision and review by the Independent Trustees and the Managing Shareholder
acting together as the Board of the Trust and subject to prior approval of the
Board and the Independent Trustees in respect of certain activities of the Trust
and the Operating Partnership). Gregory K. McGrath, the Chief Executive Officer
of the Trust, the Operating Partnership and the Managing Shareholder, and Robert
S. Geiger, the Chief Operating Officer of the Trust, the Operating Partnership
and the Managing Shareholder, and James H. Bownas and Peter M. Dickson, the
initial Independent Trustees of the Trust, will make investment decisions for
the Trust. The Independent Trustees and the Managing Shareholder comprise all
the initial members of the Board of the Trust. The Operating Partnership will
terminate on December 31, 2098 unless terminated earlier in connection with a
merger or a sale of all or substantially all of the assets of the Operating
Partnership or upon a vote of the Partners or upon the occurrence of various
other events. The Operating Partnership will be responsible for, and pay when
due, its share of all administrative and operating expenses of properties in
which it acquires an interest.
Formation Transactions
Set forth below is a description of transactions relating to the formation
of the Trust and the Operating Partnership. Gregory K. McGrath and Robert S.
Geiger are the founders of the Trust and the Operating Partnership (the
"Original Investors"). Mr. McGrath serves as the Chief Executive Officer of the
Trust and the Operating Partnership and is the Chief Executive Officer, sole
shareholder and sole director of the Managing Shareholder, which will manage the
day to day operations of the Trust and the Operating Partnership. McGrath is
also the President, sole shareholder and sole director of the corporate general
partners of 46 real estate investment limited partnerships, which since 1994
have acquired interests in residential and commercial properties. See
"MANAGEMENT" and "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER." As
described below at "INITIAL REAL ESTATE INVESTMENTS," certain of the prior
partnerships, including the Exchange Partnerships, own interests in properties
which the Trust may acquire in connection with the Exchange Offering. Mr. Geiger
serves the Trust, the Operating Partnership and the Managing Shareholder as
their Chief Operating Officer.
In connection with the formation of the Trust and the Operating
Partnership, Mr. McGrath and Mr. Geiger have each been issued an amount of Units
which are exchangeable (subject to certain escrow restrictions described below)
into 9.5% of the Common Shares outstanding after the completion of the Exchange
Offering and the Cash Offering (601,080 Common Shares out of total maximum
outstanding of 6,327,160 Common Shares), on a fully diluted basis assuming that
all then outstanding Units (other than those owned by the Trust) have been
exchanged into an equivalent number of Common Shares. Their consideration for
the Units included an initial capital contribution of $100,000 to the Operating
Partnership; a waiver of any ongoing fees currently payable to the Corporate
General Partners (which Mr. McGrath controls) which manage real estate
investment limited partnerships whose investors participate in the Exchange
Offering; an assignment to the Operating Partnership of any back end interest
attributable to such Corporate General Partners; and the advancement to date of
approximately
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$300,000 in formative expenses, including the support of the activities of the
entire staff of an affiliate of the Managing Shareholder in connection with the
Exchange Offering and the Cash Offering. As described in further detail below,
the Units issued to the Original Investors are being held in an escrow account
for a period of six to nine years, subject to earlier release in certain cases.
Assuming the Exchange Offering and the Cash Offering are completed in full
under the terms currently contemplated and no other transactions have taken
place (including, without limitation, any additional issuances of Common Shares
or Units, any exchange of Units into Common Shares or any exercise of Common
Share purchase warrants to be issued to the Dealer Manager and participating
broker-dealers in connection with the Cash Offering), immediately upon the
completion of the offerings, Mr. McGrath and Mr. Geiger would each own 601,080
Units of the Operating Partnership, representing beneficial ownership of 9.5% of
the Trust Common Shares. If the Cash Offering is closed and all or a portion of
the 2,500,000 Common Shares being offering therein are sold prior to that
closing, and the Exchange Offering is also closed, but less than 2,500,000 Units
are issued prior thereto, the Original Investors would own a varying number of
Units depending upon the actual number of Common Shares sold in the Cash
Offering and the number of Units issued in the Exchange Offering, but their
collective Common Share beneficial ownership percentage would remain at 19%. See
below at " - Ownership of the Trust and the Operating Partnership."
Mr. McGrath and Mr. Geiger have entered into a security escrow agreement
with the Trust under which they have deposited into an escrow account with
American Stock Transfer & Trust Company (the transfer agent and registrar for
the Common Shares being offered in the Cash Offering and the Units being offered
in the Exchange Offering) Units issued to them in connection with the formation
of the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering.
The effect of the escrow arrangement is that, as long as their Units are
held in the escrow account, the Original Investors will not be able to exchange
their Units into Common Shares and then sell any Common Shares. The Original
Investors will retain any voting rights to which the escrowed Units are
entitled. Any dividends paid on the escrowed Units will be held in the escrow
account and available for distribution to other Shareholders and Unitholders in
the event of any transaction which results in the distribution of the assets of
the Operating Partnership (such as its dissolution, liquidation, merger or sale
of substantially all of its assets) to the extent that the other Shareholders
and Unitholders otherwise would not receive in connection with such transaction,
distributions in an amount equal to at least the initial public offering price
of the Common Shares.
Ownership of the Trust and the Operating Partnership
Set forth below is a description of the ownership of the Trust and the
Operating Partnership on a pro forma basis, assuming that the Cash Offering and
the Exchange Offering are completed in their entirety as contemplated herein and
that the Dealer Manager or other participating broker-dealer has not exercised
any Common Share warrants granted to it in connection with the Cash Offering.
Immediately after the completion of the Cash Offering and the Exchange Offering,
there would be 2,625,000 Common Shares and 6,264,808 Units outstanding. The
purchasers of Common Shares in the Cash Offering would own 2,500,000 Common
Shares, representing a 95.2% ownership interest in the Trust as of the closing
of the Cash Offering and the Exchange Offering. Broker-dealers who earn
commissions for their services in the Exchange Offering (a number of Common
Shares equal to 5% of the Units issued to offerees as a result of their efforts)
would own the remaining 125,000, or 4.8%, of the outstanding Common Shares. On a
fully diluted basis assuming that all then outstanding Units (other than those
owned by the Trust) have been exchanged into an equivalent number of Common
Shares, the purchasers of Common Shares in
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the Cash Offering, recipients of Units in the Exchange Offering, the Original
Investors and broker-dealers who provide services in the Exchange Offering would
have a 39.5%, 39.5%, 19.0% and 2.0% beneficial ownership interest (i.e., have
the right to vote or dispose of such Common Shares or to acquire ownership of
Common Shares in exchange for Units) in the Trust, respectively.
The Trust will contribute the net proceeds of the Cash Offering to the
Operating Partnership in exchange for up to 2,500,000 unregistered Units and in
its capacity as General Partner of the Operating Partnership will also receive a
1% partnership interest in the Operating Partnership. Units held by the Trust
will not be exchangeable into Common Shares.
The two tables below reflect the pro forma allocation of Common Shares and
Units among the participants in the Cash Offering and the Exchange Offering. The
first table assumes the consummation of the Cash Offering by itself without
taking into account the Exchange Offering. The second table assumes the
consummation of the Cash Offering and the Exchange Offering.
Cash Offering
--------------------------------
Ownership:
Purchasers of
BARON CAPITAL TRUST Common
Shares in the Cash Offering 100.0%
("TRUST")
--------------------------------
--------------------------------
General Partner
Baron Capital Trust 1.0%
BARON CAPITAL PROPERTIES, L. Limited Partners
Baron Capital Trust 80.2%
("OPERATING PARTNERSHIP") Original Investors 18.8%
-----
Total 100.0%
--------------------------------
If the Trust sells all 2,500,000 Common Shares being offered in the Cash
Offering (gross proceeds of $25,000,000) and assuming that the Dealer Manager
and participating broker-dealers have not exercised any Common Share warrants
granted to them in connection with the Cash Offering and that no transactions
are effected pursuant to the Exchange Offering, the following would result:
o The Trust would use the net proceeds of the Cash Offering
($22,500,000) (remaining after payment of commissions and reimbursable
offering expenses) to acquire 2,500,000 Units in the Operating
Partnership (80.2% of the then outstanding amount). The Original
Investors would own 18.8% of the then outstanding Units (586,420
Units) and the Trust, in its capacity as general partner of the
Operating Partnership, would own the remaining 1% (31,176 Units).
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o The purchasers of Common Shares in the Cash Offering would own 100% of
the equity interest in the Trust, which, in turn, would own an 80.2%
limited partnership interest in the Operating Partnership.
o The respective ownership percentage interests in the Trust and the
Operating Partnership would remain proportionately the same in the
event the Trust sells less than all Common Shares being offered in the
Cash Offering, even though there would be fewer outstanding Common
Shares and Units.
o The Operating Partnership would use the cash proceeds received from
the Trust to acquire property interests and for working capital and
other general business purposes. Until such time that the election of
the Trust to be treated as a REIT for federal income taxes is revoked,
said uses of the cash proceeds shall exclude the acquisition of assets
that are listed in Section 351(e)(1) of the Code to the extent that
such assets would cause the Operating Partnership to own more than 78%
of the assets that are listed in Section 351(e)(1) of the Code. The
purpose of this requirement is to prevent the Operating Partnership
from being treated as an "investment company" for federal income tax
purposes. "See FEDERAL INCOME TAX CONSIDERATIONS - Transfer to an
Investment Company."
Cash Offering and Exchange Offering
--------------------------------
Ownership:
Purchasers of Common
BARON CAPITAL TRUST Shares in the Cash
Offering 95.2%
("TRUST") Broker-dealers participating 4.8%
-----
in the Exchange Offering 100.0%
Total
--------------------------------
--------------------------------
General Partner
Baron Capital Trust 1.0%
BARON CAPITAL PROPERTIES, L.P. Limited Partners
Baron Capital Trust 39.9%
("OPERATING PARTNERSHIP") Sellers of Property in
Exchange Offering 39.9%
Original Investors 19.2%
-----
Total 100.0%
--------------------------------
If the Trust sells all 2,500,000 Common Shares being offered in the Cash
Offering, and the Operating Partnership uses all 2,500,000 registered Units to
complete the Exchange Offering to acquire property interests, the following
would result:
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o The Trust would use the net proceeds of the Cash Offering
($22,500,000) (remaining after payment of commissions and reimbursable
offering expenses) to acquire 2,500,000 Units in the Operating
Partnership.
o The Operating Partnership would issue all 2,500,000 registered Units
to sellers of property interests in exchange for such interests and
acquire additional property interests with the cash proceeds received
from the Trust.
o Each broker-dealer who assists the Operating Partnership in
consummating the Exchange Offering with individual offerees who accept
the offering will be paid as a commission a number of unregistered
Common Shares of the Trust equal to 5% of the number of Operating
Partnership Units exchanged in the respective transactions.
o Assuming no Unitholders have exercised their right to exchange their
Units for an equivalent number of Common Shares, the purchasers of
Common Shares in the Cash Offering and broker-dealers providing
services in the Exchange Offering would own 95.2% and 4.8%,
respectively, of the equity interest in the Trust, and the Units of
the Operating Partnership would be owned as follows:
Percentage
Limited Partners Units Interest
---------------- ----- --------
Baron Capital Trust (as limited partner) 2,500,000 39.9%
Sellers of Property Interests
in Exchange Offering 2,500,000 39.9%
Original Investors 1,202,160 19.2%
Baron Capital Trust (as general partner) 62,648 1.0%
--------- -----
Total: 6,264,808 100.0%
If the Cash Offering is closed and all or a portion of the 2,500,000 Common
Shares being offering therein are sold prior to that closing, and the Exchange
Offering is also closed, but less than 2,500,000 Units are issued prior thereto,
the purchasers of Common Shares in the Cash Offering and broker-dealers
providing services in the Exchange Offering would still together hold 100% of
the then outstanding Common Shares of the Trust (but in varying percentages
between them, depending upon the number of Units issued), and the Trust and the
recipients of Units in the Exchange Offering would own varying numbers of Units
and percentages of the then outstanding Units, depending upon how many Common
Shares and Units were issued in connection with the respective offerings. The
Original Investors collectively would own a varying number of Units, but their
collective Common Share beneficial ownership percentage would remain at 19%. In
addition, over time as Unitholders exercise their rights to exchange Units for
an equivalent number of Common Shares: (i) the number of outstanding Common
Shares would increase, resulting in changing percentages of ownership among
Shareholders, and (ii) the number of outstanding Units would decrease, resulting
in changing percentages of ownership among Unitholders. However, such exchanges
would not affect the ownership percentage interests of any Shareholder or
Unitholder.
Regulations
General. Residential apartment communities are subject to various laws,
ordinances and regulations, including regulations relating to recreational
facilities such as swimming pools, activity centers and other common areas. The
Trust will use its best efforts to provide that each property in which it
acquires an interest has the necessary permits and approvals to operate its
business.
Fair Housing Amendments of 1988. The FHA requires residential apartment
communities first occupied after March 13, 1990 to be accessible to the
handicapped. Noncompliance with the FHA could result in the imposition of fines
or an award of damages to private litigants. The Trust will use its best efforts
to provide that properties subject to the FHA in which it acquires an interest
are in compliance with such law.
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Americans with Disabilities Act ("ADA"). Properties in which the Trust
acquires an interest must comply with Title III of the ADA to the extent that
such properties are "public accommodations" and/or "commercial facilities" as
defined by the ADA. Compliance with the ADA requirements could require removal
of structural barriers to handicapped access in certain public areas of
properties where such removal is readily achievable. The ADA does not, however,
consider residential properties, such as apartment communities, to be public
accommodations, except to the extent portions of such facilities, such as a
leasing office, are open to the public. The Trust will use its best efforts to
provide that properties in which it acquires an interest comply with all present
requirements under the ADA and applicable state laws. Noncompliance could result
in imposition of injunctive relief, fines or an award of damages. If required
changes involve a greater expenditure than the Trust might anticipate, or if
changes must be made on a more accelerated basis than it might anticipate, the
Trust's ability to make expected distributions to Shareholders could be
adversely affected. The Trust believes that its competitors would face similar
costs to comply with the requirements of the ADA.
Environmental Regulations. The Trust is subject to Federal, state, and
local environmental regulations that apply to the development of real property,
including construction activities, the ownership of real property, and the
operation of multifamily apartment communities.
The Comprehensive Environmental Response, Compensation and Liability Act,
42 U.S.C. 9601, et seq. ("CERCLA"), and applicable state Superfund laws subject
the owner of real property to claims or liability for the costs of removal or
remediation of hazardous substances that are disposed of on real property in
amounts that require removal or remediation. Liability under CERCLA and
applicable state Superfund laws can be imposed on the owner of real property or
the operator of a facility without regard to fault or even knowledge of the
disposal of hazardous substances on the property or at the facility. The
presence of hazardous substances in amounts requiring response action or the
failure to undertake remediation where it is necessary may adversely affect an
owner's ability to sell real estate or borrow money using such real estate as
collateral. In addition to claims for cleanup costs, the presence of hazardous
substances on a property could result in a claim by a private party for personal
injury or a claim by an adjacent property owner for property damage.
The Trust, where required, intends to retain a qualified environmental
consultant to conduct an environmental investigation of each property that it
considers for investment. If there is any indication of contamination, sampling
of the property will be performed by the environmental consultant. The
environmental investigation report will be reviewed by the Trust and counsel
prior to purchase of an interest in any property.
Rent Control Legislation. Although none currently are applicable to any of
the properties in which the Trust and the Operating Partnership are
contemplating an investment, state and local rent control laws in certain
jurisdictions limit a property owner's ability to increase rents and to cover
increases in operating expenses and the costs of capital improvements. Enactment
of such laws has been considered from time to time in other jurisdictions. The
Trust does not presently intend to acquire interests in residential apartment
properties in markets that are either subject to rent control or in which rent
limiting legislation exists.
Employees
The Trust and the Operating Partnership initially expect to employ a total
of approximately 20 employees. The number of employees it will hire will depend
upon the amount of net proceeds raised in the Cash Offering and the results of
the Exchange Offering.
INVESTMENT OBJECTIVES AND POLICIES
General
The Trust and the Operating Partnership have been organized to acquire
equity interests in existing residential apartment properties located in the
United States and/or to provide or acquire debt financing secured by
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mortgages on such types of property. Such investments are expected to consist
primarily of: (i) the direct and indirect acquisition, ownership, operation,
management, improvement and disposition of equity interests in such types of
properties and/or (ii) Mortgage Loans which the Trust and the Operating
Partnership provide or acquire which are secured by mortgages on such types of
properties. The Managing Shareholder expects that the proposed investments will
(1) generate current cash flow for distribution to Shareholders and Unitholders
from rental payments from the rental of residential apartment units which the
Trust and the Operating Partnership may acquire and/or principal and interest
payments in respect of Mortgage Loans which the Trust and the Operating
Partnership may provide or acquire and (2) provide the opportunity for capital
appreciation through the sale of all or a portion of the investment in equity
interests in residential apartment properties. The Trust and the Operating
Partnership intend to pay regular quarterly distributions to the Shareholders
and the Unitholders. Properties in which the Trust and the Operating Partnership
will acquire an interest are expected to use the straight-line method of
depreciation over 27-1/2 years.
The management of the Trust and the Operating Partnership has been involved
in the residential property business for over 10 years and has extensive
experience and presence in the residential property business which have enabled
it to form key alliances and working relationships with owners of residential
apartment properties and financial institutions.
The Trust and the Operating Partnership intend to acquire, own, operate,
manage, and improve residential apartment properties for long-term ownership,
and thereby to seek to maximize current and long-term income and the value of
its assets. The strategy of the Trust and the Operating Partnership is to pursue
acquisitions of interests in properties that (i) are available at prices below
estimated replacement cost; (ii) may provide attractive returns with significant
potential growth in cash flow from property operations; (iii) are strategically
located, of high quality and competitive in their respective markets; (iv) have
been under-managed or are otherwise capable of improved performance through
intensive management and leasing that will result in increased occupancy and
rental revenues, and (v) provide anticipated total returns that will increase
distributions by the Trust and the Operating Partnership and its overall market
value. The Trust will make investments in properties indirectly through the
Operating Partnership in which it will hold all of its real estate assets and
conduct all real estate operations. Unless the context otherwise requires, the
term "Trust" as used herein shall collectively refer to Baron Capital Trust and
the Operating Partnership.
The primary business objective of the Trust is to increase distributions to
Shareholders and Unitholders and to increase the value of the Trust's portfolio
of properties in which it acquires an interest. The Trust intends to achieve
these objectives by:
(i) Acquiring interests in properties that are available at prices below
estimated replacement cost and capable of enhanced performance, both in terms of
cash flow and investment value, through application of the Trust's management
ability and strategic capital improvements;
(ii) Increasing cash flow of the Trust's properties through active leasing,
rent increases, improvement in tenant retention, expense controls, effective
property management, and regular maintenance and periodic renovations, including
additions to amenities;
(iii) Managing operating expenses through the use of affiliated leasing,
marketing, financing, accounting, legal, and data processing functions; and
(iv) Emphasizing capital improvements to enhance the Trust's competitive
advantages in its markets.
The Exchange Partnerships collectively manage the properties in which they
have an interest and share property management expenses. Other properties in
which the Trust acquires an interest will be similarly managed.
After the Trust has invested the net proceeds of the Cash Offering and
completed the Exchange Offering, it intends to utilize one or more sources of
capital for future acquisitions and capital improvements, which may include
undistributed cash flow, borrowings, issuance of debt or equity securities and
other bank and/or institutional
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borrowings. The Trust intends to investigate making an additional public or
private offering of Common Shares and/or Units within the 12-month period
following the commencement of the Cash Offering if the Board of the Trust
determines that suitable property acquisition opportunities which meet its
investment criteria are available to the Trust at attractive prices and such an
offering would fulfill its cost of funds requirements. There can be no
assurance, however, that the Trust will be able to obtain capital for any such
acquisitions or improvements on terms favorable to the Trust.
The Trust expects to qualify as a REIT for federal income tax purposes
beginning with its taxable year ending December 31, 1998. See "TAX STATUS OF THE
TRUST" and "FEDERAL INCOME TAX CONSIDERATIONS - Taxation of the Trust."
Trust Policies with Respect to Certain Activities
The following is a discussion of the Trust's policies with respect to
investments, dispositions, financings, and conflicts of interest. These policies
have been determined by the Managing Shareholder of the Trust and under the
Declaration of Trust may be amended or revised from time to time at the
discretion of the Board with approval of a majority in interest of the
Shareholders entitled to vote on such matters. The Declaration of Trust contains
certain additional limitations on the Trust's activities. See "SUMMARY OF THE
DECLARATION OF TRUST - Control of Operations" and Section 1.9 of the
Declaration.
At all times, the Trust intends to make investments and conduct its
operations in such a manner as to be consistent with the requirements of the
Code for the Trust to qualify as a REIT unless, because of changing
circumstances or changes in the Code (or in Treasury Regulations), the Managing
Shareholder, with the consent of a majority of the Shareholders entitled to vote
on such matter approving the Managing Shareholder's determination, determines
that it is no longer in the best interests of the Trust to qualify as a REIT. No
assurance can be given that the Trust's objectives will be attained.
Investment Policies
The Trust's investment objective is to provide quarterly cash distributions
and achieve long-term appreciation through increases in cash flows and the value
of its properties. The Trust intends to pursue these objectives by acquiring
equity interests in one or more existing residential apartment properties
located in the United States and/or making or investing in Mortgage Loans and
other real estate interests related to such types of properties consistent with
its qualification as a REIT. The Trust may invest in First Mortgage Loans or
Junior Mortgage Loans and participating or convertible mortgages if it concludes
that it may benefit from the cash flow or any appreciation in the value of the
subject property. Such mortgages are similar to equity participation. The Trust
may also retain a purchase money mortgage for a portion of the sale price in
connection with the disposition of properties from time to time.
Subject to the percentage of ownership limitations and gross income tests
necessary for REIT qualification, the Trust also may invest in securities of
entities engaged in real estate activities or securities of other issuers,
including for the purpose of exercising control over such entities. See "FEDERAL
INCOME TAX CONSIDERATIONS - Taxation of the Trust." The Trust may acquire all or
substantially all of the securities or assets of other REITs or similar entities
where such investments would be consistent with the Trust's investment policies.
The Trust will not make an equity investment in respect of any property
where the amount invested by it plus the amount of any existing indebtedness or
refinancing indebtedness in respect of such property exceeds the appraised value
of the property. In addition, the Trust will not acquire or provide debt
financing in respect of any property where the amount invested by the Trust plus
the amount of any existing indebtedness in respect of such property exceeds 80%
of the estimated replacement cost of the property as determined by the Managing
Shareholder unless substantial justification exists. Repayment of any Mortgage
Loans provided or acquired by the Trust would typically be secured by a Mortgage
on the land, apartment units, and other improvements financed by the Trust and
be non-recourse to the borrower. It is expected that in certain cases the Trust
will provide or acquire a Second
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Mortgage Loan that is subordinate to a First Mortgage Loan provided by a lending
institution. In certain cases, Mortgage Loans provided or acquired by the Trust
may be in the form of First Mortgage Loans.
Junior Mortgages securing Junior Mortgage Loans to be provided or acquired
by the Trust may or may not be recorded. If any Junior Mortgage in favor of the
Trust is not recorded, the Trust's security interest in the Mortgage would be
unperfected and the Trust would be pari passu (i.e., on an equal basis) with all
other unsecured creditors of the borrower, provided, however, the security
instruments that will be entered into in connection with Mortgage Loans to be
provided or acquired by the Trust will typically restrict the borrower's ability
to enter into a subsequent loan arrangement with third parties which would be
senior to or pari passu with (i.e., equal to) the Mortgage held by the Trust.
Non-payment of any Junior Mortgage Loan that may be made or acquired by the
Trust may constitute an event of default by the borrower under the underlying
Senior Mortgage Loan, and such Senior Mortgage Loan may have to be repaid by the
borrower before Shareholders in the Trust will receive any return on their
investment.
The Board of the Trust has adopted a policy, described below at " -
Conflicts of Interest Policy," designed to eliminate or minimize potential
conflicts of interest which may arise in respect of any residential apartment
property investment opportunity which an Independent Trustee, any other member
of the Board, an Original Investor or any of their respective affiliates may
wish to pursue for his own account and which might be suitable for the Trust and
the Operating Partnership. Such an opportunity may be pursued only if the Board
is first given a right of first refusal to participate in the investment in
place of the requesting party on the same terms and conditions as originally
proposed and, in addition, either a majority of the disinterested members of the
Board determine that the Trust and the Operating Partnership will not exercise
the right or they fail to respond to the requesting party's proposal within a
specified period.
The Trust will obtain and maintain insurance coverage on property in which
it acquires an equity interest (and, prior to providing or acquiring any
Mortgage Loan in respect of a property, will be listed as an additional insured
or loss payee in respect of such property), protecting against casualty loss up
to replacement cost (with a $1,000 deductible per loss), and against public
liability in an amount that is reasonable taking into account the market value
of the property at the time insurance is obtained. There can be no assurance,
however, that the Trust's Property would not sustain losses in excess of its
applicable insurance coverage, and it could sustain losses as a result of risks
which are uninsurable. There are certain types of losses (generally of a
catastrophic nature, such as earthquakes, floods and wars) which may be either
uninsurable or not economically insurable. Should such a loss occur, the Trust
could lose its invested capital in the property. In that case, the Shareholders
and Unitholders could suffer a complete loss of their investment in the Trust.
Pending the commitment of Trust and Operating Partnership funds for the
purposes described in this Prospectus, for distributions to Shareholders and
Unitholders or for application of reserve funds to their purposes, the Managing
Shareholder has full authority and discretion to make short-term investments in:
(i) obligations of banks or savings and loan associations that either have
assets in excess of $5 billion or are insured in their entirety by the United
States government or its agencies and (ii) obligations of or guaranteed by the
United States government or its agencies. Such short-term investments would be
expected to earn rates of return which are lower than those earned in respect of
properties in which the Trust may invest.
The Trust intends to make investments in such a way that it will not be
treated as an investment company under the Investment Company Act of 1940.
Disposition Policies
The Managing Shareholder will periodically review the portfolio of assets
which the Trust acquires. The Trust has no current intention to dispose of any
property interests it may acquire, although it reserves the right to do so.
Disposition decisions relating to a particular property will be made based on
(but not limited to) the following factors: (i) potential to continue to
increase cash flow and value; (ii) the sale price; (iii) strategic fit of the
property with the rest of the Trust's portfolio; (iv) potential for, or the
existence of, any environmental or regulatory
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problems; (v) alternative uses of capital; and (vi) maintaining qualification as
a REIT. Any decision to dispose of a property will be made by the Managing
Shareholder.
Financing Policies
The Trust will have the right to borrow funds, and use the Trust's
available assets as security for any such loan, if the Trust's cash requirements
exceed its available cash. Under the Declaration of the Trust, the aggregate
borrowings of the Trust in relation to its net assets may not exceed 300%,
except where the Trust determines that a higher level of borrowing is
appropriate. It is expected that each property in which the Trust invests will
secure a First Mortgage Loan. The principal balance of any such First Mortgage
Loan typically would represent a substantial percentage of the Trust's basis in
any property in which the Trust owns an equity interest.
To the extent that the Managing Shareholder desires that the Trust obtain
additional capital, the Trust may raise such capital through additional public
and private equity offerings, debt financing, retention of cash flow (subject to
satisfying the Trust's distribution requirements under the REIT rules) or a
combination of these methods. The Trust may determine to issue securities senior
to the Common Shares, including Preferred Shares and debt securities (either of
which may be convertible into Common Shares or be accompanied by warrants to
purchase Common Shares). The Trust may also finance acquisitions of properties
or interests in properties through the exchange of properties, the issuance of
Shares, or the issuance of Units of limited partnership interest in the
Operating Partnership and any other partnerships the Trust may form or acquire
an equity interest in to conduct all or a portion of its real estate operations.
The proceeds from any borrowings by the Trust may be used to pay
distributions, to provide working capital, to purchase additional interests in
any applicable Operating Partnership, to refinance existing indebtedness or to
finance acquisitions or capital improvements of new properties.
Conflict of Interest Policies
The Trust has adopted certain policies designed to eliminate or minimize
potential conflicts of interest, as described below. However, there can be no
assurance that these policies always will be successful in eliminating the
influences of such conflicts, and if they are not successful, decisions could be
made that might fail to reflect the interests of all Shareholders and
Unitholders.
The Managing Shareholder will have discretion in management and control of
the affairs of the Trust and the Operating Partnership, subject to (i) general
supervision and review by the Independent Trustees and the Managing Shareholder
acting together as the Board of the Trust and (ii) prior approval authority of a
majority of the Board and/or of a majority of the Independent Trustees in
respect of certain actions of the Trust and the Operating Partnership. The
Declaration of the Trust requires that a majority of the Board of the Trust be
comprised of Independent Trustees not affiliated with the Managing Shareholder
or its Affiliates.
Actions of the Trust and the Operating Partnership requiring approval of
the Board and/or the Independent Trustees include, without limitation, the
payment of compensation to the Managing Shareholder, a Trustee, any other member
of the Board of the Trust or any of their respective Affiliates in amounts in
excess of certain specified limits for services performed for the Trust and the
acquisition of properties from, or the sale of properties to, any such parties.
For example, the Trust may not purchase property from the Managing Shareholder,
a Trustee, any other member of the Board or any of their respective Affiliates
unless a majority of the members of the Board and, in addition, a majority of
the Independent Trustees who have no other interest in the particular proposed
transaction (beyond their role on the Board or as Independent Trustees) review
the proposed transaction and determine that it is fair and reasonable to the
Trust and that the purchase price to the Trust for such property is no greater
than the cost of the property to such proposed seller, or if the purchase price
to the Trust is in excess of such cost, that substantial justification for such
excess exists and such excess is reasonable, provided, however, in no event may
the purchase price for the property exceed its then current appraised value. As
of the date of this Prospectus, the Trust does not contemplate using any
substantial portion of the net proceeds of the Cash Offering to acquire property
interests from
104
<PAGE>
the Managing Shareholder, any Trustee or any other member of the Board of the
Trust or any of their respective affiliates.
The Board of the Trust has adopted a policy designed to eliminate or
minimize potential conflicts of interests which may arise in respect of
investment opportunities suitable for the Trust and the Operating Partnership
which may be presented to the Managing Shareholder, an Independent Trustee, any
other member of the Board, an Original Investor or any of their respective
affiliates. Under the policy, such parties may pursue for their own account a
residential apartment property investment opportunity which may be suitable for
the Trust and the Operating Partnership (i.e., in accordance with the purposes
for which they were organized) only upon fulfillment of the following
conditions. First, the requesting party(ies) must deliver to the Board of the
Trust, at least 60 days prior to the consummation of any such transaction, a
written investment proposal identifying the parties to be involved in such
transaction, specifying in reasonable detail the proposed terms and conditions
of the particular investment opportunity intended to be pursued and granting the
Trust and the Operating Partnership a right of first refusal, exercisable within
30 days following the delivery of such proposal, to participate in the proposed
transaction in the place of the requesting party(ies), on the terms and
conditions specified in the written proposal.
In addition, the requesting party(ies) either (i) must receive written
notice from a majority of the disinterested members of the Board (i.e., those
persons who have no other interest in any such transaction beyond their role on
the Board), or an authorized representative acting on their behalf, which
specifies that the Trust and the Operating Partnership have determined not to
participate in the proposed transaction or (y) must have not received from the
disinterested members of the Board, or an authorized representative acting on
their behalf, written notice, within 30 days following the receipt of such
written proposal, which notifies the requesting party(ies) that the Trust and
the Operating Partnership elect to exercise their right of first refusal to
participate in the proposed transaction on the terms and conditions specified in
the written proposal. The Board of the Trust and the Independent Trustees are
responsible for overseeing the policy under the circumstances described above to
insure that it is applied fairly to the Trust. However, there can be no
assurance that the policies of the Trust and the Operating Partnership will
always be successful in eliminating or minimizing the influence of such
conflicts, and, if they are not successful, decisions could be made that might
fail to reflect fully the interests of all Shareholders and Unitholders.
For a more detailed description of Trust and Operating Partnership actions
requiring approval of the Board and/or the Independent Trustees, see "SUMMARY OF
DECLARATION OF TRUST - Control of Operations."
INITIAL REAL ESTATE INVESTMENTS
The Acquired Properties
Set forth below is a description of the Operating Partnership's recent
acquisition of beneficial ownership of a 67-unit and 80-unit residential
apartment properties located in Orlando, Florida and Lakeland, Florida,
respectively, and a special limited partnership interest in certain real estate
partnerships managed by affiliates of the Managing Shareholder, including each
of the Exchange Partnerships, which own direct or indirect equity or debt
interests in residential apartment properties. The investments were made using
net proceeds of the Trust's Cash Offering. Also described is a purchase
agreement recently entered into by the Trust under which the Trust, subject to
certain conditions, will acquire two residential apartment properties (totaling
652 units) under development in Burlington and Louisville, Kentucky upon
completion of construction.
Heatherwood Apartments
In June 1998, the Operating Partnership acquired the entire limited
partnership interest in Heatherwood Kissimmee, Ltd., a Florida limited
partnership (the "Heatherwood Partnership") which owns fee simple title to a
67-unit residential apartment property referred to as the Heatherwood Apartments
- - Phase I (the "Heatherwood Property") located at 1005 Airport Road in
Kissimmee, Florida 32741. Set forth below is certain information describing the
property, first mortgage financing to which the property is subject and the
acquisition by the Operating Partnership of beneficial ownership of the
property.
105
<PAGE>
The Heatherwood Property, completed in 1981, consists of 17 studio/one
bathroom units, 45 one bedroom/one bathroom units, and five two bedroom/one
bathroom units. The property is situated on approximately 2.26 acres and has
approximately 35,136 square feet of rentable area. The average unit size of the
studio, one bedroom and two bedroom units is approximately 288, 576 and 864
square feet, respectively. The average monthly rental rate as of July 1, 1998
for each type of unit is approximately $379, $439 and $539, respectively, or
$1.31, $.76 and $.62 per square foot, respectively. The units were approximately
97% occupied as of July 1, 1998. The average monthly occupancy rates for 1993,
1994, 1995, 1996 and 1997 were approximately 89%, 91%, 88%, 93% and 97%,
respectively.
The Operating Partnership acquired the entire limited partnership interest
in the Heatherwood Partnership from Rylex Capital, L.L.C., a Florida limited
liability company, an unaffiliated third party, for a purchase price of
$830,000. The Heatherwood Property is subject to first mortgage financing with a
current principal balance of approximately $1,245,000. The mortgage is held by
GMAC Commercial Mortgage Corp. The maturity date of the first mortgage loan is
December 2004. Assuming no prepayments of principal, the balance that will be
due at maturity is approximately $1,083,553. The monthly debt service payments
are $8,847, or an annual amount of $106,164. The loan bears a fixed interest
rate of 7.625% and amortizes on a 30-year basis. The loan is prepayable with a
prepayment fee equal to 1% of the then outstanding principal balance.
In March 1998, prior to completion of the acquisition, the property was
appraised by Consortium Appraisal, Inc., an independent appraisal firm in Winter
Park, Florida which estimated the market value of the property at $2,075,000.
The methods employed in appraising the property are discussed at "THE EXCHANGE
OFFERING - Exchange Property Appraisals." The Trust and the Operating
Partnership were not responsible for the payment of any fees or expenses for the
appraisal.
The acquisition was unanimously approved in advanced by the Board of the
Trust.
Crystal Court Apartments
In July 1998, the Operating Partnership acquired the entire limited
partnership interest in Crystal Court Apartments II, Ltd., a Florida limited
partnership (the "Crystal Court Partnership") which owns fee simple title to an
80-unit residential apartment property referred to as Crystal Court Apartments -
Phase II (the "Crystal Court Property") located in Lakeland, Florida. Set forth
below is certain information describing the property, first mortgage financing
to which the property is subject and the acquisition by the Operating
Partnership of beneficial ownership of the property.
The Crystal Court Property, completed in 1986, consists of 20 studio/one
bathroom units, 54 one bedroom/one bathroom units, and six two bedroom/one
bathroom units. The property is situated on approximately 6.8 acres and has
approximately 42,048 square feet of rentable area. The average unit size of the
studio, one bedroom and two bedroom units is approximately 288, 576 and 864
square feet, respectively. The average monthly rental rate as of July 1, 1998
for each type of unit is approximately $319, $369 and $455, respectively, or
$1.11, $.64 and $.53 per square foot, respectively. The units were approximately
92% occupied as of July 1, 1998. The average monthly occupancy rates for 1993,
1994, 1995, 1996 and 1997 were approximately 95%, 91%, 91%, 90% and 95%,
respectively.
The Operating Partnership acquired the entire limited partnership interest
in the Crystal Court Partnership from Rylex Capital, L.L.C., a Florida limited
liability company, an unaffiliated third party, for a purchase price of
$756,293. The Crystal Court Property is subject to first mortgage financing with
a current principal balance of approximately $1,488,000. The mortgage is held by
GMAC Commercial Mortgage Corp. The maturity date of the first mortgage loan is
October 2004. Assuming no prepayments of principal, the balance that will be due
at maturity is approximately $1,366,490. The monthly debt service payments are
$10,404, or an annual amount of $124,808. The loan bears a fixed interest rate
of 7.5% and amortizes on a 30-year basis. The loan is prepayable with a
prepayment fee equal to 1% of the then outstanding principal balance.
106
<PAGE>
In June 1998, prior to completion of the acquisition, the property was
appraised by Consortium Appraisal, Inc., an independent appraisal firm which
estimated the market value of the property at $2,170,000. The Trust and the
Operating Partnership were not responsible for the payment of any fees and
expenses for the appraisal.
The acquisition was unanimously approved in advance by the Board of the
Trust.
Attached as Exhibit E hereto in respect of each of the Heatherwood Property
and the Crystal Court Property is an audited statement of revenues and certain
expenses for the years ended December 31, 1996 and 1997 and an unaudited
statement of revenues and certain expenses for the five-month period ended May
31, 1998.
Acquisition of Special Limited Partnership Interests
In July 1998, the Operating Partnership made capital contributions in the
range of $8,000 to $14,000 (aggregate amount approximately $200,000) to certain
real estate partnerships managed by affiliates of the Managing Shareholder,
including each of the Exchange Partnerships, which own direct or indirect equity
or debt interests in residential apartment properties. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return of the limited
partners of the respective partnership and is not eligible to participate in the
Exchange Offering.
Contract to Purchase Two Additional Properties
[On September 16, 1998, the Trust entered in an agreement with three real
estate development companies to acquire two luxury residential apartment
properties in the development stage upon the completion of construction. The
development companies (Brentwood at Southgate, Ltd., Burlington Residential,
Ltd. and The Shoppes at Burlington, Ltd.) are controlled by Gregory K. McGrath,
one of the founders of the Trust and the Operating Partnership. The properties
will have a total of 652 units, comprised of studios and one, two and three
bedroom/one or two bathroom apartments. Construction on one of the properties,
located in Louisville, Kentucky, is expected to be completed prior to the end of
2000, and construction of the other property, located in Burlington, Kentucky
(part of the Cincinnati metropolitan area), is expected to be completed by the
end of 2001. The aggregate purchase price for the two properties is in the range
of approximately $41,000,000 to $43,000,000. The closing of each acquisition,
which is expected to occur shortly following the completion of construction, is
conditioned on, among other things, the completion of the respective apartment
property, the availability of first mortgage financing and the Trust raising the
balance of the funds necessary for the acquisition in its ongoing Cash Offering.
In connection with the transaction and in exchange for certain benefits
described below, the Trust agreed to co-guarantee (along with Mr. McGrath), for
a period of 60 days, up to $3,000,000 of the development portion of long-term
construction loans with an aggregate principal amount of up to $36,000,000 to be
provided by KeyBank, N.A. to the development companies. Subject to the
fulfillment of certain closing and funding conditions, the construction loans
will be made to the development companies in connection with the development and
construction of the two apartment properties and an 111,000 square foot shopping
center being developed in Burlington, Kentucky. The interest rate on the
construction loans is 7.52% and no interest payments are due until November
1998. The loan to value ratio of the development portion of the construction
loans is approximately 48%. The principal portion of the construction loans may
not exceed a loan to building cost ratio of 80% or a loan to value ratio of 70%.
The Trust also agreed that, if the loans are not repaid prior to the expiration
of the guarantee, it will either buy out KeyBank's position on the entire amount
of the construction loans or arrange for a third party to do so. The
construction loans are expected to be replaced by a long-term credit facility
within 180 days.]
The Trust expects to receive significant benefits from the transaction in
addition to the acquisition of two luxury apartment properties located in
attractive communities. First, in exchange for the guarantee of the development
portion of the construction loans, the Trust will receive a discount of
approximately $212,500 (representing a .5% reduction) on the purchase price of
the properties. The Trust and the development companies are negotiating a
further price reduction which would apply if the development portion of the
loans is not repaid
107
<PAGE>
prior to the expiration of the guarantee period and the Trust is required to buy
out or arrange for the buyout of the lender's position on the loans.]
The Exchange Properties
In the Exchange Offering, the Operating Partnership will offer to issue
registered Units in exchange for limited partnership interests owned by
individual limited partners in limited partnerships which own direct or indirect
interests in family residential apartment properties. As its initial investment
targets in the Exchange Offering, the Operating Partnership will offer to
acquire units of limited partnership interests from individual limited partners
in 14 real estate limited partnerships managed by Affiliates of the Managing
Partnership (such limited partners are collectively referred to herein as the
"Exchange Limited Partners" and individually as an "Exchange Limited Partner,"
such partnerships are collectively referred to herein as the "Exchange
Partnerships" and individually as an "Exchange Partnership" and the limited
partnership interests owned by the Exchange Limited Partners in the Exchange
Partnerships are collectively referred to herein as "Exchange Partnership
Units").
Each Exchange Partnership directly or indirectly owns all or a portion of
the equity interest (and, in one case, a subordinated mortgage interest) in
residential apartment property. The Operating Partnership will acquire a
beneficial ownership interest in the property by acquiring from Exchange Limited
Partners of Participating Exchange Partnerships their limited partnership
interests in the respective partnership. In connection with the completion of
the Exchange Offering in respect of each Participating Exchange Partnership, (i)
Gregory K. McGrath, a founder of the Trust and the Operating Partnership, the
Chief Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder, and the sole stockholder, director and executive officer of the
Corporate General Partner of each of the Exchange Partnership, will either grant
the Board of the Trust a management proxy coupled with an interest to vote the
shares of the Corporate General Partner of the Exchange Partnership or contract
to assign all of the stock in the Corporate General Partner to the Trust for
nominal consideration; (ii) the Corporate General Partner will assign to the
Operating Partnership all of its residual economic interest in the partnership;
and (iii) Mr. McGrath will cause the Corporate General Partner to waive its
right to receive from the partnership any ongoing fees, effective at the time of
exchange.
The 14 Exchange Properties consist of an aggregate of 849 residential units
(comprised of studio and one, two, three and four-bedroom units). Ten of the
properties are located in Florida, two properties are in Ohio and one property
each in Georgia and Indiana. Certain information relating to the 14 properties
and mortgage indebtedness secured thereby is summarized in the two tables set
forth below. Assuming the Exchange Offering in respect of the 14 properties is
accepted by all Exchange Limited Partners, the aggregate purchase price would be
approximately $33,638,991, comprised of Operating Partnership Units to be issued
with an initial value of approximately $14,017,080 plus first mortgage and other
indebtedness of approximately $19,424,161 to which the properties are subject.
The Trust and the Operating Partnership will investigate other investment
opportunities for the Exchange Offering, including property interests held by
unaffiliated owners and by certain other limited partnerships managed by
Affiliates of the Managing Shareholder. See also "PRIOR PERFORMANCE BY
AFFILIATES OF MANAGING SHAREHOLDER," THE TRUST AND THE OPERATING PARTNERSHIP"
and "INVESTMENT OBJECTIVES AND POLICIES."
Audited statements of revenues and certain expenses for the 14 Exchange
Properties described herein and a combined audited statement for the years ended
December 31, 1996 and December 31, 1997 are included in Exhibit D to this
Prospectus. Also included in the exhibit is an unaudited statement of revenues
and certain expenses for each of the properties and a combined statement for the
five-month period ended May 31, 1998. The statements of revenues and certain
expenses exclude material expenses described in the notes thereto (including
partnership administrative expenses, major maintenance, depreciation,
amortization and professional fees) that would not be comparable to those
resulting from the proposed future operations of the Exchange Properties.
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue Operating Partnership Units to each individual
Exchange Limited Partner in exchange for his respective limited partnership
interest in an Exchange Partnership. Each Exchange Limited Partner will have the
opportunity to elect on an individual basis either (i) to accept Operating
Partnership Units in exchange for his limited partnership interest in his
108
<PAGE>
respective Exchange Partnership or (ii) retain his interest in the Exchange
Partnership on substantially the same terms and conditions as his original
investment. The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Operating Partnership Units with an initial value of at least
$6,000,000. After the completion of the Exchange Offering, each Exchange
Partnership will continue to own its interest in its respective Exchange
Property, but all of the limited partnership interests therein would then be
owned by the Operating Partnership, if all Exchange Limited Partners in such
Exchange Partnership elect to accept the Exchange Offering, or by the Operating
Partnership and any Exchange Limited Partners who elect not to accept the
Exchange Offering.
The number of Operating Partnership Units to be offered to each Exchange
Limited Partner for his interest in a given Exchange Partnership have a deemed
value in the range of 102% to 125% of the amount of an Exchange Limited
Partner's original investment in the partnership. For such purposes, each
Operating Partnership Unit will be initially valued at $10, the offering price
of each Trust Common Share offered in the Cash Offering. The value of the Units
and the Common Shares are substantially identical since, as described above,
recipients of Operating Partnership Units in the Exchange Offering may exchange
their Units into an equivalent number of Common Shares at any time, subject to
certain conditions. "See "SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP."
The number of Operating Partnership Units to be offered in respect of each
Exchange Property will differ based upon a number of factors, including, among
others, the estimated appraised market value and operating history of the
property, the amount of distributed cash flow generated by the property, the
period of time that the property has been held by the underlying Exchange
Partnership and the property's overall condition. Each Exchange Property has
been appraised by a qualified and licensed independent appraisal firm and each
additional property in which it intends to acquire an interest will be appraised
in advance of acquisition.
All expenses incurred in connection with the Exchange Offering to produce,
file, print and distribute the Prospectus will be paid by the Trust and the
Operating Partnership. No special fees or commissions were or will be paid in
connection with the Exchange Offer to the Managing Shareholder, any Corporate
General Partner of an Exchange Partnership, or any of their respective
Affiliates. Broker-dealers who assist the Operating Partnership in consummating
the Exchange Offering with individual offerees who accept the offering will be
paid as a commission a number of unregistered Common Shares of the Trust equal
to 5% of the Units issued to offerees as a result of their efforts.
109
<PAGE>
Property Information
Exchange Properties
The table set forth below summarizes certain information relating to the 14
Exchange Properties in which the Operating Partnership intends to acquire an
interest in connection with the initial transactions of the Exchange Offering,
including (i) name of the partnership, and its general partner, (ii) name and
location of the properties, (iii) year each property was completed, (iv) number
of units, acreage, rentable area, average unit size, average rental rate per
unit and per square feet of rentable area as of July 1, 1998, and (v) physical
occupancy of each property as of July 1, 1998.
<TABLE>
<CAPTION>
Property Year No. of
Partnership GP (and Type of Interest) Location Completed Units
- ----------- -- --------------------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Baron Strategic Baron Capital Steeplechase Apartments Anderson, Indiana 1977 Total 72
Investment Fund II, Ltd. XXXI, Inc. (1)
1 BR 12
2 BR 60
Central Florida Income Baron Capital of Grove Hamlet Deland, Florida 1986 Total 56
Appreciation Fund, Ltd. Florida, Inc. Apartments(1)
1 BR 10
2 BR 46
Florida Capital Income Baron Capital Eagle Lake Apartments Port Orange, 1987 Total 77
Fund, Ltd. II, Inc. (1) Florida
1 BR 73
2 BR 4
Florida Capital Income Baron Capital Forest Glen Apartments Daytona Beach, 1985 Total 52
Fund II, Ltd. IV, Inc. (Phase I)(2) Florida
2 BR 28
3 BR 24
Florida Capital Income Baron Capital Bridge Point Apartments Jacksonville, 1986 Total 48
Fund III, Ltd. VII, Inc. (Phase II)(1) Florida
Studio 6
1 BR 37
2 BR 5
Florida Capital Income Baron Capital V, Glen Lake Apartments(1) St. Petersburg, 1986 Total 144
Fund IV, Ltd. Inc. Florida
1 BR 144
Florida Income Advantage Baron Capital Forest Glen Apartments Daytona Beach, 1985 Total 26
Fund I, Ltd. IV, Inc. (Phase III)(2) Florida
2 BR 19
3 BR 7
Florida Income Baron Capital Forest Glen Apartments Daytona Beach, 1985 Total 8
Appreciation Fund I, Ltd. IV, Inc. (Phase IV)(2) Florida
2 BR 6
3 BR 2
Florida Income Growth Baron Capital Blossom Corners Orlando, Florida 1980 Total 70
Fund V, Ltd. XI, Inc. Apartments (Phase I)(1)
Studio 15
1 BR 49
2 BR 6
Florida Opportunity Baron Capital Camellia Court Daytona Beach, 1982 Total 60
Income Partners, Ltd. III, Inc. Apartments(1) Florida
1 BR 59
2 BR 1
GSU Stadium Student Baron Capital X, Stadium Club Apartments Statesboro, 1987 Total 60
Apartments, Ltd. Inc. (1) Georgia
Studio 2
3 BR 3
4 BR 55
Lamplight Court of
Bellefontaine Baron Capital Lamplight Court Bellefontaine, 1973 Total 80
Apartments, Ltd. IX, Inc. Apartments(3) Ohio
Studio 12
One/One 53
Two/One 15
Midwest Income Growth Baron Capital of Brookwood Way Apartments Mansfield, Ohio 1974 Total 66
Fund VI, Ltd. Ohio III, Inc. (1)
Studio 3
1 BR 60
2 BR 3
Realty Opportunity Income Baron Capital Forest Glen Apartments Daytona Beach, 1985 Total 30
Fund VIII, Ltd. IV, Inc. (Phase II)(2) Florida
2 BR 23
3 BR 7
========
TOTAL PROPERTIES: 849
========
<CAPTION>
Approx. Physical
Rentable 7/1/98 Occupancy
Approx. Area Avg. Unit Size Average Rental Rates/Month As Of
Partnership Acres (Sq. Ft.)* (Sq. Ft.) (Per Unit) (Per Sq. Ft.) 7/1/98
- ----------- ----- --------- --------- ---------- ------------- ------
Baron Strategic 3.20 47,280 Avg. 657 $428 $.65 91%
Investment Fund II, Ltd.
1 BR 550
2 BR 678
Central Florida Income 6.21 45,504 Avg. 813 $467 $.57 98%
Appreciation Fund, Ltd.
1 BR 576
2 BR 864
Florida Capital Income 4.68 45,504 Avg. 591 $448 $.75 100%
Fund, Ltd.
1 BR 576
2 BR 864
Florida Capital Income 6.85 62,692 Avg. 1,205 $655 $.54 94%
Fund II, Ltd.
2 BR 1,075
3 BR 1,358
Florida Capital Income 3.39 27,360 Avg. 570 $450 $.79 92%
Fund III, Ltd.
Studio 288
1 BR 576
2 BR 864
Florida Capital Income 7.16 79,200 Avg. 550 $674 $1.23 68%
Fund IV, Ltd.
1 BR 550
Florida Income Advantage 6.85 29,931 Avg. 1,151 $641 $.56 92%
Fund I, Ltd.
2 BR 1,075
3 BR 1,358
Florida Income 6.85 9,166 Avg. 1,146 $639 $.56 88%
Appreciation Fund I, Ltd.
2 BR 1,075
3 BR 1,358
Florida Income Growth 3.67 39,300 Avg. 560 $434 $.78 94%
Fund V, Ltd.
Studio 300
1 BR 600
2 BR 900
Florida Opportunity 5.15 34,848 Avg. 580 $420 $.72 90%
Income Partners, Ltd.
1 BR 576
2 BR 864
GSU Stadium Student 3.50 50,736 Avg. 860 $853 $.99 82%
Apartments, Ltd.
Studio 288
3 BR 880
4 BR 880
Lamplight Court of 6.00 46,944 Avg. 587 $391 $.63 95%
Bellefontaine Apartments, Ltd.
Studio 288
One/One 576
Two/One 864
Midwest Income Growth 3.92 38,016 Avg. 576 $359 $.61 97%
Fund VI, Ltd.
Studio 288
1 BR 576
2 BR 864
Realty Opportunity Income 6.85 34,231 Avg. 1,141 $638 $.56 93%
Fund VIII, Ltd.
2 BR 1,075
3 BR 1,358
================== ============ =========== =========== ================== ================= ========
TOTAL PROPERTIES: 74.28 590,712 [766.66] [$529] [$.74]
================== ============ =========== =========== ================== ================= ========
</TABLE>
- ------------------
* Includes only residential apartment units and excludes common areas.
(1) Partnership owns the entire limited partnership interest in a limited
partnership which holds fee simple title.
(2) Partnership owns beneficial interest in an unrecorded land trust which
holds fee simple title.
(3) Partnership owns (i) a 32% limited partnership interest in a limited
partnership which holds fee simple title and (ii) an unrecorded second
mortgage in the property in the principal amount of [$300,000].
110
<PAGE>
Mortgage Information
Exchange Properties
The table below sets forth certain information relating to the indebtedness
secured by or associated with the 14 Exchange Properties in which the Operating
Partnership intends to acquire an interest in connection with the initial
transactions of the Exchange Offering, including (i) name of partnership and its
general partner, (ii) name and location of the properties, (iii) principal
balances as of May 31, 1998, (iv) interest rates, (v) annual debt service, (vi)
amortization term, (vii) maturity dates, (viii) balances due on maturity, (ix)
monthly payments, and (x) name of lending institution.
<TABLE>
<CAPTION>
5/31/98
Principal Interest Annual
Partnership GP Property Location Balance Rate Debt
----------- -- -------- -------- ------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Baron Strategic Baron Capital XXXI, Steeplechase Anderson, $1,244,892 Yrs. 1-2: $91,344
Investment Fund II, Inc. Apartments Indiana 7.25%
Ltd. Yrs. 3-4:
7.75%
Yrs. 5-10:
8.25%
Central Florida Income Baron Capital of Grove Hamlet Deland, Florida 1,254,807 9.50% 156,024
Appreciation Fund, Ltd. Florida, Inc. Apartments
Florida Capital Income Baron Capital II, Eagle Lake Apartments Port Orange, 1,447,811 8.56% 144,636
Fund, Ltd. Inc. Florida
Florida Capital Income Baron Capital IV, Forest Glen Daytona Beach, 1,834,103 7.01% 145,920
Fund II, Ltd. Inc. Apartments Florida
(Phase I)
Florida Capital Income Baron Capital VII, Bridge Point Jacksonville, 716,752 9.52% 76,572
Fund III, Ltd. Inc. Apartments Florida
(Phase II)
Florida Capital Income Baron Capital V, Glen Lake Apartments St. Petersburg, 2,692,623 9.55% 293,700
Fund IV, Ltd. Inc. Florida 359,016 8.00% 34,728
Florida Income Baron Capital IV, Forest Glen Daytona Beach, 853,557 7.01% 67,908
Advantage Fund I, Ltd. Inc. Apartments Florida
(Phase III)
Florida Income Baron Capital IV, Forest Glen Daytona Beach, 236,265 7.01% 18,792
Appreciation Fund I, Inc. Apartments Florida
Ltd. (Phase IV)
Florida Income Growth Baron Capital XI, Blossom Corners Orlando, Florida $1,030,195 9.04% 105,288
Fund V, Ltd. Inc. Apartments (Phase I)
Florida Opportunity Baron Capital III, Camellia Court Daytona Beach, 1,082,394 9.04% 111,132
Income Partners, Ltd. Inc. Apartments Florida
GSU Stadium Student Baron Capital X, Stadium Club Statesboro, 1,740,736 7.87% 151,272
Apartments, Ltd. Inc. Apartments Georgia
Lamplight Court of
Bellefontaine Baron Capital IX, Lamplight Court Bellefontaine, 1,376,182 9.04% 135,660
Apartments,Inc. Ltd. Ohio
Midwest Income Growth Baron Capital of Brookwood Way Mansfield, Ohio 1,058,868 9.04% 108,612
Fund VI, Ltd. Ohio III, Inc. Apartments
Realty Opportunity Baron Capital IV, Forest Glen Daytona Beach, 1,070,688 7.01% 85,188
Income Fund VIII, Ltd. Inc. Apartments Florida
(Phase II)
================= ==============
TOTAL PROPERTIES: $17,998,889 $1,726,776
================= ==============
<CAPTION>
Balance
Amortization Maturity Due On Monthly
Partnership Term Date Maturity Payment Lender
----------- ---- ---- -------- ------- ------
<S> <C> <C> <C> <C> <C>
Baron Strategic 30 years 10/1/06 $1,099,557 $7,612 Crown Bank
Investment Fund II,
Ltd.
Central Florida Income 25 years 6/27/98 1,314,872 13,002 Midland Loan Services
Appreciation Fund, Ltd.
Florida Capital Income 25 years 11/1/05 1,244,562 12,053 Column Financial, Inc.
Fund, Ltd.
Florida Capital Income 30 years 3/05 1,681,926 12,160 Prudential Mortgage Capital
Fund II, Ltd.
Florida Capital Income 25 years 7/1/06 625,327 6,381 Huntington Mortgage Co.
Fund III, Ltd.
Florida Capital Income 25 years 5/18/00 2,652,341 24,475 Republic Bank
Fund IV, Ltd. 25 years 5/1/05 343,772 2,894 Glen Lake Arms
Joint Venture
Florida Income 30 years 3/05 782,744 5,659 Prudential Mortgage Capital
Advantage Fund I, Ltd.
Florida Income 30 years 3/05 216,712 1,566 Prudential Mortgage Capital
Appreciation Fund I,
Ltd.
Florida Income Growth 25 years 11/1/06 $1,030,195 $8,774 Column Financial, Inc.
Fund V, Ltd.
Florida Opportunity 25 years 11/1/06 984,430 9,261 Column Financial, Inc.
Income Partners, Ltd.
GSU Stadium Student 30 years 10/1/05 1,615,458 12,606 GMAC
Apartments, Ltd.
Lamplight Court of 25 years 11/1/06 1,158,349 11,305 Column Financial
Bellefontaine Apartments,
Ltd.
Midwest Income Growth 25 years 12/1/06 890,263 9,051 Mellon Bank
Fund VI, Ltd.
Realty Opportunity 30 years 3/05 981,813 7,099 Prudential Mortgage Capital
Income Fund VIII, Ltd.
=========== ========
$16,622,321 $143,898
=========== ========
</TABLE>
111
<PAGE>
Property Description
The Exchange Properties are primarily garden style, one and two-story
residential apartment dwellings which range in size from eight units to 144
units. The Trust believes that the Exchange Properties generally occupy
strategic locations in growing sub-markets. The average unit size for properties
is 724 square feet, with ___% of the units having two or more bedrooms. A
majority of the units have washer/dryer connections and walk-in closets. The
Exchange Partnerships have improved the attractiveness of the Exchange
Properties by investing in extensive landscaping and rehabilitating certain
units. Other features frequently included in certain Exchange Properties are
swimming pools, playgrounds, volley ball courts, fitness centers and community
rooms.
None of the Exchange Partnerships currently intend to incur a material
amount of major maintenance expenditures in the next 12-month period. The
Exchange Partnerships currently expect to incur no more than approximately
$40,000 of major maintenance expenditures in respect of any property.
Lease Agreements
The Exchange Partnerships use a variety of lease forms to comply with
applicable state and local laws and customs. At some properties, the Exchange
Partnerships use leases provided or recommended by state or local apartment
associations. At other properties, the Exchange Partnerships use a standard
company lease modified if necessary to comply with local law or custom. The
terms of a lease varies with local market conditions; however, one-year leases
are most common. Generally, the leases provide that unless the parties agree in
writing to a renewal, the tenancy will convert at the end of a lease term to a
month-to-month tenancy, subject to the terms and conditions of the lease, unless
either party gives the other party at least 30 days' prior notice of
termination. All leases are terminable by the Exchange Partnerships for
nonpayment of rent, violation of property rules and regulations, or other
specified defaults.
Competition
In general, there are numerous other residential apartment properties
located in close proximity to each of the Exchange Properties. The number of
units available in any target metropolitan market could have a material effect
on a property's capacity to rent space and on the rents charged. In addition, in
many of the Trust's proposed sub-markets, institutional investors and owners and
developers of residential apartment properties compete for the acquisition and
leasing of properties. Many of these persons have substantial resources and
experience.
Insurance
The Managing Shareholder believes that all of the Exchange Properties are
adequately insured; however, an uninsured loss could result in loss of capital
investment and anticipated profits. See "RISK FACTORS - Property Losses May Not
be Insurable."
Property Management
In June 1998, the Exchange Partnerships and other real estate partnerships
managed by affiliates of the Managing Shareholder entered into an agreement to
terminate property management agreements with the prior property manager. Since
the transaction, the Exchange Partnerships and other partnerships have managed
the properties in which they have an interest and shared property management
expenses. The Exchange Properties and other properties in which the Trust and
the Operating Partnership acquire an interest will be similarly managed. During
1997, the Exchange Partnerships paid an aggregate of approximately $435,689 in
property management fees. Each of the partnerships is expected to benefit from
an economy of scale, such that the cost of self management of the properties
will be less than historical management costs.
112
<PAGE>
SELECTED FINANCIAL DATA
The Exchange Properties
The following table contains selected audited operating data for the 14
Exchange Properties on a consolidated basis for the twelve-month periods ended
December 31, 1996 and December 31, 1997, and unaudited operating data for the
five-month period ending May 31, 1998. The data was derived from the statement
of revenues and certain expenses of the limited partnerships which directly or
indirectly hold record title to the Exchange Properties. All of the Exchange
Partnerships directly or indirectly own the entire equity interest in respect of
a residential apartment property other than one Exchange Partnership which
indirectly owns 32% of the equity interest in a property and a second mortgage
interest secured by such property. See "DESCRIPTION OF THE EXCHANGE
PARTNERSHIPS" and "INITIAL REAL ESTATE INVESTMENTS - The Exchange Properties"
and Exhibits A and B hereto. Offerees should note that the Operating Partnership
will be entitled to record the full operating results of the Exchange Properties
in which it directly or indirectly acquires the entire equity interest only if
it acquires 100% of the Exchange Partnership Units from the Offerees in the
Exchange Offering and thereby acquires the entire beneficial ownership of the
properties. If the Operating Partnership acquires less than all of the Exchange
Partnership Units being sought and/or any Exchange Partnership owns less than
the entire equity interest in an Exchange Property, the Operating Partnership
will be entitled to record its proportionate share of the operating results.
The statement of revenues and certain expenses for each Exchange Property
and a combined statement are included in Exhibit D to this Prospectus, and the
data set forth below should be reviewed in conjunction with such statements for
the related period, including the notes thereto. The statements of revenues and
certain expenses exclude material expenses described in the notes thereto
(including partnership administrative expenses, major maintenance, depreciation,
amortization and professional fees) that would not be comparable to those
resulting from the proposed future operations of the Exchange Properties.
<TABLE>
<CAPTION>
Five-Month
Year Ended Year Ended Period Ended
December 31, 1997 December, 31, 1996 May 31, 1998
----------------- ------------------ ------------
<S> <C> <C> <C>
Revenues:
Rental income $3,963,840 $3,994,339 $1,860,064
Other income 179,421 242,598 76,224
---------- ---------- ----------
Total revenues $4,143,261 $4,236,937 $1,936,288
Certain Expenses:
Personnel $ 504,299 $ 497,488 $ 255,079
Advertising and promotion 112,092 93,181 37,181
Utilities 435,385 430,595 136,407
Repairs and maintenance 364,344 329,363 198,437
Real estate taxes and insurance 522,589 530,041 216,094
Mortgage interest expense 1,596,412 1,549,124 665,172
Management fees 245,983 262,461 94,948
Other operating expenses 81,811 66,102 38,402
---------- ---------- ----------
Total certain expenses $3,862,915 $3,758,355 $1,641,740
---------- ---------- ----------
Revenues in Excess of Certain Expenses
$ 280,346 $ 478,582 $ 294,568
========== ========== ==========
</TABLE>
113
<PAGE>
Exchange Properties
Estimated Taxable Operating Results
Set forth below is a table which sets forth the estimated taxable operating
results for each of the Exchange Properties and on a consolidated basis, for the
next 12-month period based on operating results for 1997 with adjustments
necessary to reflect current and expected operations of the properties.
<TABLE>
<CAPTION>
Baron Strategic Investment Central Florida Income Florida Capital
Fund II, Ltd. (Steeplechase Appreciation Fund, Ltd. Income Fund, Ltd.
Apts.) (Grove Hamlet Apts.) (Eagle Lake Apts.)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Rental Revenue: 262,000 323,000 390,000
Other Revenue: 54,000 1,000 21,000
------------------------------------------------------------------------------------
Total Revenue: 316,000 324,000 411,000
Less:
Operating Expenses: 205,000 113,000 182,000
Interest Expenses: 93,000 135,000 159,000
Depreciation and Amortization: 38,000 76,000 64,000
Other, including Major Maint.: 70,000 -- 20,000
------------------------------------------------------------------------------------
Total Expenses: 406,000 324,000 425,000
====================================================================================
Net Income (Loss) - Tax Basis: (90,000) -- (14,000)
<CAPTION>
Florida Capital Income Florida Capital Income Florida Capital Income
Fund II, Ltd. (Forest Fund III, Ltd. Fund IV, Ltd. (Glen
Glen Apts. Phase I) (Bridgepoint Apts.) Lake Apts.)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Rental Revenue: 430,000 240,000 950,000
Other Revenue: 8,000 7,000 23,000
------------------------------------------------------------------------------------
Total Revenue: 438,000 247,000 973,000
Less:
Operating Expenses: 159,000 116,000 490,000
Interest Expenses: 165,000 69,000 311,000
Depreciation and Amortization: 79,000 37,000 132,000
Other, including Major Maint.: 14,000 14,000 37,000
------------------------------------------------------------------------------------
Total Expenses: 417,000 236,000 970,000
====================================================================================
Net Income (Loss) - Tax Basis: 21,000 11,000 3,000
<CAPTION>
Florida Income
Advantage Fund, Ltd.
(Forest Glen Apts.
Phase III)
--------------------
<S> <C>
Gross Rental Revenue: 207,000
Other Revenue: 7,000
--------------------
Total Revenue: 214,000
Less:
Operating Expenses: 79,000
Interest Expenses: 56,000
Depreciation and Amortization: 71,000
Other, including Major Maint.: 6,000
--------------------
Total Expenses: 212,000
====================
Net Income (Loss) - Tax Basis: 2,000
<CAPTION>
Florida Income Florida Opportunity
Florida Income Appreciation Growth Fund V, Ltd. Income Partners,
Fund I, Ltd. (Forest Glen (Blossom Corners Apts. Ltd. (Camellia
Apts. Phase IV) Phase I) Court Apts.)
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Rental Revenue: 71,000 350,000 290,000
Other Revenue: 2,000 21,000 --
------------------------------------------------------------------------------------
Total Revenue: 73,000 371,000 290,000
Less:
Operating Expenses: 26,000 163,000 154,000
Interest Expenses: 21,000 94,000 99,000
Depreciation and Amortization: 16,000 26,000 44,000
Other, including Major Maint.: 2,000 16,000 22,000
------------------------------------------------------------------------------------
Total Expenses: 65,000 299,000 319,000
====================================================================================
Net Income (Loss) - Tax Basis: 8,000 72,000 (29,000)
<CAPTION>
Lamplight Court of
GSU Student Stadium Bellefontaine Midwest Income Growth
Apartments, Ltd. Apartments, Ltd. Fund VI, Ltd.
(Stadium Club Apts.) (Lamplight Court Apts.) (Brookwood Way Apts.)
------------------------------------------------------------------------------------
Gross Rental Revenue: 459,000 114,000 256,000
Other Revenue: 28,000 71,000 1,000
------------------------------------------------------------------------------------
Total Revenue: 487,000 185,000 257,000
Less:
Operating Expenses: 243,000 62,000 112,000
Interest Expenses: 146,000 43,000 107,000
Depreciation and Amortization: 65,000 20,000 55,000
Other, including Major Maint.: 35,000 0 --
------------------------------------------------------------------------------------
Total Expenses: 489,000 125,000 274,000
====================================================================================
Net Income (Loss) - Tax Basis: (2,000) 60,000 (17,000)
<CAPTION>
Realty Opportunity
Income Fund VIII, Ltd.
(Forest Glen Apts.
Phase II)
----------------------
<S> <C>
Gross Rental Revenue: 202,000
Other Revenue: 6,000
----------------------
Total Revenue: 208,000
Less:
Operating Expenses: 93,000
Interest Expenses: 67,000
Depreciation and Amortization: 56,000
Other, including Major Maint.: 11,000
----------------------
Total Expenses: 227,000
======================
Net Income (Loss) - Tax Basis: (19,000)
</TABLE>
114
<PAGE>
All 14 Exchange
Partnerships Combined
---------------------
Gross Rental Revenue: 4,544,000
Other Revenue: 250,000
---------
Total Revenue: 4,794,000
Less:
Operating Expenses: 2,197,000
Interest Expenses: 1,565,000
Depreciation and Amortization: 779,000
Other, including Major Maint.: 247,000
---------
Total Expenses: 4,788,000
=========
Net Income (Loss) - Tax Basis: 6,000
The Acquired Properties
The following table contains selected audited operating data for the two
Acquired Properties beneficially owned by the Operating Partnership on a
consolidated basis for the twelve-month periods ended December 31, 1996 and
December 31, 1997, and unaudited operating data for the five-month period ending
May 31, 1998. The data was derived from the statement of revenues and certain
expenses of the respective limited partnerships which own fee simple title to
the properties. The Operating Partnership acquired the entire limited
partnership interest in each of the limited partnerships in June and July 1998.
See "INITIAL REAL ESTATE INVESTMENTS - The Acquired Properties."
The statements of revenues and certain expenses are included in Exhibit E
to this Prospectus, and the data set forth below should be reviewed in
conjunction with such statements for the related period, including the notes
thereto. The statements of revenues and certain expenses exclude material
expenses described in the notes thereto (including partnership administrative
expenses, major maintenance, depreciation, amortization and professional fees)
that would not be comparable to those resulting from the proposed future
operations of the Exchange Properties.
<TABLE>
<CAPTION>
Five-Month
Year Ended Year Ended Period Ended
December 31, 1997 December, 31, 1996 May 31, 1998
----------------- ------------------ ------------
<S> <C> <C> <C>
Revenues:
Rental income $601,582 $580,792 $274,457
Other income 21,928 19,050 12,086
-------- -------- --------
Total revenues $620,043 $599,842 $286,543
Certain Expenses:
Personnel $ 68,794 $ 64,418 $ 36,766
Advertising and promotion 5,998 8,078 4,761
Utilities 49,227 50,420 19,257
Repairs and maintenance 60,257 83,880 17,153
Real estate taxes and insurance 72,692 70,743 18,160
Mortgage interest expense 181,246 191,724 121,847
Management fees 35,266 35,937 15,420
Other operating expenses 12,019 8,949 --
-------- -------- --------
Total certain expenses $485,499 $514,149 $233,364
-------- -------- --------
Revenues in Excess of Certain Expenses
$134,544 $ 85,693 $ 53,179
======== ======== ========
</TABLE>
Acquired Properties
Estimated Taxable Operating Results
Set forth below is a table which sets forth the estimated taxable operating
results for each of the Acquired Properties and on a consolidated basis, for the
next 12-month period based on operating results for 1997 with adjustments
necessary to reflect current and expected operations of the properties.
<TABLE>
<CAPTION>
Heatherwood Crystal Court
Kissimmee, Ltd. Apartments II, Ltd. Two Acquired
(Heatherwood Crystal Court Properties
Apartments Phase I) Apartments Phase II) Combined
------------------------------------------------------
<S> <C> <C> <C>
Gross Rental Revenue: 294,513 307,069 601,582
Other Revenue: 9,380 9,081 18,461
------------------------------------------------------
Total Revenue: 303,893 316,150 620,043
Less:
Operating Expenses: 158,897 107,049 265,946
Interest Expenses: 60,327 120,919 181,246
Depreciation and Amortization: 56,326 45,644 101,970
Other, including Major Maint.: 16,976 23,590 40,566
------------------------------------------------------
Total Expenses: 292,526 297,202 589,728
======================================================
Net Income (Loss) - Tax Basis: 11,367 18,948 30,315
</TABLE>
115
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE EXCHANGE PROPERTIES
Overview
The operating results of the 14 Exchange Properties depend primarily upon
income from residential apartment properties, which is substantially influenced
by (i) the demand for and supply of residential apartment units in their primary
target market and sub-markets, and (ii) operating expense levels. The operating
results of the Trust and the Operating Partnership, subsequent to the
effectiveness of the Cash Offering and the closing of any acquisitions in
connection with the Exchange Offering, will depend primarily upon these two
factors and upon the pace and price at which they can acquire and improve
additional properties.
The target metropolitan markets and sub-markets have benefited in recent
periods from demographic trends (including population and job growth) which
increase the demand for residential apartment units, while financing constraints
(specifically, reduced availability of development capital) have limited new
construction to levels significantly below construction activity in prior years.
Consequently, rental rates for residential apartment units have increased at or
above the inflation rate for the last two years and are expected to continue to
experience such increases for the next 18 months based on market statistics made
available to management of the Trust in terms of occupancy rates, supply,
demographic factors, job growth rates and recent rental trends. Expense levels
also influence operating results, and rental expenses (other than real estate
taxes) for residential apartment properties have generally increased at
approximately the rate of inflation for the past three years and are expected to
increase at the rate of inflation for the next 18 months.
Results of Operations
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1997
For the year ended December 31, 1997, revenues in excess of certain
expenses were $280,346, representing a 41.4% decrease from revenues in excess of
certain expenses of $478,582 for the year ended December 31, 1996. The decrease
was primarily attributable to three factors. First, five Exchange Properties,
including the four phases of the Forest Glen Property and the Grove Hamlet
Property, comprised of 172 residential units, were substantially removed from
the rental market during 1997 to be prepared for sale as individual condominium
units. Substantial rehabilitation was completed in the units, including new
roofs, exteriors and appliances and interior decorating. The residential units
were returned to the rental market in January 1998 after marketing efforts over
a one-year period failed to produce the number of pre-sales of units required to
permit the conversion of rental units into condominium units. The Corporate
General Partners of the respective Exchange Partnerships determined that the
return of the units to rental units was in the best interest of the
partnerships. The properties presently have an occupancy rate of 94%.
Second, one Exchange Property, the Glen Lake Property, comprised of 144
residential units, was substantially removed from the rental market for six
months in 1997 for material rehabilitation to change its focus from that of
long-term rentals to that of short-term corporate rentals. The process has been
substantially completed and the occupancy rate as of the date of this Prospectus
is 97%.
Third, two Exchange Properties, including the two phases of the Blossom
Corners Property, comprised of 138 residential units, were materially
rehabilitated during the first five months of 1997. The rehabilitation included
new roofs, exteriors and appliances and interior decorating. Occupancy averaged
80% during the rehabilitation period. However, occupancy has averaged 96% since
August 1997, and continues at that rate as of the date of this Prospectus.
Despite the foregoing factors, rental income from the Exchange Properties
decreased by only $30,499, or 0.7%, from $3,994,339 in 1996 to $3,963,840 in
1997. The stability of rental income in 1997 was attributable to strong rental
markets and ongoing capital improvements. Other income (comprised primarily of
one-time fees)
116
<PAGE>
decreased by $63,177, or 26.0%, from $242,598 in 1996 to $179,421 in 1997. The
decrease in other income in 1997 was attributable primarily to a reduction in
laundry income.
Property operating expenses increased by $57,272, or 2.6%, from $2,209,231
in 1996 to $2,266,503 in 1997. The increase in property operating expenses in
1997 was attributable to an expensing of costs involved with the rehabilitation
and re-renting of the properties. Personnel expenses increased by $6,811 (1.4%),
advertising and promotion expenses increased by $18,911 (20.3%), utility
expenses increased by $4,790 (1.1%), repairs and maintenance expenses increased
by $34,981 (10.6%), real estate taxes and insurance expenses decreased by $7,452
(1.4%), mortgage interest expense increased by $47,288 (3.1%), management fees
decreased by $16,478 (6.3%), and other operating expenses (comprised primarily
of administrative costs involved with refinancing) increased by $15,709 (23.8%).
Each Exchange Property secures the repayment of large-scale first mortgage
financing. At May 31, 1998, the aggregate principal balance of such loans was
approximately $17,998,889. The Exchange Properties, taken in the aggregate, have
significantly reduced interest rate risk through refinancings that have occurred
over the past two years. By _______ 1998, the last of ______ out of the 14
Exchange Properties is expected to be refinanced with fixed interest rate
mortgage debt. The first mortgage loans have terms in the range of five to 10
years, amortization periods of 25 to 30 years and interest rates ranging from
7.25% to 9.55% per annum. The weighted average interest rate is approximately
8.60%. The two remaining properties are expected to be refinanced over the next
six months, which is expected to result in the weighted average interest rate
dropping an additional 35 basis points to 8.25%. Other information relating to
mortgage financing secured by the Exchange Properties is summarized in the table
above at "INITIAL REAL ESTATE INVESTMENTS."
Liquidity and Capital Resources
The Exchange Properties, taken in the aggregate, had sufficient liquidity
and working capital to meet their obligations during 1996 and 1997 and to date
in 1998. They are expected to have sufficient liquidity and working capital to
meet their obligations during the next twelve-month period. Longer-term capital
needs for the properties, taken in the aggregate, include the completion of
certain deferred maintenance items (including, but not limited to, the complete
renovation of five residential units and the completion of the upgrading of
furnishings of 110 residential units. The Trust anticipates that no funds from
the Cash Offering will be applied to such items, as reserves are currently in
place for such events. The Trust does not anticipate that any funds from the
Cash Offering will be applied to other anticipated capital improvements.
The Trust believes that known trends, events or uncertainties which will or
are reasonably likely to affect the Exchange Properties short-term and long-term
liquidity and current and future prospects include the performance of the
economy and the building of new apartment communities. Although the Trust cannot
reliably predict the effects of these trends, events and uncertainties on the
Exchange Properties as a whole, some of the reasonably anticipated effects might
include downward pressure on rental rates and occupancy levels.
Generally, there are no seasonal aspects on the operations of any of the
Exchange Properties which might have a material effect on the financial
condition or results of operation, except that for the last 32 months, one
student housing property, comprised of 60 units, has had an average occupancy
rate of 93% for nine months of the year and 40% for the remaining three months
per year.
The Trust and the Operating Partnership commenced operations on May 17,
1998. In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Trust's Cash Offering to acquire beneficial ownership of a
67-unit residential apartment property referred to as the Heatherwood Apartments
- - Phase I located in Kissimmee, Florida. In July 1998, the Operating Partnership
applied a portion of the net proceeds of the Cash Offering to acquire beneficial
ownership of an 80-unit residential apartment property referred to as the
Crystal court Apartments - Phase II located in Lakewood, Florida. In July 1998,
the Operating Partnership also made capital contributions in the range of $8,000
to $14,000 (aggregate amount approximately $200,000) to certain real estate
partnerships managed by affiliates of the Managing Shareholder, including each
of the Exchange Partnerships. In exchange, the Operating Partnership received a
special non-voting limited partnership interest in such partnerships.
117
<PAGE>
Each partnership interest acquired by the Operating Partnership is subordinated
to the priority economic return of the limited partners of the respective
partnership and is not eligible to participate in the Exchange Offering. In
September 1998, the Trust entered into a purchase agreement under which, subject
to certain conditions, it will acquire two residential apartment properties
(totaling 652 units) under development in Burlington and Louisville, Kentucky
upon completion of construction. See "INITIAL REAL ESTATE INVESTMENTS." The
Operating Partnership intends to continue to acquire similar property interests
using proceeds from the Trust's Cash Offering.
The Trust and the Operating Partnership have the ability to satisfy their
cash requirements for the foreseeable future. However, it will be necessary to
raise additional capital during the next 12 months to make acquisitions and to
meet management's revenue and cash flow goals. The Trust intends to investigate
making an additional public or private offering of Common Shares and/or Units
within the next 12 months.
The Trust and the Operating Partnership expect no material change in the
number of employees over the next 12 months.
See also "THE EXCHANGE OFFERING," "THE TRUST AND THE OPERATING
PARTNERSHIP," "INVESTMENT OBJECTIVES AND POLICIES" and "INITIAL REAL ESTATE
INVESTMENTS."
Year 2000
The computer systems of the Trust and the Operating Partnership have been
tested for year 2000 problems and the Trust and the Operating Partnerships
believe that such systems are year 2000 compatible. It is possible, however,
that certain computer systems or software products of their suppliers may
experience year 2000 problems and that such problems could adversely affect
them. The Trust and the Operating Partnership are in the process of inquiring as
to the progress of its principal suppliers in identifying and addressing
problems that their computer systems will face in correctly processing date
information as the year 2000 approaches. However, there can be no assurance that
the Trust and the Operating Partnership will identify the future date-handling
problems of their suppliers in advance of the occurrence of such problems, or
that such parties will be able to successfully remedy any problems that are
discovered. With respect to their own computer systems, the Trust and the
Operating Partnership intend to upgrade their principal operating computer
software to the most recent available revision sold by their software supplier,
which the supplier has represented to be year 2000 compliant. The Trust and the
Operating Partnership believe that such upgrade will identify and solve those
year 2000 problems that could affect their operating software and can be
accomplished before the year 2000 at a reasonable cost. The failure to identify
and solve all year 2000 problems affecting their business could have an adverse
effect on the business, financial condition and results of operations of the
Trust and the Operating Partnership. See "Risk Factors - Possible "Year 2000"
Problems."
118
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of material tax considerations that may be
relevant to prospective holders of Operating Partnership Units, based upon the
Code, administrative regulations promulgated or proposed by the Treasury
Department (the "Regulations"), judicial decisions and rulings of the Internal
Revenue Service (the "IRS" or the "Service"), all of which are subject to change
(collectively the "Tax Laws"). Subsequent changes in such authorities may cause
the tax consequences to vary substantially from the consequences described
below.
Because many of the federal income tax consequences of an investment in the
Partnership will vary from one Unitholder to another, this summary does not
discuss all of the provisions of the Code that might be applicable to a
particular Unitholder. The discussion below focuses on Unitholders who are
individual citizens or residents of the United States and has only limited
application to corporations, estates, trusts, non-resident aliens or other
Unitholders subject to specialized tax treatment (such as tax-exempt
institutions, foreign persons, individual retirement accounts, REITs or mutual
funds). Unitholders should also be aware that the IRS may not agree with all of
the conclusions stated herein, and that no ruling will be requested from the
IRS. Moreover, changes in the Tax Laws after the date of this prospectus may
alter the tax consequences to a Unitholder of an investment in the Partnership.
Finally, various provisions of the Code contain a number of ambiguities, which
will be resolved only by future legislative, administrative or court action.
This summary is not intended as a substitute for individual tax planning.
Neither the Trust as General Partner of the Operating Partnership ("General
Partner"), the Operating Partnership nor any of their counsel or consultants
assumes any responsibility for the tax consequences of this transaction to any
Unitholder. Each prospective Unitholder will be required to represent in a
subscription agreement that he or she has consulted his or her own tax advisor
with respect to the federal, state, local and foreign tax consequences arising
from his or her purchase of the Units.
CLASSIFICATION AS A PARTNERSHIP
No ruling has been or will be sought from the IRS as to the status of the
Operating Partnership as a partnership for federal income tax purposes. Instead,
the Operating Partnership has obtained and relied on the opinion of special Tax
Counsel that, based upon the Code, the Regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes.
In rendering its opinion, Tax Counsel has relied on the following factual
representations made by the Partnership and the General Partner:
o The Operating Partnership has not, and will not, elect to be treated
as an association taxable as a corporation or corporation;
o The Operating Partnership has been and will continue to be operated in
accordance with (i) all applicable partnership statutes, (ii) the
Agreement of Limited Partnership of the Operating Partnership, and
(iii) the description in this Prospectus;
o At least 22% in value of all of the assets of the Operating
Partnership shall always consist of assets other than those described
in Section 351(e)(1) of the Code; and
119
<PAGE>
o The Operating Partnership will be operated so as to avoid treatment as
a publicly-traded partnership as set forth in Section 7704 of the Code
and applicable Regulations thereunder.
Under Section 7704 of the Code, certain "publicly-traded" partnerships are
treated as corporations for federal tax purposes. A partnership is a
publicly-traded partnership when interests in the partnership are traded on an
established securities market or are readily tradeable on a secondary market or
the substantial equivalent thereof. Under Code Section 7704(c), a
publicly-traded partnership will nevertheless be treated as a partnership for
tax purposes if 90% or more of its gross income consists of passive-type income,
such as interest, dividends, real property rents and gain from the sale or other
disposition of real property, and the partnership would not be treated as a
regulated investment company were it a domestic corporation. A domestic
corporation generally will be treated as a regulated investment company only if
it is required to be registered under the 1940 Act.
Under Regulation Section 1.7704-1, interests in a partnership are generally
considered readily tradeable on a secondary market or the substantial equivalent
thereof if (a) such interests are regularly quoted by any person, such as a
broker or dealer, making a market in the interests, (b) any person makes
available to the public bid or offer quotes with respect to such interests and
stands ready to effect, buy or sell transactions at the quoted prices for itself
or on behalf of others, (c) the holder of an interest has a readily available,
regular and on-going opportunity to dispose of his interest through a public
means of obtaining or providing information of offers to buy, sell or exchange
such interests, or (d) prospective buyers and sellers have the opportunity to
buy, sell or exchange interests in a time frame and with the regularity and
continuity that the existence of a secondary market would provide.
The Operating Partnership and the General Partner have represented to
special Tax Counsel that the Units of the Operating Partnership will not be
traded on an established securities market. Additionally, the Operating
Partnership and the General Partner have further represented that, at all times
throughout the existence of the Operating Partnership, at least 90% or more of
the Operating Partnership's gross income will consist of passive-type income,
and the Operating Partnership will not be required to register under the 1940
Act. Special Tax Counsel has relied on such representations in rendering its
opinion that the Operating Partnership will be classified as a partnership for
federal income tax purposes.
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to the Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
THE DISCUSSION BELOW IS BASED ON THE ASSUMPTION THAT THE OPERATING
PARTNERSHIP WILL BE CLASSIFIED AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES.
EXCHANGE OF EXCHANGE PARTNERSHIP UNITS FOR OPERATING PARTNERSHIP UNITS
Based on certain factual representations made by the Operating Partnership
and the General Partner to special Tax Counsel, a contribution by an owner
("Exchange Limited Partner") of a partnership interest ("Exchange Partnership
Units") to the Operating Partnership in exchange for Units of the Operating
Partnership (the "Exchange") will not result in the recognition of taxable gain
at the time of the Exchange so long as the Exchange Limited Partner does not
receive in connection with the Exchange a cash distribution (or a deemed cash
distribution resulting from relief from liabilities) that exceeds such Exchange
Limited Partner's aggregate adjusted basis in his or her Exchange Partnership
Units at the time of the Exchange and provided that none of the exceptions to
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nonrecognition of gain described in the immediately succeeding paragraph apply.
Special Tax Counsel is unable to issue an opinion as to whether or not a
particular Exchange Limited Partner will defer recognition of gain upon the
Exchange due to the number of factors that must be considered with respect to
each Exchange Limited Partner. Whether a particular Exchange Limited Partner
will receive a deemed cash distribution attributable to relief from liabilities
in connection with the Exchange that exceeds his or her adjusted basis in his or
her Exchange Partnership Units at the time of the Exchange will depend on a
number of variables, including such Exchange Limited Partner's adjusted tax
basis in his or her partnership interest at such time, the assets that the
Exchange Limited Partner originally contributed to the partnership in exchange
for such Exchange Partnership Units, the indebtedness, if any, of the
partnership in which the Exchange Limited Partner owns an interest (the
"Exchange Partnership") at the time of the Exchange, the tax basis of any such
contributed assets in the hands of the Exchange Partnership at the time of the
Exchange, the Exchange Limited Partner's share of the "unrealized gain" with
respect to the Exchange Partnership's assets at the time of the Exchange, and
the extent to which the Exchange Limited Partner includes in his or her basis
for his or her Exchange Partnership Units a share of the Exchange Partnership's
recourse liabilities by reason of indemnification or "deficit restoration"
obligations that will be eliminated by reason of the Exchange.
Section 721(a) of the Code provides the general rule that "no gain or loss
shall be recognized to a partnership or to any of its partners in the case of a
contribution of property to the partnership in exchange for an interest in the
partnership." In addition, Section 731 of the Code provides that a distribution
of property other than "money," by a partnership to a partner does not result in
taxable gain to that partner. The nonrecognition rule of Section 721 ordinarily
applies even when the transferred property is subject to liabilities (so long as
the assumption of such liabilities does not result in a deemed distribution of
"money" to the partner in excess of the partner's basis in the assets
contributed to the partnership). Accordingly, Section 721 and Section 731
generally will apply to prevent the recognition of gain by either an Exchange
Partnership or an Exchange Limited Partner in connection with the Exchange.
However, there are several exceptions to the availability of nonrecognition
treatment under Section 721 and Section 731 of the Code, including the
following:
1. Any decrease in a partner's liabilities, if not offset by a
corresponding increase in the partner's share of other partnership
liabilities, could cause the partner to recognize taxable gain as a
result of the partner being deemed to have received a cash
distribution from the partnership. This recognition of gain could
occur even if the decrease arose in connection with a contribution or
distribution that would otherwise qualify for tax-free treatment under
Section 721 or Section 731 of the Code. A decrease in a partner's
share of partnership liabilities (and the resulting deemed cash
distribution) also might occur upon a repayment of part or all of such
liabilities following the exchange.
2. A contribution of property that is treated in whole or in part as a
"disguised sale" of the contributed property under the Code.
3. A distribution of "marketable securities" under Section 731(c) of the
Code.
4. Recapture under Section 465(e) of the Code.
5. A contribution of an appreciated asset to a partnership which would be
treated as an investment company (within the meaning of Section 351)
if the partnership were incorporated.
The foregoing exceptions are discussed in greater detail below.
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RELIEF FROM LIABILITIES/DEEMED CASH DISTRIBUTION
If an Exchange Limited Partner is deemed to receive a cash distribution as
a result of such Exchange Limited Partner's relief from its allocable share of
liabilities of an Exchange Partnership in connection with the Exchange, then
such Exchange Limited Partner will recognize taxable gain, but only to the
extent that the deemed cash distribution exceeds such Exchange Limited Partner's
adjusted tax basis in his or her Exchange Partnership Units immediately prior to
the Exchange. Whether the deemed cash distribution results in a taxable gain
depends upon a number of circumstances that can be determined only with full
knowledge of the specific details of each particular exchange.
Under the applicable provisions of the Code, partners in a partnership
include their share of the partnership's liabilities, determined in accordance
with Regulations under Section 752 of the Code, in determining the basis of
their partnership interests. Partners also include in the basis of their
partnership interest the adjusted tax basis of any capital contributions that
they have actually made to the partnership and their allocable share of all
partnership income and gains, and they reduce their basis by the amount of all
distributions that they received from the partnership and their allocable share
of all partnership losses. For purposes of these rules, if a partner's share of
the partnership's liabilities is reduced for any reason, the partner is deemed
to have received a cash distribution equal to the amount of such reduction.
In the case of the Exchange, these rules will be applied by reference to
the Exchange Limited Partner's share of the liabilities of the Exchange
Partnership immediately before the Exchange and that Exchange Limited Partner's
share of liabilities as a Unitholder in the Operating Partnership immediately
after the Exchange. Although the Code is not clear on whether netting of debt
relief and debt assumption is possible in the case of a contribution of a
partnership interest to a partnership, Section 1.752-1(f) of the Regulations
implies that netting is permissible. Thus, an Exchange Limited Partner has a
reasonable basis for offsetting his or her share of the liabilities of the
Operating Partnership against the elimination of such Exchange Limited Partner's
share of liabilities of the Exchange Partnership in determining the amount of
the deemed cash distribution to such Exchange Limited Partner. If an Exchange
Limited Partner, however, is deemed under these rules to receive a cash
distribution in an amount in excess of the basis immediately prior to the
Exchange of the Exchange Limited Partner's Exchange Partnership Units, the
Exchange Limited Partner may recognize taxable gain.
Under Section 752 of the Code and the Regulations thereunder, a partner's
share of partnership liabilities includes the partner's share of recourse
liabilities plus the partner's share of partnership nonrecourse liabilities. A
partnership liability is a recourse liability to the extent that any partner (or
a person related to any partner) bears the "economic risk of loss" for that
liability within the meaning of the Regulations, and a partnership liability is
nonrecourse to the extent that no partner (or related person) bears the
"economic risk of loss." The Operating Partnership and the General Partner have
represented to special Tax Counsel that no Unitholder will have any share of any
recourse liabilities of the Operating Partnership. Therefore, Exchange Limited
Partners who currently include in the basis for their Exchange Partnership Units
a share of the Exchange Partnership's recourse liabilities by reason of
indemnification or "deficit restoration" agreements that they have entered into
with the Exchange Partnership, will realize a deemed cash distribution in
connection with the Exchange because such indemnification and "deficit
restoration" agreements will be eliminated in the Exchange.
Pursuant to the Regulations, a partner's share of partnership nonrecourse
liabilities equals the sum of (i) the partner's share of "partnership minimum
gain," determined in accordance with the rules of Section 704(b) of the Code and
the Regulations thereunder ("Section 704(b) Gain"); (ii) the amount of any
taxable gain that would be allocated to the partner under Section 704(c) of the
Code (or in the same manner as Section 704(c) of the Code in connection with a
revaluation of partnership property) if the partnership disposed of (in a
taxable transaction) all partnership property subject to one or more nonrecourse
liabilities of the partnership in full satisfaction of the liabilities and for
no other consideration ("Section 704(c) Gain"); and (iii) the partner's share of
"excess nonrecourse liabilities" (i.e. those not allocated under (i) and (ii)
above) which are to be allocated in accordance with the partners' respective
"shares of partnership profits."
To the extent an Exchange Limited Partner had a share of the "partnership
minimum gain" from the
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Exchange Partnership immediately prior to the Exchange, on contribution of the
Exchange Limited Partner's Exchange Partnership Units to the Operating
Partnership such share of "partnership minimum gain" will be converted into an
equivalent amount of Section 704(c) Gain. Thus, there will not be any Section
704(b) Gain for purposes of determining the Exchange Limited Partner's share of
partnership nonrecourse liabilities upon the Exchange. The nonrecourse
liabilities, if any, allocable for a particular former Exchange Limited Partner
of an Exchange Partnership by reason of Section 704(c) Gain will depend on a
number of factors, including, for example (i) the former Exchange Limited
Partner's share of existing Section 704(c) Gain of the Exchange Partnership
immediately prior to the Exchange (although the matter is not free from doubt,
the amount of such share appears to depend on, among other things, the assets
that such Exchange Limited Partner contributed (or was deemed to contribute) to
the Exchange Partnership in exchange for Exchange Partnership Units of the
Exchange Partnership, the tax basis of those assets at the time of contribution
relative to the fair market value at such time, and the amount of nonrecourse
liabilities of the Exchange Partnership currently secured by such assets,
relative to the current tax basis and "tax book value" of those assets), (ii)
the extent, if any, to which the Section 704(c) Gain attributable to the assets
of the Exchange Partnership increases by reason of the Exchange (because the
nonrecourse liabilities currently secured by particular assets exceed the tax
basis of such assets by more than the existing Section 704(c) Gain attributable
to such assets), and (iii) the extent to which the Operating Partnership causes
nonrecourse liabilities as to which there exists Section 704(c) Gain immediately
prior to the Exchange to be repaid or refinanced in connection with the Exchange
in a manner that reduces or eliminates that Section 704(c) Gain.
The Operating Partnership will allocate any "excess nonrecourse
liabilities" among the Unitholders in accordance with their respective
Percentage Interests.
The Agreement of Limited Partnership of the Operating Partnership provides
that nonrecourse deductions for any taxable period are to be allocated to the
Unitholders in accordance with the respective Partnership Interests.
Additionally, the General Partner has been given the discretion to allocate the
Operating Partnership's nonrecourse deductions in a different manner to satisfy
the Safe Harbor requirements of the Regulations. There can be no assurance that
each Unitholder will be allocated nonrecourse deductions in a manner prescribed
by the Regulations.
IT IS ESSENTIAL IN ASSESSING THE POTENTIAL IMPACT RESULTING FROM A DEEMED
RELIEF FROM LIABILITIES THAT EACH EXCHANGE LIMITED PARTNER IN AN EXCHANGE
PARTNERSHIP CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO HIS OR HER PARTICULAR
CIRCUMSTANCES.
DISGUISED SALE REGULATIONS
The Exchange will be taxable to an Exchange Limited Partner to the extent
that it is treated as a "disguised sale" of all or a portion of the Exchange
Limited Partner's Exchange Partnership Units under the Code or the Regulations.
Section 707 of the Code and the Regulations thereunder (the "Disguised Sale
Regulations") generally provide that, unless one of certain prescribed
exceptions is applicable, a partner's contribution of property to a partnership
in a contemporaneous transfer of money or other consideration from the
partnership (other than an interest in the partnership, such as the Operating
Partnership) to the partner will be treated as a sale, in whole or in part, of
such property by the partner to the partnership. The Disguised Sale Regulations
further provide that transfers of monies or other consideration between a
partnership and a partner that are made within two years of each other are
presumed to be a sale unless the facts and circumstances clearly establish that
either the transfers do not constitute a sale or an exception to disguised sale
treatment applies.
1. Effect of Assumption of Liabilities Under the Disguised Sale
Regulations. For purposes of these rules, certain reductions in a partner's
share of liabilities are treated as a transfer of money or other property from
the partnership to the partner which may give rise to a disguised sale, even if
that reduction would not otherwise result in a taxable deemed cash distribution
in excess of the partner's basis. Furthermore, the method of computing the
existence and amount of any reduction in a partner's share of liabilities under
the Disguised Sale Regulations is different from, and generally more onerous
than, the method applied under the rules discussed above under the heading
"Relief From Liabilities/Deemed Cash Distribution." However, if a transfer of
property by a partner to a partnership is not otherwise treated to any extent as
part of a disguised sale, any reduction in the
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partner's share of "qualified liabilities" (discussed below) is not treated as
part of a disguised sale. Moreover, even if the transfer otherwise constitutes a
disguised sale to some extent, the amount of the reduction in the partner's
share of liabilities treated as part of the sale proceeds may in some cases be
computed under a more favorable method in the case of "qualified liabilities"
than in the case of other liabilities.
For purposes of the Disguised Sale Regulations, a "qualified liability" in
connection with a transfer of property to a partnership includes (i) any
liability incurred more than two years prior to the earlier of the date the
partner agrees in writing to transfer the property or the date the partner
transfers the property, so long as the liability has encumbered the transferred
property throughout the two-year period; (ii) a liability that was not incurred
in anticipation of the transfer of the property to a partnership, but that was
incurred by the partner within the two-year period prior to the earlier of the
date the partner agrees in writing to transfer the property or the date the
partner transfers the property to a partnership and that has encumbered the
transferred property since it was incurred; (iii) a liability that is traceable
under the Treasury Regulations to capital expenditures with respect to property
contributed to the partnership; and (iv) a liability that was incurred in the
ordinary course of the trade or business in which property transferred to the
partnership was used or held, but only if all the assets related to that trade
or business are transferred to the partnership, other than assets that are not
material to a continuation of the trade or business. However, a recourse
liability is not a qualified liability unless the amount of the liability does
not exceed the fair market value of the transferred property (less any other
liabilities that are senior in priority and encumber such property or any
allocable liabilities described in (iii) or (iv), above) at the time of
transfer. A liability incurred within two years of the transfer is presumed to
be incurred in anticipation of the transfer unless the facts and circumstances
clearly establish that the liability was not incurred in anticipation of the
transfer. However, when contributed property is borrowed against, pledged as
collateral for a loan, or otherwise refinanced, and the proceeds of the loan are
distributed to the contributing partner, there is no disguised sale to the
extent that the proceeds are attributable to indebtedness properly allocable to
the contributing partner under the rules of Section 752 of the Code and the
partner retains substantive liability for the repayment of the loan. Finally, if
a partner treats a liability described in (i) or (ii) above as a "qualified
liability" because the facts clearly establish that it was not incurred in
anticipation of the transfer, such treatment must be disclosed to the IRS in the
manner set forth in the Disguised Sale Regulations.
Special Tax Counsel does not have adequate information, and is therefore
unable to determine, whether or not any liabilities of a particular Exchange
Partnership assumed by the Operating Partnership in the Exchange fall into one
of the four categories of "qualified liabilities" described above. Thus, special
Tax Counsel is unable to render an opinion with regard to that matter. In any
event, certain liabilities of each Exchange Partnership may be qualified
liabilities solely by reason of exception (i) or (ii) in the preceding
paragraph, and thus, the Exchange Partnership and former Exchange Limited
Partner may be required to make disclosure with respect to those liabilities in
their tax returns for the year in which the Exchange occurs.
2. Effect of Cash Distributions Under the Disguised Sale Regulations. Cash
distributions from a partnership to a partner may be treated as a transfer of
property for purposes of the "disguised sale" rules. An exception applies,
however, to distributions of "operating cash flow," as such term is defined in
the Disguised Sale Regulations. Operating cash flow distributions are presumed
not to be a part of a sale of property to a partnership unless the facts and
circumstances clearly establish that the distribution of operating cash flow is
part of a sale. The General Partner and the Operating Partnership have
represented to special Tax Counsel that no distribution of cash will be made by
the Operating Partnership to the Exchange Limited Partners of the Exchange
Partnership Units upon exchange of such interests to the Operating Partnership.
The Operating Partnership believes that its periodic distributions of cash to
Exchange Limited Partners will qualify as distributions of "operating cash flow"
under the Disguised Sale Regulations.
3. Effect of Right to Convert to a Share of the Trust. The Regulations
provide that the Section 731 nonrecognition provision regarding distribution of
property by a partnership does not apply where property is contributed to a
partnership and, within a short period, other property is distributed to the
contributing partner. The existence of the right by each Unitholder to exchange
his or her Units of the Operating Partnership for Shares of Beneficial Interest
of the Trust (the "Conversion Right") may be considered to be "other property"
received by the Exchange Limited Partners in connection with the Exchange that
will cause some portion of the Exchange to be
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considered to be a disguised sale. The Service has previously ruled in Revenue
Ruling 69-265, in a case involving a reorganization of a corporation under
Section 368(a)(1)(C) of the Code, that a conversion right is considered "other
property" under certain circumstances. Special Tax Counsel is not able to issue
an opinion as to whether the conversion right received by the Exchange Limited
Partners will be treated as "other property." Additionally, otherwise "qualified
liabilities" could also be taxable if the Conversion Right is treated as other
property (see "Effect of Disguised Sale Characterization" immediately below).
4. Effect of Disguised Sale Characterization. In any case in which a
transfer of Exchange Partnership Units to the Operating Partnership is found to
be a "disguised sale," all or a substantial portion of the gain represented by
the excess of the fair market value of the Units received by each Exchange
Limited Partner over the tax basis of the Exchange Limited Partner's Exchange
Partnership Units would be recognized by the Exchange Limited Partner. If a
transfer of property to a partnership and one or more transfers of money or
other consideration (including the assumption or taking subject to a liability)
by the partnership to that partner are treated as a disguised sale, then the
transfers will be treated as a sale of property, in whole or in part, to the
partnership by the partner acting in a capacity other than as a member of a
partnership, rather than as a contribution under Section 721 of the Code and a
partnership distribution. A transfer that is treated as a sale is treated as a
sale for all purposes of the Code and the sale is considered to take place on
the date that, under general principles of federal tax law, the partnership is
considered to become the owner of the property.
If a transfer of property by a partner to a partnership is treated as part
of a sale without regard to the partnership's assumption of or taking subject to
a qualified liability in connection with the transfer of property, the
partnership's assumption of or taking subject to that liability is treated as a
transfer of consideration made pursuant to a sale of such property to the
partnership only to the extent of the lesser of: (1) the amount of consideration
that the partnership would be treated as transferring to the partner if the
liability were not a qualified liability, or (2) the amount obtained by
multiplying the amount of the qualified liability by the partner's net equity
percentage with respect to that property. A partner's net equity percentage with
respect to an item of property is generally the amount of consideration received
by such partner (other than relief from "qualified liabilities") divided by the
partner's net equity in the property sold, as calculated under the Disguised
Sale Regulations.
SECTION 465(E) RECAPTURE
In general, the "at-risk" rules of Section 465 of the Code limit the use of
losses, (see "Tax Treatment of Partners Who Hold Operating Partnership Units
After the Exchange below and Limitations on Deductibility of Losses; Treatment
of Passive Activities and Portfolio Income," below). Under Section 465(e) of the
Code, a taxpayer may be required to include in gross income (i.e., to
"recapture") losses previously allowed to the taxpayer with respect to an
"activity," if the amount for which the taxpayer is "at risk" in the activity is
less than zero at the close of the taxable year.
The identification of a taxpayer's activities for purposes of the at-risk
rules and the determination of a taxpayer's amount at risk in an activity are
complex and uncertain. However, as a general matter a taxpayer's amount at risk
in an activity is increased by the taxpayer's income, and reduced by the
taxpayer's losses, from the activity. Therefore, any income taken into account
by an Exchange Limited Partner as a result of a deemed cash distribution or
disguised sale treatment is likely to reduce the extent to which Section 465(e)
of the Code would apply to that Exchange Limited Partner.
Nevertheless, it is possible that the consummation of the Exchange or the
repayment of certain "qualified nonrecourse financing" (as defined in Section
465(b)(6) of the Code) of the Operating Partnership or an Exchange Partnership
at the time of or following the Exchange, singularly or in combination, could
cause a former Exchange Limited Partner 's amount at risk in an activity to be
reduced below zero and could, therefore, cause an income inclusion to the former
Holder under Section 465(e) of the Code. In this regard, the definition of
"qualified nonrecourse financing" is different from, and in certain material
respects more restrictive than, the definition of "nonrecourse liabilities" that
are taken into account under Section 752 of the Code. Hence, it is possible that
a partner can incur a reduction in his or her share of "qualified nonrecourse
financing" that causes the partner to recognize income under Section 465(e) of
the Code even though the partner has a sufficient share of "nonrecourse
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liabilities" under Section 752 of the Code so that the partner would not be
deemed to have received a deemed cash distribution in excess of his or her basis
in his or her partnership interest (and thus recognized gain as a result
thereof).
TRANSFER TO AN INVESTMENT COMPANY
Tax Counsel has relied on factual representations made by the Operating
Partnership and the General Partner that, throughout the term of the Operating
Partnership, at least 22% of the total value of all assets of the Operating
Partnership will consist of assets other than those described in Section
351(e)(1) of the Code and the Regulations thereunder ("Liquid Assets").
Section 721(a) of the Code provides the general rule that "no gain or loss
shall be recognized to a partnership or to any of its partners in the case of a
contribution of property to the partnership in exchange for an interest in the
partnership." Section 721(b) of the Code, however, provides that gain (but not
loss) must be recognized in the case of a "transfer of property to a partnership
which would be treated as an investment company (within the meaning of Section
351) if the partnership were incorporated."
Pursuant to Section 1.351-1(c)(1) of the Regulations, as extended to
partnerships, a transfer of property to a partnership will be considered to be a
transfer to an investment company if (a) the transfer results, directly or
indirectly, in diversification of the transferors' interests, and (b) either (i)
more than 80% of the value of the partnership's assets are held for investment
and are readily marketable stocks or securities or interests in regulated
investment companies or real estate investment trusts (the
"not-more-than-80%-of-assets" test), or (ii) the partnership would be a
regulated investment company or a real estate investment trust if it were
incorporated.
Section 351(e)(1) of the Code provides that the determination of whether a
company is an investment company is made: (a) by taking into account all stocks
and securities held by the company; and (b) by treating as stock and securities
- - (i) money, (ii) stocks and other equity interests in a corporation, evidences
of indebtedness, options, forward or future contracts, notional principal
contracts and derivatives, (iii) any foreign currency, (iv) any interest in a
real estate investment trust, a common trust fund, a regulated investment
company, a publicly-traded partnership (as defined in Section 7704(b) or any
other equity interest (other than in a corporation) which pursuant to its terms
or any other arrangement is readily convertible into, or exchangeable for, any
asset described in clauses (i) through (iv) or clause (v) or clause (vii), (v)
except to the extent provided in the Regulations, any interest in a precious
metal, unless such metal is used or held in the active conduct of a trade or
business after the contribution, (vi) except as otherwise provided in the
Regulations, interests in any entity if substantially all of the assets of such
entity consist (directly or indirectly) of any assets described in any of the
preceding clauses or clause (viii), (vii) to the extent provided in the
Regulations, any interest in any entity not described in clause (vi), but only
to the extent of the value of such interest that is attributable to assets
listed in clauses (i) through (v) or clause (viii), or (viii) any other assets
specified in the Regulations. Assets not covered by Section 351(e)(1) are
hereinafter referred to as "Liquid Assets."
Although "money" is treated as a stock or security (see clause (i) above),
Regulation Section 1.351-1(c)(2) provides that "[T]he determination of whether a
corporation is an investment company shall ordinarily be made by reference to
the circumstances in existence immediately after the transfer in question.
However, where circumstances change thereafter pursuant to a plan in existence
at the time of the transfer, this determination shall be made by reference to
the later circumstances." The 1997 Act Senate Committee Report states that
although cash is counted as a tainted asset for purposes of the
not-more-than-80%-of-assets test, the preceding Regulation should be applied so
that if, as a part of a plan, cash is used to purchase assets that are not
treated as stock or securities, then the investment company determination is
made after the asset purchase.
Based on the preceding, cash owned by the Operating Partnership will be
considered "stock and securities" (and therefore not an Liquid Asset) unless the
Operating Partnership has a written plan in existence at the time that the cash
is obtained to use the cash to purchase assets other than those listed in Code
Section 351(e)(1) and the Operating Partnership does in fact use the cash for
such purpose.
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Additionally, the Exchange Partnership Units that are contributed to the
Operating Partnership will be considered "stock and securities" since they are
exchangeable for shares of the Trust, which is a real estate investment trust
(see clause (iv) above).
Although the Exchange of Exchange Partnership Units to the Operating
Partnership will result in a diversification of an Exchange Limited Partner's
interests, the Operating Partnership will not meet the other test that, if
otherwise satisfied, would result in the Operating Partnership being classified
as an "investment company." Based on representations made by the Operating
Partnership and the General Partner, upon the transfer of a partnership interest
to the Operating Partnership, at least 22% of the value of the Operating
Partnership's assets will consist of Liquid Assets. Consequently, at the time of
contribution of a partnership interest to the Operating Partnership, not more
than 80% of the Operating Partnership's assets will consist of assets that are
not Liquid Assets.
If the Operating Partnership is considered an investment company, the
Exchange of existing partnership interests in exchange for Units of the
Operating Partnership will be currently taxable.
WITHHOLDING
If any gain is recognized in connection with the Exchange by an Exchange
Limited Partner who is not considered a U.S. resident for tax purposes,
withholding (in an amount equal to 10% of the "amount realized" by such Exchange
Limited Partner, which would include both the value of the Operating Partnership
Units received and such Exchange Limited Partner's share of the liabilities of
the Exchange Partnership, as determined for federal income tax purposes) may be
required. Alternatively, if gain were recognized by the Exchange Partnership,
the non-U.S. Unitholder could be subject to withholding at the current rate of
35% on his share of the gain. As a condition to the receipt of Operating
Partnership Units in the Exchange, each Exchange Limited Partner who does not
want to be subject to such withholding will have to provide to the Operating
Partnership either a certification, made under penalties of perjury, that he or
she is a United States citizen or resident (or if an entity, an entity organized
under the laws of the United States) or, alternatively, a notice of
nonrecognition treatment with respect to the Exchange in a form reasonably
acceptable to the Operating Partnership.
TAX TREATMENT OF UNITHOLDERS WHO HOLD OPERATING PARTNERSHIP UNITS AFTER THE
EXCHANGE
INCOME AND DEDUCTIONS IN GENERAL. Each Unitholder will be required to
report on his or her income tax return his or her allocable share of income,
gains, losses, deductions and credits of the Operating Partnership. Such items
must be included on the Unitholder's federal income tax return without regard to
whether the Operating Partnership makes a distribution of cash to such
Unitholder. No federal income tax will be payable by the Operating Partnership
so long as it qualifies as a partnership for federal income tax purposes (see
"Classification as a Partnership").
TREATMENT OF PARTNERSHIP DISTRIBUTIONS. Distributions of money by the
Operating Partnership to a Unitholder (including for these purposes decreases in
a Unitholder's share of Partnership liabilities) generally will not be taxable
to such Unitholder for federal income tax purposes to the extent of such
Unitholder's aggregate basis in his or her Operating Partnership Units
immediately prior to the distribution. Distributions of money in excess of such
basis generally will be considered to be gain in the amount of such excess, a
portion of which may be taxed as ordinary income. As discussed above, any
reduction in a Unitholder's share of the Operating Partnership's non-recourse
liabilities, whether through repayment, refinancing with recourse liabilities,
refinancing with non-recourse liabilities secured by the other assets, or
otherwise, may be treated as a distribution of money to such Unitholder. An
issuance of additional Operating Partnership Units by the Operating Partnership
without a corresponding increase in debt may decrease each existing Unitholder's
share of non-recourse liabilities of the Operating Partnership and, thus, will
result in a corresponding deemed distribution of money.
INITIAL BASIS OF OPERATING PARTNERSHIP UNITS. In general, an Exchange
Limited Partner who acquires Operating Partnership Units in the exchange will
have an initial tax basis in such Operating Partnership Units ("Initial Basis")
equal to the aggregate basis in his or her interest in his or her Exchange
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Partnership, adjusted to reflect the effects of the Exchange (that is, reduced
to reflect any deemed distributions resulting from a reduction in the former
holder's share of liabilities and increased to reflect any gain required to be
recognized in connection with the Exchange).
As a result of the decreases in each Unitholder's share of Partnership
non-recourse liabilities that may result from the consummation of the Exchange
(see "Tax Consequences of the Exchange - Relief from Liabilities/Deemed Cash
Distribution"), each Exchange Limited Partner who receives Operating Partnership
Units may have an Initial Basis in his or her Operating Partnership Units that
is significantly lower than the basis in his or her interest in his or her
Exchange Partnership immediately prior to the Exchange. Because of this
reduction in basis, distributions of cash and deemed distributions resulting
from a reduction of a Unitholder's share of Partnership non-recourse liabilities
will be taxable to an Exchange Limited Partner sooner than it would have if such
basis reduction had not occurred. Such basis reduction also would affect the
Unitholder's ability to deduct its share of any Partnership tax losses. For the
effects on an Exchange Limited Partner of a reduction in basis that may result
from the Exchange, see "See Consequences of the Exchange - Relief from
Liabilities/Deemed Cash Distribution" and "Treatment of Partnership
Distributions," above and "Limitations on Deductibility of Losses; Treatment of
Passive Activities and Portfolio Income," below.
Each former Exchange Limited Partner's Initial Basis in his or her
Operating Partnership Units will generally be increased by (a) his or her share
of Operating Partnership taxable income and Operating Partnership exempt income
and, (b) his or her share of increases in non-recourse liabilities incurred by
the Operating Partnership, if any. Generally, each former Exchange Limited
Partner's Initial Basis in his or her Operating Partnership Units will be
decreased (but not below zero) by (i) his or her share of Partnership
distributions, (ii) his or her share of decreases in liabilities of the
Operating Partnership, including any decrease in the Exchange Limited Partner's
share of non-recourse liabilities of the Operating Partnership (see "Tax
Consequences of the Exchange - Relief from Liabilities/Deemed Cash
Distribution"), (iii) his or her share of any losses of the Operating
Partnership, and (iv) his or her share of non-deductible expenditures of the
Operating Partnership that are not chargeable to capital account.
ALLOCATIONS OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTIONS. The Agreement
of Limited Partnership of the Operating Partnership (the "Partnership
Agreement") provides that, if the Operating Partnership operates at a net loss,
net losses shall be allocated to the Unitholders in proportion to their
respective percentage ownership interests in the Operating Partnership, provided
that net losses that would have the effect of creating a deficit balance in a
limited partner's capital account (as specially adjusted for such purpose)
("Excess Loss") will be reallocated to the General Partner. The Partnership
Agreement also provides that, if the Operating Partnership operates at a net
profit, net income will first be allocated to the General Partner to the extent
of Excess Losses with respect to which the General Partner has not previously
been allocated net income, and any remaining net income shall be allocated to
the Unitholders in proportion to their respective percentage ownership interests
in the Operating Partnership. Notwithstanding the preceding, the Partnership
Agreement permits the General Partner to issue additional Units to the General
Partner and to third parties whereby such Units may have special rights,
preferences and designations, including with regard to allocations of net income
and net losses, that are senior to the rights of the other Unitholders
("Preferred Units"). Net income and net loss of the Operating Partnership for
the taxable year of liquidation of the Operating Partnership is to be allocated
first to eliminate negative balances in each Unitholder's capital account and
then, to the extent possible, in a manner such that the capital accounts of the
Unitholders immediately prior to final liquidating distributions are equal to
the amount which would have been distributable to Unitholders as set forth in
the Partnership Agreement.
EFFECT OF THE EXCHANGE ON DEPRECIATION. The Exchange may adversely affect
the computation of depreciation deductions with respect to assets of each
Exchange Partnership. Pursuant to Code Section 708(b)(1)(B), a partnership will
be considered to have been terminated if within a twelve month period, there is
a sale or exchange of 50% or more of the interests in partnership capital and
profits. As a result of the exchange of one or more interests of an Exchange
Partnership, an Exchange Partnership may "terminate" under Section 708(b)(1)(B)
of the Code. Section 168(i)(7) of the Code provides, in effect, that when a
partnership terminates under Section 708(b)(1)(B) of the Code, the partnership
must begin new depreciation periods for its property. As a result, if there is a
tax termination of an Exchange Partnership, the remaining basis of the assets of
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the Exchange Partnership will be depreciated over the period that would apply if
those assets were newly acquired by the such terminated Exchange Partnership in
a purchase transaction.
TAX ALLOCATIONS WITH RESPECT TO BOOK-TAX DIFFERENCE ON CONTRIBUTED
PROPERTIES. Pursuant to Section 704(c) of the Code, income, gain, loss and
deduction attributable to appreciated or depreciated property that is
contributed to a partnership must be allocated for federal income tax purposes
in a manner such that the contributor is charged with, or benefits from, the
unrealized gain or unrealized loss associated with the property at the time of
contribution. The amount of such unrealized gain or unrealized loss is generally
equal to the difference between the fair market value of the contributed
property at the time of contribution and the adjusted tax basis of such property
at the time of contribution (referred to as "Book-Tax Difference"). These rules
will apply with respect to the contribution of Exchange Partnership Units to the
Operating Partnership in the Exchange.
The Partnership Agreement requires allocations of income, gain, losses and
deductions attributable to the properties as to which there Book-Tax Difference
be made in a manner that is consistent with Section 704(c) of the Code. The
Partnership Agreement authorizes the General Partner to elect any method
prescribed by the Regulations to be used by the Operating Partnership for
allocation of items affected by Section 704(c) of the Code. As a result of
Section 704(c), in general, a contributor of Exchange Partnership Units will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain until such time that the Book-Tax Difference
is reduced to zero. In addition, depending on the method of allocation that is
selected, the contributor could be allocated items of income for tax purposes to
offset depreciation which is allocated to other partners in excess of
depreciation otherwise permitted to be allocated to other partners by the
ceiling rule of the Regulations. This would tend to eliminate the Book-Tax
Difference.
DISSOLUTION OF PARTNERSHIP. In the event of the dissolution of the
Operating Partnership, a distribution of Partnership property (other than money)
will not result in taxable gain to a Unitholder (except to the extent provided
in Sections 737, 704(c)(1)(B) and 731(c) of the Code). A Unitholder will hold
such distributed property with a basis equal to the adjusted basis of such
Operating Partnership Units, reduced by any money distributed in liquidation.
Further, the liquidation of the Operating Partnership will be taxable to a
holder of Operating Partnership Units to the extent that any money distributed
in liquidation (including any money deemed distributed as a result of relief
from liabilities) exceeds such holder's tax basis in his or her Operating
Partnership Units.
LIMITATIONS ON DEDUCTIBILITY OF LOSSES; TREATMENT OF PASSIVE ACTIVITIES AND
PORTFOLIO INCOME. The passive loss limitations generally provide that
individuals, estates, trusts and closely held corporations and personal service
corporations can deduct losses from passive activities (generally, activities in
which the taxpayer does not materially participate), only to the extent that
such losses are not in excess of the taxpayer's income from passive activities
or investments. If the partnership were to be classified as a publicly traded
partnership under the Code (see "Classification of the Partnership" above), any
losses or deductions allocable to a holder of Operating Partnership Units could
be used only against gains or income of the Operating Partnership and could not
be used to offset passive income from other passive activities. Similarly, any
Partnership income or gain allocable to a holder of Operating Partnership Units
could not be offset with losses from other passive activities of such holder.
In addition to the foregoing limitations, a holder of Operating Partnership
Units may not deduct from taxable income its share of Partnership losses, if
any, to the extent that such losses exceed the lesser of (i) the adjusted tax
basis of his or her Operating Partnership Units at the end of the Operating
Partnership's taxable year in which the loss occurs, and (ii) the amount for
which such holder is considered "at risk" at the end of that year. In general, a
holder of Operating Partnership Units will initially be "at risk" to the extent
of his or her basis in his or her Units (unless the Unitholder borrowed amounts
on a non-recourse basis to acquire such interest), including for such purposes
only such Unitholder's share of the Operating Partnership's liabilities, as
determined under Section 752 of the Code, that are considered "qualified
non-recourse financing" for purposes of the "at risk" rules. After consummation
of the Exchange, in general, a Unitholder's at-risk amount will increase or
decrease as the adjusted basis in his or her Operating Partnership Units
increases or decreases. Losses disallowed to a Unitholder as a result
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of these rules can be carried forward and may be allowable to such holder to the
extent that his or her adjusted basis or at-risk amount (whichever was the
limiting factor) is increased in a subsequent year. The at-risk rules apply to
an individual partner, an individual shareholder of a corporate partner that is
an S corporation and a corporate partner if 50% or more of the value of stock of
such corporate partner is owned directly or indirectly by five or fewer
individuals at any time during the last half of the taxable year.
SECTION 754 ELECTION. The General Partner has the authority, in its sole
and absolute discretion, to determine whether to make any available election
pursuant to the Code including, without limitation, an election under Section
754 of the Code. Once made, a Section 754 Election is irrevocable without the
consent of the IRS. If made, the 754 Election would generally permit a purchaser
of Operating Partnership Units to adjust his or her share of the basis in the
Operating Partnership's properties ("Inside Basis") pursuant to Section 743(b)
of the Code to fair market value (as reflected by the value of consideration
paid for the Operating Partnership Units), as if such purchaser had acquired a
direct interest in the Operating Partnership's Assets. The Section 743(b)
adjustment is attributed solely to a purchaser of Operating Partnership Units
and is not added to the basis of Partnership's assets associated with all of the
Operating Partnership's Unitholders.
A Section 754 Election is advantageous if the transferee's tax basis in his
or her interests is higher than such interest's share of the aggregate tax basis
to the partnership of the partnership's assets immediately prior to the
transfer. In such a case, as a result of the election, the transferee would have
a higher tax basis in his or her share of the partnership's assets for purposes
of calculating, among other items, his or her depreciation and depletion
deductions and his or her share of any gain or loss on a sale of the
partnership's assets. Conversely, a Section 754 Election is disadvantageous if
the transferee's tax basis in such interests is lower than such interest's share
of the aggregate tax basis of the partnership's assets immediately prior to the
transfer. Thus, the fair market value of the interests may be affected either
favorably or adversely by the election.
DISPOSITION OF OPERATING PARTNERSHIP UNITS BY UNITHOLDERS. If a Partnership
Unit is sold or otherwise disposed of, the determination of gain or loss from
the sale or other disposition will be based on the difference between the amount
realized and the tax basis for such Partnership Unit. Upon the sale of a
Partnership Unit, the "amount realized" will be measured by the sum of the cash
and fair market value of other property received for the Operating Partnership
Unit plus the portion of the Operating Partnership's liabilities considered
allocable to the Operating Partnership Unit sold. Similarly, upon a gift of a
Partnership Unit, a Unitholder will be deemed to have realized an amount with
respect to the portion of the Operating Partnership's nonrecourse liabilities
considered allocable to such Partnership Unit. To the extent that the sum of the
amount of cash or property received and the allocable share of the Operating
Partnership's liabilities exceeds the holder's basis for the Operating
Partnership Unit disposed of, such Unitholder will recognize gain. The tax
liability resulting from such gain could exceed the amount of cash received from
such disposition.
To the extent that the amount realized upon the sale of the Operating
Partnership Unit attributable to a Unitholder's share of "unrealized
receivables" of the Operating Partnership exceeds the basis attributable to
those assets, such excess will be treated as ordinary income. Unrealized
receivables include, to the extent not previously includable in Partnership
Income, any rights to payment for services rendered or to be rendered.
Unrealized receivables also include amounts that would be subject to recapture
as ordinary income if the Operating Partnership had sold its assets at their
fair market value at the time of the transfer of a Partnership Unit, such as
"depreciation recapture" under Sections 1245 and 1250 of the Code.
TAX TREATMENT OF CONVERSION RIGHT. If a Unitholder exercises his or her
right to exchange his or her Operating Partnership Units for Common Shares of
the Trust, or if upon a Unitholder's election to convert, the Trust satisfies
the Unitholder's conversion right by paying cash for the Unitholder's Operating
Partnership Units, such transaction will be a fully taxable sale to the
Unitholder. As a result, the Unitholder will be treated as realizing an amount
equal to the amount of the cash or the value of the Common Shares received upon
the conversion plus the amount of liabilities of the Operating Partnership
considered allocable to the redeemed Operating Partnership Units at the time of
the redemption.
CONSTRUCTIVE TERMINATION. A partnership, will be considered to have been
terminated for tax
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purposes if there is a sale or exchange of 50% or more of the total interests in
partnership capital and profits within a twelve-month period. Under existing
Regulations, a termination of a partnership will result in a deemed transfer by
a partnership, of its assets to a new partnership in exchange for an interest in
a new partnership followed by a deemed distribution of interests in the new
partnership to the partners of the terminated partnership in liquidation of the
partnership. Under the 1997 Act, if a partnership is permitted to elect and does
elect to be treated as a large partnership it will not terminate by reason of
the sale or exchange of interests in the partnership. A termination of the
partnership will result in the closing of the partnership's taxable year for all
partners. In the case of a partner reporting on a taxable year other than a
fiscal year ending December 31, the closing of the partnership's taxable year
may result in more than twelve months' taxable income or loss of the partnership
being includable in the partners taxable income for year of termination. New tax
elections required to be made by the partnership, including a new election under
Section 754 of the Code, would be required to be made subsequent to a
termination if such an election continues to be desired, and a termination could
result in a deferral of partnership deductions for depreciation. A termination
could also result in penalties if the partnership were unable to determine that
the termination had occurred. Moreover, a termination might either accelerate
the application of or subject the partnership to, any tax legislation enacted
prior to the termination.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raise issues unique to such persons and, as
described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs and other retirement plans) are subject to federal
income tax on unrelated business taxable income. Much of the taxable income
derived by such an organization from the ownership of a Unit will be unrelated
business taxable income and thus will be taxable to such a Unitholder.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence, they will be required to file
federal tax returns in respect of their share of Partnership income, gain, loss
or deduction and pay federal income tax at regular rates on any net income or
gain. Generally, a partnership is required to pay a withholding tax on the
portion of the partnership's income which is effectively connected with the
conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been made
to such partners. However, under rules applicable to publicly-traded
partnerships, a partnership must withhold on actual cash distributions made
quarterly to foreign Unitholders. Each foreign Unitholder must obtain a taxpayer
identification number from the IRS and submit that number to the transfer agent
of the Operating Partnership in order obtain credit for the taxes withheld. A
change in applicable law may require the Operating Partnership to change these
procedures.
Because a foreign corporation which owns Units will be treated as engaged
in a United States trade or business, such a corporation may be subject to
United States branch profits tax at a rate of 30% in addition to regular federal
income tax on its allocable share of the Operating Partnership's income and gain
(as adjusted for changes in the foreign corporation's "United States net
equity") which is effectively connected with the conduct of a United States
trade or business. That tax may be reduced or eliminated by an income tax treaty
between the United States and the country with respect to which a foreign
corporate Unitholder is a qualified resident. In addition, such a Unitholder is
subject to special information reporting requirements under Section 6038C of the
Code.
Under a ruling of the IRS, a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on the
disposition of the such Unit to the extent that such gain is effectively
connected with the United States trade or business of the foreign Unitholder.
PARTNERSHIP INCOME TAX INFORMATION RETURNS AND PARTNERSHIP AUDIT PROCEDURES
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The General Partner on behalf of the Operating Partnership will use
reasonable efforts to furnish the Unitholders with the tax information
reasonably required by Unitholders for federal and state income tax reporting
purposes within 90 days after the close of each Partnership taxable year.
The federal income tax information returns filed by the Operating
Partnership may be audited by the Service. The Code contains partnership audit
procedures governing the manner in which the Service audit adjustments of
partnership items are resolved. For taxable years beginning after December 31,
1997 (the first available year), the Operating Partnership may be able to elect
the simplified pass-through system for audits that was enacted as part of the
1997 Act. Such election is available to partnerships that have 100 or more
partners and meet certain other requirements set forth in the Act.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of Partnership items of income,
gain, loss, deduction and credit is determined at the partnership level in a
unified partnership proceeding, rather than in separate proceedings with each
partner. The Code provides for one partner to be designated as the "Tax Matters
Partner" for these purposes. The Partnership Agreement appoints the General
Partner as the Tax Matters Partner for the Operating Partnership.
The Tax Matters Partner is authorized, but not required, to take certain
actions on behalf of the Operating Partnership and the Unitholders and can
extend the statute of limitations for assessment of tax deficiencies against
Unitholders with respect to Partnership items. The Tax Matters Partner will make
a reasonable effort to keep each Unitholder informed of administrative and
judicial tax proceedings with respect to Partnership's items to the extent
required pursuant to Regulations issued under Section 6223 of the Code. The Tax
Matters Partner is authorized to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings for the adjustment of
Partnership items required to be taken into account by a Unitholder for income
tax purposes, and in the settlement agreement the Tax Matters Partner may
expressly state that such agreement shall bind all Unitholders, provided,
however, that such settlement agreement shall not bind any Unitholder (a) who
(within the time prescribed pursuant to the Code and Regulations) files a
statement with the IRS providing that the Tax Matters Partner shall not have the
authority to enter into a settlement agreement on behalf of such Unitholder or
(b) who is a "notice partner" (as defined in Section 6231 of the Code) or a
member of a "notice group" (as defined in Section 6223(b)(2) of the Code).
The Unitholders will generally be required to treat Operating Partnership
items on their federal income returns in a manner consistent with the treatment
of the items on the Operating Partnership information return. In general, that
consistency requirement is waived if the Unitholder files a statement with the
IRS identifying the inconsistency. Failure to satisfy the consistency
requirement, if not waived, will result in an adjustment to conform the
treatment of the item by the Unitholder to the treatment on the Operating
Partnership return. Even if the consistency requirement is waived, adjustments
to the Unitholder's tax liability with respect to the Operating Partnership
items may result from an audit of the Operating Partnership's or the
Unitholder's tax return. Intentional or negligent disregard of the consistency
requirement may subject a Unitholder to substantial penalties. In addition, an
audit of the Operating Partnership return may also lead to an audit of an
individual Unitholder's tax return and such audit could result in adjustment of
non-partnership items.
A partner in an electing large partnership must report all partnership
items consistently with their treatment on the partnership return. An
inconsistency cannot be excused by notifying the IRS of the differing treatment.
Unitholders who fail to report partnership items consistently with their
treatment on the partnership return are subject to accuracy-related and fraud
penalties.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The Temporary Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that the
Operating Partnership is not subject to the registration requirement on the
basis that it will not constitute a tax shelter.
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Under Section 183 of the Code, certain expenses (other than for real estate
taxes and interests) from activities not engaged in for profit are allowed as
deductions only to the extent of income from the activity and then only to the
extent such expenses, together with other itemized deductions exceed two percent
(2%) of the taxpayer's adjusted gross income. Section 183 generally applies to
activities that are not conducted as a business or in a business-like manner,
activities that have significant recreational aspects with little or no profits,
or activities where the primary source of investment return is through tax
deductions and credits.
The limitation of Section of 183 may not be applicable if, based on the
facts and circumstances of the particular situation, it is determined that a
member's investment in the Operating Partnership and the Operating Partnership's
business constitutes transactions and activities "entered into for profit." The
fact that the possibility of ultimately obtaining profits is uncertain, standing
alone, does not appear to be sufficient grounds for the denial of losses under
Section 183. The General Partner and the Operating Partnership have represented
that the Operating Partnership's principal objective is to earn a profit. Based
on such representation and on the nature and extent of the activities to be
undertaken by the Operating Partnership, it is not likely that Section 183 could
be successfully applied to limit deductions claimed by the Operating
Partnership. However, because of the inherently factual nature of the inquiry,
special Tax Counsel cannot give unqualified assurance that the IRS will not
attempt to challenge a Unitholder's deductions under Section 183 or that any
such challenge would not be successful.
With respect to Partnership activities, the profit objective test is to be
applied at the Operating Partnership level. However, the test may be applied at
the partner level to determine whether the partner acquired his or her interest
in an anticipation of profit. Accordingly, no assurance can be given that the
profit objective principals may not be applied in the future to disallow
deductions taken by one or more of the partners with respect to their interest
in the Operating Partnership. No investor should become a partner unless his
objective is to secure an economic profit from his investment in the Operating
Partnership, determined without regard to tax benefits, which may be received.
ORGANIZATIONAL AND SYNDICATION FEES
Section 709 of the Code provides that organizational fees are not deducted
currently but may be amortized over a period of not less than 60 months after a
partnership begins doing business. If a partnership is liquidated before the end
of the 60-month period, the remaining organizational expenditures are deductible
as losses at that time. Organizational fees and expenses are those expenditures
that are (i) incidental to the creation of a partnership, (ii) chargeable to the
capital account, (iii) of a character that, if expended incidentally to the
creation of a partnership having an ascertainable life, would be amortized over
such life.
Section 709 also disallows a current deduction for syndication fees.
Further, such fees are not eligible for the 60-month amortization period for
organizational expenses noted above. Syndication fees are expenses connected
with the promotion of the sale of units or interests in a partnership and may
include such items as some professional fees, selling expenses, and printing
costs.
There can be no assurance that the IRS will not attempt to reclassify
certain expenditures that are deducted or amortized by the Operating Partnership
as syndication costs.
ANTI-ABUSE REGULATIONS
Pursuant to Section 1.701-2 of the Regulations regarding certain "abusive"
transactions involving partnerships, if a partnership is formed or availed of in
connection with a transaction "with a principal purpose of substantially
reducing the present value of the partners' aggregate federal tax liability in a
manner that is inconsistent with the intent" of the partnership provisions of
the Code, the Service has the authority to recast the transaction so as to
achieve tax results consistent with the intent of the partnership provisions,
taking into account all of the facts and circumstances. Special Tax Counsel is
not able to render an opinion regarding whether or not the Service will apply
the anti-abuse Regulations to recast the transactions of the Operating
Partnership.
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ALTERNATIVE MINIMUM TAX ON ITEMS OF TAX PREFERENCE.
The Code contains different sets of minimum tax rules applicable to
corporate and non-corporate taxpayers. The Operating Partnership will not be
subject to the alternative minimum tax, but the Unitholders are required to take
into account on their own tax returns their respective shares of the Operating
Partnership's tax preference items and adjustments in order to compute
alternative minimum taxable income. SINCE THE IMPACT OF THE ALTERNATIVE MINIMUM
TAX DEPENDS ON EACH UNITHOLDER'S PARTICULAR SITUATION, THE FORMER HOLDERS OF
EXCHANGE PARTNERSHIP UNITS, AND CURRENT UNITHOLDERS, ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE APPLICABILITY OF THE ALTERNATIVE MINIMUM TAX
STATE AND LOCAL TAXES
In addition to the federal income aspects described above, a Unitholder
should consider the potential state and local tax consequences of owning
Operating Partnership Units. Tax returns may be required and tax liability may
be imposed both in the state or local jurisdictions where a Unitholder resides
and in each state or local jurisdiction in which the Operating Partnership has
assets or otherwise does business. Thus, persons holding Operating Partnership
Units either directly or through one or more Partnerships or limited liability
companies, may be subject to state and local taxation in a number of
jurisdictions in which the Operating Partnership directly or indirectly holds
real property and would be required to file periodic tax returns in those
jurisdictions. The Operating Partnership anticipates providing the Unitholders
with information reasonably necessary to permit them to satisfy state and local
return filing requirements. To the extent that a Unitholder pays income tax with
respect to the Operating Partnership to a state where he or she is not a
resident (or the Operating Partnership is required to pay such tax on behalf of
the Unitholder), the Unitholder may be entitled, in whole or in part, to a
deduction or credit against income tax that otherwise would be owed to his or
her state of residence with respect to the same income. A Unitholder should
consult with his or her personal tax advisor with respect to the state and local
income tax implications for such Unitholder of owning Operating Partnership
Units.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO THE INVESTOR OF AN INVESTMENT
IN THE OPERATING PARTNERSHIP, INCLUDING TAX CONSEQUENCES TO THE INVESTOR UPON
THE EXCHANGE OF HIS OR HER EXCHANGE PARTNERSHIP UNITS FOR UNITS OF THE OPERATING
PARTNERSHIP.
INCOME TAX CONSIDERATIONS WITH RESPECT TO THE TRUST
The General Partner (sometimes hereinafter referred to as the "Trust") intends
to operate in a manner that permits it to satisfy the requirements for taxation
as a REIT under the applicable provisions of the Code. No assurance can be
given, however, that such requirements will be met. The following is a summary
of the Federal income tax considerations for the Trust and its Shareholders with
respect to the treatment of the Trust as a REIT. Since these provisions are
highly technical and complex, each prospective purchaser of the Trust's Common
Shares is urged to consult his own tax advisor with respect to the Federal,
state, local, foreign and other tax consequences of the purchase, ownership and
disposition of the Common Shares. The Trust has not obtained, and does not
intend to request, a ruling from the Internal Revenue Service ("IRS") that it
will be treated as a REIT. Instead, the Trust has obtained and relied upon the
opinion of its special Tax Counsel that, based on the organization and proposed
operation of the Trust and based on certain other assumptions and
representations, it will qualify as a REIT. The opinion is not binding on the
IRS or any court.
In brief, if certain detailed conditions imposed by the REIT provisions of
the Code are met, entities, such as the Trust, that invest primarily in real
estate and that otherwise would be treated for Federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to Shareholders. This treatment
substantially eliminates the "double taxation" (i.e., at both the corporate and
Shareholder levels) that generally results from the use of corporations.
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If the Trust fails to qualify as a REIT in any year, however, it will be
subject to Federal income taxation as if it were a domestic corporation, and its
Shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, the Trust could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its Shareholders would be reduced or eliminated.
The Managing Shareholder of the Trust currently expects that the Trust will
operate in a manner that permits it to elect, and that it will elect, REIT
status for the taxable year ending December 31, 1998, and in each taxable year
thereafter. There can be no assurance, however, that this expectation will be
fulfilled, since qualification as a REIT depends on the Trust continuing to
satisfy numerous asset, income and distribution tests described below, which in
turn will be dependent in part on the Trust's operating results.
The following summary is based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local, or foreign tax considerations, nor does it discuss all of the
aspects of Federal income taxation that may be relevant to a prospective
Shareholder in light of his particular circumstances or to certain types of
Shareholders (including insurance companies, tax-exempt entities, financial
institutions, broker-dealers, foreign corporations and persons who are not
citizens or residents of the United States) subject to special treatment under
Federal income tax laws.
TAXATION OF THE TRUST
General. In any year in which the Trust qualifies as a REIT, in general it
will not be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to Shareholders. The Trust may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed.
Notwithstanding its qualifications as a REIT, the Trust may also be subject
to taxation in certain other circumstances. If the Trust should fail to satisfy
either the 75% of 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 net income
attributable to the greater of the amount by which the REIT fails the 75% test
or 95% test, multiplied by a fraction intended to reflect the Trust's
profitability. The Trust will also be subject to a tax of 100% on net income
from any "prohibited transaction" as described below, and if the Trust has (i)
net income from the sale or other disposition of "foreclosure property" which is
held primarily for sale to customers in the ordinary course of business or (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 Trust should fail to distribute during each calendar year at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any undistributed
taxable income from prior years, the Trust would be subject to a 4% excise tax
on the excess of such required distribution over the amounts actually
distributed. For taxable years beginning after August 5, 1997, the Trust may
elect to retain rather than distribute its net long-term capital gains. The
effect of such election is that (i) the Trust is required to pay the tax on such
gains within 30 days after the close of the Trust's taxable year, (ii)
Shareholders, while required to include their proportionate share of the
undistributed long-term capital gains in income, will receive a credit or refund
for their share of the tax paid by the Trust, and (iii) the tax basis of a
Shareholder's beneficial interest in the Trust would be increased by the amount
of undistributed long-term capital gains (less the amount of capital gains tax
paid by the Trust) included in the Shareholder's long-term capital gain. To
designate amounts as undistributed capital gains, the designation must be made
in a written notice to Shareholders and mailed at any time prior to the
expiration of 60 days after the close of the Trust's taxable year or mailed with
its annual report to the taxable year. The Trust may also be subject to the
corporate alternative minimum tax, as well as tax in certain situations, not
presently contemplated. The Trust will use the calendar year both for Federal
income tax purposes, as is required of a newly organized REIT, and for financial
reporting purposes.
In order to qualify as a REIT, the Trust must meet, among others, the
following requirements:
Stock Ownership Tests. The Trust's Shares must be held by a minimum of 100
persons for at least 335 days in each taxable year (or a proportional number of
days in any short taxable year). In addition, at all times
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during the second half of each taxable year, no more than 50% in value of the
Shares of the Trust may be owned, directly or indirectly and by applying certain
constructive ownership rules, by five or fewer individuals, which for this
purpose includes certain tax-exempt entities. For purposes of this test, in
general, any Shares held by a qualified domestic pension or other retirement
trust will be treated as held directly by its beneficiaries in proportion to
their actuarial interest in such trust rather than by such trust. These stock
ownership requirements need not be met until the second taxable year of the
Trust for which a REIT election is made.
In order to ensure compliance with the foregoing stock ownership tests, the
Trust has placed certain restrictions on the transfer of its Shares to prevent
additional concentration of the share ownership. Moreover, to evidence
compliance with these requirements, under Treasury regulations the Trust must
maintain records which disclose the actual ownership of its outstanding Shares.
In fulfilling its obligations to maintain records, the Trust must and will
demand written statements each year from the record holders of designated
percentages of its Shares disclosing the actual owners of such Shares (as
prescribed by Treasury regulations). Under the 1997 Act, for taxable years
beginning after August 5, 1997, if the Trust complies with the Treasury
regulations for ascertaining its actual ownership and did not know, or exercise
reasonable diligence would not have reason to know, that more than 50% in value
of its outstanding Shares were held, actually or constructively, by five or
fewer individuals, then the Trust will be treated as meeting such requirements.
A list of those persons failing or refusing to comply with such demand must be
maintained as a part of the Trust's records. A Shareholder failing or refusing
to comply with the Trust's written demand must submit with his tax return a
similar statement disclosing the actual ownership of Shares and certain other
information. In addition, the Declaration of Trust for the Trust provides
restrictions regarding the transfer of its Shares that are intended to assist
the Trust in continuing to satisfy the stock ownership requirements.
Asset Tests. At the close of each quarter of the Trust's taxable year, the
Trust must satisfy three tests relating to the nature of its assets (determined
in accordance with generally accepted accounting principles). First, at least
75% of the value of the Trust's total assets must be represented by real estate
assets (which for this purpose includes (i) its allocable share of real estate
assets held by partnerships in which the Trust owns an interest; (ii) stock or
debt instruments purchased with the proceeds of a stock offering and held for
not more than one year from the date the Trust received such proceeds), cash,
cash items and government securities and (iii) stock in other real estate
investment trusts. Second, not more than 25% of the Trust's total assets may be
represented by securities other than those in the 75% asset class. Third, of the
investments included in the 25% asset class, securities in this class may not
exceed (i) in the case of securities of any one non-government issuer, 5% of the
value of the Trust's total assets or (ii) 10% of the outstanding voting
securities of any one such issuer. The Trust's investment in any properties
through its interest in one or more partnerships would be intended to constitute
an investment in qualified assets for purposes of the 75% assets test.
Gross Income Tests. There are currently three separate percentage tests
relating to the sources of the Trust's gross income which must be satisfied for
each taxable year. For purposes of these tests, if the Trust invests in one or
more partnerships, the Trust will be treated as receiving its share of the
income and loss of such partnerships, and the gross income of the partnerships
will retain the same character in the hands of the Trust as it has in the hands
of the respective partnerships. The three tests are as follows:
1. The 75% Test. At least 75% of the Trust's gross income for the
taxable year must be "qualifying income." Qualifying income generally
includes (i) rents from real property (except as described below); (ii)
interest on obligations secured by mortgages on, or interests in, real
property; (iii) gains from the sale or other disposition of interests in
real property and real estate mortgages, other than gain from property held
primarily for sale to customers in the ordinary course of the Trust's trade
or business ("dealer property"); (iv) dividends or other distributions on
shares in other REITs, as well as gain from the sale of such shares; (v)
abatements and refunds of real property taxes; (vi) income from the
operation, and gain from the sale, of property acquired at or in lieu of a
foreclosure of the mortgage secured by such property ("foreclosure
property"); (vii) commitment fees received for agreeing to make loans
secured by mortgages on real property or to purchase or lease real
property; and (viii) qualified temporary investment income.
Rents received from a tenant will not, however, qualify as rents from
real property in satisfying
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the 75% test (or the 95% gross income test described below) if the Trust,
or an owner of 10% or more of the Trust, directly or constructively owns
10% or more of such tenant. In addition, if rent attributable to personal
property leased in connection with a lease of real property is greater than
15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as rents from real
property. Moreover, an amount received or accrued will not qualify as rents
from real property (or as interest income) for purposes of the 75% and 95%
gross income tests if it is based in whole or in part on the income or
profits of any person, although an amount received or accrued generally
will not be excluded from "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales.
Finally, for rents received to qualify as rents from real property, the
Trust generally must not operate or manage the property or furnish or
render services to tenants, other than through an "independent contractor"
from whom the Trust derives no income, except that the "independent
contractor" requirement does not apply to the extent that the services
provided by the Trust are "usually or customarily rendered" in connection
with the rental of space for occupancy only, or are not otherwise
considered "rendered to the occupant for his convenience." For taxable
years beginning after August 5, 1997, a REIT is permitted to render a de
minimis amount of impermissible services to tenants, or in connection with
the management of property, and still treat amounts received with respect
to that property as rents from real estate.
The amount received or accrued by the Trust during the taxable year
for the impermissible services with respect to a property may not exceed 1%
of all amounts received or accrued by the Trust directly or indirectly from
the property. The amount received for any service (or management operation)
for this purpose shall be deemed to be not less than 150% of the direct
cost of the Trust in furnishing or rendering the service (or providing the
management or operation).
2. The 95% Test. In addition to deriving 75% of its gross income from
the sources listed above, at least 95% of the Trust's gross income for the
taxable year must be derived from the above-described qualifying income,
and from dividends, interests, or gains from the sale or other disposition
of Shares or other securities that are not dealer property. Dividends and
interest on any obligations not collateralized by an interest in real
property are included for purposes of the 95% test, but not for purposes of
the 75% test.
For purposes of determining whether the Trust complies with the 75%
and 95% gross income test, gross income does not include income from
prohibited transactions. A "prohibited transaction" is a sale of dealer
property (excluding foreclosure property); however, it does not include a
sale of property if such property is held by the Trust for at least four
years and certain other requirements (relating to the number of properties
sold in a year, their tax bases, and the cost of improvements made thereto)
are satisfied. The Trust and the Managing Shareholder have represented to
Special Tax Counsel that neither the Trust nor the Operating Partnership
will enter into transactions for the sale of dealer property. Special Tax
Counsel, is, however, unable to issue an opinion regarding whether or not
the Trust will recognize income from one or more prohibited transactions.
The Trust believes that, for purposes of both the 75% and 95% gross
income test, its investment in properties directly or through one or more
partnerships will in major part give rise to qualifying income in the form
of rents, and that gains on sales of properties, or of the Trust's interest
in a partnership, generally will also constitute qualifying income. The
Trust intends to closely monitor its non-qualifying income and anticipates
that any non-qualifying income on its investments and activities will not
result in the Trust failing either the 75% or 95% gross income test.
Even if the Trust fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if: (i) the Trust's
failure to comply was due to reasonable cause and not to willful neglect;
(ii) the Trust reports the nature and amount of each item of its income
included in the tests on a schedule attached to its tax return; and (iii)
any incorrect information on this schedule is not due to fraud with intent
to evade tax. If these relief provisions apply, however, the
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Trust will nonetheless be subject to a 100% tax on the greater of the
amount by which it fails either the 75% or 95% gross income test,
multiplied by a fraction intended to reflect the Trust's profitability.
3. The 30% Test. For taxable years beginning on or before August 5,
1997, a REIT was required to derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property
held for less than four years (other than foreclosure property and
involuntary conversions); (ii) stock or securities (including an interest
rate swap or cap agreement) held for less than one year, and (iii) property
in a prohibited transaction. The Trust does not anticipate that it will
have difficulty in complying with this test. The 30% test has been repealed
for taxable years beginning after August 5, 1997.
Annual Distribution Requirements. In order to qualify as a REIT, the Trust
is required to distribute dividends (other than capital gain dividends) to its
Shareholders each year in an amount at least equal to (A) the sum of (i) 95% of
the Trust's REIT taxable income (computed without regard to the dividends paid
deduction and the REIT's net capital gain) and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (B) the sum of certain items of
non-cash income. For taxable years beginning after August 5, 1997 the Act (i)
expands the class of non-cash income that is excluded from the distribution
requirement to include income from the cancellation of indebtedness, and (ii)
extends the treatment of original issue discount ("OID") (over cash and the fair
market value of property received on the instrument) as such non-cash income to
OID instruments generally and for REITs that use an accrual method of
accounting. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before the Trust timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Trust does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on
the undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. For taxable years beginning after August 5, 1997, the
Trust may elect to retain rather than distribute its net long-term capital
gains. The effect of such election is that (i) the Trust is required to pay the
tax on such gains within 30 days after the close of the Trust's taxable year,
(ii) Shareholders, while required to include their proportionate share of the
undistributed long-term capital gains in income, will receive a credit or refund
for their share of the tax paid by the Trust, and (iii) the tax basis of a
Shareholder's beneficial interest in the Trust would be increased by the amount
of undistributed long-term capital gains (less the amount of capital gains tax
paid by the Trust) included in the Shareholder's long-term capital gains. To
designate amounts as undistributed capital gains, the designation must be made
in a written notice to Shareholders and mailed at any time prior to the
expiration of 60 days after the close of the Trust's taxable year or mailed with
its annual report for the taxable year.
The Trust intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the preceding paragraph. In this
regard, the Declaration authorizes the Managing Shareholder of the Trust to take
such steps as may be necessary to cause any partnership in which the Trust may
own an interest to distribute to its partners an amount sufficient to permit the
Trust to meet these distribution requirements. It is possible that the Trust may
not have sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to timing differences between the actual receipt of income and
actual payment of expenses, on the one hand, and the inclusion of such income
and deduction of such expenses in computing the Trust's REIT taxable income, on
the other hand; due to a partnership's inability to control cash distributions
with respect to those properties as to which it does not have decision making
control; or for other reasons. To avoid any problem with the 95% distribution
requirement, the Trust will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, intends to borrow funds (or
cause any applicable partnership or other affiliate to borrow funds) in order to
satisfy the distribution requirement. However, there can be no assurance that
such borrowing would be available at such time.
If the Trust fails to meet the 95% distribution requirement as a result of
an adjustment to the Trust's tax return by the Internal Revenue Service (the
"Service"), the Trust may retroactively cure the failure by paying a "deficiency
dividend" (plus applicable penalties and interest) within a specified period.
Failure to Qualify. If the Trust fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, the Trust will be
subject to tax (including any applicable alternative minimum tax) on its
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taxable income at regular corporate rates. Distributions to Shareholders in any
year in which the Trust fails to qualify as a REIT will not be deductible by the
Trust, nor generally will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distribution to Shareholders will be taxable as ordinary income, and, subject to
certain limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Trust also will be disqualified from re-electing taxation as a
REIT for the four taxable years following the year during which qualification
was lost.
TAX ASPECTS OF THE TRUST'S INVESTMENT IN THE OPERATING PARTNERSHIP
An increase in the Trust's REIT taxable income from its interest in a
partnership (whether or not a corresponding cash distribution is also received
from the partnership) will increase its distribution requirements, but will not
be subject to Federal income tax in the hands of the Trust provided that an
amount equal to such income is distributed by the Trust to its Shareholders.
Moreover, for purposes of the REIT asset tests, the Trust will include its
proportionate share of assets held by a partnership.
Entity Classification. The Trust's investment in one or more partnerships
raises special tax considerations, including the possibility of a challenge by
the Service of the status of such entities as a partnership (as opposed to an
association taxable as a corporation for Federal income tax purposes) (see
"Classification as a Partnership" above). If a partnership were to be treated as
an association, it would be taxable as a corporation and therefore subject to an
entity-level tax on its income. In such a situation, the character of the
Trust's assets and items of gross income would change, which would preclude the
Trust from satisfying the REIT asset tests and the REIT gross income tests,
which in turn would prevent the Trust from qualifying as a REIT.
Tax Allocations with Respect to Trust Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the 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. See "Tax Treatment of Unitholders Who Hold Operating
Partnership Units After the Exchange -- Tax Allocations With Respect to Book-Tax
Difference on Contributed Properties."
Sale of Trust Properties. The Trust's share of any gain realized by a
partnership on the sale of any dealer property generally will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
Under existing law, whether property is dealer property is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. Any partnership utilized by the Trust for its real estate
operations would be expected to hold properties for investment with a view to
long-term appreciation, to engage in the business of acquiring, owing, operating
and developing the properties, and to make such occasional sales of the
properties as are consistent with the Trust's investment objectives. Based upon
the Trust's investment objectives, the Trust believes that overall, properties
acquired by it or a partnership utilized by it should not be considered dealer
property and that the amount of income from prohibited transactions, if any,
would not be material.
TAXATION OF SHAREHOLDERS
Taxation of Taxable Domestic Shareholders. As long as the Trust qualifies
as a REIT, distributions made to the Trust's taxable domestic Shareholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income and will
not be eligible for the dividends received deduction for corporations.
Distributions (and for taxable years beginning after August 5, 1997,
undistributed amounts) that are designated as capital gain dividends will be
taxed as long-term capital gains (to the extent they do not exceed the Trust's
actual net capital gain for the taxable year) without regard to the period from
which the Shareholder has held its Common Shares. However, corporate
Shareholders may be required to treat up to 20% of certain capital gain
dividends as ordinary income. To the extent that the Trust makes distributions
in excess of current and accumulated earnings and profits, these distributions
are treated first as a tax-free return of capital to the Shareholders, reducing
the tax basis of a Shareholder's Common Shares by the amount of such excess
distribution (but not below zero), with distributions in excess of the
Shareholder's tax basis being taxed as capital
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gains (if the Common Shares is held as a capital asset). In addition, any
dividend declared by the Trust in October, November or December of any year and
payable to a Shareholder of record on a specific date in any such month shall be
treated as both paid by the Trust and received by the Shareholder on December 31
of such year, provided that the dividend is actually paid by the Trust during
January of the following calendar year. Shareholders may not include in their
individual income tax returns any net operating losses or capital losses of the
Trust. Federal income tax rules may also require that certain minimum tax
adjustments and preferences be apportioned to Shareholders.
In general, any loss upon a sale or exchange of Common Shares by a
Shareholders who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss, to
the extent of distributions from the Trust required to be treated by such
Shareholder as long-term capital gains.
The 1997 Act made certain changes to the Code with respect to taxation of
long-term capital gains earned by taxpayers other than a corporation. In
general, for sales made after May 6, 1997, the maximum tax rate for individual
taxpayers on net long-term capital gains (i.e., the excess of net long-term
capital gain over net short-term capital loss) is lowered to 20% for most
assets. This 20% rate applies to sales on or after July 29, 1997 only if the
asset was held more than 18 months at the time of disposition. Capital gains on
the disposition of assets on or after July 29, 1997 held for more than one year
and up to 18 months at the time of disposition will be taxed as "mid-term gain"
at a maximum rate of 28%. Also, so called, "unrecaptured Section 1250 gain" is
subject to a maximum federal income tax rate of 25%. "Unrecaptured Section 1250
gain" generally includes the long-term capital gain realized on (i) the sale
after May 6, 1997 of a real property asset described in Section 1250 of the
Code, or (ii) the sale after July 28, 1997 of a real property asset described in
Section 1250 of the Code which the taxpayer has held for more than 18 months,
but in each case not in excess of the amount of depreciation (less the gain, if
any, treated as ordinary income under Code Section 1250) taken on such asset.
The rate of 18% instead of 20% will apply after December 31, 2000 for assets
held more than five years. However, the 18% rate applies only to assets acquired
after December 31, 2000 unless the taxpayer elects to treat an asset held prior
to such date as sold for fair market value on January 1, 2001. In the case of
individuals whose ordinary income is taxed at a 15% rate, the 20% rate is
reduced to 10%, and the 10% rate for assets held more than five years is reduced
to 8%.
On November 12, 1997, the IRS issued Notice 97-64 which describes temporary
Treasury regulations that will be issued under Section 1(h) of the Code and
provides guidance regarding the application of the 1997 Act's new capital gain
rates to the sale of assets by REIT's and other pass-through entities.
Shareholders of the Trust should consult their tax advisor with regard to
(i) the application of the changes made by the 1997 Act with respect to taxation
of capital gains and capital gain dividends, and (ii) to state, local and
foreign taxes on capital gains.
Backup Withholding. The Trust will report to its domestic Shareholders and
to the Service the amount of dividends paid for each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a Shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such Shareholder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact; or (ii) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
Shareholder that does not provide the Trust with its correct taxpayer
identification number may also be subject to penalties imposed by the Service.
Any amount paid as backup withholding is available as a credit against the
Shareholder's income tax liability. U.S. Shareholders should consult their own
tax advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. The Trust may be required to
withhold a portion of capital gain distributions made to any Shareholders who
fail to certify their non-foreign status on the Trust. See "Taxation of Foreign
Shareholders" below.
Taxation of Tax-Exempt Shareholders. The Service has issued a revenue
ruling in which it held that amounts distributed by a REIT to a tax-exempt
employees' pension trust do not constitute unrelated business taxable income
("UBTI"). Subject to the discussion below regarding a "pension-held REIT," based
upon such ruling and the statutory framework of the Code, distributions by the
Trust to a Shareholder that is a tax-exempt entity should also not constitute
UBTI, provided that the tax-exempt entity has not financed the acquisition of
its Common Shares
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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, and that the Trust, consistent with its present intent, does
not hold a residual interest in a "real estate mortgage investment conduit"
("REMIC").
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT") at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of shares of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or one
or more qualified pension trusts (each owning more than a 10% interest by value
in the REIT) hold in the aggregate more than 50% by value of the interests in
such REIT.
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 highly complex and the following is only a summary of such
rules. Prospective Non-U.S. Shareholders should consult with their own tax
advisors to determine the impact of Federal, state, local and foreign income tax
laws with regard to an investment in Common Shares, including any reporting
requirements. The Trust will qualify as a "domestically-controlled REIT" so long
as less than 50% in value of its Shares is held by foreign persons (i.e.,
non-resident aliens, and foreign corporations, partnerships, trusts and
estates). The Trust currently anticipates that it will qualify as a
domestically-controlled REIT. Under these circumstances, gain from the sale of
Common Shares by a foreign person should not be subject to United States
taxation, unless such gain is effectively connected with such person's United
States business or, in the case of an individual foreign person, such person is
present within the United States for more than 182 days during the taxable year.
However, notwithstanding the Trust's current anticipation that the Trust will
qualify as a domestically controlled REIT, because the Common Shares will be
freely tradable by Shareholders, no assurance can be given that the Trust will
continue to so qualify.
Distributions of cash generated by the Trust's real estate operations (but
not by the sale or exchange of properties) that are paid to foreign persons
generally will be subject to United States withholding tax at rate of 30%,
unless (i) an applicable tax treaty reduces that tax and the foreign Shareholder
files with the Trust the required form evidencing such lower rate, or (ii) the
foreign Shareholder files an IRS Form 4224 with the Trust claiming that the
distribution is "effectively connected" income.
Distributions of proceeds attributable to the sale or exchange of United
States real property interests of the Trust are subject to income and
withholding taxes pursuant to the Foreign Investment in Real Property Tax Act of
1980 ("FIRPTA"), and may be subject to branch profits tax in the hands of a
Shareholder which is a foreign corporation if it is not entitled to treaty
relief for exemption. The Trust is required by applicable Treasury Regulations
to withhold 35% of any distribution to a foreign person that could be designated
by the Trust as a capital gain dividend; this amount is creditable against the
foreign Shareholder's FIRPTA tax liability.
The Federal income taxation of foreign persons is a highly complex matter
that may be affected by many other considerations. Accordingly, foreign
investors in the Trust should consult their own tax advisors regarding the
income and withholding tax considerations with respect to their investments in
the Trust.
OTHER TAX CONSIDERATIONS
Possible Legislative or Other Actions Affecting Tax Consequences.
Prospective Shareholders should recognize that the present Federal income tax
treatment of investment in the Trust may be modified by legislative, judicial or
administrative action at any time and that any such action may affect
investments and commitments previously made. The rules dealing with Federal
income taxation are constantly under review by persons involved in the
legislative process and by the Service and the Treasury Department, resulting in
revisions of regulations and revised interpretations of established concepts as
well as statutory changes. No assurance can be given as to the form or content
(including with respect to effective dates) of any tax legislation which may be
enacted. Revisions in
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Federal tax laws and interpretations thereof could adversely affect the tax
consequences of investment in the Trust.
State and Local Taxes. The Trust and its Shareholders may be subject to
state or local taxation in various jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the Trust
and its Shareholders may not conform to the Federal income tax consequences
discussed above. Consequently, prospective Shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in Common Shares.
EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE PURCHASE, OWNERSHIP AND
SALE OF COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
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SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT
Unitholders of the Operating Partnership, including without limitation,
Offerees who accept the Exchange Offering will have the rights and obligations
under the Operating Partnership Agreement. The material provisions of the
Operating Partnership Agreement are described above at "THE TRUST AND THE
OPERATING PARTNERSHIP - The Operating Partnership" and below at "COMPARISON OF
RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS AND
TRUST COMMON SHARES." The Declaration of Trust also contains certain additional
limitations on the Trust's activities which will affect the operation of the
Operating Partnership. See "SUMMARY OF THE DECLARATION OF TRUST - Control of
Operations" and Section 1.9 of the Declaration of Trust.
SUMMARY OF DECLARATION OF TRUST
Shareholders of the Trust will have the rights and obligations under the
Declaration of Trust for the Trust (the "Declaration of Trust" or the
"Declaration"). The following briefly summarizes material provisions of the
Declaration not described elsewhere in this Prospectus and is qualified in its
entirety by express reference to the provisions of the agreement. The Trust will
deliver a copy of the Declaration to each requesting Offeree without charge.
Term
The term of the Trust commenced on July 31, 1997 and will end on the
earliest to occur of (a) December 31, 2098, (b) the determination of the holders
of at least a majority of the Shares then outstanding to dissolve the Trust; (c)
the sale of all or substantially all of the Trust's Property, (d) the withdrawal
of the Offering by the Managing Shareholder prior to the Termination Date of the
Offering, and (e) the occurrence of any other event which, by law, would require
the Trust to terminate. Upon dissolution, the Managing Shareholder or a
liquidity receiver or trustee selected by the Managing Shareholder or the
Investors will liquidate the Trust's assets. (See Recitals and Article 9 of the
Declaration.)
Control of Operations
The Managing Shareholder will manage and control the affairs of the Trust
and the Operating Partnership, subject to general supervision and review by the
Independent Trustees and the Managing Shareholder acting together as the Board
of the Trust and to prior approval authority of the Board and/or the Independent
Trustees in respect of certain actions. The Declaration requires that a majority
of the Board of the Trust be comprised of Independent Trustees not affiliated
with the Managing Shareholder or its Affiliates. The Managing Shareholder will
be obligated to devote to the Trust such time as may be reasonably necessary to
conduct the Trust's business. The Investors will have no participation in or
control over the management of the Trust or the Operating Partnership. The
Managing Shareholder is obligated to manage the Trust in the best interest of
its Partners. (See "FIDUCIARY RESPONSIBILITY" and Article 7 of the Declaration.)
The following discussion describes certain actions of the Trust and the
Operating Partnership, as applicable, which require approval and/or supervision
of the Board and/or the Independent Trustees and certain other provisions,
restrictions and limitations affecting the operations of the Trust and the
Operating Partnership. (See Section 1.9 of the Declaration.)
o At, or prior to, the initial meeting of the Board of the Trust, the
Declaration and the Operating Partnership Agreement must be reviewed and
ratified by a majority vote of the Board and of the Independent Trustees.
(See Section 1.9(b) of the Declaration.)
o The Board must establish written policies on investments and any borrowing
to be made by the Trust and Operating Partnership and monitor the
administrative procedures, investment operations and performance of the
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Trust, the Operating Partnership and the Managing Shareholder to ensure
that such policies are being carried out. (See Section 1.9(c) of the
Declaration.)
o The Board must evaluate the performance of the Managing Shareholder (and
any successor advisor of the Trust) prior to entering into or renewing a
management agreement relating to the administration and management of the
Trust (other than the initial term of the Trust Management Agreement which
is described in this Prospectus (see "MANAGEMENT - Trust Management
Agreement"), which is deemed to have been approved by Investors who acquire
Common Shares in the Offering, by a majority of the Board and a majority of
the Independent Trustees). Any such management agreement may not have a
term of more than one year and must be terminable by a majority of the
Independent Trustees or the Managing Shareholder (or any successor advisor,
as the case may be) on at least 60 days prior written notice without cause
or penalty. The Board must determine that any successor to the Managing
Shareholder (or any successor advisor) possesses sufficient qualifications
to perform the advisory function for the Trust and justify the compensation
provided for in the applicable management agreement. (See Section 1.9(d) of
the Declaration.)
o The Independent Trustees must determine, at least annually, that the total
fees and expenses of the Trust and the Operating Partnership are reasonable
in light of their investment performance, their net assets, their net
income, and the fees and expenses of other comparable unaffiliated REITs.
(See Section 1.9(f) of the Declaration.)
o The Independent Trustees must determine that organizational and offering
expenses payable by the Trust and the Operating Partnership in connection
with the formation of the Trust and the Operating Partnership and any
offerings of Shares or Units is reasonable and in no event exceeds an
amount equal to 15% of the gross proceeds of the particular offering. (See
Section 1.9(g) of the Declaration.)
o The Independent Trustees must determine that the total amount of any
acquisition fee and expenses payable by the Trust or the Operating
Partnership in connection with acquiring its investments is reasonable and
in no event exceeds an amount equal to 6% of the purchase price of the
subject property (including the amount actually paid for or allocated to
the purchase, development, construction or improvement of a property,
exclusive of Acquisition Fees and Acquisition Expenses), or in the case of
a mortgage loan made or acquired by the Trust or the Operating Partnership,
6% of the funds advanced, unless a majority of the disinterested members of
the Board and a majority of the disinterested Independent Trustees approve
payment of an acquisition fee in excess of such amounts based upon their
determination that such excess fee is commercially competitive, fair and
reasonable to the Trust and the Operating Partnership. (See Section 1.9(h)
of the Declaration.)
o The Independent Trustees have the fiduciary responsibility of limiting the
total operating expenses (less certain items described below) of each of
the Trust and the Operating Partnership in any fiscal year to the greater
of (i) 2% of the aggregate book value of their respective investments, or
(ii) 25% of their respective net income for such year unless the
Independent Trustees make a finding that, based on such unusual and
non-recurring factors which they deem sufficient, a higher level of such
operating expenses is justified for such year. Within 60 days after the end
of each fiscal year in which the Trust or the Operating Partnership incurs
operating expenses in excess of such amount, the Trust or the Operating
Partnership, as the case may be, must send to the Shareholders and
Unitholders written disclosure of such fact, together with an explanation
of the factors the Independent Trustees considered in arriving at their
finding that such higher operating expenses were justified. If the
Independent Trustees do not determine such excess expenses are justified,
the Managing Shareholder must reimburse the Trust or the Operating
Partnership, as applicable, at the end of such fiscal year the amount by
which the total operating expenses paid or incurred by the Trust or the
Operating Partnership exceed the limitations herein provided. For purposes
of determining "total operating expenses" the following items are excluded:
(i) the expenses of raising capital, including without limitation
organizational and offering expenses, legal, audit, accounting,
underwriting, brokerage, listing, registration and other fees, printing and
other such expenses, and tax incurred in connection with the issuance,
distribution, transfer, registration, and stock exchange listing, if any,
of the Trust's Shares and the Operating Partnership's Units; (ii) interest
payments; (iii) taxes; (iv) non-cash expenditures such as depreciation,
amortization and bad debt reserves; (v) incentive compensation paid which
is based on the gain from the sale of Trust or Operating Partnership
assets; and (e)
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acquisition fees and expenses, real estate commissions on resale of
property and other expenses connected with the acquisition, disposition,
and ownership of real estate interests, mortgage loans, or other property.
(See Section 1.9(i) of the Declaration.)
o A majority of the Independent Trustees must determine that any real estate
commission paid to the Managing Shareholder, a Trustee, any other member of
the Board or any of their respective Affiliates in connection with the
resale of any Trust or Operating Partnership asset is reasonable, customary
and competitive in light of the size, type and location of such property
and in no event exceeds 3% of the sale price, and that the amount of such
commissions payable when added to the commissions payable to unaffiliated
real estate brokers does not exceed the lesser of such competitive real
estate commission or an amount equal to 6% of the sale price. (See Section
1.9(j) of the Declaration.)
o The Independent Trustees must determine, at least annually, that the
compensation which the Trust contracts to pay to the Managing Shareholder
(or any successor advisor) is reasonable in relation to the nature and
quality of services performed and that such compensation is within the
limits prescribed in the fourth item above in this section. The Independent
Trustees must also supervise the performance of the Managing Shareholder
(and any successor advisor) and the compensation payable to it by the Trust
to determine that the terms and conditions of the contract are being
carried out. (See Section 1.9(k) of the Declaration.)
o Neither the Trust nor the Operating Partnership may purchase property or
any equity interest in any entity owning one or more properties from the
Managing Shareholder, a Trustee, any other member of the Board, or any of
their respective Affiliates unless a majority of the disinterested members
of the Board and a majority of the disinterested Independent Trustees
review the proposed transaction and determine that it is fair and
reasonable to the Trust and the Operating Partnership and that the purchase
price to the Trust or the Operating Partnership, as applicable, for such
property or equity interest is no greater than the cost of the property or
equity interest to such proposed seller, or if the purchase price to the
Trust or the Operating Partnership is in excess of such cost, that
substantial justification for such excess exists and such excess is
reasonable, provided, however, in no event may the purchase price for the
property exceed its current appraised value. (See Section 1.9(l) of the
Declaration.)
o Neither the Managing Shareholder, any Trustee, any other member of the
Board nor any of their respective Affiliates may acquire or lease any
assets from the Trust or the Operating Partnership unless a majority of the
disinterested members of the Board and a majority of the disinterested
Independent Trustees determine that the proposed transaction is fair and
reasonable to the Trust and the Operating Partnership. (See Section 1.9(m)
of the Declaration.)
o No loans may be made by the Trust or the Operating Partnership to the
Managing Shareholder, a Trustee, any other member of the Board or any of
their respective Affiliates except as provided below or to any wholly owned
subsidiary of the Trust or the Operating Partnership. (See Section 1.9(n)
of the Declaration.)
o Neither the Trust nor the Operating Partnership may borrow money from or
invest in joint ventures with the Managing Shareholder, a Trustee, any
other member of the Board or any of their respective Affiliates unless a
majority of the disinterested members of the Board and a majority of the
disinterested Independent Trustees determine that such proposed transaction
is fair, competitive, and commercially reasonable and no less favorable to
the Trust and the Operating Partnership than such transactions between
unaffiliated parties under the same circumstances. (See Section 1.9(o) of
the Declaration.)
o Neither the Trust nor the Operating Partnership may invest in equity
securities unless a majority of the disinterested members of the Board and
a majority of the disinterested Independent Trustees determine that such
proposed transaction is fair, competitive, and commercially reasonable.
(See Section 1.9(q) of the Declaration.)
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o The Independent Trustees must review the investment policies of the Trust
at least annually to determine that the policies being followed by the
Trust at any time are in the best interests of the Shareholders and the
Unitholders. (See "INVESTMENT OBJECTIVES AND POLICIES" and Section 1.9(r)
of the Declaration.)
o In the event that the Trust or the Operating Partnership and one or more
other investment programs sponsored by the Managing Shareholder or an
Affiliate of the Managing Shareholder seek to acquire similar types of
properties, the Board (including the Independent Trustees) must review the
method described in "INVESTMENT OBJECTIVES AND POLICIES - Trust Policies
with Respect to Certain Activities - Investment Policies" for allocating
the acquisition of properties among the Trust or the Operating Partnership,
as applicable, and such other programs in order to determine that such
method is applied fairly to the Trust and the Operating Partnership. (See
Section 1.9(s) of the Declaration.)
o Any other transaction not described in this section between the Trust or
the Operating Partnership and the Managing Shareholder, a Trustee, any
other member of the Board or any of their respective Affiliates requires
the determination of a majority of the disinterested members of the Board
and a majority of the disinterested Independent Trustees that the proposed
transaction is fair and reasonable to the Trust and the Operating
Partnership and on terms and conditions no less favorable to the Trust and
the Operating Partnership than those available from unaffiliated parties.
(See Section 1.9(t) of the Declaration.)
o The purchase price payable for property to be acquired by the Trust and the
Operating Partnership must be based on the fair market value of the
property as determined by a majority of the members of the Board, provided,
however, in cases in which a majority of the Independent Trustees in their
sole discretion determine, and in all cases in which the Trust or the
Operating Partnership proposes to acquire property from the Managing
Shareholder, a Trustee, any other member of the Board or any of their
respective Affiliates, such fair market value must be determined by a
qualified independent appraiser selected by the Independent Trustees. (See
Section 1.9(u) of the Declaration.)
o In connection with a proposed Roll-up (as defined below) involving the
assets of the Trust or the Operating Partnership, an appraisal of all such
assets must be obtained from a qualified independent appraiser and
delivered to the Shareholders and Unitholders in connection with the
proposed transaction. The sponsor of the transaction must offer to
Shareholders and Unitholders who vote against the proposal the choice of:
(i) accepting the securities of the Roll-up entity (i.e., the entity
surviving the Roll-up) or (ii) either (x) remaining as Shareholders in the
Trust or Unitholders in the Operating Partnership, as applicable, and
preserving their interests therein on the same terms and conditions as
existed previously or (y) receiving cash in an amount equal to their
respective pro rata share of the appraised value of the net assets of the
Trust or the Operating Partnership, as applicable. The Trust is prohibited
from participating in certain types of Roll-ups specified in the
Declaration. Generally, a "Roll-up" is a transaction involving the
acquisition, merger, conversion, or consolidation either directly or
indirectly of the Trust or the Operating Partnership and the issuance of
securities of a Roll-up entity. (See Section 1.9(v) of the Declaration.)
o The aggregate borrowings of each of the Trust and the Operating
Partnership, secured and unsecured, must be reasonable in relation to their
respective net assets and must be reviewed at least quarterly by the Board.
The maximum amount of such borrowings in relation to such net assets may
not exceed 300%, in the absence of a satisfactory showing that higher level
of borrowing is appropriate. Any borrowing in excess of such amount
requires the approval of a majority of the Independent Trustees and must be
disclosed to Shareholders and the Unitholders in the next quarterly report
of the Trust, along with an explanation of the justification of such
excess. (See Section 1.9(w) of the Declaration.)
o Neither the Trust nor the Operating Partnership may invest more than 10% of
its total assets in unimproved real property or mortgage loans on such type
of property. (See Section 1.9(x) of the Declaration.)
o Neither the Trust nor the Operating Partnership may invest in commodities
or commodity future contracts, excluding future contracts used solely for
hedging purposes in connection with the Trust's or the Operating
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Partnership's ordinary business of investing in real estate assets and
mortgages. (See Section 1.9(y) of the Declaration.)
o Neither the Trust nor the Operating Partnership may invest in or make
mortgage loans (other than loans insured or guaranteed by a government or
government agency) unless an appraisal of replacement cost is obtained
concerning the underlying property. In cases in which a majority of the
Independent Trustees in their sole discretion determine, and in all cases
in which the proposed transaction is with the Managing Shareholder, a
Trustee, any other member of the Board or any of their respective
Affiliates, the appraisal must be obtained from a qualified independent
appraiser. The appraisal must be maintained in the Trust's records for at
least five years, and must be available for inspection and duplication by
any Shareholder or Unitholder at the Shareholder's or Unitholder's own
expense. In addition to the appraisal, the Trust or the Operating
Partnership, as applicable, must also obtain a mortgagee's or owner's title
insurance policy or commitment as to the priority of the mortgage or the
condition of the title. The Trust and the Operating Partnership are
prohibited from (i) investing in real estate contracts of sale (i.e., land
sale contracts), unless such contracts are in recordable form and
appropriately recorded in the chain of title; (ii) investing in or making
any mortgage loans on any one property if the aggregate amount of all
mortgage loans outstanding on the property, including the loans of the
Trust or the Operating Partnership, as applicable, would exceed an amount
equal to 80% of the replacement cost of the property as determined by
appraisal unless substantial justification exists; and (iii) making or
investing in any mortgage loans that are subordinate to any mortgage or
equity interest of the Managing Shareholder, Trustees, any other members of
the Board or any of their respective Affiliates. (See Section 1.9(z) of the
Declaration.)
o The Trust and the Operating Partnership may not issue options or warrants
to purchase Shares or Units to the Managing Shareholder, the Trustees, any
other member of the Board or any of their respective Affiliates except on
the same terms as such options or warrants are sold to the general public.
The Trust and the Operating Partnership may issue options or warrants to
persons not so connected with the Trust or the Operating Partnership but
not at exercise prices less than the fair market value of such securities
on the date of grant and for consideration (which may include services)
that in the judgment of the Independent Trustees has a market value less
than the value of such option on the date of grant. Options or warrants
issuable to the Managing Shareholder, the Trustees, any other member of the
Board or any of their respective Affiliates must not exceed an amount equal
to 10% of the outstanding Common Shares or other securities of the Trust or
of the Units or other securities of the Operating Partnership on the date
of grant of any options or warrants. (See Section 1.9(cc) of the
Declaration.)
o The payment by the Trust and the Operating Partnership of an interest in
the gain from the sale of their respective assets, for which full
consideration is not paid in cash or property of equivalent value, is
allowed provided the amount or percentage of such interest is reasonable.
Such an interest is considered reasonable if it does not exceed 15% of the
balance of such net proceeds remaining after payment to Shareholders or
Unitholders (as applicable), in the aggregate, of an amount equal to 100%
of the original issue price of their Shares or Units, plus an amount equal
to 6% of the original issue price of their Shares or Units, per annum
cumulative. For purposes of this calculation, the original issue price of
Shares and Units may be reduced by prior cash distributions to Shareholders
and Unitholders, as applicable. (See Section 1.9(ee) of the Declaration.)
Liability and Indemnification
Neither the Managing Shareholder, the Trustees, any other members of the
Board nor any of their respective Affiliates are liable to the Trust or to any
Shareholder for any loss suffered by the Trust which arises out of any action or
inaction of such person, if such person, in good faith, determines that such
course of conduct was in the Trust's best interest and such course of conduct
was within the scope of the Declaration and did not constitute negligence or
misconduct in the case of a person who is not an Independent Trustee, or gross
negligence or willful misconduct, in the case of any such person who is an
Independent Trustee. (See Section 3.5 of the Declaration.)
The Trust will indemnify the Managing Shareholder, the Independent
Trustees, any other member of the Board and each of its Affiliates and each of
their respective officers, directors, shareholders, partners, agents and
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employees (provided such persons act within the scope of the Declaration)
against any loss, liability or damage (including costs of litigation and
attorneys' fees) incurred by such person arising out of or incidental to the
Cash Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. Notwithstanding the foregoing, the exculpatory
provisions do not include indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), unless (i) there has
been a successful adjudication on the merits of each claim involving alleged
securities law violations as to the particular indemnitee, (ii) such claims have
been dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee, or (iii) a court of competent jurisdiction
approves a settlement of the claims against the particular indemnitee and finds
that indemnification of the settlement and the related costs should be made. In
addition, the exculpatory provisions do not include indemnification for
liabilities arising from or out of intentional or criminal wrongdoing. See
Section 3.7(b) of the Declaration of Trust. It is the position of the Securities
and Exchange Commission and certain state securities administrators that any
attempt to limit the liability of a Managing Shareholder or persons controlling
an issuer under the federal securities laws or state securities laws is contrary
to public policy and, therefore, is unenforceable. (See Sections 3.7 and 3.8 of
the Declaration.)
Assuming compliance with the Declaration and applicable formative and
qualifying requirements in Delaware and any other jurisdiction in which the
Trust conducts its business, a Shareholder will not be personally liable under
Delaware law for any obligations of the Trust, except for indemnification
liabilities arising from any misrepresentation made by him in the Investor
Subscription Documents submitted to the Trust. The Trust will, to the extent
practicable, endeavor to limit the liability of the Shareholders in each
jurisdiction in which the Trust operates. (See Section 3.4 of the Declaration.)
The law governing whether a jurisdiction other than Delaware will honor the
limitation of liability extended under Delaware law to the Shareholders is
uncertain. Many states have enacted legislation recognizing the limited
liability provisions of the Delaware business trust. In other states, there has
been no authoritative legislative or judicial determination as to whether the
limitation of liability would be honored. The Trust will make all equity
investments in properties through the Operating Partnership, a Delaware limited
partnership, which provides the Trust limited liability. Therefore, regardless
of the local treatment of business trusts, the Trust believes that the
Shareholders will not be subject to personal liability for property liabilities
and that with regard to the operation of the Trust itself the limitation of
Shareholders' liability under Delaware law will govern.
Under certain federal and state environmental laws of general application,
entities that own or operate properties contaminated with hazardous substances
may be liable for cleanup liabilities regardless of other limitations of
liability. The Trust is not aware of any case where such environmental
liabilities were imposed on non-management participants in a business trust. See
"THE TRUST AND THE OPERATING PARTNERSHIP - Regulations."
The Delaware Act does not contain any provision imposing liability on a
Shareholder for participation in the control of the Trust, although no
Shareholder has any rights to do so except through the rights to propose and
vote on matters described above. The Delaware Act does not require a Shareholder
who receives distributions that are made when the Trust is or would be rendered
insolvent to return those distributions under equitable principles enforced by
courts. Under Delaware decisions, a trust beneficiary who receives overpayments
from a trust is obligated to return those payments, with interest, subject to
equitable defenses. The application of these cases to beneficiaries of a
business trust is uncertain. The Declaration has been signed by the Corporate
Trustee and the Managing Shareholder is the initial beneficiary.
Distributions
The Trust presently intends to make quarterly pro rata distributions of
available funds, if any, to its Shareholders. In order to maintain its
qualification as a REIT under the Code, the Trust must make annual distributions
to Shareholders of at least 95% of its taxable income, determined without regard
to the deduction for dividends paid and by excluding any net capital gains. For
taxable years beginning after August 5, 1997, the 1997 Act (1) expands the class
of excess noncash items that are excluded from the distribution requirement to
include
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income from the cancellation of indebtedness and (2) extends the treatment of
original issue discount and coupon interest as excess noncash items to REITs,
like the Trust, that use an accrual method of accounting. Under certain
circumstances, the Trust may be required to make distributions in excess of cash
flow available for distribution to meet such distribution requirements.
Shareholders will be entitled to receive any distributions declared on a pro
rata basis for each outstanding class of Shares taking into account the relative
rights of priority of each class entitled to distributions. (See Section 6.7 of
the Declaration.)
The Board of the Trust is expected to adopt a distribution reinvestment
program. Upon the adoption of the plan, the Trust will provide material
information to Shareholders regarding the plan and the effect of reinvesting
distributions from the Trust, including the tax consequences thereof. The Trust
will provide Shareholders updated information at least annually. (See Section
2.8 of the Declaration.)
Quarterly and Annual Reports
The Trust will provide each Shareholder with quarterly and annual reports
as described below at "REPORTS TO UNITHOLDERS AND SHAREHOLDERS." (See also
Section 5.3 of the Declaration.)
Accounting
The accounting period of the Trust will end on December 31 of each year.
The Trust will utilize the accrual method of accounting for the Trust's
operations on the basis used in preparing the Trust's federal income tax returns
with such adjustments as may be in the Trust's best interest. (See Section 5.1
of the Declaration.)
Books and Records; Tax Information
The Trust will keep appropriate records relating to its activities. All
books, records and files of the Trust will be kept at its principal offices at
Cincinnati, Ohio or Wilmington, Delaware. An independent certified public
accounting firm will prepare the Trust's federal income tax returns as soon as
practicable after the conclusion of each year. The Trust will use its reasonable
best efforts to obtain the information for those returns as soon as possible and
to cause the resulting accounting and tax information to be transmitted to the
Shareholders as soon as possible after receipt from the accounting firm.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. (See Sections
5.2, 5.3(c), and 6.4 of the Declaration.)
Governing Law
All provisions of the Declaration will be construed according to the laws
of the State of Delaware except as may otherwise be required by law in any other
state. (See Section 9.2 of the Declaration.)
Amendments and Voting Rights
The Managing Shareholder may amend the Declaration without notice to or
approval of the Shareholders for the following purposes: to maintain the federal
income tax status of the Trust as a REIT (unless the Managing Shareholder
determines that it is in the best interests of the Shareholders to disqualify
the Trust's REIT status and a majority of Common Shares entitled to vote approve
such determination); or to comply with law. (See Section 9.6(a) of the
Declaration.)
Other amendments to the Declaration may be proposed either by the Managing
Shareholder or holders of at least 10% of the Common Shares, either by calling a
meeting of the Shareholders or by soliciting written consents. The procedure for
such meetings or solicitations is found at Section 6.5 of the Declaration. Such
proposed amendments require the approval of a majority in interest of the
Shareholders entitled to vote given at a meeting of Shareholders or by written
consents. (See Section 9.6(b) of the Declaration.) Other voting rights of
Shareholders are described below at " - Meeting and Voting Rights."
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Dissolution of Trust
The term of the Trust will end on the earliest to occur of (a) December 31,
2098, (b) the vote of a majority in interest of the Shareholders, (c) the sale
of all or substantially all of the Trust's Property, (d) the withdrawal of the
Offering by the Managing Shareholder prior to the Termination Date of the
Offering, (e) any other event requiring dissolution by law. The Trust will wind
up its business after dissolution unless (i) any remaining Managing Shareholder
and a majority in interest of the Shareholders (calculated without regard to
Common Shares held by the Managing Shareholder) or (ii) if there is no remaining
Managing Shareholder or its Affiliates, a majority in interest of the
Shareholders, elects to continue the Trust. The Managing Shareholder (or in the
absence thereof, a liquidating trustee chosen by the Shareholders) will
liquidate the Trust's assets if it is not continued. (See Article 8 of the
Declaration.)
Removal and Resignation of the Managing Shareholder
The holders of at least 10% of the Common Shares may propose the removal of
the Managing Shareholder, either by calling a meeting or soliciting consents in
accordance with the terms of the Declaration. Removal of the Managing
Shareholder requires either the affirmative vote of a majority of the Common
Shares (excluding Common Shares held by the Managing Shareholder which is the
subject of the vote or by its Affiliates) or the affirmative vote of a majority
of the Independent Trustees. The Shareholders entitled to vote thereon may
replace a removed Managing Shareholder or fill a vacancy by vote of a majority
in interest of such Shareholders. (See Section 7.11 of the Declaration.)
The Managing Shareholder or a majority of the Independent Trustees may
terminate the Trust Management Agreement and the Managing Shareholder may resign
as Managing Shareholder without cause or penalty by giving the Trust at least 60
days prior written notice. Upon the termination of the Trust Management
Agreement, the Managing Shareholder must cooperate with the Trust and take all
reasonable steps requested to assist the Board in making an orderly transition
of the management, administrative and advisory function. (See Section 7.3(d) of
the Declaration and Article VI of the Trust Management Agreement.)
Transferability of Shareholders' Interests
The Common Shares are freely transferable by the Shareholders, subject to
certain restrictions on transfer which the Managing Shareholder deems necessary
to comply with the REIT provisions of the Code. (See Section 2.5 and Article 2A
of the Declaration.) Such limitations are described at "CAPITAL STOCK OF THE
TRUST - Restrictions on Ownership and Transfer."
Independent Activities
Provided that they comply with any fiduciary obligation to the Trust, the
Managing Shareholder and each Shareholder may engage in whatever activities they
choose, whether or not such activities are competitive with the Trust, without
any obligation to offer any interest in such activities to the Trust or to any
other Shareholders. (See Sections 6.2 and 7.9 of the Declaration.)
Power of Attorney
In the Declaration, the Shareholders acknowledge that the Managing
Shareholder has been granted an irrevocable power of attorney to execute and
file (i) all amendments, alterations or changes in the Declaration of the Trust
which comply with the terms of the Declaration; (ii) all other instruments which
the Managing Shareholder believes to be in the best interest of the Trust to
file; (iii) all certificates or other instruments necessary to qualify or
maintain the Trust as a REIT or as a business trust in which the Shareholders
have limited liability in the jurisdictions where the Trust may conduct
business; and (iv) all instruments necessary to effect a dissolution,
termination, liquidation or continuation of the Trust when such dissolution,
termination, liquidation, cancellation or continuation is called for under the
Declaration. (See Section 9.3 of the Declaration.)
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Meetings and Voting Rights
The Trust will conduct an annual meeting of Shareholders at which all
members of the Board (including all Independent Trustees) (except where the
Managing Shareholder and a Majority of the Shareholders entitled to vote on such
matter approve staggered elections for such positions, in which case only the
class up for election) will be elected or reelected and any other proper
business may be conducted. Each Common Share entitles the holder to one vote on
all matters requiring a vote of Shareholders, including the election of members
of the Board. The Shareholders meeting will be held upon reasonable notice and
within 30 days after the delivery of the Trust's annual report to Shareholders,
but in any event no later than the end of the sixth month following the end of
the prior full fiscal year. Special meetings of the Shareholders may be called
at any time, either by the Managing Shareholder, a majority of the Independent
Trustees, any officer of the Trust, or Shareholders who hold 10% or more of the
Common Shares then outstanding, for any matter on which such Shareholders may
vote. The Trust may not take any of the following actions without approval of
the holders of at least a majority of the Shares entitled to vote:
(1) Sell, exchange, lease, mortgage, pledge or transfer all or
substantially all of the Trust's assets if not in the ordinary course of
operation of Trust Property or in connection with liquidation and
dissolution.
(2) Merge or otherwise reorganize the Trust.
(3) Dissolve or liquidate the Trust, other than before its initial
investment in property.
(4) Amend the Declaration; provided, however, the Declaration may be
amended by the Managing Shareholder without notice or approval of the
Shareholders for the following purposes: (i) to maintain the federal income
tax status of the Trust (unless the Managing Shareholder determines (with
the concurrence of a Majority of the Shareholders entitled to vote on such
matter) that it is in the best interest of Shareholders to change the
Trust's tax status); and (ii) to comply with law. (See Sections 1.9(ff),
6.5, 6.6 and 7.3(b) of the Declaration.)
In addition to any other actions of the Trust requiring the approval of
Shareholders under the Declaration, a Majority of the Shareholders present in
person or by proxy at an annual meeting at which a quorum is present, may,
without the necessity for concurrence by the Board, vote to amend the
Declaration, terminate the Trust, and elect and/or remove one or more members of
the Board. (See Section 6.6(b) of the Declaration.)
Additional Offerings of Shares
There will be no mandatory assessments of Shareholders in respect of the
Common Shares or any additional Shares the Trust may issue in the future. To the
extent that the Board desires to obtain additional capital, the Trust may raise
such capital through additional public and private equity offerings, debt
financing, retention of cash flow (subject to satisfying the Trust's
distribution requirements under the REIT rules) or a combination of these
methods. The Trust may determine to issue securities senior to the Common
Shares, including Preferred Shares, debt securities, or Units of limited
partnership interest in the Operating Partnership (either of which may be
convertible into Common Shares or be accompanied by warrants to purchase Common
Shares). The Trust may also finance acquisitions of properties or interests in
properties through the exchange of properties or through the issuance of Shares
or debt securities or the issuance of Units of limited partnership interest in
the Operating Partnership in which it will conduct all of its real estate
operations. (See Article 2 of the Declaration.)
The proceeds from any borrowings by the Trust may be used to pay
distributions, to provide working capital, to purchase additional interests in
the Operating Partnership, to refinance existing indebtedness or to finance
acquisitions or capital improvements of new properties. (See Section 1.8(a) of
the Declaration.)
Temporary Investments
Pending the commitment of Trust funds for the purposes described in this
Prospectus, for distributions to Shareholders or for application of reserve
funds to their purposes, the Managing Shareholder has full authority and
discretion to make short-term investments in: (i) obligations of banks or
savings and loan associations that either
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have assets in excess of $5 billion or are insured in their entirety by the
United States government or its agencies and (ii) obligations of or guaranteed
by the United States government or its agencies. Such short-term investments
would be expected to earn rates of return which are lower than those earned in
respect of properties in which the Trust may invest. (See Sections 1.2(a) and
5.5 of the Declaration.)
REPORTS TO UNITHOLDERS AND SHAREHOLDERS
Operating Partnership Unitholders
Within 120 days after the close of each partnership year, the Operating
Partnership is required to mail to each Limited Partner, an annual report
containing financial statements of the Operating Partnership presented in
accordance with generally accepted accounting principles ("GAAP") and audited by
a nationally recognized firm of qualified independent public accountants. Within
60 days after the close of each quarter (except the last quarter), the Operating
Partnership is required to mail to each Limited Partner a report containing
unaudited financial statements of the Operating Partnership. The Operating
Partnership is required to use all reasonable efforts to furnish to Limited
Partners, within 90 days after the close of each taxable year, the tax
information reasonably required by the Limited Partners for federal and state
income tax reporting purposes.
Each Limited Partner is entitled, upon written request and at his expense,
to obtain a copy of the following from the Operating Partnership: (i) most
recent annual and quarterly reports filed with the Commission by the Trust under
the Exchange Act (defined below), (ii) the Operating Partnership's federal,
state and local income tax returns for each year, (iii) a current list of the
name and address of each Unitholder, (iv) the Operating Partnership Agreement,
the Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each Limited Partner
and the date each Limited Partner became a partner of the Operating Partnership.
Trust Shareholders
The Trust will keep each Shareholder currently advised as to activities of
the Trust by reports furnished at least quarterly. Each quarterly report will
contain a condensed statement of "cash flow from operations" for the year to
date as determined by the Managing Shareholder in conformity with generally
accepted accounting principles on a basis consistent with that of the annual
financial statements and showing its derivation from net income. (See Section
5.3(a) of the Declaration.)
Within 120 days after the end of each fiscal year following the completion
of the Cash Offering, the Trust is required to prepare and mail to each
Shareholder as of a record date determined by the Managing Shareholder, an
annual report which includes the following:
(1) Financial statements prepared in accordance with generally
accepted accounting principles which are audited and reported on by the
Trust's independent certified public accountants;
(2) The ratio of the costs of raising capital during the period to the
capital raised;
(3) The aggregate amount of advisory fees and the aggregate amount of
other fees paid to the Managing Shareholder and any of its Affiliates
during the period by the Trust and including fees or charges paid to them
by third parties doing business with the Trust;
(4) The total operating expenses (as defined in Section 1.9(i) of the
Declaration), stated as a percentage of the book amount of the Trust's
investments and as a percentage of its net income;
(5) A report from the Independent Trustees that the policies being
followed by Trust are in the best interests of its Shareholders and the
basis for such determination; and
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(6) Full disclosure of all material terms, factors, and circumstances
surrounding any and all transactions involving the Trust, the Managing
Shareholder, the Trustees, any other members of the Board and any of their
respective Affiliates occurring in the year for which the annual report is
made. (See Section 5.3(b) of the Declaration.)
The Common Shares being sold in the Cash Offering have been registered
under the Securities Act of 1933, as amended (the "Securities Act"). As of the
date of this Prospectus, the Trust has not registered the Common Shares under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or listed
them on any securities exchange. The Trust will apply for listing on the
American Stock Exchange ("AMEX") of the Common Shares being offered in the Cash
Offering and Common Shares into which Units being offered in the Exchange
Offering are exchangeable and expects to qualify for AMEX listing and register
such Common Shares under the Exchange Act by the end of the second quarter of
1998. However, there can be no assurance whether the Trust will qualify for such
listing on AMEX or any other stock exchange and, if so, of the timing of the
effectiveness of any such listing.
Although Common Shares acquired by Investors in the Cash Offering and
Common Shares acquired by Unitholders in exchange for Units will be freely
tradable securities, there can be no assurance that an active trading market
will be established or maintained for the Common Shares. The Trust will be
required to file periodic reports (Form 10-KSB or Form 10-K annual reports, Form
10-QSB or Form 10-Q quarterly reports and Form 8-KSB or Form 8-K current
reports) under the Exchange Act in 1998 and for any subsequent fiscal year in
which it has more than 300 Shareholders in any such year or it is otherwise
required by applicable law to do so. The Trust is expected to have at least 300
Shareholders after the completion of the Cash Offering and accordingly would be
required to file such reports on a continuing basis.
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COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS,
OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES
The rights and obligations of the Corporate General Partner and Exchange
Limited Partners in respect of each Exchange Partnership are governed by the
agreement of limited partnership of the partnership (collectively, the "Exchange
Partnership Agreements" and individually, an "Exchange Partnership Agreement").
The rights and obligations under the various Exchange Partnership Agreements are
identical except as described below. Exchange Limited Partners are urged to
review the Exchange Partnership Agreement pertaining to their investment which
was attached as Exhibit A to the Private Placement Memorandum they received in
connection with their original purchase of Exchange Partnership Units in such
partnership's private offering.
Upon their acceptance of the Exchange Offering, Exchange Limited Partners
of Participating Exchange Partnerships will become limited partners in the
Operating Partnership and have rights set forth under the Operating Partnership
Agreement as described below. Exchange Limited Partners of Participating
Exchange Partnerships who accept the Exchange Offer and thereby receive
Operating Partnership Units will entitled to exchange all or a portion of such
units for an equivalent number of Common Shares of the Trust at any time and
from time to time, subject to certain restrictions described above at "THE
EXCHANGE OFFERING." Holders of Trust Common Shares will have the rights set
forth under the Declaration of Trust for the Trust which are summarized above at
"SUMMARY OF DECLARATION OF TRUST" and below. The Declaration of Trust also
contains certain additional limitations on the Trust's activities which will
affect the operation of the Trust and the Operating Partnership. See "SUMMARY OF
THE DECLARATION OF TRUST - Control of Operations" and Section 1.9 of the
Declaration of Trust.
The rights of limited partners in the Participating Exchange Partnerships
differ in many respects from the rights they will have as limited partners in
the Operating Partnership if they accept the Exchange Offering and the rights
they will have upon the exercise of their right to exchange Operating
Partnership Units for an equivalent number of Trust Common Shares. The following
discussion compares the material provisions of each type of security but does
not purport to be a complete statement of such provisions under Florida and
Delaware limited partnership law, as applicable, Delaware business trust law,
the Exchange Partnership Agreements, the Operating Partnership Agreement and the
Declaration of Trust of the Trust or a comprehensive comparison of the rights of
holders of Exchange Partnership Units, the holders of Operating Partnership
Units and holders of Trust Common Shares under such agreements or laws. This
summary is qualified in its entirety by reference to such agreements and laws.
Following the Exchange Offering, each Non-participating Partner will retain
his existing interest in his Exchange Partnership. The Non-participating
Partners will retain all of their economic and voting rights, rights to receive
reports and other rights as set forth in the Exchange Partnership Agreement. As
described in further detail in this Prospectus at "AMENDMENTS TO PARTNERSHIP
AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS," the partnership agreement of
each Participating Exchange Partnership which has one or more Non-participating
Limited Partners following the Exchange Offering will be amended so that such
partners will be entitled to vote as a class in respect of all matters as to
which limited partners are entitled to vote under the partnership agreement
prior to the completion of the Exchange Offering, with certain exceptions. In
addition, the Trust and the Operating Partnership have agreed that in respect of
certain proposed actions, the Participating Exchange Partnership must obtain the
prior approval of Non-participating Limited Partners holding a majority of the
limited partnership interests held by all Non-participating Limited Partners in
the partnership. For example, the partnership may not sell its existing property
interest, acquire any additional property interests or cease to exist without
such approval. The partnership agreement, as amended, will continue in full
force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "THE EXCHANGE OFFERING."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
each Participating Exchange Partnership which has one or more Non-participating
Limited Partners immediately following the completion of the Exchange Offering
as to such partnership.
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Issuance of Additional Securities
Exchange Partnerships: Under the Exchange Partnership Agreements, the interests
of the partners are comprised of general partner interests and limited partner
interests only. Additional partnership interests may be sold by an Exchange
Partnership in the future if the Corporate General Partner thereof determines it
to be in the best interest of the partnership to commit additional funds to its
property and that such funds should not be financed from the partnership's
earnings or through additional indebtedness.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, without the majority approval
of the Non-participating Limited Partners of the partnership voting as a class,
the partnership will not be authorized to admit any additional persons as
limited partnerships other than pursuant to provisions of the agreement which
set forth procedures for admission or pertain to transfers of limited
partnership interests. In addition, as a result of such amendments, the
Corporate General Partner will continue to have discretion to issue additional
units of limited partnership interest of the same class as units held by the
limited partners of the partnership and to determine the terms of such issuance,
provided, however, that the majority approval of Non-participating Limited
Partners voting as a class is required to approve such issuance in advance where
the selling price for such shares is not less than the approximate market value
of the units. See below at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: Under the Operating Partnership Agreement, the
initial interests of the partners are comprised of the General Partner interest
held by the Trust and Operating Partnership Units of limited partnership
interest to be held by the Trust and by recipients of Operating Partnership
Units in connection with the Exchange Offering. The Trust, as General Partner of
the Operating Partnership, is authorized to cause the Operating Partnership to
issue additional partnership interests in the Operating Partnership for any
purpose of the Operating Partnership at any time to the partners in the
Operating Partnership or to other persons for such consideration and on such
terms and conditions as may be established by the Trust in its sole and absolute
discretion. The Trust may cause the Operating Partnership to issue additional
interests in the Operating Partnership in one or more classes, or one or more
series of any such classes, with such designations, preferences and relative
rights, powers and duties senior to interests Operating Partnership Limited
Partners, subject to Delaware business trust law. Since Units are exchangeable
by Unitholders into an equivalent number of Common Shares of the Trust, the
maximum number of Units that may be issued by the Operating Partnership is
limited to the number of authorized Shares of the Trust, which is 25,000,000,
less the number of Shares issued directly by the Trust (excluding Common Shares
issued in exchanges of Units for Common Shares).
The Trust: The Trust has authority to issue an aggregate of 25,000,000 Shares.
The Managing Shareholder is authorized to issue from the authorized but unissued
Shares of the Trust, additional Common Shares as well as Preferred Shares in one
or more series and to establish from time to time the number of Preferred Shares
to be included in each such series and to fix the designations and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption of the shares of each series, provided, however, (i) the Managing
Shareholder will be authorized to issue Preferred Shares only upon approval of
either Shareholders of the Trust holding a majority of the then outstanding
Shares entitled to vote upon such matter or a majority of the disinterested
Independent. If the Trust issues additional securities in the future, (x) the
Trust must cause the Operating Partnership to issue to the Trust, interests in
the Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(y) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted by the Trust for Trust
Common Shares pursuant to an employee stock option plan, the Trust must cause
the Operating Partnership to issue to the Trust one Operating Partnership Unit
for each Trust Common Share acquired upon such exercise and the Trust must
contribute to the Operating Partnership the net proceeds received from such
exercise. The Operating Partnership will also issue Operating Partnership Units
to employees of the Operating Partnership or any subsidiary of the Operating
Partnership upon the exercise by any such employees of an option to acquire
Operating Partnership Units granted by the Operating Partnership pursuant to an
employee stock option plan.
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The Trust will also issue Trust Common Shares on a one-for-one basis to
holders of Operating Partnership Units who exercise their rights to exchange
their Operating Partnership Units for an identical number of Trust Common
Shares, subject to certain exceptions described at "THE EXCHANGE OFFERING."
Term of Existence
Exchange Partnerships: The term of each Exchange Partnership terminates on
December 31 of the year of the fortieth anniversary of its formation, unless
terminated earlier by law or under the provisions of the respective Exchange
Partnership Agreement, including (i) the determination of a majority in interest
of limited partners to dissolve the partnership, (ii) actions affecting the
activities of the Corporate General Partner (including, among other things,
resignation or dissolution) unless a majority in interest of the limited
partners vote to continue the partnership and appoint a successor general
partner, and (iii) the sale of all or substantially all of the property of the
partnership.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, without the majority approval
of the Non-participating Limited Partners of the partnership voting as a class,
the partnership will not be permitted to cease to exist.
In addition, as a result of such amendments, following the Exchange
Offering, the partnership may be dissolved by the vote of at least a majority of
the outstanding limited partnership interests in the partnership, but only with
the approval of Non-participating Limited Partners holding a majority of the
then outstanding units of the partnership held by all Non-participating Limited
Partners. Furthermore, the partnership will be dissolved if the last remaining
general partner of the partnership (each of the Exchange Partnerships currently
have only one general partner) ceases to act as general partner, unless the
limited partners of the partnership (including the Operating Partnership and
Non-participating Limited Partners) holding at least a majority of the then
outstanding units of the partnership elect to continue the partnership and elect
a new general partner and such continuation, election of such general partner(s)
and the amount, type and purchase price of any interest in the partnership such
successor general partner(s) may acquire in connection therewith have been
approved in advance by Non-participating Limited Partners of the partnership
holding a majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners. See below at "AMENDMENTS TO PARTNERSHIP
AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: The term of the Operating Partnership terminates on
December 31, 2098 unless terminated earlier by law or under the provisions of
the Operating Partnership Agreement, including (i) the withdrawal of the Trust
as General Partner, unless a majority in interest vote to continue the Operating
Partnership and appoint a successor general partner, (ii) the General Partner's
election to dissolve the Operating Partnership with the approval of Limited
Partners holding a majority in interest of the Operating Partnership Units, (ii)
the sale of all or substantially all of the properties of the Operating
Partnership, (iv) the merger of the Operating Partnership with or into another
entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the commencement
of any proceedings against the Trust seeking its reorganization, liquidation,
dissolution or similar relief or the involuntary appointment of a trustee to
receive or liquidate the Trust or any substantial portion of its properties and
such proceeding or appointment has not been dismissed, vacated or stayed within
a specified period of time.
The Trust: The term of the Trust terminates on December 31, 2098 unless
terminated earlier (i) by law, (ii) the determination of the holders of at least
a majority of the Trust Shares then outstanding to dissolve the Trust, (iii) the
sale of all or substantially all of the Trust's property or (iv) the withdrawal
of the Cash Offering by the Managing Shareholder of the Trust prior to the
termination date of the Cash Offering.
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Management Control
Exchange Partnerships: Subject to the rights of limited partners in the Exchange
Partnerships set forth in the Exchange Partnership Agreements which are
described below at "Meetings and Voting Rights," the Corporate General Partner
of each partnership has full exclusive and complete discretion in management and
control of the partnership.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, any amendment of any agreement
entered into between any Participating Exchange Partnership and any affiliates
of the Corporate General Partner following the Exchange Offering (other than any
agreement described in the offering documents relating to the original private
offering of the partnership) will require the approval of Non-participating
Limited Partners of the partnership holding a majority of the then outstanding
units of the partnership held by all Non-participating Limited Partners. See
below at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS."
Operating Partnership: Subject to the rights of Operating Partnership Limited
Partners set forth in the Operating Partnership Agreement which are set forth
below at "Meetings and Voting Rights," the Trust, as General Partner of the
Operating Partnership, has all management powers over the business and affairs
of the Operating Partnership. As described immediately below, the Managing
Shareholder of the Trust has management control over the Operating Partnership
and the Trust.
The Trust: Subject to the rights of Shareholders set forth in the Declaration of
Trust, the Managing Shareholder of the Trust has full exclusive and complete
discretion in the management and control of the Trust and the Operating
Partnership, subject to the general supervision and review by the Independent
Trustees and the Managing Shareholder of the Trust acting together as the Board
of the Trust and subject to the prior approval of the Board and the Independent
Trustees in respect of certain activities of the Trust and the Operating
Partnership. See "SUMMARY OF DECLARATION OF TRUST - Control of Operations" and
Section 1.9 of the Declaration of Trust.
Economic Interest
Exchange Partnerships: In private offerings commenced between 1994 and 1997,
Exchange Limited Partners acquired Exchange Partnership Units in one or more
Exchange Partnerships in return for capital contributions. Each Exchange
Partnership maintains a capital account for each of its partners to which it
allocates the partner's share of all items of partnership income, gain, expense,
loss, deduction and credit determined in accordance with the Internal Revenue
Code of 1986, as amended, and regulations issued thereunder. Under the
respective Exchange Partnership Agreement, after giving effect to certain
technical special allocation provisions, (i) taxable income is allocable 100% to
the Corporate General Partner until the profit allocated plus the cumulative
profit allocable to the Corporate General Partner for prior fiscal periods
during which a profit was earned by the partnership equal the cumulative amounts
distributable to the Corporate General Partner and the balance, if any, is
allocated to the Exchange Limited Partners and (ii) taxable losses are allocable
99% to the Exchange Limited Partners and 1% to the Corporate General Partner,
provided, however, that losses are not allocable to any Exchange Limited Partner
to the extent that such allocation would cause such Exchange Limited Partner to
have an adjusted capital account deficit at the end of the taxable year (which
excess losses are allocable to the Corporate General Partner). Each limited
partnership in an Exchange Partnership owns an interest in the entire limited
partnership interests in the partnership in proportion to his respective
ownership of shares.
Each Exchange Limited Partnership is required to distribute at least
quarterly distributable cash flow (defined as all cash received by the
partnership from any source, other than capital contributions, loan proceeds and
proceeds from the sale or refinancing of property, less operating expenses,
principal and interest payments on indebtedness, capital expenditures, general
partner fees and reasonable cash reserves). Each Exchange Limited Partner has a
preferential interest over the Corporate General Partner in respect of his
partnership's distributable
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cash flow and net proceeds from the sale or refinancing of property owned by the
partnership. The interests of the Exchange Limited Partners and the Corporate
General Partner in a particular Exchange Partnership in such distributable cash
flow and net sale or refinancing proceeds are set forth in the Prospectus
Supplement delivered to each Exchange Limited Partner in the partnership.
Schedule B to this Prospectus contains a table for each Exchange Partnership
which summarizes on a partnership by partnership basis such allocations.
The Corporate General Partner of each Participating Exchange Partnership
has agreed to waive all fees that may be earned by it, including without
limitation administrative fees, investments fees and real estate commissions.
The Corporate General Partner of each Participating Exchange Partnership has
also agreed to assign to the Operating Partnership all of its back-end interests
in each such partnership.
Upon the liquidation and dissolution of an Exchange Partnership, and after
payment of or the creation of reserves for the payment of partnership
liabilities, the proceeds of the sale or other disposition of the partnership's
remaining property will be distributed to the limited partners and the Corporate
General Partner in proportion to their respective capital accounts in the
partnership.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, without the majority approval
of the Non-participating Limited Partners of the partnership voting as a class,
the partnership will not be permitted to sell its existing property interest,
acquire any additional property interests, cease to exist, or modify the rights
of limited partners to receive 100% of the quarterly cash distributions and net
proceeds from the sale or refinancing of the partnership's property until they
have received the preferred amount specified in the respective Exchange
Partnership Agreement. See below at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: Each limited partner in a real estate limited partnership
who agrees to sell his limited partnership interest to the Operating
Partnership, including each Exchange Limited Partner in a Participating Exchange
Partnership who accepts the Exchange Offering, will exchange such limited
partnership interests for a number of Operating Partnership Units based on the
seller's proportionate share of the appraised market value of the underlying
property.
The Operating Partnership will maintain for each partner in the Operating
Partnership a capital account to which will be allocated the partner's share of
all items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder. After giving effect to certain technical special
allocation provisions, (i) taxable income is allocable 100% to the General
Partner to the extent that, on a cumulative basis, net losses previously
allocated to the General Partner exceed net income previously allocated to the
General Partner, and the balance is allocable to Limited Partners and the
General Partner in proportion to their respective ownership of Operating
Partnership Units, and (ii) net losses are allocable to the Limited Partners and
the General Partner in proportion to their respective ownership of Operating
Partnership Units, provided, however, that net losses are not allocable to any
Limited Partner to the extent that such allocation would cause such Limited
Partner to have an adjusted capital account deficit at the end of such taxable
year (which excess losses are allocable to the General Partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow of the Operating Partnership (defined as (i) all cash
revenues received by the Operating Partnership from any source, other than
capital contributions to the Operating Partnership, and cash flow treated as net
capital gains under the Code, plus (ii) the amount of any reduction in reserves
of the Operating Partnership). Such distributions are to be made in the
following priority: (x) first to holders of any class of partnership interest
having a preference over Operating Partnership Units (no such preferred class
exists as of the date of this Prospectus or is currently anticipated to be
issued by the management of the Operating Partnership) and (y) thereafter, to
holders of Operating Partnership Units. Each holder of Operating Partnership
Units, including the Trust and each recipient of Operating Partnership Units in
the Exchange Offering, will receive a share of such distributions in proportion
to his respective ownership of Operating Partnership Units.
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Upon liquidation of the Operating Partnership, the Limited Partners and the
General Partner are entitled to receive a share of the net liquidation proceeds
of the Operating Partnership (remaining after payment of, or the creation of a
reasonable reserve for, all of the partnership's liabilities and obligations) in
proportion to their respective capital account balances.
The Trust: Holders of Trust Common Shares will acquire such shares (i) in
connection with the Cash Offering or any subsequent public or private offering
of Trust Common Shares that may be made by the Trust, (ii) upon the exercise of
their right to exchange Operating Partnership Units for an equivalent number of
Trust Common Shares, or (iii) upon their exercise of options or their receipt of
Trust Common Shares under any stock option plan or employee bonus plan that may
be adopted by the Board of the Trust.
As discussed above under "Issuance of Additional Securities," the Trust is
authorized to issue Shares in addition to the Trust Common Shares offered in the
Cash Offering and Trust Common Shares to be issued in connection with the
exchange of Operating Partnership Units.
The Managing Shareholder has full discretion as to the timing and amount of
distributions to be made by the Trust, provided, however, the Managing
Shareholder is required to endeavor to declare and make distributions as
required for the Trust to quality as a REIT under the Code so long as the
Managing Shareholder believes it is in the best interest of the Trust to
continue to so qualify. As of the date of this Prospectus, the Trust intends to
make quarterly distributions of available funds, if any to its Shareholders.
Shareholders will be entitled to receive any such distributions on a pro rata
basis for each outstanding class of Shares taking into account the relative
rights of priority of each class entitled to receive distributions. No preferred
class which has a priority over Common Shares exists as of the date of this
Prospectus or is currently anticipated by the management of the Trust to be
issued.
Upon liquidation of the Trust, the Shareholders are entitled to receive the
net liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class
Property Investments and Anticipated Holding Period
Exchange Partnerships: Each of the Exchange Partnerships was formed to acquire
and now owns an interest in residential apartment property described at "PRIOR
PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER" and in Exhibits A and B to
this Prospectus and in the Prospectus Supplement accompanying this Prospectus
prepared for each particular Exchange Partnership and delivered to each Exchange
Limited Partner in such partnership. The anticipated holding periods of the
respective properties in which the Exchange Partnerships own a direct or
indirect interest were not stated in the original private placement offering
materials, although the offering materials in respect of certain of the Exchange
Partnerships indicated that the Corporate General Partner intended to list the
property interests on the market for sale within two to five years following the
private offering.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, without the majority approval
of the Non-participating Limited Partners of the partnership voting as a class,
the partnership will not be permitted to sell all or substantially all of its
existing property interest, acquire any additional property interests or cease
to exist. See below at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS."
Operating Partnership and the Trust: The Operating Partnership and the Trust
have been formed to acquire a diversified portfolio of equity and debt interests
in residential apartment properties, including without limitation property
interests owned by the Exchange Partnerships and other real estate limited
partnerships which are managed by affiliates of the Managing Shareholder of the
Trust. The Operating Partnership will use net cash proceeds from the Trust's
Cash Offering and from any future public or private offering of securities that
may be made by the Trust or the Operating Partnership, together with unissued
securities of the Trust or the Operating Partnership, to acquire property
interests. The Operating Partnership intends to issue up to $25 million of
registered Operating Partnership Units in connection with the Exchange Offering.
The first candidates targeted for acquisition in the Exchange
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Offering are property interests in 14 Exchange Properties described in this
Prospectus at "PROPOSED INITIAL REAL ESTATE INVESTMENTS" and at Exhibit B. The
Trust and the Operating Partnership contemplate acquiring assets for long-term
ownership, and in any given case, for a minimum of four years.
Restrictions on Transfers of Securities
Exchange Partnerships: Under each Exchange Partnership Agreement, no limited
partner of the respective Exchange Partnership may sell or transfer his interest
in the partnership unless the Corporate General Partner of the partnership
consents to such sale or transfer and certain other conditions are fulfilled.
Operating Partnership: Each Operating Partnership Limited Partner may sell or
transfer his Operating Partnership Units without the prior written consent of
the Trust (acting as General Partner of the Operating Partnership) except where,
in the opinion of legal counsel to the Operating Partnership, such transfer
would require the filing of a registration statement under the Act or would
otherwise violate applicable federal or state securities laws.
The Trust: The Trust Common Shares are freely transferable by Shareholders
subject to certain restrictions on transfer which the Managing Shareholder deems
necessary to comply with the REIT provisions of the Code. Such restrictions are
described at "Capital Stock of the Trust - Restrictions on Ownership and
Transfers." The restrictions may have the effect of making an attempted takeover
of the Trust more difficult for an acquiror. See "RISK FACTORS - Anti-Takeover
Provisions."
Tax Status
Exchange Partnerships: The Exchange Partnerships were designed to be classified
and treated as partnerships for federal income tax purposes. As partnerships,
the Exchange Partnerships are not be subject to federal income tax. Instead,
each limited partner in an Exchange Partnership is required to report annually
on his personal income tax return his allocable share of the partnership's
income, gain, loss, deductions, credits and items of tax preference regardless
of whether any distribution of cash or property is made to by the partnership to
limited partners during any given year. A distribution from an Exchange
Partnership, including a distribution in final liquidation, results in the
recognition of income by each limited partner to the extent that any cash
distributed exceeds his adjusted tax basis in his Existing Partnership Units at
that time.
Each Offeree should review the "TAX ASPECTS" section of the original
private placement memorandum pertaining to his investment in his Exchange
Partnership. A limited partner who sells or transfers his Exchange Partnership
Units will realize gain or loss equal to the difference between the amount
realized on the sale or transfer and the adjusted basis of the units disposed
of. See Exhibit B to this Prospectus.
Operating Partnership: The Operating Partnership has been designed to be
classified and treated as a partnership for federal income tax purposes. The tax
consequences of an investment in the Operating Partnership are identical to
those described immediately above under " - Exchange Partnerships."
The Trust: In any year in which the Trust qualifies as a real estate investment
trust ("REIT"), in general it will not be subject to federal income tax on that
portion of its REIT taxable income or gain which is distributed to Shareholders.
The Trust may, however, be subject to tax at normal corporate rates upon any
taxable income or capital gain not distributed in any given year. As long as the
Trust qualifies as a REIT, distributions made to the Trust's taxable domestic
non-tax-exempt Shareholders out of current or accumulated earnings and profits
(and not designated as capital gain dividends) will be taken by them as ordinary
income and will not be eligible for the dividends received deduction for
corporations. Distributions (and for taxable years beginning after August 5,
1997, undistributed amounts) that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Trust's actual net capital gain for the taxable year) without regard to the
period for which the Shareholder has held his Trust Common Shares.
In general, any loss upon a sale or exchange of Trust Common Shares by a
Shareholder who has held such shares for six months or less will be treated as a
long-term capital loss, to the extent of distributions from the Trust
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required to be treated by such Shareholder as long-term capital gains. A more
detailed description of the foregoing tax considerations and those applying to
tax-exempt and foreign Shareholders is set forth above at "FEDERAL INCOME TAX
CONSIDERATIONS." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each Offeree's tax advisor.
Pre-emptive Rights
Exchange Partnerships, Operating Partnership and the Trust: Holders of Exchange
Partnership Units, holders of Operating Partnership Units and holders of Trust
Common Shares have no conversion, redemption, preemptive or exchange rights to
subscribe to any securities issued by the Exchange Partnership, the Operating
Partnership or the Trust in the future, except in two instances as follows.
First, if the Corporate General Partner of an Exchange Partnership determines
that it is necessary or in the best interest of the partnership to commit
additional funds to its property and that such funds should not be financed from
the partnership's earnings or through additional indebtedness, the Corporate
General Partner intends whenever possible to give limited partners the first
opportunity for a limited time to purchase any additional units that may be
offered by the partnership. Second, holders of Operating Partnership Units are
entitled to exchange such units into an equivalent number of Trust Common Shares
at any time and from time to time, subject to certain conditions described at
"THE EXCHANGE OFFERING."
Managing Entity Removal and Resignation Rights
Exchange Partnerships: Limited partners holding at least a majority of the
outstanding Exchange Partnership Units of an Exchange Partnership have the right
to remove the Corporate General Partner of the partnership if they determine
that it is not performing its powers, duties and obligations in the best
interests of the partnership (unless any officer or affiliate of the general
partner would continue to have personal liability for any debts of the
partnership). The Corporate General Partner may resign by delivering written
notice to the limited partners, provided, however, such resignation will be
effective not less than 90 days after notice thereof is delivered to the limited
partners only if the limited partners owning at least a majority of the Exchange
Partnership Units then outstanding have consented to such resignation.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, (except where any officer or
affiliate of the general partner would continue to have personal liability for
any debts of the partnership), the Corporate General Partner of the partnership
may be removed only if a court of competent jurisdiction finds that the general
partner is not performing its duties in the best interest of the partnership,
the Non-participating Limited Partners voting as a class consent to such removal
and the general partner is given the requisite notice. The effect of this
amendment is that following the Exchange Offering, the Corporate General Partner
of a Participating Exchange Partnership with one or more Non-participating
Limited Partners may be removed only if the Non-participating Limited Partners
initiate an action in court to have the general partner removed and the court
makes the requisite finding.
In addition, as a result of such amendments, if the last remaining general
partner of the partnership (each of the Exchange Partnerships currently has only
one general partner) ceases to act as general partner, the limited partners of
the partnership (including the Operating Partnership and Non-participating
Limited Partners) holding at least a majority of the then outstanding units of
the partnership may elect to continue the partnership and elect one or more new
general partners as long as the same has been approved in advance by
Non-participating Limited Partners of the partnership holding a majority of the
then outstanding units of the partnership held by all Non-participating Limited
Partners. Moreover, if the partnership is continued under the circumstances
described above, the new general partner(s) will be permitted to purchase an
interest in the partnership only on terms and conditions approved by a majority
vote of the Non-participating Limited Partners voting as a class. In addition,
as a result of such amendments, the Corporate General Partner of the partnership
would be entitled to retire or resign only with the approval of
Non-participating Limited Partners of the partnership holding a majority of the
then outstanding units of the partnership held by all Non-participating Limited
Partners. See below at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS."
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Operating Partnership: The Trust may not be removed as General Partner of the
Operating Partnership by the Limited Partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as General
Partner except in certain limited circumstances.
The Trust: The holders of at least 10% of the outstanding Trust Common Shares
may propose the removal of the Managing Shareholder, an Independent Trustee or
any other member of the Board of the Trust either by calling a meeting or
soliciting consents in accordance with the terms of the Declaration. Removal of
any of the foregoing requires either the affirmative vote of a majority of the
outstanding Trust Common Shares (excluding Trust Common Shares held by the
Managing Shareholder, Independent Trustee or other member of the Board which is
the subject of the vote or by its affiliates) or the affirmative vote of a
majority of the disinterested Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may
terminate the Trust Management Agreement and the Managing Shareholder may resign
as Managing Shareholder without cause or penalty by giving the Trust at least 60
days prior written notice. The holders of at least a majority of the outstanding
Trust Common Shares, at a meeting called for such purpose in accordance with the
terms and conditions of the Declaration, may also terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may
be removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnerships: Each limited partner of an Exchange Partnership is
entitled to receive annual financial statements relating to the partnership,
including a balance sheet and related statements of income and retained earnings
and changes in financial position. On the written request of limited partners
holding at least 20% of the outstanding limited partnership interests in an
Exchange Partnership, the statements must be audited by an independent public
accountant and presented in accordance with generally accepted accounting
principles ("GAAP"). Exchange Limited Partners also have the right to obtain
other information about their respective partnerships and receive a list of
names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, each Exchange Partnership
is required to provide each limited partner therein with data necessary to
report his distributive share of partnership income, deductions and credits for
federal income tax purposes.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, Non-participating Limited
Partners of a Participating Exchange Partnership holding a majority of the then
outstanding units of the partnership held by all Non-participating Limited
Partners may require that the annual financial statements required to be
delivered by the partnership to limited partners be audited. See below at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each Limited Partner, an annual
report containing financial statements of the Operating Partnership presented in
accordance with GAAP and audited by a nationally recognized firm of qualified
independent public accountants. Within 60 days after the close of each quarter
(except the last quarter), the Operating Partnership is required to mail to each
Limited Partner a report containing unaudited financial statements of the
Operating Partnership. The Operating Partnership is required to use all
reasonable efforts to furnish to Limited Partners, within 90 days after the
close of each taxable year, the tax information reasonably required by the
Limited Partners for federal and state income tax reporting purposes.
Each Limited Partner is entitled, upon written request and at his expense,
to obtain for proper partnership purposes a copy of the following from the
Operating Partnership: (i) most recent annual and quarterly reports filed
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with the Commission by the Trust under the 1934 Act, (ii) the Operating
Partnership's federal, state and local income tax returns for each year, (iii) a
current list of the name and address of each Unitholder, (iv) the Operating
Partnership Agreement, the Certificate of Limited Partnership of the Operating
Partnership filed in the State of Delaware and all amendments thereto, and (v)
information relating to the amount of cash and other consideration contributed
by each Limited Partner and the date each Limited Partner became a partner of
the Operating Partnership.
The Trust: The Trust is required to keep each Shareholder currently advised as
to activities of the Trust by reports furnished at least quarterly. Each
quarterly report is required to contain a condensed statement of "cash flow from
operations" for the year to date as determined by the Managing Shareholder.
Within 120 days after the close of each fiscal year, the Trust is required to
prepare and mail to each Shareholder an annual report which includes the
following: (i) audited financial statements prepared in accordance with GAAP by
the Trust's independent certified public accountants; (ii) the ratio of the
costs of raising capital during the period to the capital raised; (iii) the
aggregate amount of advisory fees and other fees paid to the Managing
Shareholder and its affiliates; (iv) the total operating expenses stated as a
percentage of the book amount of the Trust's investments and as a percentage of
its net income; (v) a report from the Independent Trustees that the policies
being followed by the Trust are in the best interests of its Shareholders and
the basis for such determination and; (vi) full disclosure of all material
terms, factors, and circumstances surrounding any and all transactions involving
the Trust, the Managing Shareholder, the Trustees, any other members of the
Board and any of their respective affiliates occurring during the year.
In addition, the Trust is also required to deliver to its Shareholders
periodic reports required to be delivered under the 1934 Act (i.e, Form 10-KSB
or Form 10-K annual reports, Form 10-QSB or Form 10-Q quarterly reports, and
Form 8-KSB or Form 8-K current reports) for the fiscal year in which the Trust's
Securities Act registration statement becomes effective and thereafter if either
(i) the Trust registers the Trust Common Shares under the 1934 Act and qualifies
for the listing of such shares on a stock exchange, (ii) the Trust has more than
300 Shareholders, or (iii) the Trust is otherwise required to do so by the
applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders. See "SUMMARY OF DECLARATION OF TRUST
Quarterly and Annual Reports" and " - Books and Records; Tax Information."
Assessments
Exchange Partnerships, Operating Partnership and the Trust: No future
assessments may be required of holders of limited partnership interests in an
Exchange Partnership, holders of Operating Partnership Units or holders of Trust
Common Shares.
Amendments of Governing Agreements
Exchange Partnerships: The amendment of the partnership agreement pertaining to
each Exchange Partnership requires the consent of the holders of at least a
majority of the outstanding limited partnership interests in the partnership
except that (i) the Corporate General Partner may amend the agreement in respect
of certain specified matters which will not adversely affect limited partners,
and (ii) any amendment may not without a limited partner's consent increase his
liability or change the capital contribution required from him, his economic
interest, rights on dissolution or any voting rights.
As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, except in certain
circumstances specified in immediately preceding paragraph, the partnership
agreement of the partnership may be amended only with the approval of both (i)
limited partners holding at least a majority of the outstanding limited
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partnership interests in the partnership and (ii) Non-participating Limited
Partners of the partnership holding a majority of the then outstanding units of
the partnership held by all Non-participating Limited Partners. See below at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: Amendments to the Operating Partnership Agreement may be
proposed by the Trust (as General Partner) or by holders of at least 25% of the
outstanding Operating Partnership Units. Except in the cases described below,
the consent of holders of at least a majority of the outstanding Operating
Partnership Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the Operating Partnership Agreement without the
consent of any Limited Partners for the following purposes: (i) to add to the
obligations of the Trust in its capacity as General Partner of the Trust or to
surrender for the benefit of Limited Partners any right or power granted to the
Trust or any of its affiliates, (ii) to set forth the rights, powers, duties and
preferences of the holders of any additional interests in the Operating
Partnership which may be issued in the future, (iii) to satisfy any requirements
contained in an order, ruling or regulation of any federal or state agency or
contained in any federal or state law and (iv) for certain other specified
matters of an inconsequential nature and not materially adversely affecting the
Limited Partners.
The Operating Partnership Agreement may not be amended, without a Limited
Partner's consent, to convert his partnership interest into a general partner's
interest; modify his limited liability; alter his rights to receive
distributions or allocations of partnership income, gains, loss and deductions;
cause the dissolution of the Operating Partnership prior to the time provided
for in the Operating Partnership Agreement; amend the amendment provision of the
Operating Partnership Agreement described in this paragraph; or amend Article VI
of the Operating Partnership Agreement or any definition used therein which
would have the effect of causing the allocations in Article VI to fail to comply
with the requirements of Section 514(c)(9)(E) of the Code.
The consent of all Limited Partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Operating Partnership Units is
required to amend any of the following sections of the Operating Partnership
Agreement: (i) Section 4.2(a) (pertaining to the Trust's authority, without the
approval of any Limited Partner, to cause the Operating Partnership to issue
additional partnership interests in the Operating Partnership in the future);
(ii) the second sentence of Section 7.1(a) (which provides that the Trust may
not be removed as General Partner of the Operating Partnership by the Limited
Partners); (iii) Section 7.5 (pertaining to limitations on the outside
activities of the Trust); (iv) Section 7.6 (pertaining to contracts among the
Operating Partnership, the Trust and any of their respective affiliates or
subsidiaries); (v) Section 7.8 (pertaining to limitations on the liability of
the Trust as General Partner of the Operating Partnership); (vi) Section 11.2
(pertaining to limitations on the Trust's right to transfer its interest in the
Operating Partnership): (vii) Section 13.1(c) (which provides that the Operating
Partnership may be terminated prior to December 31, 2098 with the consent of the
holders of at least a majority of the outstanding Operating Partnership Units);
(viii) Section 14.1(d) (which provides for super-majority voting requirements
described herein; or (ix) Section 14.2 (pertaining to meetings of Limited
Partners).
The Trust: The Managing Shareholder of the Trust may amend the Declaration
without approval of the Shareholders to maintain the federal income tax status
of the Trust as a REIT (unless the Managing Shareholder determines that it is in
the best interests of the Shareholders to discontinue the Trust's REIT status
and holders of at least a majority of the Trust Common Shares approve such
determination); and to comply with law.
Other amendments to the Declaration may be proposed either by the Managing
Shareholder or holders of at least 10% of the outstanding Trust Common Shares,
either by calling a meeting of the Shareholders or by soliciting written
consents. Such proposed amendments require the approval of a majority in
interest of the Shareholders entitled to vote given at a meeting of Shareholders
or by written consents.
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Liability and Indemnification
Exchange Partnerships: The Corporate General Partner of each Exchange
Partnership is generally liable for all liabilities and obligations of the
partnership to the extent such obligations are not paid by the partnership and
are not by their terms limited to recourse against specific property. Each
limited partner of an Exchange Partnership is generally not liable for the
liabilities and obligations of the partnership.
Each Exchange Partnership is required to indemnify its Corporate General
Partner, each of the Corporate General Partner's affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such indemnified persons have acted within the scope of the applicable
partnership agreement) against any loss, liability or damage incurred by such
indemnified person arising out of the partnership's private offering of limited
partnership interests and the management of the partnership's affairs within the
scope of the partnership agreement, unless such indemnified person's negligence
or intentional or criminal wrongdoing is involved; provided, however, such
indemnification will not be made with respect to any liability imposed by
judgment arising out of any violation of federal or state securities laws
associated with such offering. No indemnified person is liability to his
Exchange Partnership or to any partner thereof for any loss suffered by the
Exchange Partnership which arises out of any action or inaction of such person
if such person, in good faith, determined that such course of conduct was in the
best interests of the Exchange Partnership and within the scope of the
applicable partnership agreement and did not constitute the negligence or
intentional or criminal wrongdoing of such person.
Operating Partnership: The Trust, as General Partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The Limited Partners (other than the Trust in its capacity as General
Partner thereof) have no responsibility for the liabilities or obligations of
the Operating Partnership.
The Trust has no liability for monetary damages to the Operating
Partnership or any partners or assignees for losses sustained or liabilities
incurred as a result of errors in judgment for any act or omission, unless (i)
the Trust actually received an improper benefit in money, property or services
(in which case, such liability shall be for the amount of the benefit actually
received), or (ii) the Trust's action or inaction was the result of active and
deliberate dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of
the Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages, liabilities, expenses, judgments, fines, settlements, and other
amounts arising from any claims, demands, actions, suits or proceedings that
relate to the operations of the Operating Partnership in which any such
indemnified person may be involved, or threatened to be involved, as a party or
otherwise, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith, or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
The Trust: Neither the Managing Shareholder, the Trustees, any other members of
the Board or any of their respective affiliates nor any Shareholders of the
Trust are liable for the liabilities and obligations of the Trust to third
parties. In addition, such persons are not liable to the Trust or to any
Shareholder for any loss suffered by the Trust which arises out of any action or
inaction of such person, if such person, in good faith, determines that such
course of conduct was in the Trust's best interest and within the scope of the
Declaration and did not constitute negligence or misconduct, in the case of any
such person who is not an Independent Trustee, or gross negligence or wrongful
misconduct, in the case of any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees,
other members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and
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employees (provided such persons have acted within the scope of the Declaration)
against any loss, liability or damage incurred by such person arising out of the
Cash Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act, except under certain limited
circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability and
Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnerships: The allocation between the limited partners and Corporate
General Partner of each Exchange Partnership of distributable cash flow and net
proceeds from the sale or refinancing of property is described in Exhibit B to
this Prospectus. The allocation of net liquidation proceeds among the partners
is described above at " - Economic Interest." The Corporate General Partner or
an affiliate is also entitled to earn a real estate commission in an amount
equal to 50% of any commissions paid to an outside broker on the sale of any
partnership property, but in no event greater than 3% of the sales proceeds.
The Corporate General Partner of each Participating Exchange Partnership
has agreed to waive all fees payable to it by the partnership following the
Exchange Offering, including without limitation annual administrative fees,
acquisition fees and real estate commissions, and to assign to the Operating
Partnership all back-end interests attributable to the Corporate General
Partnership's general partner interest in the partnership. Accordingly, the
Exchange Partnership Agreement of each Participating Exchange Partnership will
be amended following the Exchange Offering to delete the payment of the
foregoing fees.
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as General Partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders of
Operating Partnership Units on a per unit basis, except that the Trust may not
elect to exchange Units held for an equivalent number of Trust Common Shares.
The allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
The Trust: The table included in this Prospectus at "COMPENSATION OF MANAGING
PERSONS AND AFFILIATES - The Trust" describes all reimbursement payments that
may be received by the Managing Shareholder and its affiliates for expenses
incurred in connection with the preparation of the prospectus for the Cash
Offering, the Cash Offering, the operation of the Trust and the acquisition and
disposition of the Trust's property.
Meetings and Voting Rights
Exchange Partnerships: Meetings of the partners of each Exchange Partnership may
be called at any time, either by the Corporate General Partner or by limited
partners holding at least 25% of the outstanding Exchange Partnership Units, for
any matter on which limited partners may vote. The following actions require the
affirmative vote of limited partners holding at least a majority of the
outstanding Exchange Partnership Units in respect of an Exchange Partnership:
(a) reforming the partnership to replace the Corporate General Partner; (b)
acceptance of the resignation of the Corporate General Partner; (c) revising any
contract between the Exchange Partnership and any affiliate of the Corporate
General Partner; (d) removal of the Corporate General Partner; (e) dissolution
of the Exchange Partnership prior to the expiration of its term except as
otherwise provided in the applicable partnership agreement or as required by
law; (f) removal and replacement of the party appointed to supervise a
liquidation of the partnership's assets upon its dissolution; (g) the sale of
all or substantially all of the partnership's property; and (h) amending the
partnership agreement as described above at " - Amendments of Governing
Agreements."
The consent of all limited partners is required for the following actions
by each Exchange Partnership: (a) contravening the respective partnership
agreement or certificate of limited partnership; (b) actions making it
impossible to carry on the ordinary course of business of the partnership; (c)
confession of a judgment in excess of 20% of the partnership's assets; and (d)
allowing the Corporate General Partner to possess partnership assets for other
than a partnership purpose.
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As a result of certain amendments to be made to the partnership agreement
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners following the Exchange Offering, the Corporate General Partner
of the partnership or Non-participating Limited Partners holding a majority of
the then outstanding units held by all Non-participating Limited Partners in the
partnership, may call a meeting of the partnership to act on any matter upon
which the limited partners of the partnership are permitted to act. In addition,
the approval of Non-participating Limited Partners of the partnership holding a
majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners will be required to replace the Corporate
General Partner in its capacity as liquidating trustee or receiver or the
receiver or trustee appointed by the general partner in connection with the
liquidation of the partnership. See below at "AMENDMENTS TO PARTNERSHIP
AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS."
Operating Partnership: Meetings of the partners of the Operating Partnership may
be called by the Trust (as General Partner) and by Limited Partners holding at
least 25% of the outstanding Operating Partnership Units. The consent of Limited
Partners holding at least a majority of the outstanding Operating Partnership
Units is required for action by the Limited Partners, except where otherwise
provided in the Operating Partnership Agreement as described below. Voting by
the Limited Partners may be conducted at a meeting of the partners or without a
meeting by written consent. Limited Partners are entitled to vote on proposed
amendments to the Operating Partnership Agreement as described above at "
Amendments of Governing Agreements."
The following actions of the Operating Partnership require the consent of
all Limited Partners of the Operating Partnership: (a) any action that would
make it impossible to carry on the ordinary business of the Operating
Partnership; (b) the possession of partnership property, or the assignment of
any right in specific partnership property, for other than a partnership
purpose, except as otherwise provided in the Operating Partnership Agreement;
(c) the admission of any new partner to the Operating Partnership, except as
otherwise provided in the Operating Partnership Agreement; or (d) any action
that would subject a limited partner to liability as a general partner in any
jurisdiction or any other liability, except as provided in the Operating
Partnership Agreement or under the Delaware Act.
In addition, the consent of the Limited Partners holding at least a
majority of the outstanding Operating Partnership Units is required to approve
the Trust's election to dissolve the Operating Partnership prior to the
termination of its term as specified in the Operating Partnership Agreement.
Limited Partners holding a majority of the outstanding Operating Partnership
Units are also entitled, in the absence of any general partner of the Operating
Partnership, to elect a liquidator to oversee the winding up and dissolution of
the Operating Partnership and to perform a full accounting of the Operating
Partnership's liabilities and properties.
The Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Managing Shareholder and Shareholders holding at least a majority of
the outstanding Trust Shares entitled to vote on such matter approve staggered
elections for such positions, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Trust Common Shares, for any matter on which such Shareholders may vote. The
Trust may not take any of the following actions without approval of Shareholders
of at least a majority of the Shares entitled to vote: (a) the sale, exchange,
lease, mortgage, pledge or transfer of all or substantially all of the Trust's
assets if not in the ordinary course of operation of the Trust or in connection
with liquidation and dissolution; (b) the merger or reorganization of the Trust;
and (c) the dissolution or liquidation of the Trust following its initial
property investments.
In addition, Shareholders holding at least a majority of Shares entitled to
vote present in person or by proxy at an annual meeting at which a quorum is
present, may, without the necessity for concurrence by the Board, vote to amend
the Declaration of Trust, terminate the Trust, and elect and/or remove one or
more members of the Board.
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Accounting Method and Period
Exchange Partnerships, Operating Partnership and the Trust: The accounting
period of the Exchange Partnerships, the Operating Partnership and the Trust
will end on December 31 of each year. Each of them will utilize the accrual
method of accounting for their operations.
CAPITAL STOCK OF THE TRUST
General
The Declaration of Trust authorizes the Trust to issue up to 25,000,000
Shares of beneficial interest, no par value per Share, consisting of Common
Shares and of Preferred Shares of such classes with such preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Managing Shareholder
may create and authorize from time to time in accordance with Delaware law and
the Declaration. Prior to the Cash Offering, there were no Shares outstanding.
The Trust is offering for sale up to 2,500,000 Common Shares in the Cash
Offering. If the Exchange Offering is completed as contemplated, sellers of
property interests would receive up to 2,500,000 Units in the Operating
Partnership which would be exchangeable into 2,500,000 additional Common Shares.
The following description summarizes all material terms and provisions of
the Common Shares. The Common Shares when paid for and issued will be fully paid
and non-assessable. Each Common Share is equal in all respects to every other
Common Share and entitles the holder to one vote on all matters requiring a vote
of Shareholders, including the election of members of the Board. Holders of
Common Shares do not have the right to cumulate their votes in the election of
members of the Board, which means that the holders of a majority of the
outstanding Common Shares can elect all of the nominees for Board positions then
standing for election. Shareholders are entitled to such distributions as may be
declared from time to time by the Managing Shareholder out of funds legally
available therefor. Shareholders will be entitled to receive any distributions
declared by the Managing Shareholder on a pro rata basis for each outstanding
class of Shares taking into account the relative rights of priority of each
class entitled to distributions. Holders of Common Shares have no conversion,
redemption, preemptive or exchange rights to subscribe to any securities issued
by the Trust in the future. In the event of a liquidation, dissolution or
winding up of the affairs of the Trust, the Shareholders are entitled to share
ratably in the assets of the Trust remaining after provision for payment of all
liabilities to creditors and payment of liquidation preferences and accrued
dividends, if any, on any series of Preferred Shares that may have been issued.
Transfer Agent
The escrow agent for the Cash Offering, and the transfer agent and
registrar for the Common Shares and the Units, will be American Stock Transfer &
Trust Company, New York, New York. The company will also hold in an escrow
account the Units acquired by the Original Investors in connection with the
formation of the Trust and the Operating Partnership as described at "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions."
Restrictions on Ownership and Transfer
The Trust's Declaration of Trust contains certain restrictions on the
number of Shares of the Trust that individual Shareholders may own. For the
Trust to qualify as a REIT under the Code, no more than 50% in value of its
Shares may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities and constructive ownership among
specified family members) during the last half of a taxable year (other than the
first taxable year) or during a proportionate part of a shorter taxable year.
The Shares must also be beneficially owned (other than during the first taxable
year) by 100 or more persons during at least 335 days of each taxable year or
during a proportionate part of a shorter taxable year. Because the Trust expects
to qualify as a REIT, the Declaration of the Trust contains restrictions on the
acquisition of Shares intended to ensure compliance with these requirements.
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Subject to certain exceptions specified in the Declaration of Trust, no
Shareholder (other than the Original Investors) may own, or be deemed to own by
virtue of the attribution provisions of the Code, more than 5.0% (the "Ownership
Limit") of the Trust's Shares. The Managing Shareholder (upon receipt of a
ruling from the Internal Revenue Service (the "Service") or an opinion of
counsel or other evidence satisfactory to the Managing Shareholder and upon such
other conditions as the Managing Shareholder may require) may in its discretion
waive the Ownership Limit depending on the then existing facts and circumstances
surrounding the proposed transfer, including without limitation, the identity of
the party requesting such waiver, the number and extent of Share ownership of
other Shareholders, the aggregate number of outstanding Shares and the extent of
any contractual restrictions (other than that contained in the Declaration of
Trust) on any Shareholders relating to transfer of their Shares. See Section
2A.12 of the Declaration of Trust. As a condition of such exemption, the
intended transferee must give written notice to the Trust of the proposed
transfer no later than the fifteenth day prior to any transfer which, if
consummated, would result in the intended transferee owning Shares in excess of
the Ownership Limit. The Managing Shareholder of the Trust may require such
opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure the Trust's status as a
REIT. Any transfer of the Shares that would (i) create a direct or indirect
ownership of the Shares in excess of the Ownership Limit, (ii) result in the
Shares being owned by fewer than 100 persons or (iii) result in the Trust being
"closely held" within the meaning of Section 856(h) of the Code, shall be null
and void, and the intended transferee will acquire no rights to the Shares. The
foregoing restrictions on transferability and ownership will not apply if the
Managing Shareholder determines, which determination must be approved by the
Shareholders, that it is no longer in the best interests of the Trust to attempt
to qualify, or to continue to qualify, as a REIT.
Any purported transfer of Shares that would result in a person owning
Shares in excess of the Ownership Limit or cause the Trust to become "closely
held" under Section 856(h) of the Code that is not otherwise permitted as
provided above will constitute excess shares ("Excess Shares"), which will be
transferred by operation of law to the Trust as trustee for the exclusive
benefit of the person or persons to whom the Excess Shares are ultimately
transferred, until such time as the intended transferee re-transfers the Excess
Shares. While these Excess Shares are held in trust, they will not be entitled
to vote or to share in any dividends or other distributions. Subject to the
Ownership Limit, the Excess Shares may be transferred by the intended transferee
to any person (if the Excess Shares would not be Excess Shares in the hands of
such person) at a price not to exceed the price paid by the intended transferee
(or, if no consideration was paid, fair market value), at which point the Excess
Shares will automatically be exchanged for the Shares to which the Excess Shares
are attributable. In addition, such Excess Shares held in trust are subject to
purchase by the Trust at a purchase price equal to the lesser of the price paid
for the Shares by the intended transferee (or, if no consideration was paid,
fair market value) as reflected in the last reported sales price reported on the
New York Stock Exchange ("NYSE") on the trading day immediately preceding the
relevant date, or if not then traded on the NYSE, the last reported sales price
of such Shares on the trading day immediately preceding the relevant date as
reported on any exchange or quotation system over which such Shares may be
traded, or if not then traded over any exchange or quotation system, then the
market price of such Shares on the relevant date as determined in good faith by
the Managing Shareholder of the Trust.
From and after the intended transfer to the intended transferee of the
Excess Shares, the intended transferee shall cease to be entitled to
distributions, voting rights and other benefits with respect to such Shares
except the right to payment of the purchase price of the Shares on the
retransfer of Shares as provided above. Any dividend or distribution paid to a
proposed transferee on Excess Shares prior to the discovery by the Trust that
such Shares have been transferred in violation of the provisions of the Trust's
Declaration shall be repaid to the Trust upon demand. 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 Shares may be deemed, at the option of the Trust, to have acted as an
agent on behalf of the Trust in acquiring such Excess Shares and to hold such
Excess Shares on behalf of the Trust.
All certificates representing Shares will bear a legend referring to the
restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Code, more than 5.0% (or such other percentage between 1/2 of 1% and 5%, as
provided in the rules and regulations promulgated under the
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Code) of the number or value of the outstanding Shares of the Trust must give a
written notice to the Trust by January 31 of each year. In addition, each
Shareholder shall upon demand be required to disclose to the Trust in writing
such information with respect to the direct, indirect and constructive ownership
of Shares as the Managing Shareholder deems reasonably necessary to comply with
the provisions of the Code applicable to a REIT, to comply with the requirements
of any taxing authority or governmental agency or to determine any such
compliance.
These ownership limitations could have the effect of discouraging a
takeover or other transaction in which holders of some, or a majority, of the
Shares might receive a premium for their Shares over the then prevailing market
price or which such holders might believe to be otherwise in their best
interest.
CAPITALIZATION
The following table sets forth the capitalization of the Operating
Partnership on a pro forma basis, assuming the completion of the sale of a
minimum number of ________ Common Shares (_____ shares have been sold as of the
date of this Prospectus) and a maximum number of 2,500,000 Common Shares being
offered. As described above at "THE TRUST AND THE OPERATING PARTNERSHIP - The
Operating Partnership," the Trust will contribute the net proceeds from its Cash
Offering in exchange for a number of Units equivalent to the number of Common
Shares sold by the Trust in the Cash Offering. The subscription price for each
Common Share being offered in the Cash Offering is $10.00, and is payable in
full in cash upon subscription. For purposes of determining capitalization, such
amount has been calculated after deducting commissions and reimbursable offering
expenses, estimated to be approximately $1.00 per Common Share to be paid out of
the proceeds of the Cash Offering. The capitalization of the Operating
Partnership set forth below does not take into account any proposed acquisitions
of property interests by the Operating Partnership in exchange for Units
registered in connection with the Exchange Offering and the subsequent exchange
by Unitholders of such Units for Common Shares. The Operating Partnership will
not receive any cash proceeds from the Exchange Offering. The Original Investors
provided initial capitalization of the Operating Partnership in the amount of
$100,000 cash and other consideration. See "THE TRUST AND THE OPERATING
PARTNERSHIP - Formation Transactions."
<TABLE>
<CAPTION>
Minimum Common Shares Maximum Common Shares
Sold in Cash Offering (______) Sold in Cash Offering (2,500,000)
------------------------------ ---------------------------------
<S> <C> <C>
Capital Contribution by the Trust:
Units $_________ $ 22,500,000
--------- ------------
Total Capitalization $_________ $ 22,500,000
</TABLE>
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TERMS OF THE CASH OFFERING
The Trust is offering in the Cash Offering a maximum of 2,500,000 Common
Shares of beneficial interest in the Trust at $10.00 per Common Share
($25,000,000 in the aggregate). See "CAPITAL STOCK OF THE TRUST" and
"CAPITALIZATION." As of the date of this Prospectus, the Trust has sold _______
Common Shares in the Cash Offering (gross proceeds of $_________). All offering
proceeds received by the Trust have been released from the escrow account with
American Stock Transfer & Trust Company since the Trust has fulfilled the
$500,000 minimum gross proceeds escrow condition.
All of the Common Shares to be issued or sold by the Trust in the Cash
Offering will be tradable without restriction under the Securities Act, but will
be subject to certain restrictions designed to permit the Trust to qualify and
maintain its REIT status under the Code for federal income tax purposes. See
above at "THE TRUST AND THE OPERATING PARTNERSHIP - Ownership of the Trust and
the Operating Partnership" for a description of the ownership of the Common
Shares being offered hereby and the Units of limited partnership interest in the
Operating Partnership on a pro forma basis, assuming that all or a portion of
the Common Shares being offered Cash Offering are sold and the Exchange Offering
is completed in whole or in part.
After payment of commissions and reimbursable expenses related to the Cash
Offering, the remaining funds will be contributed to the Operating Partnership
to be used to fund investments or to pay expenses other than those associated
with the Cash Offering, as determined by the Trust in its discretion. See "THE
TRUST AND THE OPERATING PARTNERSHIP - The Operating Partnership."
The Common Shares will be offered and sold in the Cash Offering on a
non-exclusive best efforts basis through Sigma Financial Corporation (the
"Dealer Manager"), a Michigan corporation which is a member of the National
Association of Securities Dealers, Inc. ("NASD") and registered as a
broker-dealer with the Securities and Exchange Commission and with the
appropriate authority of each state where offers of the Common Shares will be
made. Sigma Financial Corporation, which is not affiliated with the Managing
Shareholder or any of its Affiliates, has acted as dealer manager for certain
private offerings of limited partner interests in real estate investment limited
partnerships sponsored by Affiliates of the Managing Shareholder and is expected
to act as dealer manager in certain future programs sponsored by Affiliates of
the Managing Shareholder. The Dealer Manager may select other NASD member firms
as co-manager or selected broker-dealers to participate in the Cash Offering.
Asset Allocation Securities Corp., Calton & Associates, Inc., Oakbrook
Investment Brokers Inc. and Strategic Assets, Inc., each a member of the NASD,
have entered into selling agreements with the Dealer Manager and will
participate in the sale of Common Shares in connection with the Cash Offering.
The Dealer Manager and participating broker-dealers have entered into an
Underwriting Agreement with the Trust pursuant to Appendix F of the Rules of
Fair Practice of the NASD. The Dealer Manager and participating broker-dealers
will receive selling commissions in an amount equal to 8% of the subscription
price for all Common Shares sold by them. The Dealer Manager may reallocate a
portion or all of its commission. The Trust reserves the right to waive the
payment of all or a part of a commission by one or more investors in the Cash
Offering, in which case the cost of the Common Shares acquired by such investors
will be less than the cost of equivalent Common Shares to an investor paying a
commission, provided, however, the Trust will exercise such waiver right on a
case by case basis according to the facts and circumstances involved.
In addition, the Dealer Manager and the participating broker-dealers will
be entitled to receive a warrant ("Warrant") to acquire a number of Common
Shares in an amount equal to 8.5% of the number of Common Shares sold in the
Cash Offering by the Dealer Manager or participating broker-dealers selected by
it, at a purchase price equal to $13.00 per Common Share. The Warrant will be
exercisable for a period of four years following the first anniversary of the
grant of the Warrant. For a period of six years following the grant of the
Warrant, any registered holder of the Warrant or Common Shares issued upon
exercise of the Warrant may request that the Trust include such securities as
well as any Common Shares underlying any unexercised portion of the Warrant in
any registration statement that the Trust determines to file under the
Securities Act. Such registration would be at the Trust's
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expense, excluding underwriter's compensation and expense allowance relating to
the requesting holder's securities to be registered and fees and expenses of
such holder's counsel.
Pursuant to the Underwriting Agreement, the Dealer Manager and
participating broker-dealers will not be obligated to purchase any Common
Shares, but will only be required to use their best efforts to sell Common
Shares to suitable offerees. The agreement may be terminated by either party in
certain circumstances. The Trust and the Dealer Manager have agreed to indemnify
each other against or to contribute to losses arising out of certain
liabilities, including liabilities arising under the Security Act. The Trust has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. Nevertheless, the parties may seek to enforce such
indemnification and rights to contribution which are expressly provided under
the agreement.
The Trust will reimburse the Managing Shareholder for distribution, due
diligence and organizational expenses incurred in connection with the formation
of the Trust and the Operating Partnership and with the Cash Offering, in an
amount not to exceed 1% of the aggregate subscription price paid for Common
Shares in the Cash Offering. To the extent the distribution, due diligence and
organizational expenses exceed 1% of gross proceeds of the Cash Offering, those
expenses will not be reimbursed. The Trust will also reimburse the Managing
Shareholder for legal, accounting and consulting fees and printing, filing,
recording, postage and other miscellaneous expenses incurred in connection with
the Cash Offering, in an amount not to exceed 1% of the aggregate subscription
price paid for Common Shares in the Cash Offering. Any such expenses of the
Managing Shareholder in excess of 1% of the aggregate subscription price paid
for Common Shares in the Cash Offering will be paid by the Managing Shareholder.
Such reimbursements will be payable out of the net proceeds of the Cash
Offering.
In addition, the Trust will reimburse the Managing Shareholder for expenses
incurred prior to and during the Cash Offering for investigating and evaluating
investment opportunities for the Trust and the Operating Partnership and
assisting them in effecting their investments, in an amount not to exceed 4% of
the aggregate subscription price paid for Common Shares in the Cash Offering.
Such reimbursements will be payable from available net proceeds of the Cash
Offering or as cash flow permits as determined by the Board of the Trust.
The termination date of the Cash Offering (the "Termination Date") is
scheduled to be December 31, 1998 or an earlier or later date (no later than
November 30, 1999) determined by the Managing Shareholder as specified below.
The Managing Shareholder may in its sole discretion terminate the Cash Offering
at any time before the scheduled Termination Date or extend the scheduled
Termination Date to any date or from date to date which is no later than the
earlier to occur of the date by which all 2,500,000 Common Shares being offered
have been sold and November 30, 1999.
The Managing Shareholder will have the right to withdraw the Offering of
Common Shares at any time prior to the Termination Date, in which case the Trust
will be immediately dissolved at the expense of the Managing Shareholder and all
subscription funds will be returned promptly to the subscribers. If the Managing
Shareholder withdraws the Offering, any person that has received fees or other
payments from the proceeds of the Cash Offering will be required to return such
fees or payments to the Trust upon the demand of the Managing Shareholder.
The Common Shares being sold in the Cash Offering have been registered
under the Securities Act of 1933, as amended (the "Securities Act"). The Trust
has not yet registered the Common Shares under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or applied for their listing on any
securities exchange. The Trust will apply for listing on the American Stock
Exchange ("AMEX") of the Common Shares being offered in the Cash Offering and of
the Common Shares into which Units to be offered in the Exchange Offering are
exchangeable and expects to qualify for AMEX listing and register such Common
Shares under the Securities Exchange Act of 1934, as amended, by the end of the
second quarter of 1999. However, there can be no assurance whether the Trust
will qualify for such listing on AMEX or any other stock exchange and, if so, of
the timing of the effectiveness of any such listing.
The eligibility for listing or quotation privileges in respect of a
particular national securities exchange or over-the-counter market is based on
several factors, including without limitation the number of shareholders and
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market makers, the bid price of the issuer's security, the number and market
value of outstanding securities owned by non-Affiliates of the issuer, total
assets of the issuer, and the amount of shareholders' equity in the issuer.
Although the Common Shares acquired by purchasers in the Cash Offering will be
freely tradable securities, there can be no assurance that an active trading
market will be established or maintained for the Common Shares. The Trust will
be required to file periodic reports (Form 10-KSB or Form 10-K annual reports,
Form 10-QSB or Form 10-Q quarterly reports and Form 8-KSB or Form 8-K current
reports) under the Exchange Act during 1998 and in any subsequent fiscal year in
which it has more than 300 Shareholders or it is otherwise required by
applicable law to do so. The Trust is expected to have at least 300 Shareholders
after the completion of the Cash Offering and accordingly would be required to
file such reports on a continuing basis.
AMENDMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIP AGREEMENTS
Following the completion of the Exchange Offering, each limited partner in
a Participating Exchange Partnership (as defined below) who elects not to accept
the Exchange Offering (individually, a "Non-participating Limited Partner" and
collectively, the "Non-participating Limited Partners") will retain his existing
interest in the partnership. The Non-participating Limited Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in their respective partnership agreement. See "COMPARISON
OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES." Although Non-participating Limited Partners in any
particular Participating Exchange Partnership together will hold no more than
10% of the limited partnership interest in the partnership, they will have
significant influence over certain activities of the partnership and the
Operating Partnership by virtue of certain partnership agreement amendments in
their favor which will be effected upon completion of the Exchange Offering. For
purposes of this Prospectus, the term "Participating Exchange Partnership,"
which will apply only if the Exchange Offering is completed in part or in full,
refers to each Exchange Partnership whose limited partners holding at least 90%
of all limited partnership interests therein elect to accept the Exchange
Offering, and the term "Participating Exchange Partnerships" refers to all such
partnerships as a group.
The purpose of the amendments is to permit Non-participating Limited
Partners in Participating Exchange Partnerships the opportunity to vote as a
class whether to approve certain actions which the Operating Partnership might
otherwise unilaterally cause a Participating Exchange Partnership to take by
exercising the Operating Partnership's voting rights in its capacity as a likely
large minority holder or majority holder of limited partnership interests in the
partnership following the Exchange Offering.
The partnership agreement of each Participating Exchange Partnership which
has one or more Non-participating Limited Partners following the Exchange
Offering will be amended so that such partners will be entitled to vote as a
class in respect of all matters as to which limited partners are entitled to
vote under the partnership agreement prior to the completion of the Exchange
Offering, with certain exceptions. In addition, the Trust and the Operating
Partnership have agreed that in respect of certain proposed actions, the
Participating Exchange Partnership must obtain the prior approval of
Non-participating Limited Partners holding a majority of the limited partnership
interests held by all Non-participating Limited Partners in the partnership. For
example, the partnership may not sell its existing property interest, acquire
any additional property interests or cease to exist without such approval.
As a condition of the admission of the Operating Partnership as a limited
partner to each Participating Exchange Partnership (by virtue of the completion
of exchanges in connection with the Exchange Offering), the Trust and the
Operating Partnership have agreed to amend the agreement of limited partnership
of each Participating Exchange Partnership (individually, the "Exchange
Partnership Agreement," and collectively, the "Exchange Partnership Agreements")
in the manner described below, and not to cause the further amendment of the
Exchange Partnership Agreement, as long as any Non-Participating Limited Partner
remains a limited partner in the partnership, without the prior approval of
either (i) all Non-Participating Limited Partners, if unanimous approval is
required under the Exchange Partnership Agreement prior to the Exchange
Offering, or (ii) Non-participating
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Limited Partners holding at least a majority of the limited partnership
interests held by all Non-participating Limited Partners in the partnership, if
the approval of a majority interest is required under the Exchange Partnership
Agreement prior to the Exchange Offering. The Exchange Partnership Agreements,
as amended, will define these special rights as granted to all limited partners
in the respective Participating Exchange Partnerships other than the Trust, the
Operating Partnership and any of their respective affiliates.
Set forth below are the specific Exchange Partnership Agreement amendments
that will be effected in respect of each Participating Exchange Partnership
which has one or more Non-participating Limited Partners immediately following
the completion of the Exchange Offering as to such partnership. For illustration
purposes, the section numbers set forth below refer to the Agreement of Limited
Partnership of GSU Stadium Student Apartments, Ltd., one of the Exchange
Partnerships whose limited partners are being offered the opportunity to
participate in the Exchange Offering. Section numbers may vary among the various
Exchange Partnership Agreements, and corresponding amendments will be made to
the corresponding sections of the partnership agreements of other applicable
Participating Exchange Partnerships.
1. The Exchange Partnership Agreement will be amended by adding the
following provision as Section 16.08 thereof:
"16.08 Certain Actions Requiring Approval of Unaffiliated Limited Partners
Without the prior approval of Limited Partners (other than Baron Capital
Trust, Baron Capital Properties, L.P. or any of their respective
affiliates) holding at least a majority of the Units then outstanding which
are held by all such Limited Partners:
(i) The Partnership will not cease to exist; will continue to own the
same property interest it owned prior to the completion of the offering of
Baron Capital Properties, L.P. to Limited Partners to issue limited
partnership interests therein in exchange for Units in the Partnership; and
will not acquire any additional property interests or sell any property
interests;
(ii) The Partnership will not reinvest its Distributable Cash [defined
in the respective Exchange Partnership Agreements to include all cash
received by the Partnership from any source, other than capital
contributions, loan proceeds and proceeds from the sale or refinancing of
property, less operating expenses, principal and interest payments on
indebtedness, capital expenditures, general partner fees and reasonable
cash reserves], but rather will continue to distribute such cash to the
Limited Partners in the Partnership in accordance with Section 10.02 of
this Agreement at least quarterly within 30 days following the end of each
fiscal quarter.
(iii) The Partnership will not reinvest net proceeds from the sale or
refinancing of the Partnership's Property, but rather will distribute such
proceeds to the Limited Partners in the Partnership in accordance with
Section 10.03 of this Agreement following repayment of all indebtedness
secured by such property."
As a result of this amendment, following the Exchange Offering, without the
majority approval of the Non-participating Limited Partners of the respective
Participating Exchange Partnership voting as a class, the partnership will not
be permitted to sell its existing property interest, acquire any additional
property interests, cease to exist, or modify the right of limited partners to
continue to receive 100% of the quarterly cash distributions and net proceeds
from the sale or refinancing of the partnership's property until they have
received the preferred amount specified in the respective Exchange Partnership
Agreement.
2. Section 12.03 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"Except for admission of Limited Partners to the Partnership in the manner
provided in this Article XII
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and Article XI, no one may subsequently be admitted to the Partnership as a
Limited Partner except upon amendment of this Agreement executed and
acknowledged by the General Partner and Limited Partners (other than Baron
Capital Trust, Baron Capital Properties, L.P. or any of their respective
affiliates) holding at least a majority of the Units then outstanding which
are held by all such Limited Partners."
As a result of this amendment, following the Exchange Offering, without the
majority approval of the Non-participating Limited Partners of the respective
Participating Exchange Partnership voting as a class, the partnership may not
admit any additional persons as limited partnerships other than pursuant to
Article XII (sets forth procedures for admission) and Article XI (pertaining to
transfers of limited partnership interests).
3. Section 12.05(c) of the Exchange Partnership Agreement will be deleted
and the following substituted therefor:
"(c) The General Partner may cause the Partnership to issue additional
Units of the same class as the Units initially offered to Investors in any
number to such persons and on such terms as the General Partner may
determine, provided, however, the Partnership will either sell those
additional Units (i) for a price at least equal to the net asset value per
Unit of the Partnership or (ii) for a price not less than the approximate
market value of the Units, provided that Limited Partners (other than Baron
Capital Trust, Baron Capital Properties, L.P. or any of their respective
affiliates) holding at least a majority of the Units then outstanding which
are held by all such Limited Partners have approved the sale in advance."
As a result of this amendment, the Corporate General Partner of each
Participating Exchange Partnership with one or more Non-participating Limited
Partners following the Exchange Offering, continues to have discretion to issue
additional units of limited partnership interest of the same class as units held
by the limited partners of the partnership and to determine the terms of such
issuance, provided, however, that the majority approval of Non-participating
Limited Partners voting as a class is required to approve such issuance in
advance where the selling price for such shares is not less than the approximate
market value of the units.
4. Section 15.02 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"If at any time the last remaining General Partner retires, resigns, is
removed or fails or ceases for any other reason to act as the General
Partner of the Partnership, the Limited Partners may, by a vote of Limited
Partners holding at least a majority of the Units then outstanding under
Section 22.03 within 90 days following such occurrence, elect to continue
the Partnership and elect one or more successor General Partners willing to
serve in such capacity to continue the business of the Partnership,
provided, however, such continuation and election of a successor General
Partner(s) may only be effected with the consent of Limited Partners (other
than Baron Capital Trust, Baron Capital Properties, L.P. or any of their
respective affiliates) holding at least a majority of the Units then
outstanding which are held by all such Limited Partners. In case the
Partnership is continued under the terms and conditions of this Section
15.02, the successor General Partner(s) will be permitted to purchase an
interest in the Partnership only in an amount, of a type and at a purchase
price consented to by Limited Partners (other than Baron Capital Trust,
Baron Capital Properties, L.P. or any of their respective affiliates)
holding at least a majority of the Units then outstanding which are held by
all such Limited Partners."
As a result of this amendment, if the last remaining general partner of any
Participating Exchange Partnership with one or more Non-participating Limited
Partners following the Exchange Offering (each of the Exchange Partnerships
currently have only one general partner) ceases to act as general partner, the
limited partners of the partnership (including the Operating Partnership and
Non-participating Limited Partners) holding at least a majority of the then
outstanding units of the partnership may elect to continue the partnership and
elect one or more new general partners as long as the same has been approved in
advance by Non-participating Limited Partners of the partnership holding a
majority of the then outstanding units of the partnership held by all
Non-participating Limited
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Partners. In addition, if the partnership is continued under the circumstances
described above, the new general partner(s) will be permitted to purchase an
interest in the partnership only on terms and conditions approved by a majority
vote of the Non-participating Limited Partners voting as a class.
5. Section 15.03 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"The General Partner may announce its intention to retire or resign its
position by written notice mailed or delivered to each of the Limited
Partners not less than 90 days prior to the effective date of such proposed
retirement or resignation. Such retirement or resignation will become
effective upon the date specified in such notification but only if Limited
Partners (other than Baron Capital Trust, Baron Capital Properties, L.P. or
any of their respective affiliates) holding at least a majority of the
Units then outstanding which are held by all such Limited Partners consent
in writing to said retirement or resignation. In the event of the
retirement or resignation of the General Partner, its interest in the
Partnership, as General Partner, will be automatically converted into a
Limited Partner interest except that it will be entitled to the same
allocations of income, gain, expense, loss, deduction and credit and the
same distributions to which it would otherwise have been entitled,
provided, however, it will not then be entitled to any uncollected fees
payable by the Partnership to the extent not accrued before the date of
resignation or retirement. The reformation or reorganization of the General
Partner, should the General Partner at any time be a corporation or
partnership, will not in and of itself constitute the retirement or
resignation of the General Partner for purposes of this Section 15.03."
As a result of this amendment, the Corporate General Partner of each
Participating Exchange Partnership with one or more Non-participating Limited
Partners following the Exchange Offering may retire or resign only with the
approval of Non-participating Limited Partners of the partnership holding a
majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners.
6. Section 15.05(d) of the Exchange Partnership Agreement will be deleted
and the following substituted therefor:
"Any contract referred to in subsection (c) above [i.e., agreements entered
into between the Partnership and any affiliates of the General Partner
(other that any agreements described in the offering documents relating to
the original private offering of the Partnership)] will require the
approval of Limited Partners (other than Baron Capital Trust, Baron Capital
Properties, L.P. or any of their respective affiliates) holding at least a
majority of the Units then outstanding which are held by all such Limited
Partners, exercising their voting rights pursuant to Section 22.03 below,
before it may be amended."
As a result of this amendment, any amendment of any agreement entered into
between any Participating Exchange Partnership and any affiliates of the
Corporate General Partner following the Exchange Offering (other than any
agreement described in the offering documents relating to the original private
offering of the partnership) will require the approval of Non-participating
Limited Partners of the partnership holding a majority of the then outstanding
units of the partnership held by all Non-participating Limited Partners.
7. Section 15.06(a) of the Exchange Partnership Agreement will be deleted
and the following substituted therefor:
"A General Partner may be removed only if (i) a court of law with competent
jurisdiction over the matter determines that the General Partner is not
performing its powers, duties and obligations in the best interests of the
Partnership, (ii) Limited Partners (other than Baron Capital Trust, Baron
Capital Properties, L.P. or any of their respective affiliates) holding at
least a majority of the Units then outstanding which are held by all such
Limited Partners consent to such removal and (iii) the General Partner is
given written notice of removal at least 30 days prior to the effective
date of such removal. Notwithstanding anything to the contrary contained
herein, a General Partner may not be removed by
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any action if any officer or Affiliate thereof has any personal liability
whatsoever on any debt of the Partnership unless and until such liability
has been extinguished."
Prior to the Exchange Offering, the Corporate General Partner of an
Exchange Partnership may be removed by limited partners of the partnership
holding at least a majority of the outstanding limited partnership interests in
the partnership if they determine that the general partner is not performing its
duties in the best interests of the partnership, they give the general partner
the requisite notice, and no officer or affiliate of the general partner has any
personal liability on any debt of the partnership. As a result of the foregoing
amendment, except as provided in the last sentence of Section 15.06(a), the
Corporate General Partner of a Participating Exchange Partnership with one or
more Non-participating Limited Partners following the Exchange Offering may be
removed only if a court of competent jurisdiction finds that the general partner
is not performing its duties in the best interest of the partnership, the
Non-participating Limited Partners voting as a class consent to such removal and
the general partner is given the requisite notice. The effect of this amendment
is that following the Exchange Offering, the Corporate General Partner of a
Participating Exchange Partnership with one or more Non-participating Limited
Partners may be removed only if the Non-participating Limited Partners initiate
an action in court to have the general partner removed and the court makes the
requisite finding.
8. Section 16.07 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"The General Partner will list the Partnership's Property for sale with a
nationally recognized real estate broker no later than June 30, 2004 and at
least every 18 months thereafter until the property is sold, at a price to
be determined by the General Partner. The affirmative vote of Limited
Partners (other than Baron Capital Trust, Baron Capital Properties, L.P. or
any of their respective affiliates) holding at least a majority of the
Units then outstanding which are held by all such Limited Partners shall be
required to effect a sale of all or substantially all of the Partnership's
Property."
As a result of this amendment, following the Exchange Offering, a
Participating Exchange Partnership with one or more Non-participating Limited
Partners may sell all or substantially all of its property only with the prior
approval of Non-participating Limited Partners of the partnership holding a
majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners.
9. Section 19.02 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"Within 90 days after the end of each Fiscal Year of the Partnership, the
General Partner will prepare and furnish to each of the Partners a
statement showing net income or loss of the Partnership for Federal income
tax purposes and the share thereof allocable to each Partner and any
additional information required under Section 15.05(c). Each Limited
Partner will be provided annually with financial statements, including a
balance sheet and related statements of income and retained earnings and
changes in financial position. On the written request of Limited Partners
(other than Baron Capital Trust, Baron Capital Properties, L.P. or any of
their respective affiliates) holding at least a majority of the Units then
outstanding which are held by all such Limited Partners, the General
Partner will, at the Partnership's request and expense, have such financial
statements audited by an independent public accountant in accordance with
generally acceptable auditing standards and will promptly send a copy of
such audited statements and report of the accountant to each Limited
Partner."
As a result of this amendment, following the Exchange Offering,
Non-participating Limited Partners of a Participating Exchange Partnership
holding a majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited.
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10. The first sentence of Section 20.01 of the Exchange Partnership
Agreement will be deleted and the following substituted therefor:
"The occurrence of any one of the following events will cause the
dissolution of the Partnership:
(1) The expiration of the term of this Agreement.
(2) The vote of Limited Partners holding at least a majority of the
Units then outstanding to dissolve the Partnership, and in
addition the consent to such dissolution of Limited Partners
(other than Baron Capital Trust, Baron Capital Properties, L.P.
or any of their respective affiliates) holding at least a
majority of the Units then outstanding which are held by all such
Limited Partners.
(3) The death, resignation, retirement, dissolution, removal,
bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetency of the last remaining General Partner
then in office and the refusal of any successor General Partner
to replace it, unless Limited Partners holding at least a
majority of the Units then outstanding, as provided in Section
15.02 of this Agreement, vote to continue the Partnership and
elect one or more successor General Partners willing to serve in
such capacity to continue the business of the Partnership and in
addition Limited Partners (other than Baron Capital Trust, Baron
Capital Properties, L.P. or any of their respective affiliates)
holding at least a majority of the Units then outstanding which
are held by all such Limited Partners consent to such
continuation, election of such General Partner(s) and the amount,
type and purchase price of any interest in the Partnership such
successor General Partner(s) may acquire in connection therewith.
(4) The sale of all or substantially all of the Partnership's
Property.
(5) The occurrence of any other event which, by law, would require
the Partnership to be dissolved."
As a result of this amendment, following the Exchange Offering, a
Participating Exchange Partnership with one or more Non-participating Limited
Partners may be dissolved by the vote of at least a majority of the outstanding
limited partnership interests in the partnership, but only with the approval of
Non-participating Limited Partners holding a majority of the then outstanding
units of the partnership held by all Non-participating Limited Partners. In
addition, the partnership will be dissolved if the last remaining general
partner of the partnership (each of the Exchange Partnerships currently have
only one general partner) ceases to act as general partner, unless the limited
partners of the partnership (including the Operating Partnership and
Non-participating Limited Partners) holding at least a majority of the then
outstanding units of the partnership elect to continue the partnership and elect
a new general partner and such continuation, election of such general partner(s)
and the amount, type and purchase price of any interest in the partnership such
successor general partner(s) may acquire in connection therewith have been
approved in advance by Non-participating Limited Partners of the partnership
holding a majority of the then outstanding units of the partnership held by all
Non-participating Limited Partners.
11. The third sentence of the second paragraph of Section 20.02 of the
Exchange Partnership Agreement will be deleted and the following substituted
therefor:
"The Limited Partners may, by exercising their voting rights under Section
22.03, appoint such a liquidating receiver or trustee to replace the
General Partner or the receiver or trustee appointed by the General Partner
for the purpose of liquidating the assets of the Partnership, provided,
however, such appointment must be consented to by Limited Partners (other
than Baron Capital Trust, Baron Capital Properties, L.P. or any of their
respective affiliates) holding at least a majority of the Units then
outstanding which are held by all such Limited Partners; any such
appointment by the Limited Partners
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will supersede the designation herein of the General Partner or such
receiver or trustee appointed by the General Partner."
Prior to the Exchange Offering, limited partners of each Exchange
Partnership, by a vote of at least a majority of the outstanding limited
partnership interests in the partnership, had the right to appoint a liquidating
receiver or trustee to replace the Corporate General Partner or the receiver or
trustee appointed by the general partner in connection with the liquidation of
the partnership. As a result of this amendment, in respect of each Participating
Exchange Partnership with one or more Non-participating Limited Partners
following the Exchange Offering, such replacement also requires the approval of
Non-participating Limited Partners of the partnership holding a majority of the
then outstanding units of the partnership held by all Non-participating Limited
Partners.
12. Section 21.01 of the Exchange Partnership Agreement will be deleted and
the following substituted therefor:
"No alterations, modifications, amendments or changes of this Agreement
will be effective or binding upon the parties unless the same have been
adopted by Limited Partners exercising their voting rights pursuant to
Section 22.03 and the same has been consented to by Limited Partners (other
than Baron Capital Trust, Baron Capital Properties, L.P. or any of their
respective affiliates) holding at least a majority of the Units then
outstanding which are held by all such Limited Partners, except (i) with
respect to one or more amendments admitting Limited Partners, which may be
effected in the manner provided in Article XII of this Agreement, (ii) that
no Partner's duties or liabilities may be increased and no Partner's
interest in the capital, profits, Distributable Cash or Net Proceeds of the
Partnership or voting rights may be reduced, without his written consent;
and (iii) that this Agreement may be amended by the General Partner without
notice to or the approval of the Limited Partners, from time to time for
the following purposes: (1) to cure any ambiguity, formal defect or
omission or to correct or supplement any provision herein that may be
inconsistent with any other provision contained herein or in the Memorandum
or to effect any amendment without notice to or approval by Limited
Partners, as specified in other provisions of this Agreement; (2) to make
such other changes or provisions in regard to matters or questions arising
under this Agreement that will not materially and adversely affect the
interest of any Limited Partner; (3) to otherwise equitably resolve issues
arising under the Memorandum or this Agreement so long as similarly
situated Limited Partners are not treated differently; (4) to maintain the
federal tax status of the Partnership and any of its Limited Partners (so
long as no Limited Partner's liability is materially increased without his
consent) or as provided in Section 10.4(c); and (5) to comply with law."
As a result of this amendment, following the Exchange Offering and except
in certain circumstances specified in Section 21.02, the partnership agreement
of a Participating Exchange Partnership with one or more Non-participating
Limited Partners may be amended only with the approval of both (i) limited
partners holding at least a majority of the outstanding limited partnership
interests in the partnership and (ii) Non-participating Limited Partners of the
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners.
13. The first sentence of Section 22.02 of the Exchange Partnership
Agreement will be deleted and the following substituted therefor:
"The General Partner, or Limited Partners (other than Baron Capital Trust,
Baron Capital Properties, L.P. or any of their respective affiliates)
holding at least a majority of the Units then outstanding which are held by
all such Limited Partners, may convene a meeting of the Partnership for any
matter on which the Partners may vote as provided in this Agreement."
As a result of this amendment, following the Exchange Offering in respect
of each Participating Exchange Partnership with one or more Non-participating
Limited Partners, the Corporate General Partner or Non-participating Limited
Partners holding a majority of the then outstanding units held by all
Non-participating Limited
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Partners in the partnership, may call a meeting of the partnership to act on any
matter upon which the limited partners of the partnership are permitted to act.
14. The Corporate General Partner of each Exchange Partnership is a
single-purpose corporation whose stock is owned entirely by Gregory K. McGrath,
a founder of the Trust and the Operating Partnership. In connection with the
formation of the Trust and the Operating Partnership, Mr. McGrath agreed to
waive fees payable under the Exchange Partnership Agreement to the Corporate
General Partner of each Participating Exchange Partnership following the
Exchange Offering. The fees waived include, without limitation, annual
administrative fees, any real estate commission that might be earned in
connection with the sale of a partnership's property and any fees to cover
distribution, due diligence and organizational expenses and legal, accounting,
filing, recording and other miscellaneous expenses in connection with additional
sales of units of limited partnership interest pursuant to Section 12.05 of the
Exchange Partnership Agreement. Moreover, since all the Exchange Partnerships
assumed the property management function in respect of their properties in June
1998, no affiliate of any Corporate General Partner will earn a fee for
performing property management services. Accordingly, the Exchange Partnership
Agreements will be amended to delete the payment of the foregoing fees. For
example, Sections 15.04(a)(i) (offering costs relating to future offerings of
limited partnership interests), 15.04(a)(ii) (property management fee),
15.04(a)(iii) (real estate commissions), 15.04(b) (acquisition fee), and
15.04(c) (administrative fee) will be deleted.
As a result of the partnership agreement amendments described above,
Non-participating Limited Partners in each Participating Exchange Partnership
will have the ability to veto certain actions of the partnership which might be
in the best interest of the partnership, the Operating Partnership, the Trust or
the holders of securities of the Trust and the Operating Partnership. There can
be no assurance that Non-participating Limited Partners will not use such voting
power in a manner which may have an adverse effect on the operations of the
Trust or the Operating Partnership. See "RISK FACTORS - Non-participating
Exchange Limited Partners in Participating Exchange Partnerships Will Have
Significant Influence over Certain Actions of the Partnerships."
As described above at "THE EXCHANGE OFFERING," in respect of each
Participating Exchange Partnership, Mr. McGrath (the sole stockholder, director
and executive officer of each such partnership) will provide a management proxy
to the Board of the Trust or the Operating Partnership will acquire from Mr.
McGrath for a nominal amount the outstanding common stock of the Corporate
General Partner.
OTHER INFORMATION
General
The Operating Partnership and the Trust undertake to make available to each
Offeree or his representative, or both, during the course of the Exchange
Offering and prior to the Offeree's acceptance of the Exchange Offering, the
opportunity to ask questions of and receive answers from the Operating
Partnership, the Trust or any person acting on their respective behalf relating
to the terms and conditions of the Exchange Offering and the Cash Offering and
to obtain any additional information necessary to verify the accuracy of
information made available to such Offeree.
Prior to making an investment decision respecting the Exchange Offering, an
Offeree should carefully review and consider this entire Prospectus and all
Exhibits hereto. Offerees are urged to make arrangements with the Trust to
inspect any books, records, contracts, or instruments referred to in this
Prospectus and other data relating thereto. The Trust is available to discuss
with Offerees any matter set forth in this Prospectus or any other matter
relating to the Units and the Common Shares into which they are exchangeable,
subject to certain conditions, so that Offerees and their advisors, if any, may
have available to them all information, financial and otherwise, necessary to
formulate a well-informed investment decision.
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Authorized Sales Material
Sales material may be used in connection with the Exchange Offering only
when accompanied or preceded by the delivery of this Prospectus. Only sales
material that indicates that it is distributed by the Trust, the Operating
Partnership or the Managing Shareholder may be distributed to Offerees.
Currently, the Operating Partnership intends to distribute to Offerees (i) a
letter transmitting this Prospectus and any amendments or supplements thereto
which summarizes this Exchange Offering and instructs the Offeree how to proceed
if he wishes to accept the offering and (ii) possibly a sales brochure or other
written or graphic communications depicting certain information regarding the
Operating Partnership, the Trust, the Managing Shareholder and the residential
real estate industry. All such additional sales material will be signed by or
otherwise identified as authorized by the Trust, the Operating Partnership or
the Managing Shareholder. Any other sales material or information has not been
authorized for use by the Trust, the Operating Partnership or the Managing
Shareholder and must be disregarded by Offerees.
In certain jurisdictions, some or all of this sales material may not be
distributed pursuant to securities law requirements, and in all jurisdictions,
this Exchange Offering is made only by this Prospectus and accompanying
materials.
All authorized sales material will be consistent with this Prospectus, as
supplemented. Nevertheless, sales material by its nature does not purport to be
a complete description of the Exchange Offering and Offerees must review this
Prospectus and supplements carefully for a complete description of the Exchange
Offering. Authorized sales material should not be considered to be the basis for
the Exchange Offering of Units or an Offeree=s decision to accept the Exchange
Offering. Sales material is not a part of this Prospectus and is not
incorporated by reference into this Prospectus unless expressly stated in this
Prospectus or supplements hereto.
Financial Statements
The audited balance sheets of the Trust and the Operating Partnership as of
February 3, 1998 and the audited balance sheet of the Managing Shareholder as of
February 28, 1998 are set forth in Exhibit C hereto.
The statements of revenues and certain expenses for each of the 14 Exchange
Properties described in this Prospectus at "INITIAL REAL ESTATE INVESTMENTS The
Exchange Properties," which are the initial acquisition targets in the Exchange
Offering, and the combined statement of revenues and certain expenses for such
properties for the years ended December 31, 1996 and December 31, 1997 (audited)
and for the five-month period ended May 31, 1998 (unaudited) are set forth in
Exhibit D hereto. The statements of revenues and certain expenses for each of
the two Acquired Properties described in this Prospectus at "INITIAL REAL ESTATE
INVESTMENTS - The Acquired Properties," which the Operating Partnership has
acquired as of the date of this Prospectus, and the combined statement of
revenues and certain expenses for such properties for the years ended December
31, 1996 and December 31, 1997 (audited) and for the five-month period ended May
31, 1998 (unaudited) are set forth in Exhibit E hereto.
LITIGATION
There are no pending legal proceedings to which the Trust, the Operating
Partnership or the Managing Shareholder is a party which are material to the
operations of the Trust and the Operating Partnership, and the Trust and the
Managing Shareholder have no knowledge that any such legal proceedings are
contemplated or threatened by any third party.
EXPERTS
The audited balance sheets of the Trust and the Operating Partnership as of
February 3, 1998 and the audited balance sheet of the Managing Shareholder as of
February 28, 1998 have been included herein and in the Registration Statement in
reliance upon the report of Rachlin Cohen & Holtz, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in auditing and accounting.
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The statements of revenues and certain expenses for the 14 Exchange
Properties and the combined statement of revenues and certain expenses for such
properties for the years ended December 31, 1996 and December 31, 1997 (set
forth in Exhibit D hereto) and the statements of revenues and certain expenses
for the two Acquired Properties for the same periods (set forth in Exhibit E
hereto) have been included herein and in the Registration Statement in reliance
upon the reports of Elroy D. Miedema, an independent certified public
accountant, appearing herein, and upon the authority of said independent
certified public accountant as an expert in accounting and auditing.
LEGAL MATTERS
The authority of the Operating Partnership to issue Units offered hereby is
being passed upon for the Trust by Schoeman, Marsh & Updike, LLP, New York, New
York, counsel to the Trust. Copies of the draft opinion letter of counsel as to
the Operating Partnership's authority to issue the Units may be obtained by
writing to the Trust. The firm will be partially compensated with Units with an
initial assigned value of up to approximately $150,000 for legal services
performed for the Trust and the Operating Partnership in connection with the
Cash Offering and the Exchange Offering. Such Units will be paid out of Units
issued to one of the founders of the Trust and the Operating Partnership in
connection with their formation. The actual number thereof will depend upon the
number of Common Shares to be sold in the Cash Offering and the number of Units
to be issued in the Exchange Offering.
Keating, Muething & Klekamp, P.L.L., Cincinnati, Ohio, has passed on
certain tax matters as described under "FEDERAL INCOME TAX CONSIDERATIONS." The
tax opinion is not included as an appendix to this Prospectus, but has been
filed with the Commission as an exhibit to the Operating Partnership's
registration statement. Upon receipt of a written request made to Nikki Vearil
at Baron Capital Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, by
an Offeree or his representative who has been so designated in writing, the
Operating Partnership will transmit promptly a copy of the tax opinion, without
charge. Counsel to the Trust and the Managing Shareholder will not represent or
advise any Offeree in connection with the Exchange Offering. THEREFORE, EACH
OFFEREE SHOULD CONSULT THE INVESTOR'S OWN LEGAL, TAX AND INVESTMENT COUNSEL.
The representation of counsel to the Trust has been limited to matters
specifically addressed to it. No Offeree should assume that counsel to the Trust
has in any manner investigated the merits of an investment in the Units or the
Common Shares into which the Units are exchangeable, subject to certain
conditions, or undertaken any role other than assisting in, and reviewing items
specifically referred to it with regard to, the preparation of this Prospectus
and the issuance of the opinions referred to above. In assisting in the
preparation of this Prospectus, counsel to the Trust has relied upon the
representations and statements of the Trust and the Managing Shareholder as to
facts regarding the Operating Partnership, the Trust and the Managing
Shareholder and their respective affiliates and the proposed activities and has
not independently verified such representations and statements.
EXPENSES OF THE EXCHANGE OFFERING
All legal, accounting, due diligence and other expenses incurred by each of
the Exchange Partnerships and the Operating Partnership incident to the Exchange
Offering will be paid by the party incurring such expense, except that all of
the expenses incurred in connection with the preparation, filing, printing and
distributing of the Registration Statement and the Prospectus, and completion of
the transactions described therein (estimated to be approximately $440,000) will
be paid by the Operating Partnership out of the net proceeds of the Trust's Cash
Offering and net available cash flow. No special fees or commissions were or
will be paid to the Managing Shareholder, any Corporate General Partner of an
Exchange Partnership, or any of their respective affiliates, in connection with
the Exchange Offer. As of the date of this Prospectus, in connection with the
Exchange Offering, each Exchange Partnership has paid out of available cash flow
an estimated amount in the range of $26,000 to $38,000 of expenses. The Exchange
Partnerships are not expected to incur any significant additional expenses
related to the offering.
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Set forth below is an itemized list of all expenses incurred or estimated
to be incurred in connection with the Exchange Offering and the persons
responsible for paying such expenses:
<TABLE>
<CAPTION>
Actual Amount
Type of Expense to Date or Estimate Party Responsible for Paying
- --------------- ------------------- ----------------------------
<S> <C> <C> <C>
Commission Registration Filing Fees $ 7,576 Operating Partnership
State Registration Filing Fees $ 50,000 (est.) Operating Partnership
Legal Fees, including preparation of offering
documents, opinions and state registration filings $ 355,000 (est.) Operating Partnership
Printing, Mailing and Solicitation Expenses $ 25,000 (est.) Operating Partnership
------------------------
Total $ 437,576 (est.)
</TABLE>
The Operating Partnership may elect to reimburse brokers, fiduciaries,
custodians and other nominees for reasonable out-of-pocket expenses incurred in
sending this Prospectus and other materials to, and obtaining instructions
relating to such materials from, Offerees. Any broker-dealer who assists the
Operating Partnership in consummating the Exchange Offering with individual
Offerees who accept the offering will be paid a commission equal to a number of
unregistered Common Shares of the Trust having a value equal to 5% of the
initial value assigned to the Operating Partnership Units exchanged in the
particular transactions.
ADDITIONAL INFORMATION
Prior to the commencement of the Cash Offering and the Exchange Offering,
neither the Trust nor the Operating Partnership was a reporting company under
the Securities Exchange Act of 1934, as amended. The Operating Partnership has
filed with the Commission a Registration Statement (of which this Prospectus is
a part) on Form S-4 under the Securities Act with respect to the Operating
Partnership Units being offered in this Exchange Offering. The Trust has filed
with the Commission a Registration Statement (of which a separate Prospectus is
a part) on Form SB-2 under the Securities Act with respect to the Common Shares
offered in the Cash Offering. The prospectuses do not contain all the
information set forth in the respective Registration Statement, certain portions
of which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in the prospectuses as to the content of any
contract or other document are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the respective Registration Statement, each such statement being
qualified in all respects by such reference and the exhibits and schedules
hereto and to the prospectus being used in the Cash Offering. For further
information regarding the Operating Partnership and the Units being offered
hereby and the Trust and the Common Shares being offered in the Cash Offering,
reference is hereby made to the respective Registration Statement and such
exhibits and schedules.
The Registration Statements and exhibits and schedules forming a part
thereof filed by the Operating Partnership and the Trust with the Commission can
be inspected and copies obtained from the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: 7 World Trade Center, 13th Floor, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
The Trust and the Operating Partnership will furnish their Shareholders and
Unitholders with annual reports containing financial statements audited by its
independent certified public accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
183
<PAGE>
GLOSSARY
Whenever used in this Prospectus, the following terms shall have the
meanings set forth below, unless the context indicates otherwise. The singular
shall include the plural and the masculine gender shall include the feminine,
and vice versa, as the context requires. In addition, the term "person" and its
pronouns "he," "she," "him," and "her" as used in this Prospectus shall include
natural persons of the masculine and feminine gender and entities, including,
without limitation, corporations, partnerships, limited liability companies and
trusts, unless the context indicates otherwise.
"Acquired Properties" refers to two residential apartment properties
referred to as Heatherwood Apartments - Phase I and Crystal Court Apartments
Phase II which are located in Kissimmee and Lakeland, Florida, respectively. In
June and July, 1998, respectively, the Operating Partnership acquired beneficial
ownership of the properties. See "INITIAL REAL ESTATE INVESTMENTS - The Acquired
Properties."
"Affiliate" An "affiliate" of, or person "affiliated" with, a specified
person includes any of the following:
(a) Any person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
(b) Any person directly or indirectly owning, controlling or holding, with
power to vote 10% or more of the outstanding voting securities of such other
person.
(c) Any person 10% or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held, with power to vote, by such
other person.
(d) Any executive officer, director, trustee or general partner of such
other person.
(e) Any legal entity for which such person acts as an executive officer,
director, trustee or general partner.
"AMEX" refers to the American Stock Exchange or any successor exchange.
"Baron Advisors" means Baron Advisors, Inc., a Delaware corporation which
is the initial Managing Shareholder of the Trust.
"Baron Properties" means Baron Capital Properties, Inc., a Delaware
corporation which is the initial Corporate Trustee of the Trust, with its
principal place of business located at 1105 North Market Street, Wilmington,
Delaware 19899.
"Board" refers to the Managing Shareholder and the Independent Trustees,
acting together as the initial Board of the Trust in accordance with the terms
of the Declaration, and their successors in such capacity.
"Cash Offering" refers to the offering by the Trust to the public of
2,500,000 Common Shares in the Trust for a purchase price of $10 per share
pursuant to the Trust's Prospectus dated May 15, 1998, as amended August 11,
1998, as it may be further amended or supplemented from time to time.
"Certificate" means the Certificate of Limited Partnership of the
Partnership, as amended from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any rules and regulations promulgated thereunder.
"Commission" means the Securities and Exchange Commission.
184
<PAGE>
"Common Share" means a beneficial interest in the Trust designated as a
Common Share by the Trust in accordance with Sections 1.6 and 2.1 of the
Declaration of Trust.
"Corporate General Partner" means the respective corporation which is the
sole general partner of one of the Exchange Partnerships whose limited partners
will be offered the opportunity to participate in the Exchange Offering. All
such corporate general partners, which are controlled by Gregory K. McGrath, one
of the founders of the Trust and the Operating Partnership, are referred to
herein collectively as the "Corporate General Partners."
"Corporate Trustee" means Baron Capital Properties, Inc., a Delaware
corporation which is the trustee of the Trust under the Declaration, and its
successors. The Corporate Trustee acts as legal holder of the Trust Property,
subject to the terms of the Declaration. Its address is 1105 North Market
Street, Wilmington, Delaware 19899.
"Dealer Manager" refers to Sigma Financial Corporation, a Michigan
corporation which is the broker-dealer selected by the Managing Shareholder to
be the dealer manager of the Cash Offering.
"Declaration" or "Declaration of Trust" means the Amended and Restated
Declaration of Trust for the Trust made as of August 11, 1998, which establishes
the Trust and the rights and obligations of the Managing Shareholder, the
Trustees, other members of the Board of the Trust and the Shareholders.
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act,
as amended.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" refers to the Securities Exchange Act of 1934, as amended,
and any rules and regulations promulgated thereunder.
"Exchange Limited Partners" refers to the individual limited partners to
which the Operating Partnership will make the Exchange Offering in connection
with the initial transactions thereunder, including the limited partners in 14
real estate limited partnerships managed by Affiliates of the Managing
Partnership. See "PROPOSED INITIAL REAL ESTATE INVESTMENTS."
"Exchange Offering" refers to the exchange offering, being made pursuant to
this Prospectus, under which the Operating Partnership will offer to issue
registered Units in exchange for limited partnership interests in real estate
limited partnerships which own direct or indirect interests in residential
apartment properties. See "SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP"
and "THE EXCHANGE OFFERING."
"Exchange Limited Partners" refers to the limited partners of the 14
Exchange Partnerships, each of whom is being offered the opportunity to
participate in the Exchange Offering.
"Exchange Partnerships" refers to the 14 real estate limited partnerships
whose limited partners will be offered the opportunity by the Operating
Partnership to exchange their limited partnership interests in such partnerships
for Operating Partnership Units. Each Exchange Partnership owns a direct or
indirect interest in residential apartment property and is managed by a
Corporate General Partner which is an Affiliate of the Managing Partnership. In
the Exchange Offering, the Operating Partnership will acquire beneficial
ownership of all or a substantial majority of the underlying property interests
of each Participating Exchange Partnership. See "INITIAL REAL ESTATE
INVESTMENTS."
"Exchange Properties" refers to the 14 residential apartment properties
which are the initial targets of the Exchange Offering. In the offering, the
Operating Partnership will acquire an indirect equity or mortgage interest in
all or a portion of the Exchange Properties in the Exchange Offering by
acquiring limited partnership interests in each Participating Exchange
Partnership which owns a direct or indirect interest in an Exchange Property.
See "INITIAL REAL ESTATE INVESTMENTS."
185
<PAGE>
"First Mortgage" refers to a Mortgage which takes priority or precedence
over liens of Junior Mortgages on a particular property.
"First Mortgage Loan" means a Mortgage Loan secured or collateralized by a
First Mortgage.
"Fiscal Period" means a quarter ending on March 31, June 30, September 30
or December 31 of each Fiscal Year.
"Fiscal Year" means a year ending on December 31. The first Fiscal Year of
the Trust and the Operating Partnership may begin after January 1 and
consequently have a duration of less than 12 months. The last Fiscal Year of the
Trust and the Operating Partnership may end before December 31 and consequently
have a duration of less than 12 months.
"Independent Trustee" means a Trustee of the Trust who meets certain
qualifications described herein at "MANAGEMENT - The Board of the Trust and
Trustees - Independent Trustees" and who becomes an Independent Trustee of the
Trust under the terms of the Declaration and serves on the Board of the Trust.
See Section 7.5 of Declaration of Trust. All Independent Trustees are referred
to herein collectively as the "Independent Trustees."
"IRAs" means individual retirement accounts.
"IRS" or "Service" means the Internal Revenue Service.
"Junior Mortgage" refers to a Mortgage which (i) has the same priority or
precedence over charges or encumbrances upon real property as that required for
a First Mortgage except that it is subject to the priority of one or more
Mortgages and (ii) must be satisfied before such other charges or liens (other
than prior Mortgages) are entitled to participate in the proceeds of any sale.
"Junior Mortgage Loan" refers to a Mortgage Loan secured or collateralized
by a Junior Mortgage.
"Limited Partner" or "Unitholder" means an owner of Units in the Operating
Partnership (which will initially include the Trust and Offerees who accept the
Exchange Offering). All Limited Partners and Unitholders are referred to herein
collectively as the "Limited Partners" or "Unitholders."
"Managing Shareholder" refers to Baron Advisors, Inc. or such substitute or
different Managing Shareholder as may subsequently be admitted to the Trust
pursuant to the terms of the Declaration of Trust, which will have all of the
powers and obligations of the Managing Shareholder to operate the Trust as
described in this Prospectus.
"Managing Person" means any of the following: (a) Trust or Operating
Partnership officers, agents, or Affiliates; the Managing Shareholder; a
Trustee; any other member of the Board; Affiliates of the Managing Shareholder,
a Trustee and any other member of the Board and (b) any directors, officers or
agents of any organizations named in (a) above when acting for the Managing
Shareholder, a Trustee, any other member of the Board or any of their respective
Affiliates on behalf of the Trust or the Operating Partnership.
"Mortgage" refers to a mortgage, deed of trust or other security interest
in real property or in rights or interests in real property.
"Mortgage Loan" refers to a note, bond or other evidence of indebtedness or
obligation which is secured or collateralized by a Mortgage.
"NASD" refers to the National Association of Securities Dealers, Inc.
"1997 Act" refers to the Taxpayer Relief Bill of 1997.
186
<PAGE>
"Non-participating Limited Partners", which term applies only if the
Exchange Offering is completed (see "THE EXCHANGE OFFERING"), refers to limited
partners in each Participating Exchange Partnership who elect not to accept the
Exchange Offering and instead retain their interest in the partnership on
substantially the same terms and conditions as their original investment in the
partnership.
"Operating Partnership" means Baron Capital Properties, L.P., a Delaware
limited partnership which is the issuer of Units being offered in connection
with the Exchange Offering and of which the Trust is the General Partner and a
limited partner. The Trust's interests in residential apartment properties to be
acquired will be held and real estate operations will be conducted by the
Operating Partnership.
"Operating Partnership Agreement" means the Agreement of Limited
Partnership of Baron Capital Properties, L.P. dated as of May 15, 1998, as
amended August 11, 1998.
"Operating Partnership Property" means all property owned or acquired by
the Operating Partnership.
"Operating Partnership Units" or "Units" refer to units of limited
partnership interest in the Operating Partnership, including those which it will
offer to issue in the Exchange Offering.
"Original Investors" refers to Gregory K. McGrath and Robert S. Geiger, the
founders of the Trust and the Operating Partnership. See "THE TRUST AND THE
OPERATING PARTNERSHIP - Formation Transactions."
"Participating Exchange Partnership", which term applies only if the
Exchange Offering is completed (see "THE EXCHANGE OFFERING"), refers to each
Exchange Partnership whose Exchange Limited Partners holding at least 90% of the
limited partnership interests therein elect to accept the Exchange Offering. The
offering will not be completed as to any Exchange Partnership whatsoever unless
a sufficient number of offerees accept the offering such that the offering
involves the issuance of Operating Partnership Units with an initial value of at
least $6,000,000. All Participating Exchange Partnerships are referred to herein
collectively as the "Participating Exchange Partnerships."
"Person" refers to any natural person, partnership, corporation,
association, trust, limited liability company or other legal entity.
"Plans" means employee benefit plans and IRAs.
"Preferred Share" refers to a share of beneficial interest with such
preferences and rights (in relation to other Shares authorized and issued by the
Trust) as the Managing Shareholder may designate under Section 2.1(c) of the
Declaration of Trust for sale or issuance subsequent to completion of the Cash
Offering.
"Property" means all real or personal property owned or acquired by the
Trust and the Operataing Partnership, which is expected to include but not be
limited to (i) the land, buildings and improvements comprising one or more
existing residential apartment properties in which the Trust and the Operating
Partnership may make an equity investment, and (ii) their respective rights in
connection with Mortgage Loans they may provide or acquire which are secured by
Mortgages on the land, buildings and improvements comprising residential
apartment properties. See "INVESTMENT OBJECTIVES AND POLICIES."
"Prospectus" means this Prospectus of the Operating Partnership dated
September __, 1998, as the same may be amended or supplemented from time to
time.
"Regulations" means the applicable Treasury Regulations promulgated or
proposed under the Code.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
187
<PAGE>
"Second Mortgage" means a Mortgage which (i) has the same priority or
precedence over charges or encumbrances upon real property as that required for
a First Mortgage except that it is subject to the priority of a First Mortgage
and (ii) must be satisfied before such other charges or encumbrances (other than
the First Mortgage) are entitled to participate in the proceeds of any sale.
"Second Mortgage Loan" means a Mortgage Loan secured or collateralized by a
Second Mortgage.
"Securities Act" means the Securities Act of 1933, as amended, and any
rules and regulations promulgated thereunder.
"Senior Mortgage" refers to a Mortgage which takes priority or precedence
over liens of Junior Mortgages on a particular property.
"Senior Mortgage Loan" means a Mortgage Loan secured or collateralized by a
Senior Mortgage.
"Service" or "IRS" means the Internal Revenue Service.
"Share" means a beneficial interest in the Trust which is either a Common
Share or a Preferred Share authorized for issuance and designated as such by the
Managing Shareholder in accordance with the Declaration of Trust.
"Shareholder" means an owner of Shares in the Trust.
"Trust" means Baron Capital Trust, a Delaware business trust created by the
Corporate Trustee and having a principal office at 7826 Cooper Road, Cincinnati,
Ohio 45242. The Trust is the General Partner and a limited partner of the
Operating Partnership and the issuer of the Common Shares being offered in the
Cash Offering.
"Trustee" means a person serving as a Corporate Trustee or an Independent
Trustee of the Trust. All Trustees are referred to herein collectively as the
"Trustees."
"Trust Management Agreement" means the Trust Management Agreement dated as
of May 15, 1998, as amended August 11, 1998, between the Trust and the Managing
Shareholder, under which the Managing Shareholder will perform certain
management, administrative services and investment advisory services for the
Trust.
"Trust Property" means all property owned or acquired by the Trust or on
its behalf as part of the trust estate established under the Declaration of
Trust.
"Unitholder" or "Limited Partner" means an owner of Units in the Operating
Partnership (which will initially include the Trust and Offerees of
Participating Exchange Partnerships who accept the Exchange Offering). All
Unitholders and Limited Partners are referred to herein collectively as the
"Unitholders" or "Limited Partners."
"Units" or "Operating Partnership Units" refer to units of limited
partnership interest in the Operating Partnership which it is offering to issue
in the Exchange Offering.
188
<PAGE>
EXHIBIT A
PRIOR PERFORMANCE OF AFFILIATES
OF
MANAGING SHAREHOLDER
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS
The following table summarizes the experience of Affiliates of the Managing
Shareholder of the Trust, Baron Advisors, Inc., in organizing 41 investment
programs whose offerings closed in the most recent three years. The 41 programs
have investment objectives similar to those of the Trust and the Operating
Partnership in that the programs provided financing in respect of residential
properties (and in one case, a retail shopping center) for current income and
capital appreciation (except in the case of mortgage funds).
<TABLE>
<CAPTION>
Florida Income Realty Opportunity Florida Income
Advantage Fund Income Fund VIII, Appreciation Fund
I, Ltd. (Baron Ltd. (Baron Capital I, Ltd. (Baron Capital
Capital IV, Inc., IV, Inc., general IV, Inc., general
general partner) partner) partner)
----------------- ------------------- ----------------------
<S> <C> <C> <C>
Dollar amount offered: $ 940,000 $ 1,020,000 $ 840,000
Dollar amount raised:
(percent relative to 940,000 1,020,000 205,000
amount offered): (100%) (100%) (24%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 94,000 94,400 20,500
(10%) (9%) (10%)
Cash reserve accounts: 0 0 0
Amount raised available for
investment (percentage): 846,000 925,600 184,500
(90%) (91%) (90%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 846,000(1) 925,600(1) 184,500(1)
of existing limited partners: (90%) (91%) (90%)
Investment fee: 0 0 0
Percent leverage (mortgage financing
divided by total acquisition cost) 42% 46% 48%
Date offering began: 2/94 3/94 4/94
Length of offering (in months): 3 3 2
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 3 3 2
</TABLE>
- ----------
(1) Net proceeds from the private offering of the partnership were invested to
acquire a beneficial interest in an unrecorded land trust which owns fee
simple title to a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
IT SHOULD NOT BE ASSUMED THAT INVESTORS IN THIS OFFERING WILL EXPERIENCE
RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE
PARTNERSHIPS DESCRIBED IN THE TABLES ABOVE AND BELOW. INVESTORS SHOULD NOTE THAT
THE INVESTMENT OBJECTIVES OF ALL OF THE PARTNERSHIPS DESCRIBED IN THE FOLLOWING
TABLES DIFFERED AT LEAST IN PART FROM THE INVESTMENT OBJECTIVES OF THE TRUST AND
THE OPERATING PARTNERSHIP AND THAT INVESTORS WILL NOT HAVE ANY INTEREST IN ANY
OF THE PARTNERSHIPS AS A RESULT OF THE ACQUISITION OF OPERATING PARTNERSHIP
UNITS OR COMMON SHARES IN THE TRUST, EXCEPT AS OTHERWISE INDICATED IN THE
PROSPECTUS.
I-1
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Baron First Time Clearwater First
Home Buyer Fund Home Buyer Time Homebuyer
V, Ltd. (Baron Mortgage Fund IV, Program, Ltd.
Capital XXIX, Inc., Ltd. (Baron Capital (Baron Capital XVI,
general partner) XXVIII, Inc., general Inc., general
partner) partner)
------------------- --------------------- -------------------
<S> <C> <C> <C>
Dollar amount offered: $ 500,000 $ 500,000 $ 750,000
Dollar amount raised:
(percent relative to 500,000 500,000 750,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 50,000 45,000 77,500
(10%) (9%) (10%)
Cash reserve accounts: 25,000 0 0
(5%)
Amount raised available for
investment (percentage): 425,000 455,000 672,500
(85%) (91%) (90%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 425,000(2) 430,000(3) 672,500(2)
of existing limited partners: (85%) (86%) (90%)
Investment fee: 0 25,000 0
(5%)
Percent leverage (mortgage financing
divided by total acquisition cost) N/A N/A N/A
Date offering began: 1/96 6/96 3/96
Length of offering (in months): 4 5 7
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 3 4 6
</TABLE>
- ----------
(2) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a condominium developer.
(3) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a single-family housing developer.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-2
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Income Lamplight Court Baron Strategic
Growth Fund V, of Bellefontaine Vulture Fund I,
Ltd. (Baron Capital Apartments, Ltd. Ltd. (Baron Capital
XI, Inc., general (Baron Capital IX, XXVI, Inc., general
partner) Inc., general partner)
partner)
------------------- ------------------ -------------------
<S> <C> <C> <C>
Dollar amount offered: $1,150,000 $700,000 $900,000
Dollar amount raised:
(percent relative to 1,150,000 700,000 900,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 125,000 80,000 119,000
(11%) (11%) (13%)
Cash reserve accounts: 142,000 0 90,000
(12%) (10%)
Amount raised available for
investment (percentage): 883,000 620,000 691,000
(77%) (89%) (77%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 825,500(4) 580,000(5) 601,000(6)
of existing limited partners: (72%) (83%) (67%)
Investment fee: 57,500 40,000 90,000
(5%) (6%) (10%)
Percent leverage (mortgage financing
divided by total acquisition cost) 56% 71% 67%
Date offering began: 10/95 4/96 5/96
Length of offering (in months): 16 6 5
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 6 4 4
</TABLE>
- ----------
(4) Net proceeds from the private offering of the partnership were invested to
acquire all of the limited partnership interest in a limited partnership
which owns record title to residential apartment property.
(5) Net proceeds from the private offering of the partnership were invested to
acquire debt and limited partnership interests in a limited partnership
which owns record title to a residential apartment property.
(6) Net proceeds from the private offering of the partnership were invested to
acquire notes receivable associated with a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-3
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Strategic
Investment Fund, Investment Fund Investment Fund
Ltd. (Baron II, Ltd. VI, Ltd. (Baron
Capital XXXIII, (Baron Capital XXXI, Capital XXXI,
Inc., general Inc., general Inc., general
partner) partner) partner)
---------------- -------------------- ---------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 800,000 $ 1,200,000
Dollar amount raised:
(percent relative to 1,200,000 800,000 1,200,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 140,000 100,000 130,000
(12%) (12%) (11%)
Cash reserve accounts: 120,000 80,000 120,000
(10%) (10%) (10%)
Amount raised available for
investment (percentage): 940,000 620,000 950,000
(78%) (78%) (79%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 796,000(6) 524,000(4) 806,000(4)
of existing limited partners: (66%) (66%) (67%)
Investment fee: 144,000 96,000 144,000
(12%) (12%) (12%)
Percent leverage (mortgage financing
divided by total acquisition cost) 56% 71% 67%
Date offering began: 6/96 7/96 11/96
Length of offering (in months): 6 3 5
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 5 2 4
</TABLE>
- ----------
(4) Net proceeds from the private offering of the partnership were invested to
acquire all of the limited partnership interest in a limited partnership
which owns record title to residential apartment property.
(6) Net proceeds from the private offering of the partnership were invested to
acquire notes receivable associated with a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-4
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Tampa Capital Florida Capital
Income Fund, Ltd. Income Fund, Ltd. Income Fund II,
(Baron Capital II, (Baron Capital I, Ltd. (Baron Capital
Inc., general Inc., general IV, Inc., general
partner) partner) partner)
------------------ ----------------- -------------------
<S> <C> <C> <C>
Dollar amount offered: $ 807,000 $ 1,050,000 $ 920,000
Dollar amount raised:
(percent relative to 807,000 1,050,000 920,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 90,700 115,000 102,000
(11%) (11%) (11%)
Cash reserve accounts: 0 165,500 199,000
(16%) (22%)
Amount raised available for
investment (percentage): 716,300 769,500 619,000
(89%) (73%) (67%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 656,300(4) 589,500(7) 548,000(1)
of existing limited partners: (81%) (56%) (60%)
Investment fee: 60,000 180,000 71,000
(7%) (17%) (8%)
Percent leverage (mortgage financing
divided by total acquisition cost) 69% 72% 71%
Date offering began: 11/94 12/94 1/95
Length of offering (in months): 6 8 6
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 3 7 4
</TABLE>
- ----------
(1) Net proceeds from the private offering of the partnership were invested to
acquire a beneficial interest in an unrecorded land trust which owns fee
simple title to a residential apartment property.
(4) Net proceeds from the private offering of the partnership were invested to
acquire all of the limited partnership interest in a limited partnership
which owns record title to residential apartment property.
(7) Net proceeds from the private offering of the partnership were invested to
acquire record title to a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-5
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Opportunity Florida Capital Florida Tax Credit
Income Partners, Income Fund III, Fund, Ltd.
Ltd. (Baron Capital Ltd. (Baron Capital (Baron Capital
III, Inc., general VII, Inc., general VI, Inc., general
partner) partner) partner)
------------------- ------------------- ------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 800,000 $ 626,000
Dollar amount raised:
(percent relative to 800,000 800,000 626,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 90,000 90,000 80,000
(11%) (11%) (13%)
Cash reserve accounts: 143,000 121,000 0
(18%) (15%)
Amount raised available for
investment (percentage): 567,000 589,000 546,000
(71%) (74%) (87%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 543,000(7) 549,000(7) 546,000(4)
of existing limited partners: (68%) (69%) (87%)
Investment fee: 24,000 40,000 0
(3%) (5%)
Percent leverage (mortgage financing
divided by total acquisition cost) 62% 56% 51%
Date offering began: 8/95 6/95 6/95
Length of offering (in months): 3 5 11
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 3 4 9
</TABLE>
- ----------
(4) Net proceeds from the private offering of the partnership were invested to
acquire all of the limited partnership interest in a limited partnership
which owns record title to residential apartment property.
(7) Net proceeds from the private offering of the partnership were invested to
acquire record title to a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-6
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
GSU Stadium Florida Capital Brevard Mortgage
Student Apartments, Income Fund IV, Program, Ltd.
Ltd. (Baron Capital Ltd. (Baron Capital (Baron Capital
X, Inc., general V, Inc., general XII, Inc., general
partner) partner) partner)
------------------- ------------------- ------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,000,000 $ 1,820,000 $575,000
Dollar amount raised:
(percent relative to 1,000,000 1,820,000 575,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 110,000 202,000 67,500
(11%) (11%) (12%)
Cash reserve accounts: 100,000 305,200 57,500
(10%) (17%) (10%)
Amount raised available for
investment (percentage): 790,000 1,312,800 450,000
(79%) (72%) (78%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 690,000(4) 1,212,800(7) 450,000(8)
of existing limited partners: (69%) (67%) (78%)
Investment fee: 100,000 100,000 0
(10%) (5%)
Percent leverage (mortgage financing
divided by total acquisition cost) 67% 70% N/A
Date offering began: 11/95 1/95 1/96
Length of offering (in months): 4 16 4
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 3 10 3
</TABLE>
- ----------
(4) Net proceeds from the private offering of the partnership were invested to
acquire all of the limited partnership interest in a limited partnership
which owns record title to residential apartment property.
(7) Net proceeds from the private offering of the partnership were invested to
acquire record title to a residential apartment property.
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-7
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Baron First Time Baron First Time
Home Buyer Homebuyer Home Buyer
Mortgage Fund II, Mortgage Fund III, Mortgage Fund, Ltd.
Ltd. (Baron Capital Ltd. (Baron Capital (Baron Capital VIII,
XV, Inc., general XXVII, Inc., general Inc., general
partner) partner) partner)
------------------- -------------------- --------------------
<S> <C> <C> <C>
Dollar amount offered: $ 500,000 $ 500,000 $ 500,000
Dollar amount raised:
(percent relative to 500,000 500,000 500,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 45,000 50,000 50,000
(9%) (10%) (10%)
Cash reserve accounts: 0 0 0
Amount raised available for
investment (percentage): 455,000 450,000 450,000
(91%) (90%) (90%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 455,000(3) 450,000(2) 450,000(3)
of existing limited partners: (91%) (90%) (90%)
Investment fee: 0 0 0
Percent leverage (mortgage financing
divided by total acquisition cost) N/A N/A N/A
Date offering began: 2/96 5/96 1/96
Length of offering (in months): 6 4 4
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 4 3 3
</TABLE>
- ----------
(2) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a condominium developer.
(3) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a single-family housing developer.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-8
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Baron Income Baron Mortgage
Development Fund, Property Mortgage Development Fund
IX, Ltd. (Baron Fund VI, Ltd. (Baron Capital VII, Ltd (Baron
Capital XLII, Inc., XXIX, Inc., general Capital XXXVII, Inc.,
general partner) partner) general partner)
------------------- ---------------------------- ---------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 750,000 $ 700,000
Dollar amount raised:
(percent relative to 800,000 750,000 700,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 122,000 105,000 115,000
(15%) (14%) (16%)
Cash reserve accounts: 0 0 0
Amount raised available for
investment (percentage): 678,000 645,000 585,000
(85%) (86%) (84%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 678,000(3) 645,000(8) 585,000(8)
of existing limited partners: (85%) (86%) (84%)
Investment fee: 0 0 0
Percent leverage (mortgage financing
divided by total acquisition cost) N/A N/A N/A
Date offering began: 1/97 8/96 11/96
Length of offering (in months): 8 16 8
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 4 9 6
</TABLE>
- ----------
(3) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a single-family housing developer.
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-9
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Baron Mortgage Baron Mortgage
Development Fund, Development Fund, Development Fund
X, Ltd. (Baron XI, Ltd. (Baron Capital XVIII, LP (Baron
Capital XLIII, Inc., XXXIII, Inc., general Capital LXV, Inc.,
general partner) partner) general partner)
-------------------- ----------------------- ------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 800,000 $ 800,000
Dollar amount raised:
(percent relative to 800,000 800,000 800,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 122,000 122,000 132,000
(15%) (15%) (16%)
Cash reserve accounts: 0 0 0
Amount raised available for
investment (percentage): 678,000 678,000 668,000
(85%) (85%) (84%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 678,000(2) 678,000(2) 668,000(8)
of existing limited partners: (85%) (85%) (84%)
Investment fee: 0 0 0
Percent leverage (mortgage financing
divided by total acquisition cost) N/A N/A N/A
Date offering began: 11/96 3/97 7/97
Length of offering (in months): 16 5 4
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 8 2 2
</TABLE>
- ----------
(2) Net proceeds from the private offering of the partnership were invested to
make a subordinated mortgage loan to a condominium developer.
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-10
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Mortgage
Investment Fund V, Investment Fund VII, Development Fund
Ltd. (Baron Capital Ltd. (Baron Capital XV,Ltd.(Baron Capital
XL, Inc., general XLI, Inc., general XLVIII,Inc.,general
partner) partner) partner)
------------------- -------------------- ---------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 1,900,000 $700,000
Dollar amount raised:
(percent relative to 1,200,000 1,900,000 700,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 142,000 229,000 125,000
(12%) (12%) (18%)
Cash reserve accounts: 120,000 190,000 0
(10%) (10%)
Amount raised available for
investment (percentage): 938,000 1,481,000 575,000
(78%) (78%) (82%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 818,000(9) 1,253,000(10) 575,000(8)
of existing limited partners: (68%) (66%) (82%)
Investment fee: 120,000 228,000 0
(10%) (12%)
Percent leverage (mortgage financing
divided by total acquisition cost) 69% 60% N/A
Date offering began: 11/96 1/97 6/97
Length of offering (in months): 7 11 8
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 6 6 7
</TABLE>
- ----------
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
(9) Net proceeds from the private offering of the partnership were invested to
acquire receivables associated with two residential apartment properties.
(10) Net proceeds from the private offering of the partnership were invested to
acquire receivables associated with three residential apartment properties.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-11
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Mortgage
Investment Fund X, Investment Fund VIII, Development Fund
Ltd. (Baron Capital Ltd. (Baron Capital XIV, Ltd.(Baron Capital
LXIV, Inc., general XLIV, Inc., general XLVII, Inc.,general
partner) partner) partner)
------------------- --------------------- -----------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 1,200,000 $ 1,000,000
Dollar amount raised:
(percent relative to 1,200,000 1,200,000 1,000,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 140,000 152,000 160,000
(12%) (13%) (16%)
Cash reserve accounts: 0 120,000 0
(10%)
Amount raised available for
investment (percentage): 1,060,000 928,000 840,000
(88%) (77%) (84%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 916,000(11) 784,000(10) 840,000(8)
of existing limited partners: (76%) (65%) (84%)
Investment fee: 144,000 144,000 0
(12%) (12%)
Percent leverage (mortgage financing
divided by total acquisition cost) N/A 79% N/A
Date offering began: 7/97 5/97 5/97
Length of offering (in months): 8 9 10
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 5 3 4
</TABLE>
- ----------
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
(10) Net proceeds from the private offering of the partnership were invested to
acquire receivables associated with three residential apartment properties.
(11) Net proceeds from the private offering of the partnership were invested to
acquire limited partnership interests in two limited partnerships which own
separate residential apartment properties and to provide subordinated
mortgage financing secured by another residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-12
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic
Florida Tax Credit Investment Fund IV, Investment Fund IX,
Fund II, Ltd. (Baron Ltd. (Baron Capital Ltd.(Baron Capital
Capital XXXIV, Inc., XVII, Inc., general LXII, Inc.,general
general partner) partner) partner)
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Dollar amount offered: 310,000 $ 1,000,000 $ 1,200,000
Dollar amount raised:
(percent relative to 310,000 1,000,000 1,200,000
amount offered): (100%) (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 41,000 210,000 152,000
(13%) (21%) (13%)
Cash reserve accounts: 0 100,000 120,000
(10%) (10%)
Amount raised available for
investment (percentage): 259,000 690,000 808,000
(84%) (69%) (67%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 259,000(7) 690,000(8) 674,000(12)
of existing limited partners: (84%) (69%) (56%)
Investment fee: 10,000 0 20,000
(3%) (5%) (2%)
Percent leverage (mortgage financing
divided by total acquisition cost) 70% N/A
Date offering began: 9/96 11/96 7/96
Length of offering (in months): 20 16 11
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 9 14 10
</TABLE>
- ----------
(7) Net proceeds from the private offering of the partnership were invested to
acquire record title to a residential apartment property.
(8) Net proceeds from the private offering of the partnership were invested to
provide or acquire a second mortgage loan secured by a residential
apartment property.
(12) Net proceeds from the private offering of the partnership were invested to
acquire limited partnership interests in a limited partnership which owns
record title to a residential apartment property and to make a subordinated
mortgage loan secured by a separate residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-13
<PAGE>
Table I: BARON ADVISORS AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Central Florida Midwest Income
Income Appreciation Growth Fund VI, Ltd.
Fund, Ltd. (Baron (Baron Capital of
Capital of Florida, Ohio III, Inc.,
Inc., general partner) general partner)
---------------------- --------------------
<S> <C> <C>
Dollar amount offered: $1,050,000 $300,000
Dollar amount raised:
(percent relative to 1,050,000 300,000
amount offered): (100%) (100%)
Less offering expenses (percent):
Selling commissions and
due diligence expenses
paid to sponsor/affiliate: 133,000 33,000
(13%) (11%)
Cash reserve accounts: 159,000 33,000
(15%) (11%)
Amount raised available for
investment (percentage): 725,000 219,000
(69%) (73%)
Acquisition costs (percent):
Cash payments to acquire interest
in investment property or to
redeem limited partner interests 725,000(7) 219,000(7)
of existing limited partners: (69%) (73%)
Investment fee: 28,000 15,000
(3%) (5%)
Percent leverage (mortgage financing
divided by total acquisition cost) (62%) 64%
Date offering began: 8/94 4/96
Length of offering (in months): 14 6
Months required to invest
90% of the amount
available for investment
(measured from beginning
of offering): 10 4
</TABLE>
- ----------
(7) Net proceeds from the private offering of the partnership were invested to
acquire record title to a residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
I-14
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS
The following table summarizes the payments made to Affiliates of the Managing
Shareholder of the Trust, Baron Advisors, Inc., by 41 real estate investment
programs sponsored by Affiliates of the Managing Shareholder from their
inception through May 31, 1998. The prior programs have investment objectives
similar to those of the Trust and the Operating Partnership in that the programs
provided financing in respect of residential properties (and in one case, a
retail shopping center) for current income and capital appreciation (except in
the case of mortgage funds).
<TABLE>
<CAPTION>
Florida Income Realty Opportunity Florida Income
Advantage Fund Income Fund Appreciation
I, Ltd. VIII, Ltd. Fund I, Ltd.
-------------- ------------------ --------------
<S> <C> <C> <C>
Date offering began: 2/94 3/94 4/94
Dollar amount raised: $ 940,000 $ 944,000 $ 205,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $ 94,000 $ 94,400 $ 20,500
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $ 119,036 $ 93,303 $ 31,243
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $ 119,036 $ 93,303 $ 31,243
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-1
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Tampa Capital Florida Capital
Income Fund, Income Fund, Income
Ltd. Ltd. Fund II, Ltd.
--------------- ------------- ---------------
<S> <C> <C> <C>
Date offering began: 11/94 9/94 1/95
Dollar amount raised: $807,000 $1,050,000 $920,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $90,700 $115,000 $ 102,000
Acquisition fees: $60,000 $136,500 $71,000
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $24,584 $147,696 $99,744
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $44,773 $47,729 $36,059
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-2
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Opportunity Florida Capital Florida Tax
Income Partners, Income Fund III, Credit Fund,
Ltd. Ltd. Ltd.
------------------- ---------------- ------------
<S> <C> <C> <C>
Date offering began: 8/95 6/95 6/95
Dollar amount raised: $800,000 $800,000 $626,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $90,000 $90,000 $ 80,000
Acquisition fees: $24,000 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $73,276 $125,781 $(30,001)
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $27,010 $19,276 $30,107
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-3
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Florida Capital GSU Student
Homebuyer Mortgage Income Fund IV, Stadium Apartments,
Fund, Ltd. Ltd. Ltd.
------------------ --------------- -------------------
<S> <C> <C> <C>
Date offering began: 1/96 1/95 11/95
Dollar amount raised: $500,000 $1,820,000 $1,000,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $50,000 $202,000 $ 110,000
Acquisition fees: 0 0 $100,000
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $140,826 $(299,889) $119,364
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: 0 $63,115 $35,980
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-4
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Brevard Mortgage Baron First Time Clearwater First
Program, Ltd. Homebuyer Time Home Buyer
Mortgage Fund II, Program, Ltd.
Ltd.
---------------- ----------------- ----------------
<S> <C> <C> <C>
Date offering began: 1/96 2/96 3/96
Dollar amount raised: $575,000 $500,000 $750,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $67,500 $45,000 $ 77,500
Acquisition fees: 0 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $111,068 $133,616 $165,018
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-5
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Baron First Time Baron First Time
Homebuyer Homebuyer Homebuyer Mortgage
Mortgage Fund III, Mortgage Fund V, Fund IV, Ltd.
Ltd. Ltd.
------------------ ---------------- ------------------
<S> <C> <C> <C>
Date offering began: 5/96 1/96 6/96
Dollar amount raised: $500,000 $500,000 $500,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $50,500 $50,000 $ 45,000
Acquisition fees: 0 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $123,475 $125,579 $112,927
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-6
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Income Lamplight Court Baron Strategic
Growth Fund V, of Bellefontaine Vulture
Ltd. Apartments, Ltd. Fund I, Ltd.
-------------- ---------------- ---------------
<S> <C> <C> <C>
Date offering began: 10/95 4/96 5/96
Dollar amount raised: $1,150,000 $700,000 $900,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $125,500 $80,000 $ 119,000
Acquisition fees: $57,500 $40,000 $90,000
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $14,690 $142,523 $46,224
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $24,687 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-7
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Strategic
Investment Fund, Investment Fund Investment
Ltd. II, Ltd. Fund VI, Ltd.
---------------- --------------- ---------------
<S> <C> <C> <C>
Date offering began: 6/96 7/96 11/96
Dollar amount raised: $1,200,000 $800,000 $1,200,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $140,000 $100,000 $ 130,000
Acquisition fees: $144,000 $96,000 $144,000
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $63,990 $(46,088) $10,599
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-8
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Development Baron Income Baron Mortgage
Fund IX, Ltd. Property Mortgage Development
Fund VI, Ltd. Fund VII, Ltd.
----------------- ----------------- --------------
<S> <C> <C> <C>
Date offering began: 1/97 8/96 11/96
Dollar amount raised: $800,000 $750,000 $700,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $80,000 $75,000 $70,000
Acquisition fees: 0 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $98,395 $108,231 $100,328
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-9
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Baron Mortgage Baron Mortgage
Development Fund X, Development Fund Development
Ltd. XI, Ltd. Fund XVIII, LP
------------------- ---------------- --------------
<S> <C> <C> <C>
Date offering began: 11/96 3/97 7/97
Dollar amount raised: $800,000 $800,000 $800,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $80,000 $80,000 $80,000
Acquisition fees: 0 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $115,330 $100,982 $51,250
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-10
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Mortgage
Investment Fund, Investment Fund Development
V, Ltd. VII, Ltd. Fund XV, Ltd.
---------------- --------------- --------------
<S> <C> <C> <C>
Date offering began: 11/96 1/97 6/97
Dollar amount raised: $1,200,000 $1,900,000 $700,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $120,000 $190,000 $70,000
Acquisition fees: 0 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $85,999 $25,496 $43,042
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-11
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Baron Mortgage
Investment Fund Investment Fund Development
X, Ltd. VIII, Ltd. Fund XIV, Ltd.
--------------- --------------- --------------
<S> <C> <C> <C>
Date offering began: 7/97 5/97 5/97
Dollar amount raised: $1,200,000 $1,200,000 $1,000,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $120,000 $108,000 $90,000
Acquisition fees: $0 $0 $0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $7,333 $23,719 $87,521
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-12
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Baron Strategic Florida Tax
Investment Fund Investment Fund Credit Fund II,
IV, Ltd. IX, Ltd. Ltd.
--------------- --------------- ---------------
<S> <C> <C> <C>
Date offering began: 11/96 7/97 9/96
Dollar amount raised: $1,000,000 $1,200,000 $310,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $90,000 $120,000 $31,000
Acquisition fees: 0 0
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: $57,530 $(4,022) $33,692
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0 0
Property Management
and Administrative Fees: 0 0 0
Partnership Management
Fees: 0 0 0
Reimbursements: 0 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-13
<PAGE>
Table II: COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Central Florida Midwest Income
Income Appreciation Growth Fund
Fund, Ltd. VI, Ltd.
------------------- --------------
<S> <C> <C>
Date offering began: 8/94 4/96
Dollar amount raised: $1,050,000 $300,000
Amount paid of Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence expenses: $133,000 $33,000
Acquisition fees: 28,000 15,000
Dollar amount of cash
generated (deficiency)
by program from operations
from its inception through
May 31, 1998 before
deducting payments to
Baron Advisors Affiliates: (165,226) $73,674
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0
Property Management
and Administrative Fees: 34,154 26,799
Partnership Management
Fees: 0 0
Reimbursements: 0 0
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
II-14
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS
The following table includes operating results for the periods indicated of 41
programs sponsored by Affiliates of the Managing Shareholder of the Trust, Baron
Advisors, Inc., which closed in the most recent five years. The prior programs
have investment objectives similar to those of the Trust and the Operating
Partnership in that the programs provided financing in respect of residential
properties (and in one case, a retail shopping center) for current income and
capital appreciation (except in the case of mortgage funds).
<TABLE>
<CAPTION>
Florida Capital Income Fund, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $162,294 $346,154 $348,348 $377,296
Other: 1,321 21,065 32,140 3,670
Less:
Operating Expenses: (78,586) (182,429) (169,938) (201,404)
Interest Expenses: (60,696) (158,727) (159,163) (128,897)
Depreciation and Amortization: (26,834) (64,402) (63,327) (69,441)
Other: Major Maintenance: (9,293) (19,712) 0 (40,663)
Net Income (Loss) - Tax Basis: (11,794) (58,051) (11,940) (59,439)
Cash generated from operations: 13,719 (14,714) 19,247 6,332
Less: Cash distributions: 12,000 80,700 80,700 56,059
Cash generated after cash distributions: 1,719 (95,414) (61,453) (49,727)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (15) (72) (15) (73)
Cash distributions to investors: 15 100 100 69
Annualized cash on cash yield
to investors: 3% 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors,
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-1
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Income Advantage Fund I, Ltd.
1/1/98-5/31/98 1997 1996 1995
------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $73,138 $170,175 $180,549 $165,493
Other: 0 7,031 5,721 47,756
Less:
Operating Expenses: (34,961) (79,292) (73,049) (89,479)
Interest Expenses: (16,115) (49,070) (49,964) (29,185)
Depreciation and Amortization: (23,408) (70,922) (50,446) (49,641)
Major Maintenance Expense (2,666) (18,353) 0 (28,185)
Net Income (Loss) - Tax Basis: (4,012) (40,431) 12,811 16,759
Cash generated from operations: 19,396 23,460 57,536 18,644
Less: Cash distributions: 25,058 0 82,500 94,000
Cash generated after cash distributions: (5,662) 23,460 (24,964) (75,356)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (4) (43) 14 18
Cash distributions to investors: 27 0 88 100
Annualized cash on cash yield
to investors: 5% 0% 9% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-2
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Realty Opportunity Income Fund VIII, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $81,544 $159,093 $181,587 $216,535
Other: 0 6,252 3,616 37,068
Less:
Operating Expenses: (37,741) (93,216) (89,343) (98,705)
Interest Expenses: (19,045) (60,222) (59,048) (38,897)
Depreciation and Amortization: (23,408) (56,180) (55,941) (55,265)
Other: Major Maintenance: (3,640) (21,967) 0 (23,632)
Net Income (Loss) - Tax Basis: (2,290) (66,240) (19,129) 37,104
Cash generated from operations: 21,118 (16,312) 33,196 55,301
Less: Cash distributions: 5,000 0 80,800 94,400
Cash generated after cash distributions: 16,118 (16,312) (47,604) (39,099)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (2) (65) (19) 37
Cash distributions to investors: 5 0 86 100
Annualized cash on cash yield
to investors: 1% 0% 8% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-3
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Income Appreciation Fund I, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $17,535 $56,139 $57,348 $69,986
Other: 0 2,437 2,565 8,944
Less:
Operating Expenses: (11,156) (26,488) (26,417) (36,080)
Interest Expenses: (5,128) (17,843) (15,898) (13,692)
Depreciation and Amortization: (6,777) (16,264) (16,172) (10,878)
Other: Major Maintenance: (992) (6,317) 0 (9,754)
Net Income (Loss) - Tax Basis: (6,518) (8,336) 1,426 8,526
Cash generated from operations: 259 5,491 15,033 10,460
Less: Cash distributions: 3,200 0 19,375 20,500
Cash generated after cash distributions: (2,941) 5,491 (4,342) (10,040)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (8) (41) 7 41
Cash distributions to investors: 4 0 95 100
Annualized cash on cash yield
to investors: 1% 0 9% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-4
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Tampa Capital Income Fund, Ltd.
1996 1995
---- ----
<S> <C> <C>
Gross Revenues: $409,146 $404,384
Other: 0 0
Less:
Operating Expenses: (207,313) (213,327)
Interest Expenses: (131,405) (88,632)
Depreciation and Amortization: (77,185) (69,040)
Other: Major Maintenance: 0 (25,157)
Net Income (Loss) - Tax Basis: (6,757) 8,228
Cash generated from operations: 70,428 77,268
Less: Cash distributions: 105,000 58,328
Cash generated after cash distributions: (34,572) 18,940
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (6) 8
Cash distributions to investors: 100 56
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
In January 1997, the partnership sold the asset acquired with the net proceeds
of its offering. See Tables IV and V below.
III-5
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Income Fund II, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $146,210 $379,763 $319,640 $355,612
Other: 0 7,968 16,405 3,084
Less:
Operating Expenses: (70,699) (158,953) (154,720) (195,088)
Interest Expenses: (32,963) (149,908) (130,820) (66,611)
Depreciation and Amortization: (32,949) (79,077) (78,505) (76,341)
Other: Major Maintenance: (11,652) (86,899) 0 (43,168)
Net Income (Loss) - Tax Basis: (2,053) (87,106) (28,000) (22,512)
Cash generated from operations: 30,896 (15,997) 34,100 50,745
Less: Cash distributions: 17,800 0 92,000 52,468
Cash generated after cash distributions: 13,096 (15,997) (57,900) (1,723)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (3) (95) (30) (24)
Cash distributions to investors: 38 0 100 57
Annualized cash on cash yield
to investors: 4% 0 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-6
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Opportunity Income Partners, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $108,490 $218,018 $311,719 $207,207
Other: 0 0 0 9,634
Less:
Operating Expenses: (59,426) (153,765) (149,572) (100,163)
Interest Expenses: (46,307) (98,851) (78,273) (47,679)
Depreciation and Amortization: (18,362) (44,069) (47,371) (24,532)
Other: Major Maintenance: (7,081) (22,392) 0 (8,649)
Net Income (Loss) - Tax Basis: (22,686) (101,059) 36,503 35,818
Cash generated from operations: (4,324) (56,990) 83,874 50,716
Less: Cash distributions: 40,000 80,000 77,441 3,390
Cash generated after cash distributions: (44,324) (136,990) 6,433 47,326
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (28) (126) 46 45
Cash distributions to investors: 50 100 97 4
Annualized cash on cash yield
to investors: 10% 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-7
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Income Fund III, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $100,133 $212,608 $228,451 $106,625
Other: 0 6,605 7,884 0
Less:
Operating Expenses: (41,558) (116,044) (112,640) (54,323)
Interest Expenses: (25,685) (69,345) (68,759) (12,597)
Depreciation and Amortization: (15,371) (36,890) (37,979) (18,548)
Other: Major Maintenance: (3,967) (13,630) 0 (3,488)
Net Income (Loss) - Tax Basis: 13,552 (16,696) 16,957 17,669
Cash generated from operations: 28,923 13,589 47,052 36,217
Less: Cash distributions: 14,000 80,000 79,867 22,482
Cash generated after cash distributions: 14,923 (66,411) (32,815) 13,735
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 17 (21) 10 22
Cash distributions to investors: 18 100 100 28
Annualized cash on cash yield
to investors: 4% 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-8
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Tax Credit Fund, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $122,055 $282,587 $266,240 $274,862
Other: 0 0 0 0
Less:
Operating Expenses: (86,743) (191,445) (172,489) (194,953)
Interest Expenses (29,123) (67,422) (69,122) (99,684)
Depreciation and Amortization: (21,420) (51,408) (47,236) (25,740)
Major Maintenance Expense (3,191) (28,357) (20,067) (13,149)
Net Income (Loss) - Tax Basis: (18,422) (56,045) (42,674) (58,664)
Cash generated from operations: 2,998 (4,637) 4,562 (32,924)
Less: Cash distributions: 6,260 0 25,194 0
Cash generated after cash distributions: (3,262) (4,637) (20,632) (32,924)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (29) (90) (68) (94)
Cash distributions to investors: 10 0 40 0
Annualized cash on cash yield
to investors: 2% 1% 4% 2%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-9
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Mortgage Fund, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $25,056 $70,341 $46,970
Other: 0 0 0
Less:
Operating Expenses: (93) (774) (674)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 24,963 69,567 46,296
Cash generated from operations: 24,963 69,567 46,296
Less: Cash distributions: 25,000 60,000 45,536
Cash generated after cash distributions: (37) 9,567 760
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 139 93
Cash distributions to investors: 50 120 91
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-10
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Income Fund IV, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $392,673 $745,649 $695,308 $422,209
Other: 0 22,536 60,265 9,640
Less:
Operating Expenses: (271,314) (469,088) (435,005) (301,870)
Interest Expenses: (96,499) (310,603) (312,704) (173,711)
Depreciation and Amortization: (55,025) (132,061) (137,316) (120,000)
Other: Major Maintenance: (146,281) (36,903) 0 (1,750)
Net Income (Loss) - Tax Basis: (176,446) (180,470) (129,452) (165,482)
Cash generated from operations: (121,421) (70,945) (52,401) (55,122)
Less: Cash distributions: 91,000 180,233 149,240 676
Cash generated after cash distributions: (212,421) (251,178) (201,641) (55,798)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (97) (99) (71) (91)
Cash distributions to investors: 50 99 82 0
Annualized cash on cash yield
to investors: 10% 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-11
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
GSU Stadium Student Apartments, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $188,491 $458,687 $427,919 $200,668
Other: 0 27,710 21,809 0
Less:
Operating Expenses: (76,304) (242,603) (212,984) (106,361)
Interest Expenses: (59,123) (146,120) (122,433) (50,645)
Depreciation and Amortization: (27,140) (65,135) (66,830) (66,999)
Other: Major Maintenance: (4,326) (35,113) (54,112) (46,277)
Net Income (Loss) - Tax Basis: 21,598 (2,574) (6,631) (69,614)
Cash generated from operations: 48,738 34,851 38,390 (2,615)
Less: Cash distributions: 48,628 203,105* 84,961 25,000
Cash generated after cash distributions: 110 (168,254) (46,571) (27,615)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 21 (3) (7) (70)
Cash distributions to investors: 49 203 85 25
Annualized cash on cash yield
to investors: 10% 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
* $100,000 of such amount represents a return of capital attributable to net
proceeds in connection with a first mortgage refinancing with an initial
principal balance higher than the principal balance at the time of
refinancing.
III-12
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Brevard Mortgage Program, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $26,825 $17,009 $73,267
Other: 0 0 0
Less:
Operating Expenses: (3,040) (2,119) (874)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 23,785 14,890 72,393
Cash generated from operations: 23,785 14,890 72,393
Less: Cash distributions: 11,979 57,500 34,572
Cash generated after cash distributions: (17,401) (42,610) 37,821
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 41 26 126
Cash distributions to investors: 21 100 60
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-13
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Mortgage Fund II, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $24,618 $69,051 $41,748
Other: 0 45 0
Less:
Operating Expenses: (252) (938) (611)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 24,366 68,158 41,137
Cash generated from operations: 24,366 68,113 41,137
Less: Cash distributions: 25,000 60,300 42,619
Cash generated after cash distributions: (634) 7,813 (1,482)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 49 136 82
Cash distributions to investors: 50 121 85
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-14
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Clearwater First Time Homebuyer Program, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $30,150 $88,149 $46,999
Other: 0 0 0
Less:
Operating Expenses: (55) (132) (93)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 30,095 88,017 46,906
Cash generated from operations: 30,095 88,017 46,906
Less: Cash distributions: 37,503 90,000 43,377
Cash generated after cash distributions: (7,408) (1,983) 3,529
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 40 40 62
Cash distributions to investors: 50 120 58
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-15
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Mortgage Fund III, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $25,008 $70,425 $29,006
Other: 0 0 0
Less:
Operating Expenses: (241) (315) (408)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 24,767 70,110 28,598
Cash generated from operations: 24,767 70,110 28,598
Less: Cash distributions: 25,000 60,000 27,846
Cash generated after cash distributions: (233) 10,110 752
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 140 57
Cash distributions to investors: 50 120 56
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-16
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Mortgage Fund V, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $25,000 $75,400 $26,198
Other: 0 0 0
Less:
Operating Expenses: (61) (713) (245)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 24,939 74,687 25,953
Cash generated from operations: 24,939 74,687 25,953
Less: Cash distributions: 25,000 60,000 25,140
Cash generated after cash distributions: (61) 14,687 813
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 149 52
Cash distributions to investors: 50 120 50
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-17
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Mortgage Fund IV, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $25,008 $74,020 $14,529
Other: 0 0 0
Less:
Operating Expenses: (89) (164) (377)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 24,919 73,856 14,152
Cash generated from operations: 24,919 73,856 14,152
Less: Cash distributions: 25,000 60,000 13,900
Cash generated after cash distributions: (81) 13,856 252
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 147 28
Cash distributions to investors: 50 120 28
Annualized cash on cash yield
to investors: 12% 12% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-18
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Income Growth Fund V, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $146,163 $273,596 $278,590
Other: 0 20,987 26,698
Less:
Operating Expenses: (58,764) (163,172) (172,943)
Interest Expenses: (44,202) (94,358) (98,805)
Depreciation and Amortization: (21,877) (52,504) (56,381)
Major Maintenance Expense (7,295) (16,416) (27,704)
Net Income (Loss) - Tax Basis: 14,025 (31,867) (45,963)
Cash generated from operations: 35,902 (350) (20,862)
Less: Cash distributions: 39,000 114,988 77,039
Cash generated after cash distributions: (3,098) (115,338) (97,901)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 12 (28) (40)
Cash distributions to investors: 34 100 67
Annualized cash on cash yield
to investors: 7% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-19
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Lamplight Court of Bellefontaine Apartments, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $45,653 $113,524 108,308
Other: 29,873 70,793 16,800
Less:
Operating Expenses: (15,221) (62,041) (66,080)
Interest Expenses: (16,823) (43,068) (37,299)
Depreciation and Amortization: (8,392) (20,141) (17,594)
Other: Major Maintenance: (1,896) 0 0
Net Income (Loss) - Tax Basis: 33,194 59,067 4,135
Cash generated from operations: 41,586 79,208 21,729
Less: Cash distributions: 29,167 69,525 16,593
Cash generated after cash distributions: 12,419 9,683 5,136
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 47 84 6
Cash distributions to investors: 42 100 24
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-20
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Vulture Fund I, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $32,915 $28,581 $3,731
Other: 0 0 0
Less:
Operating Expenses: (1,834) (16,705) (464)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 31,081 11,876 3,267
Cash generated from operations: 31,081 11,876 3,267
Less: Cash distributions: 37,500 89,894 14,044
Cash generated after cash distributions: (6,419) (78,018) (10,777)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 34 13 4
Cash distributions to investors: 42 100 16
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-21
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $27,713 $61,000 $2,479
Other: 0 1,906 0
Less:
Operating Expenses: (1,114) (25,685) (403)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 26,599 37,221 2,076
Cash generated from operations: 26,599 35,315 2,076
Less: Cash distributions: 38,237 112,664 8,884
Cash generated after cash distributions: (10,982) (77,349) (6,808)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 22 31 2
Cash distributions to investors: 32 94 7
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-22
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund II, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: 109,597 261,513 79,630
Other: 8,037 53,534 1,666
Less:
Operating Expenses: (73,368) (205,243) (60,041)
Interest Expenses: (38,548) (92,514) 0
Depreciation and Amortization: (16,027) (38,465) (7,552)
Other: Major Maintenance: 20,248 (70,103) 0
Net Income (Loss) - Tax Basis: (30,557) (91,278) 13,703
Cash generated from operations: (14,530) (52,813) 21,255
Less: Cash distributions: 14,000 79,601 2,942
Cash generated after cash distributions: (28,530) (132,414) 18,313
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (38) (114) 17
Cash distributions to investors: 18 100 4
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-23
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund VI, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $8,294 $8,050 $400
Other: 0 4,500 0
Less:
Operating Expenses: (3,965) (1,962) (218)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 4,329 10,588 182
Cash generated from operations: 4,329 6,088 182
Less: Cash distributions: 60,000 85,003 0
Cash generated after cash distributions: (55,671) (78,915) 182
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 4 9 0
Cash distributions to investors: 50 71 0
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-24
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Development Fund IX, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $39,920 $69,804
Other: 0 749
Less:
Operating Expenses: (95) (11,234)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 39,825 59,319
Cash generated from operations: 39,825 58,570
Less: Cash distributions: 40,140 58,397
Cash generated after cash distributions: (315) 173
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 56
Cash distributions to investors: 50 73
Annualized cash on cash yield
to investors: 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees,
distribution supplements and interest income.
III-25
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Income Property Mortgage Fund VI, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $37,517 66,807 $5,740
Other: 0 389 85
Less:
Operating Expenses: (94) (1,479) (260)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 37,423 65,717 5,565
Cash generated from operations: 37,423 65,328 5,480
Less: Cash distributions: 37,500 65,250 6,334
Cash generated after cash distributions: (77) 78 (854)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 80 7
Cash distributions to investors: 50 87 8
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-26
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund VII, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $35,023 $66,692 $10,012
Other: 0 542 2
Less:
Operating Expenses: (159) (1,703) (10,079)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 34,864 65,531 (65)
Cash generated from operations: 34,864 65,531 (67)
Less: Cash distributions: 35,000 65,075 27
Cash generated after cash distributions: (136) 456 (94)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 93 (2)
Cash distributions to investors: 50 93 0
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-27
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund X, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $38,527 $77,526 $9,998
Other: 0 1,789 23
Less:
Operating Expenses: (104) (584) (10,033)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 38,423 78,731 (12)
Cash generated from operations: 38,423 76,942 (35)
Less: Cash distributions: 39,826 76,878 200
Cash generated after cash distributions: (1,403) 64 (235)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 48 79 (13)
Cash distributions to investors: 50 96 0
Annualized cash on cash yield
to investors: 12% 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-28
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund XI, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $39,867 $61,200
Other: 0 0
Less:
Operating Expenses: (85) 0
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 39,782 61,200
Cash generated from operations: 39,782 61,200
Less: Cash distributions: 40,000 61,109
Cash generated after cash distributions: (218) 91
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 50 0
Cash distributions to investors: 50 76
Annualized cash on cash yield
to investors: 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-29
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund XVIII, L.P.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $25,178 $46,473
Other: 0 759
Less:
Operating Expenses: (122) (20,279)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 25,056 26,953
Cash generated from operations: 25,056 26,194
Less: Cash distributions: 40,000 26,135
Cash generated after cash distributions: (14,944) 59
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 31 17
Cash distributions to investors: 50 33
Annualized cash on cash yield
to investors: 12% 12%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-30
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund V, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: $27,169 $69,423 $10,145
Other: 0 0 109
Less:
Operating Expenses: (5,496) (5,117) (10,125)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 21,673 64,306 129
Cash generated from operations: 21,673 64,306 20
Less: Cash distributions: 50,000 62,868 0
Cash generated after cash distributions: (28,327) 1,438 20
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 18 1 8
Cash distributions to investors: 42 52 0
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-31
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund VII, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $59,341 $3,050
Other: 0 0
Less:
Operating Expenses: (23,289) (13,606)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 36,052 (10,556)
Cash generated from operations: 36,052 (10,556)
Less: Cash distributions: 78,570 77,208
Cash generated after cash distributions: (42,518) (87,764)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 19 (6)
Cash distributions to investors: 41 41
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-32
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund IV, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $68,948 $0
Other: 0 883
Less:
Operating Expenses: (9,251) (2,167)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 59,697 (1,284)
Cash generated from operations: 59,697 (2,167)
Less: Cash distributions: 35,010 27,130
Cash generated after cash distributions: 24,687 (29,297)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 60 (1)
Cash distributions to investors: 35 27
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-33
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund XIV, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $43,470 $44,419
Other: 0 631
Less:
Operating Expenses: (94) (274)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 43,376 44,776
Cash generated from operations: 43,376 44,145
Less: Cash distributions: 49,281 44,070
Cash generated after cash distributions: (5,905) 75
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 43 21
Cash distributions to investors: 49 44
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-34
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund X, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $7,315 $0
Other: 0 1,756
Less:
Operating Expenses: (1,501) (237)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 5,814 1,519
Cash generated from operations: 5,814 1,519
Less: Cash distributions: 55,036 13,428
Cash generated after cash distributions: (49,222) (11,909)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 5 1
Cash distributions to investors: 46 11
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-35
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Fund XV, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $30,871 $12,669
Other: 0 190
Less:
Operating Expenses: (198) (300)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 30,673 12,559
Cash generated from operations: 30,673 12,369
Less: Cash distributions: 32,573 12,362
Cash generated after cash distributions: (1,900) 7
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 44 13
Cash distributions to investors: 47 18
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-36
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund VIII, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $32,557 $0
Other: 0 1,708
Less:
Operating Expenses: (8,475) (363)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 24,082 1,345
Cash generated from operations: 24,082 (363)
Less: Cash distributions: 48,769 30,450
Cash generated after cash distributions: (24,687) (30,813)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 20 1
Cash distributions to investors: 41 25
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-37
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Florida Tax Credit Fund II, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $71,525 $151,372 $193,970 $116,455
Other: 0 0 0 0
Less:
Operating Expenses: (52,842) (114,363) (121,850) (65,664)
Interest Expenses: (17,480) (41,317) (38,995) (21,949)
Depreciation and Amortization: (10,742) (25,780) (25,565) (21,669)
Other: Major Maintenance: (1,116) (6,265) (8,135) (9,654)
Net Income (Loss) - Tax Basis: (10,655) (36,353) (575) (2,481)
Cash generated from operations: 87 (10,573) 24,990 19,188
Less: Cash distributions: 2,940 2,780 34 0
Cash generated after cash distributions: (2,853) (13,353) 24,956 19,188
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (34) (117) (2) 8
Cash distributions to investors: 9 9 0 0
Annualized cash on cash yield
to investors: 9% 9% 0 0
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-38
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Fund IX, Ltd.
1/1/98-5/31/98 1997
-------------- ----
<S> <C> <C>
Gross Revenues: $1,075 $676
Other: 0 0
Less:
Operating Expenses: (1,330) (4,443)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 255 (3,767)
Cash generated from operations: 255 (3,767)
Less: Cash distributions: 23,884 3,589
Cash generated after cash distributions: 24,139 (7,356)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 0 (3)
Cash distributions to investors: 20 3
Annualized cash on cash yield
to investors: 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-39
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Central Florida Income Appreciation Fund, Ltd.
1/1/98-5/31/98 1997 1996 1995
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
Gross Revenues: $110,752 $228,623 $244,496 $275,805
Other: 0 0 0 0
Less:
Operating Expenses: (51,996) (112,911) (127,984) (236,408)
Interest Expenses: (50,175) (134,746) (124,291) (128,965)
Depreciation and Amortization: (31,226) (76,023) (74,942) (75,915)
Other: Major Maintenance: (24,218) (19,500) (1,346) (12,362)
Net Income (Loss) - Tax Basis: (46,863) (114,557) (84,067) (177,845)
Cash generated from operations: (15,637) (38,534) (9,125) (101,930)
Less: Cash distributions: 2,300 0 105,000 78,750
Cash generated after cash distributions: (17,937) (38,534) (114,125) (180,680)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (45) (109) (80) (169)
Cash distributions to investors: 2 0 100 75
Annualized cash on cash yield
to investors: 0% 0% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-40
<PAGE>
Table III: OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
<TABLE>
<CAPTION>
Midwest Income Growth Fund VI, Ltd.
1/1/98-5/31/98 1997 1996
-------------- ---- ----
<S> <C> <C> <C>
Gross Revenues: 108,339 $257,567 $98,226
Other: 0 0 0
Less:
Operating Expenses: (37,367) (84,233) (28,556)
Interest Expenses: (40,956) (106,684) (28,631)
Depreciation and Amortization: (22,843) (54,823) (17,563)
Other: Major Maintenance: (2,046) (61,985) 0
Net Income (Loss) - Tax Basis: 5,127 (50,158) 23,476
Cash generated from operations: 27,970 4,665 41,039
Less: Cash distributions: 15,000 29,799 5,547
Cash generated after cash distributions: 12,970 (25,134) 35,492
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 17 (167) 78
Cash distributions to investors: 50 99 18
Annualized cash on cash yield
to investors: 10% 10% 10%
Amount (in percentage terms) remaining
invested in program property at the end
of last year reported in table: 100% 100% 100%
</TABLE>
The significant differences between tax basis net income (loss) reflected in the
table above and net income (loss) determined on the basis of generally accepted
accounting principles ("GAAP") are as follows. First, for tax purposes,
residential apartment properties have a depreciable life of 27.5 years, compared
to 30 years under GAAP. Second, rental income is accounted for on a tax basis on
receipt, but accrued under GAAP accounting. According to management of the
Operating Partnership, the difference in accounting results attributable to the
different depreciable lives and timing of rental income under the two methods is
not material. Third, for tax purposes, the partnership's depreciable basis in
its residential apartment property was stepped up at the time of the investors'
acquisition of a limited partnership interest in the partnership to reflect
their purchase price. Under GAAP accounting, stepped up basis is not recognized.
For 1997, the difference between net income (loss) determined on a tax basis and
net income (loss) determined on a GAAP basis was approximately $____________.
In certain cases, "cash distributions" may include net operating cash flow, a
portion of cash reserves funded out of net proceeds of the program's offering,
refinancing proceeds or advances from affiliates. "Other" includes ancillary
income such as forfeit security deposits, laundry and vending income, pet fees
and interest income.
III-41
<PAGE>
Table IV- RESULTS OF COMPLETED PROGRAMS
The following table includes information relating to the financial results of
one program sponsored by an affiliate of the Managing Shareholder of the Trust,
Baron Advisors, Inc., which completed operations within the last five years. The
prior program had investment objectives similar to those of the Trust and the
Operating Partnership in that the program provided financing in respect of
a residential property for current income and capital appreciation.
Tampa Capital Income Fund, Ltd.
Dollar Amount Raised: $1,050,000
Number of Properties Purchased: one
Date of Closing of Offering: 7/95
Date of Acquisition of Property: 12/94
Date of Sale of Property: 2/97
Tax and Distribution Data Per $1,000
Investment Through 1996:
Federal Income Tax Results:
Ordinary Income (loss):
from operations: 171 est.
from recapture: Not applicable
Capital Gain (loss): 138
Deferred Gain(1):
Capital: 138
Ordinary: Not applicable
Cash Distribution to Investors: 10%
Source (on GAAP basis):
Investment Income: $180,000
Return of capital: $900,000
Source (on cash basis):
Sales: $900,000
Refinancing: Not applicable
Operations: $180,000
Other: Not applicable
Receivable on Net Purchase Money Financing $295,000 (2)
- ----------
(1) "Deferred Gain" represents the amount of capital gain or ordinary gain that
is realized upon receipt of installment payments under the promissory note
received in exchange for the property sold.
(2) Portion of purchase price paid with promissory note payable in 36 equal
monthly payments including 9% annual interest rate.
IV-1
<PAGE>
TABLE V: SALES OR DISPOSAL OF PROPERTIES
The following table includes certain financial information concerning the sale
of a property within the most recent three years by an investment program
sponsored by an Affiliate of the Managing Shareholder.
Tampa Capital Income Fund, Ltd.
Property: Lakewood Apartments
Date Acquired: 12/94
Date of Sale: 2/97
Selling Price, Net of Closing Costs and GAAP Adjustments: $2,795,000
Cash Received net of closing costs: $900,000
Mortgage Balance at time of sale: $1,500,000
Purchase money mortgage taken back by program: $295,000(1)
Adjustments resulting from application of GAAP: Not applicable
Total $2,695,000(2)
Cost of Properties Including Closing and Soft Costs:
Original Mortgage Financing: $1,500,000
Total acquisition cost, capital improvements,
closing and soft costs: $1,050,000(3)
Total $2,550,000
Excess of Property Operating Cash Receipts
Over Cash Expenditures: $180,000 est.
- ----------
(1) Portion of purchase price paid with promissory note payable in 36 equal
monthly payments including 9% annual interest rate.
(2) The entire gain ($145,000) will be treated as a capital gain for tax
purposes.
(3) Does not include offering costs.
V-1
<PAGE>
OTHER PROGRAMS SPONSORED BY
AFFILIATES OF MANAGING SHAREHOLDER
<TABLE>
<CAPTION>
MAXIMUM
DATE CAPITAL
FORMED RAISE PARTNERSHIP NAME GENERAL PARTNER
- ------ ------- ---------------- ---------------
<S> <C> <C> <C>
10/18/96 700,000 Baron Mortgage Development Fund VII, Ltd. Baron Capital XXXVII,
Inc.
04/02/97 1,000,000 Baron Mortgage Development Fund XII, Ltd. Baron Capital XLVI, Inc.
Inc.
05/20/97 1,000,000 Baron First Mortgage Development Fund XVI, Ltd. Baron Capital LX, Inc.
05/22/97 1,000,000 Baron First Mortgage Development Fund XVII, Baron Capital LXI, Inc.
Ltd.
06/03/97 1,200,000 Baron Strategic Investment Fund IX, Ltd. Baron Capital LXII, Inc.
09/15/97 1,000,000 Baron Mortgage Development Fund XIX, L.P. Baron Capital LXVI, Inc.
09/10/97 1,000,000 Baron Mortgage Development Fund XX, L.P. Baron Capital LXVII, Inc.
11/24/97 1,000,000 Baron Mortgage Development Fund XXI, L.P. Baron Capital LXVIII,
Inc.
</TABLE>
<PAGE>
EXHIBIT B
SUMMARY OF EXCHANGE PROPERTY
AND EXCHANGE PARTNERSHIP INFORMATION
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME GROWTH FUND V, LTD.
(GP: Baron Capital XI, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1980
BLOSSOM CORNERS Limited partnership interest in limited
APARTMENTS - PHASE I partnership which holds fee simple
2001 Raper Dairy Road
Orlando, Florida 32822
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 3.67
<CAPTION>
--------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 15 300 $360
--------------------------------------------------------------------------------------------------------------
1 BR 49 600 $440
--------------------------------------------------------------------------------------------------------------
2 BR 6 900 $540
--------------------------------------------------------------------------------------------------------------
Total 70 39,300
---------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 94% ESTIMATED APPRAISED VALUE: $2,195,000
1997 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 1/98
1996 AVG. MONTHLY OCCUPANCY %: 89% 5/31/98 FEDERAL INCOME TAX BASIS: $1,651,058
1995 AVG. MONTHLY OCCUPANCY %: 90% DEPRECIATION LIFE CLAIMED: 24.5 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 91% REALTY TAX RATE (MILLAGE): 21.6657
1993 AVG. MONTHLY OCCUPANCY %: 84% 5/31/98 PROPERTY TAX VALUE: $1,194,445
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/06
Column Financial, Inc.
3414 Peachtree Road N.E.
Suite 1140
Atlanta, Georgia 30326-1113
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,050,000 ANNUAL DEBT SERVICE: $105,288
5/31/98 BALANCE: $1,030,195 MONTHLY PAYMENT: $ 8,774
BALANCE DUE AT MATURITY: $ 882,430
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.04% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayment penalty equal to 1% of prepayment amount if prepaid prior to fifth anniversary of loan; no
prepayment penalty thereafter.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 11/95 NUMBER OF UNITS SOLD: 2,300
NUMBER OF INVESTORS: 49 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,150,000 DATE OFFERING TERMINATED: 2/97
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive any remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors' original
(per $1,000 of Investors' original investment): 109 Units investment):
valued at $10 per Unit (or $1,090) Short Term Capital Gain (assuming 39% rate): $155
Long Term Capital Gain (assuming 20% rate): $ 79
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND III, LTD.
(GP: Baron Capital VII, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1986
Bridge point Apartments - Phase II Limited partnership interest in limited
1500 Monument Road partnership which holds fee simple
Suite 1102
Jacksonville, Florida 32225
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 3.39
<CAPTION>
--------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 6 288 $389
--------------------------------------------------------------------------------------------------------------
1 BR 37 576 $439
--------------------------------------------------------------------------------------------------------------
2 BR 5 864 $600
--------------------------------------------------------------------------------------------------------------
Total 48 27,360
-------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 92% ESTIMATED APPRAISED VALUE: $1,610,000
1997 AVG. MONTHLY OCCUPANCY %: 93% APPRAISAL DATE: 2/98
1996 AVG. MONTHLY OCCUPANCY %: 95% 5/31/98 FEDERAL INCOME TAX BASIS: $1,167,745
1995AVG. MONTHLY OCCUPANCY %: 94% DEPRECIATION LIFE CLAIMED: 25.5 yrs.
1994AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 21.4228
1993AVG. MONTHLY OCCUPANCY %: 93% 5/31/98 PROPERTY TAX VALUE: $904,775
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 7/1/06
Huntington Mortgage Co.
41 South High Street
Suite 900
Columbus, Ohio 43215
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $735,000 ANNUAL DEBT SERVICE: $76,572
5/31/98 BALANCE: $716,752 MONTHLY PAYMENT: $ 6,381
BALANCE DUE AT MATURITY: $625,327
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.52% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayment permitted only after 7/1/05.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 6/95 NUMBER OF UNITS SOLD: 1,600
NUMBER OF INVESTORS: 32 PRICE PER UNIT: $500
PAID IN CAPITAL: $800,000 DATE OFFERING TERMINATED: 11/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive any remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM EXCHANGE
OFFERED IN EXCHANGE OFFERING OFFERING (per $1,000 of Investors' original
(per $1,000 of Investors' original investment): 111 Units investment):
valued at $10 per Unit (or $1,110) Short Term Capital Gain (assuming 39% rate): $101
Long Term Capital Gain (assuming 20% rate): $ 52
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
MIDWEST INCOME GROWTH FUND VI, LTD.
(GP: Baron Capital of Ohio III, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1974
BROOKWOOD WAY APARTMENTS Limited partnership interest in limited
327 N. Brookwood Way partnership which holds fee simple
Mansfield, Ohio 44906
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 3.92
<CAPTION>
--------------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 3 288 $269
--------------------------------------------------------------------------------------------------------------
1 BR 60 576 $359
--------------------------------------------------------------------------------------------------------------
2 BR 3 864 $389
--------------------------------------------------------------------------------------------------------------
Total 66 38,016
-------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 97% ESTIMATED APPRAISED VALUE: $1,764,000
1997 AVG. MONTHLY OCCUPANCY %: 94% APPRAISAL DATE: 6/96
1996 AVG. MONTHLY OCCUPANCY %: 97% 5/31/98 FEDERAL INCOME TAX BASIS: $1,714,776
1995 AVG. MONTHLY OCCUPANCY %: 95% DEPRECIATION LIFE CLAIMED: 25 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 96% REALTY TAX RATE (MILLAGE): 78.13
1993 AVG. MONTHLY OCCUPANCY %: 94% 5/31/98 PROPERTY TAX VALUE: $349,520
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 12/1/06
Mellon Bank
1422 Euclid #900
Cleveland, Ohio 44115
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,075,000 ANNUAL DEBT SERVICE: $108,612
5/31/98 BALANCE: $1,058,868 MONTHLY PAYMENT: $ 9,051
BALANCE DUE AT MATURITY: $ 890,263
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.04% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Loan may be prepaid in whole at any time after December 1, 2001 provided written notice of such prepayment is
received by lender not more than 60 days and not less than 30 days prior to the date of such payment.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 6/96 NUMBER OF UNITS SOLD: 600
NUMBER OF INVESTORS: 7 PRICE PER UNIT: $500
PAID IN CAPITAL: $300,000 DATE OFFERING TERMINATED: 10/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive 70% of any remaining distributable cash during the fiscal year
less a reasonable cash reserve determined by the GP, with the GP receiving the remaining 30%.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM EXCHANGE
OFFERED IN EXCHANGE OFFERING OFFERING (per $1,000 of Investors' original
(per $1,000 of Investors' original investment): 102 Units investment):
valued at $10 per Unit (or $1,020) Short Term Capital Gain (assuming 39% rate): $155
Long Term Capital Gain (assuming 20% rate): $ 79
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
FLORIDA OPPORTUNITY INCOME PARTNERS, LTD.
(GP: Baron Capital III, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1982
CAMELLIA COURT APARTMENTS Limited partnership interest in limited
1401 S. Clyde Morris Boulevard partnership which holds fee simple
Daytona Beach, Florida 32114
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 5.15
<CAPTION>
----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 59 576 $420
----------------------------------------------------------------------------------------------------------
2 BR 1 864 $560
----------------------------------------------------------------------------------------------------------
Total 60 34,848
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 90% ESTIMATED APPRAISED VALUE: $1,833,000
1997 AVG. MONTHLY OCCUPANCY %: 75% APPRAISAL DATE: 8/98:
1996 AVG. MONTHLY OCCUPANCY %: 91% 5/31/98 FEDERAL INCOME TAX BASIS: $1,402,928
1995 AVG. MONTHLY OCCUPANCY %: 91% DEPRECIATION LIFE CLAIMED: 24.5 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 78% REALTY TAX RATE (MILLAGE): 26.77249
1993 AVG. MONTHLY OCCUPANCY %: 72% 5/31/98 PROPERTY TAX VALUE: $1,100,618
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/06
Column Financial
6400 Congress Avenue #200
Boca Raton, Florida 33487
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,100,000 ANNUAL DEBT SERVICE: $111,132
5/31/98 BALANCE: $1,082,394 MONTHLY PAYMENT: $ 9,261
BALANCE DUE AT MATURITY: $ 984,430
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.04% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first five years of the loan; thereafter, entire principal balance may be
prepaid, provided during the sixth and seventh years of the loan lender is paid a prepayment fee equal to the greater of one
percent of the outstanding loan balance or yield maintenance.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C>
DATE OFFERING BEGAN: 5/95 NUMBER OF UNITS SOLD: 800
NUMBER OF INVESTORS: 29 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $800,000 DATE OFFERING TERMINATED: 12/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive any remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'original
(per $1,000 of Investors' original investment): 105 Units investment.
valued at $10 per Unit (or $1,050) Short Term Capital Gain (assuming 39% rate): $155
Long Term Capital Gain (assuming 20% rate): $ 79
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND, LTD.
(GP: Baron Capital II, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<CAPTION>
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1987
Eagle Lake Apartments Limited partnership interest in limited
1025 Eagle Lake Trail partnership which holds fee simple
Port Orange, Florida 32119
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 4.68
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 73 576 $439
-----------------------------------------------------------------------------------------------------------
2 BR 4 864 $550-555
-----------------------------------------------------------------------------------------------------------
Total 77 45,504
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 100% ESTIMATED APPRAISED VALUE: $2,530,000
1997 AVG. MONTHLY OCCUPANCY %: 94% APPRAISAL DATE: 1/98
1996 AVG. MONTHLY OCCUPANCY %: 96% 5/31/98 FEDERAL INCOME TAX BASIS: $2,028,504
1995 AVG. MONTHLY OCCUPANCY %: 92% DEPRECIATION LIFE CLAIMED: 24 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 95% REALTY TAX RATE (MILLAGE): 24.44549
1993 AVG. MONTHLY OCCUPANCY %: 95% 5/31/98 PROPERTY TAX VALUE: $1,755,464
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/05
Column Financial, Inc.
3414 Peachtree Road N.E.
Suite 1140
Atlanta, Georgia 30325-1113
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,500,000 ANNUAL DEBT SERVICE: $144,636
5/31/98 BALANCE: $1,447,811 MONTHLY PAYMENT: $ 12,053
BALANCE DUE AT MATURITY: $1,244,562
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 8.56% through maturity and amortizes on a
25-year basis.
PREPAYMENT PROVISIONS: May be prepaid after 10/25/00 with prepayment penalty equal to 1% of prepayment amount. = INVESTMENT PROGRAM
INFORMATION
<CAPTION>
<S> <C> <C> <C>
DATE OFFERING BEGAN: 11/94 NUMBER OF UNITS SOLD: 1,614
NUMBER OF INVESTORS: 31 PRICE PER UNIT: $500
PAID IN CAPITAL: $807,000 DATE OFFERING TERMINATED: 6/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions. Thereafter, the investors are entitled to receive all remaining
distributable cash during the fiscal year less a reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return (and, in the case of a property sale,
after the holders of second mortgage financing have received 10% of the net sale proceeds remaining after the investors have
received an aggregate amount equal to their capital contributions), the GP is entitled to receive any remaining net proceeds until
it has received a similar return on its capital contribution; thereafter, investors and the GP share any remaining net proceeds
70%/30%.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFFERED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors' original
(per $1,000 of Investors' original investment): 110 Units investment):
valued at $10 per Unit (or $1,100) Short Term Capital Gain (assuming 39% rate): $216
Long Term Capital Gain (assuming 20% rate): $111
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND II, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase I Beneficial interest in unrecorded land trust
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.85 (all 4 phases)
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
2 BR 28 1,075 $619
-----------------------------------------------------------------------------------------------------------
3 BR 24 1,358 $699
-----------------------------------------------------------------------------------------------------------
Total 52 62,692
---------------------------------------------------------------------------
<S> <C> <C>
7/1/98 OCCUPANCY %: 94% ESTIMATED APPRAISED VALUE: $2,990,845
1997 AVG. MONTHLY OCCUPANCY %: 82% APPRAISAL DATE: 11/97
1996 AVG. MONTHLY OCCUPANCY %: 85% 5/31/98 FEDERAL INCOME TAX BASIS: $2,110,459
1995 AVG. MONTHLY OCCUPANCY %: 93% DEPRECIATION LIFE CLAIMED: 23 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 95% REALTY TAX RATE (MILLAGE): 26.41256
1993 AVG. MONTHLY OCCUPANCY %: 93% 5/31/98 PROPERTY TAX VALUE: $1,594,041
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,836,576 ANNUAL DEBT SERVICE: $145,920
5/31/98 BALANCE: $1,834,103 MONTHLY PAYMENT: $ 12,160
BALANCE DUE AT MATURITY: $1,681,926
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 7.01% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable after 4/2001 with yield maintenance until 10/2004; thereafter prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: First half 1994 NUMBER OF UNITS SOLD: 2,000*
NUMBER OF INVESTORS: 38 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,000,000* DATE OFFERING TERMINATED: 7/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions. Thereafter, the investors are entitled to receive all remaining
distributable cash during the fiscal year less a reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors' original
(per $1,000 of Investors' original investment): 117 Units investment):
valued at $10 per Unit (or $1,170) Short Term Capital Gain (assuming 39% rate): $181
Long Term Capital Gain (assuming 20% rate): $ 93
- ------------------------------------------------------------------------------------------------------------------------------------
(See Endnotes)
- --------------------
* Includes 1,840 units sold in the program's offering plus 160 units issued to four investors in exchange for property interests
acquired by them in an earlier unrelated program which was terminated.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REALTY OPPORTUNITY INCOME FUND VIII, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase II Beneficial interest in unrecorded land trust
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.85 (all 4 phases)
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
2 BR 23 1,075 $619
-----------------------------------------------------------------------------------------------------------
3 BR 7 1,358 $699
-----------------------------------------------------------------------------------------------------------
Total 30 34,231
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 93% ESTIMATED APPRAISED VALUE: $2,173,162
1997 AVG. MONTHLY OCCUPANCY %: 73% APPRAISAL DATE: 11/97
1996 AVG. MONTHLY OCCUPANCY %: 82% 5/31/98 FEDERAL INCOME TAX BASIS: $1,145,209
1995 AVG. MONTHLY OCCUPANCY %: 91% DEPRECIATION LIFE CLAIMED: 23 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 26.41256
1993 AVG. MONTHLY OCCUPANCY %: 92% 5/31/98 PROPERTY TAX VALUE: $930,725
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $ 1,072,132 ANNUAL DEBT SERVICE: $85,188
5/31/98 BALANCE: $ 1,070,688 MONTHLY PAYMENT: $ 7,099
BALANCE DUE AT MATURITY: $ 981,813
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 7.01% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable after 4/2001 with yield maintenance until 10/2004; thereafter prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 3/94 NUMBER OF UNITS SOLD: 944
NUMBER OF INVESTORS: 45 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $944,000 DATE OFFERING TERMINATED: 6/94
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions. Thereafter, the investors are entitled to receive all remaining
distributable cash during the fiscal year less a reasonable cash reserve determined by the GP.
ALLOCATION OF INTEREST IN NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount
(including prior distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to
receive any remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors
and the GP share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 118 Units original investment):
valued at $10 per Unit (or $1,180) Short Term Capital Gain (assuming 39% rate): $312
Long Term Capital Gain (assuming 20% rate): $160
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
- ------------------
* The GP became a manager of this program in July 1995, replacing Realty Capital
I, Inc., the initial sponsor.
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME ADVANTAGE FUND I, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase III Beneficial interest in unrecorded land trust
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.85 (all 4 phases)
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
2 BR 19 1,075 $619
-----------------------------------------------------------------------------------------------------------
3 BR 7 1,358 $699
-----------------------------------------------------------------------------------------------------------
Total 26 29,931
---------------------------------------------------------------------------
<S> <C> <C>
7/1/98 OCCUPANCY %: 92% ESTIMATED APPRAISED VALUE: $1,940,339
1997 AVG. MONTHLY OCCUPANCY %: 88% APPRAISAL DATE: 11/97
1996 AVG. MONTHLY OCCUPANCY %: 94% 5/31/98 FEDERAL INCOME TAX BASIS: $1,312,422
1995 AVG. MONTHLY OCCUPANCY %: 98% DEPRECIATION LIFE CLAIMED: 23 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 26.41256
1993 AVG. MONTHLY OCCUPANCY %: 93% 5/31/98 PROPERTY TAX VALUE: $743,191
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $854,708 ANNUAL DEBT SERVICE: $67,908
5/31/98 BALANCE: $853,557 MONTHLY PAYMENT: $ 5,659
BALANCE DUE AT MATURITY: $782,744
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 7.01% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable after 4/2001 with yield maintenance until 10/2004; thereafter prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 2/94 NUMBER OF UNITS SOLD: 940
NUMBER OF INVESTORS: 46 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $940,000 DATE OFFERING TERMINATED: 6/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive all remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 116 Units original investment):
valued at $10 per Unit (or $1,160) Short Term Capital Gain (assuming 39% rate): $84
Long Term Capital Gain (assuming 20% rate): $43
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
- ------------------
The GP became a manager of this program in July 1995, replacing Realty Capital
IV, Inc., the initial sponsor.
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME APPRECIATION FUND I, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase IV Beneficial interest in unrecorded land trust
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.85 (all 4 phases)
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
2 BR 6 1,075 $619
-----------------------------------------------------------------------------------------------------------
3 BR 2 1,358 $699
-----------------------------------------------------------------------------------------------------------
Total 8 9,166
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 88% ESTIMATED APPRAISED VALUE: $471,679
1997 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 11/97
1996 AVG. MONTHLY OCCUPANCY %: 91% 5/31/98 FEDERAL INCOME TAX BASIS: $429,936
1995 AVG. MONTHLY OCCUPANCY %: 88% DEPRECIATION LIFE CLAIMED: 23 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 91% REALTY TAX RATE (MILLAGE): 26.41256
1993 AVG. MONTHLY OCCUPANCY %: 91% 5/31/98 PROPERTY TAX VALUE: $204,899
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $236,584 ANNUAL DEBT SERVICE: $18,792
5/31/98 BALANCE: $236,265 MONTHLY PAYMENT: $ 1,566
BALANCE DUE AT MATURITY: $216,712
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 7.01% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable after 4/2001 with yield maintenance until 10/2004; thereafter prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 4/94 NUMBER OF UNITS SOLD: 205
NUMBER OF INVESTORS: 13 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $205,000 DATE OFFERING TERMINATED: 9/94
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive any remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 116 Units original investment):
valued at $10 per Unit (or $1,160) Short Term Capital Gain (assuming 39% rate): $106
Long Term Capital Gain (assuming 20% rate): $ 55
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
- ------------------
The GP became a manager of this program in July 1995, replacing Realty Capital
II, Inc., the initial sponsor.
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND IV, LTD.
(GP: Baron Capital V, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1986
GLEN LAKE ARMS APARTMENTS Limited partnership interest in limited partnership
2000 Gandy Boulevard North which holds fee simple
St. Petersburg, Florida 33702
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 7.16
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
1 BR 144 550 $674
-----------------------------------------------------------------------------------------------------------
Total 144 79,200
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 68% ESTIMATED APPRAISED VALUE: $6,483,079
1997 AVG. MONTHLY OCCUPANCY %: 78% APPRAISAL DATE: 1/98
1996 AVG. MONTHLY OCCUPANCY %: 81% 5/31/98 FEDERAL INCOME TAX BASIS: $4,165,648
1995 AVG. MONTHLY OCCUPANCY %: 72% DEPRECIATION LIFE CLAIMED: 25 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 79% REALTY TAX RATE (MILLAGE): 25.4849
1993 AVG. MONTHLY OCCUPANCY %: 84% 5/31/98 PROPERTY TAX VALUE: $3,789,000
====================================================================================================================================
MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: SECOND MORTGAGE HOLDER AND ADDRESS:
Republic Bank Glen Lake Arms Joint Venture
1301 Sixth Avenue West 10490 Gandy Boulevard North, Suite 2E
Bradenton, Florida 34205 St. Petersburg, Florida 33702
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $2,812,500 INITIAL PRINCIPAL BALANCE: $375,000
5/31/98 BALANCE: $2,692,623 5/31/98 BALANCE: $359,016
BALANCE DUE AT MATURITY: $2,652,341 BALANCE DUE AT MATURITY: $343,772
MATURITY DATE: 5/18/00 MATURITY DATE: 5/01/05
ANNUAL DEBT SERVICE: $ 293,700 ANNUAL DEBT SERVICE: $ 34,728
MONTHLY PAYMENT: $ 24,475 MONTHLY PAYMENT: $ 2,894
MORTGAGE INTEREST AND AMORTIZATION MORTGAGE INTEREST AND AMORTIZATION
PROVISIONS: The loan bears a fixed interest rate PROVISIONS: The loan bears a fixed interest rate of
of 9.55% and amortizes on a 25-year basis. 8.0% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty PREPAYMENT PROVISIONS: Prepayable without penalty
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 8/95 NUMBER OF UNITS SOLD: 3,640
NUMBER OF INVESTORS: 60 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,820,000 DATE OFFERING TERMINATED: 6/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive all remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return (and, in the case of a property sale,
after the holder of collateral mortgage financing has received 10% of the net sale proceeds remaining after investors have
received an aggregate amount equal to their capital contributions), the GP is entitled to receive any remaining net proceeds until
it has received a similar return on its capital contribution; thereafter the investors and the GP share any remaining net proceeds
70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 125 Units original investment):
valued at $10 per Unit (or $1,250) Short Term Capital Gain (assuming 39% rate): $135
Long Term Capital Gain (assuming 20% rate): $ 69
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
CENTRAL FLORIDA INCOME APPRECIATION FUND, LTD.
(GP: Baron Capital of Florida, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1986
GROVE HAMLET APARTMENTS Limited partnership interest in limited partnership
815B Grove Hamlet Way which holds fee simple
Deland, Florida 32720
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.21
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
1 BR 10 576 $409
-----------------------------------------------------------------------------------------------------------
2 BR 46 864 $479
-----------------------------------------------------------------------------------------------------------
Total 56 45,504
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 98% ESTIMATED APPRAISED VALUE: $2,575,887
1997 AVG. MONTHLY OCCUPANCY %: 71% APPRAISAL DATE: 11/97
1996 AVG. MONTHLY OCCUPANCY %: 75% 5/31/98 FEDERAL INCOME TAX BASIS: $1,634,074
1995 AVG. MONTHLY OCCUPANCY %: 92% DEPRECIATION LIFE CLAIMED: 23 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 95% REALTY TAX RATE (MILLAGE): 25.17206
1993 AVG. MONTHLY OCCUPANCY %: 96% 5/31/98 PROPERTY TAX VALUE: $_________
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/05
Midland Loan Services
210 West 10th Street
Kansas City, Missouri 64105
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,400,000 ANNUAL DEBT SERVICE: $156,024
5/31/98 BALANCE: $1,254,807 MONTHLY PAYMENT: $ 13,002
BALANCE DUE AT MATURITY: $1,314,872
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.50% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 7/94 NUMBER OF UNITS SOLD: 2,100
NUMBER OF INVESTORS: 51 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,050,000 DATE OFFERING TERMINATED: 10/95
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive any remaining distributable cash during the fiscal year less a
reasonable cash reserve determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 119 Units original investment):
valued at $10 per Unit (or $1,190) Short Term Capital Gain (assuming 39% rate): $227
Long Term Capital Gain (assuming 20% rate): $116
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD.
(GP: Baron Capital IX, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1973
LAMPLIGHT COURT APARTMENTS Limited partnership interest in limited partnership
1600 S. Detroit which holds fee simple; also an unrecorded
Bellefontaine, OH 43311 second mortgage in the property
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 6.00
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
Studio 12 288 5 unfurnished $339
7 furnished $359
-----------------------------------------------------------------------------------------------------------
one/one 53 576 $369
-----------------------------------------------------------------------------------------------------------
two/one 15 864 $499
-----------------------------------------------------------------------------------------------------------
Total 80 46,944
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 95% ESTIMATED APPRAISED VALUE: $2,147,000
1997 AVG. MONTHLY OCCUPANCY %: 87% APPRAISAL DATE: 6/96
1996 AVG. MONTHLY OCCUPANCY %: 93% 5/31/98 FEDERAL INCOME TAX BASIS: $1,741,174
1995 AVG. MONTHLY OCCUPANCY %: 88% DEPRECIATION LIFE CLAIMED: 15.25 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 90% REALTY TAX RATE (MILLAGE): 46.67
1993 AVG. MONTHLY OCCUPANCY %: 89% 5/31/98 PROPERTY TAX VALUE: $518,000
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/06
Column Financial
3414 Peachtree Road N.E.
Suite 1140
Atlanta, Georgia 30326
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,400,000 ANNUAL DEBT SERVICE: $135,660
5/31/98 BALANCE: $1,376,182 MONTHLY PAYMENT: $ 11,305
BALANCE DUE AT MATURITY: $1,158,349
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 9.04% and amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first five years of the loan; thereafter, may be prepaid in whole;
provided that during the sixth and seventh years of the loan, lender is paid a prepayment fee equal to the greater of one percent of
the outstanding loan balance or yield maintenance.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 3/96 NUMBER OF UNITS SOLD: 700
NUMBER OF INVESTORS: 27 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $700,000 DATE OFFERING TERMINATED: 11/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive 50% of any remaining distributable cash during the fiscal year
less a reasonable cash reserve determined by the GP, and the GP the remaining 50%.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 50%/50%.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 112 Units original investment):
valued at $10 per Unit (or $1,120) Short Term Capital Gain (assuming 39% rate): $155
Long Term Capital Gain (assuming 20% rate): $ 79
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
GSU STADIUM STUDENT APARTMENTS, LTD.
(GP: Baron Capital X, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1987
STADIUM CLUB APARTMENTS Limited partnership interest in limited partnership
210 Lanier Drive which holds fee simple
Statesboro, Georgia 30458
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 3.50
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
Studio 2 288 $375
-----------------------------------------------------------------------------------------------------------
3 BR 3 880 $688
-----------------------------------------------------------------------------------------------------------
4 BR 55 880 $876
-----------------------------------------------------------------------------------------------------------
Total 60 50,736
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 82% ESTIMATED APPRAISED VALUE: $2,800,000
1997 AVG. MONTHLY OCCUPANCY %: 86% APPRAISAL DATE: 8/97
1996 AVG. MONTHLY OCCUPANCY %: 90% 5/31/98 FEDERAL INCOME TAX BASIS: $2,041,199
1995 AVG. MONTHLY OCCUPANCY %: 74% DEPRECIATION LIFE CLAIMED: 25 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 86% REALTY TAX RATE (MILLAGE): 28.93
1993 AVG. MONTHLY OCCUPANCY %: 82% 5/31/98 PROPERTY TAX VALUE: $1,802,200
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/05
GMAC
650 Dresher Road
Horsham, Pennsylvania 19044
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,750,000 ANNUAL DEBT SERVICE: $151,272
5/31/98 BALANCE: $1,740,736 MONTHLY PAYMENT: $ 12,606
BALANCE DUE AT MATURITY: $1,615,458
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan bears a fixed interest rate of 7.87% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable with prepayment fee in an amount equal to 1% of the then outstanding principal balance.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 11/95 NUMBER OF UNITS SOLD: 2,000
NUMBER OF INVESTORS: 38 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,000,000 DATE OFFERING TERMINATED: 2/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 10% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the GP receives all remaining distributable cash during the fiscal year less a reasonable cash reserve
determined by the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 10% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 70%/30%.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 117 Units original investment):
valued at $10 per Unit (or $1,170) Short Term Capital Gain (assuming 39% rate): $125
Long Term Capital Gain (assuming 20% rate): $ 64
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
<TABLE>
<CAPTION>
BARON STRATEGIC INVESTMENT FUND II, LTD.
(GP: Baron Capital XXXI, Inc.)
====================================================================================================================================
PROPERTY INFORMATION
<S> <C> <C>
PROPERTY NAME AND ADDRESS: TYPE OF PROPERTY INTEREST: YEAR COMPLETED: 1977
STEEPLECHASE APARTMENTS Limited partnership interest in limited partnership
841 W. 53rd Street which holds fee simple
Anderson, Indiana 46013
UNIT MIX AND RENTAL RATES: APPROXIMATE ACREAGE: 3.2
<CAPTION>
-----------------------------------------------------------------------------------------------------------
APPROXIMATE APPROXIMATE
RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------
1 BR 12 550 $399
-----------------------------------------------------------------------------------------------------------
2 BR 60 678 $419
-----------------------------------------------------------------------------------------------------------
Total 72 47,280
---------------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
7/1/98 OCCUPANCY %: 91% ESTIMATED APPRAISED VALUE: $2,125,000
1997 AVG. MONTHLY OCCUPANCY %: 73% APPRAISAL DATE: 7/98: oral estimate pending receipt of MAI
1996 AVG. MONTHLY OCCUPANCY %: 70% appraisal
1995 AVG. MONTHLY OCCUPANCY %: 82% 5/31/98 FEDERAL INCOME TAX BASIS: $1,290,088
1994 AVG. MONTHLY OCCUPANCY %: 78% DEPRECIATION LIFE CLAIMED: 25 yrs.
1993 AVG. MONTHLY OCCUPANCY %: 81% REALTY TAX RATE (MILLAGE): 12.3716
5/31/98 PROPERTY TAX VALUE: $285,170
====================================================================================================================================
FIRST MORTGAGE INFORMATION
<CAPTION>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/06
Crown Bank
105 Live Oaks Garden #129
Castleberry, Florida 32707
<S> <C> <C> <C>
INITIAL PRINCIPAL BALANCE: $1,260,000 ANNUAL DEBT SERVICE: $ 91,344
5/31/98 BALANCE: $1,244,892 MONTHLY PAYMENT: $ 7,612
BALANCE DUE AT MATURITY: $1,099,557
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: During loan years 1 and 2 interest rate is 7.25%; during years 3 and 4 interest rate
is 7.75%; thereafter, 8.25%. The loan amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 5/96 NUMBER OF UNITS SOLD: 1,600
NUMBER OF INVESTORS: 16 PRICE PER UNIT: $500
PAID IN CAPITAL: $800,000 DATE OFFERING TERMINATED: 10/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is distributed to the investors until they have received
a 12.5% non-cumulative return on their capital contributions; the GP is then entitled to receive a similar return on its capital
contribution. Thereafter, the investors are entitled to receive 50% of any remaining distributable cash during the fiscal year
less a reasonable cash reserve determined by the GP, and the GP the remaining 50%.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors have received an aggregate amount (including prior
distributions) equal to their capital contributions plus a 12.5% yearly cash-on-cash return, the GP is entitled to receive any
remaining net proceeds until it has received a similar return on its capital contribution; thereafter the investors and the GP
share any remaining net proceeds 50%/50%.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM
OFFERED IN EXCHANGE OFFERING EXCHANGE OFFERING (per $1,000 of Investors'
(per $1,000 of Investors' original investment): 110 Units original investment):
valued at $10 per Unit (or $1,100) Short Term Capital Gain (assuming 39% rate): $155
Long Term Capital Gain (assuming 20% rate): $ 79
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes)
<PAGE>
Endnotes:
1. The First Mortgage Loan is not insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise
insured or guaranteed.
2. The Property is in good overall condition and is suitable and adequate for
the purpose for which it was built.
3. The Property is subject to significant competition from other residential
apartment properties in the general vicinity of the Property.
4. In the opinion of the Managing Shareholder, the Property is covered by
insurance of the types and amounts which are comparable for similar
properties located in the general vicinity of the Property.
5. Each Property is a residential apartment property (other than Glen Lake
Arms Apartments, which are short-term corporate residential units) which
generally leases units to tenants under one-year term lease agreements
common in the industry.
6. The estimated appraised value of the Property was determined by a qualified
and licensed independent appraisal firm. See the Prospectus at "THE
EXCHANGE OFFERING - Exchange Property Appraisals."
7. The overall depreciable life of the Property is 27.5 years; depreciation is
determined using the straight-line method.
8. Based on certain factual representations made by the Operating Partnership
and on certain conditions specified at "FEDERAL INCOME TAX CONSIDERATIONS -
Exchange of Exchange Partnership Units for Operating Partnership Units,"
special tax counsel has opined that Offerees who accept the Exchange
Offering will not incur any immediate tax liability for any taxable gain in
connection with such transaction. Any such tax liability will be deferred
until a later date. The schedule at "Estimated Deferred Taxable Gain from
Exchange Offering (per $1,000 of Investors' original investment)" indicates
the amount of taxable gain each Offeree who accepts the Exchange Offering
will defer in connection with such transaction per each $1,000 of his
original investment.
<PAGE>
EXHIBIT C
FINANCIAL STATEMENTS OF THE TRUST,
THE OPERATING PARTNERSHIP AND
THE MANAGING SHAREHOLDER
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
BARON CAPITAL TRUST
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheet F-2
Notes to Financial Statements F-3
BARON CAPITAL PROPERTIES, L.P.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-4
FINANCIAL STATEMENTS
Balance Sheet F-5
Notes to Financial Statements F-6
BARON ADVISORS, INC.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-7
FINANCIAL STATEMENTS
Balance Sheet F-8
Notes to Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Trustees and Shareholders
Baron Capital Trust
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Capital Trust (the
"Trust") as of February 3, 1998. This financial statement is the responsibility
of the Trust's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Baron Capital Trust as of
February 3, 1998 in conformity with generally accepted accounting principles.
RACHLIN COHEN & HOLTZ
Miami, Florida
March 20, 1998
F-1
<PAGE>
BARON CAPITAL TRUST
BALANCE SHEET
FEBRUARY 3, 1998
ASSETS
Current Assets:
Cash $100
====
SHAREHOLDERS' EQUITY
Shareholders' Equity:
Common shares, no par value; 25,000,000 shares
authorized; none issued and outstanding $ --
Additional paid-in-capital 100
----
$100
====
See notes to financial statements.
F-2
<PAGE>
BARON CAPITAL TRUST
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1998
NOTE 1. ORGANIZATION
Baron Capital Trust (the "Trust"), a Delaware business trust, and its
affiliate, Baron Capital Properties, L.P. (the "Operating Partnership"), a
Delaware limited partnership, constitute a self-administered and
self-managed real estate company which has been organized to indirectly
acquire equity interests in existing residential apartment properties
located in the United States and to provide or acquire debt financing
secured by mortgages on such types of property. The Trust intends to
acquire, own, operate, manage and improve residential apartment properties
for long-term ownership, and thereby to seek to maximize current and
long-term income and the value of its assets.
The Trust's Declaration authorizes it to issue up to 25,000,000 shares of
beneficial interest, no par value per share, consisting of common shares
and of preferred shares of such classes with such preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption as the Managing
Shareholder may create and authorize from time to time in accordance with
Delaware law and the Declaration. Prior to the proposed offering referred
to below, there were no shares outstanding.
NOTE 2. PROPOSED PUBLIC OFFERING
The Trust is proposing to offer, in an initial public offering, a maximum
of 2,500,000 common shares of beneficial interest in the Trust at $10 per
common share, which is payable in full upon subscription, for proposed
total gross proceeds of $25,000,000. Funds received will be held in escrow
until the minimum of 50,000 common shares is sold. All of the common shares
to be issued or sold by the Trust in the offering will be tradable without
restriction under the Securities Act, but will be subject to certain
restrictions designed to permit the Trust to qualify and maintain its
status as a Real Estate Investment Trust under the Internal Revenue Code.
F-3
<PAGE>
Exhibit C
BARON CAPITAL TRUST
BALANCE SHEET
As of June 30, 1998
June 30, 1998
-------------
ASSETS
Current Assets
Checking/Savings
Amer Stock Trans & Trust Escrow 225,540.00
Key Bank 160,857.55
------------
Total Checking/Savings 386,397.55
------------
Total Current Assets 386,397.55
Other Assets
Investments
Baron Capital Properties, L.P. 1,532,240.00
------------
Total Investments 1,532,240.00
------------
Total Other Assets 1,532,240.00
------------
TOTAL ASSETS 1,918,637.55
============
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Other Current Liabilities
Other Payables 147,563.64
------------
Total Other Current Liabilities 147,563.64
------------
Total Current Liabilities 147,563.64
------------
Equity
Common Shares 2,031,233.89
Partnership Capital 100.00
Net Income -260,259.98
------------
Total Equity 1,771,073.91
------------
TOTAL LIABILITIES & EQUITY 1,918,637.55
============
F-4
<PAGE>
BARON CAPITAL TRUST
PROFIT AND LOSS
January through June 1998
Jan - Jun 1998
--------------
Income
Bank account interest 406.66
----------
Total Income 406.66
Expense
Advisory Expenses 40,624.67
Bank Service Charges 160.58
Commissions 162,498.71
Federal Withholding on Interest 0.01
Investment Expenses 57,382.67
----------
Total Expenses 260,666.64
----------
Net Income -260,259.98
----------
F-5
<PAGE>
BARON CAPITAL TRUST
STATEMENT OF CASH FLOWS
Period Ending June 30, 1998
1998
-------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (260,259.98)
Changes in assets (increase) decrease in:
Other assets 0.00
Changes in liabilities, increase (decrease) in:
Accounts payable and accrued expenses 147,563.64
-------------
Net cash provided by operating activities (112,696.34)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Baron Capital Properties, L.P. (1,532,240.00)
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering Proceeds 2,031,333.89
Net increase (decrease) in cash and cash equivalents 386,397.55
Cash and cash equivalents, beginning of period 0.00
-------------
Cash and cash equivalents, end of period 386,397.55
F-6
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
Baron Capital Properties. L.P.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Capital Properties, L.P.
(the "Partnership") as of February 3, 1998. This financial statement is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Baron Capital Properties, L.P.
as of February 3, 1998 in conformity with generally accepted accounting
principles.
RACHLIN COHEN & HOLTZ
Miami, Florida
March 20, 1998
F-7
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
BALANCE SHEET
FEBRUARY 3, 1998
ASSETS
Current Assets:
Cash $50,000
=======
PARTNERS' CAPITAL
Partners' Capital:
General partner $ --
Limited partners 50,000
-------
$50,000
=======
See notes to financial statements.
F-8
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1998
NOTE 1. ORGANIZATION
Baron Capital Properties, L.P. (the "Operating Partnership"), a Delaware
limited partnership, is the operating partner of Baron Capital Trust (the
"Trust"). Together, both the Trust and Operating Partnership constitute a
self-administered and self-managed real estate company which has been
organized to indirectly acquire equity interests in existing residential
apartment properties located in the United States and to provide or acquire
debt financing secured by mortgages on such types of property. The Trust
intends to acquire, own, operate, manage and improve residential apartment
properties for long-term ownership, and thereby to seek to maximize current
and long-term income and the value of its assets.
The operations of the Trust will be carried on through the Operating
Partnership. Substantially all of the Trust's assets (including the
property interests acquired) will be held by, and its operations conducted
through, the Operating Partnership. As its sole general partner, the Trust
will control the Operating Partnership as well as hold units representing
an economic interest in the Operating Partnership. The Operating
Partnership will be responsible for, and pay when due, its share of all
administrative and operating expenses of properties in which it acquires an
interest.
In its proposed exchange offering, the Operating Partnership intends to
issue up to 2,500,000 units of limited partnership interest ("Units") in
exchange for limited partnership interests owned by limited partners in
real estate limited partnerships which own direct or indirect equity or
debt interests in residential apartment properties. Holders of Units will
have the right, exercisable at any time following the offering, to exchange
all or a portion of their Units into an equivalent number of Common Shares
of beneficial interest in the Trust.
The Trust, as General Partner of the Operating Partnership, is authorized
to cause the Operating Partnership to issue additional limited partnership
interests in the Operating Partnership for any purpose of the Operating
Partnership at any time to such persons and on such terms and conditions as
may be determined by the Trust in its sole and absolute discretion. Since
Units are exchangeable by Unitholders into an equivalent number of Common
Shares of the Trust, the maximum number of Units that may be issued by the
Operating Partnership is limited to the number of authorized Shares of the
Trust, which is 25,000,000, less shares issued by the Trust directly,
excluding Common Shares issued in exchanges of Units for Common Shares.
In exchange for a cash capital contribution and other consideration paid to
the Operating Partnership, in May 1998, each of its founders, Gregory K.
McGrath and Robert S. Geiger, was issued an amount of Units which are
exchangeable (subject to certain escrow restrictions) into 9.5% of the
Common Shares of the Trust outstanding after the completion of the exchange
offering and the cash public offering to be made by the Trust, on a fully
diluted basis assuming that all then outstanding Units (other than those
owned by the Trust) have been exchanged into an equivalent number of Common
Shares.
F-9
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholder
Baron Advisors, Inc.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Advisors, Inc. (the
"Managing Shareholder") as of February 28, 1998. This financial statement is the
responsibility of the Managing Shareholder's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of Baron Advisors, Inc. as of
February 28, 1998 in conformity with generally accepted accounting principles.
RACHLIN COHEN & HOLTZ
Miami, Florida
March 26, 1998
F-10
<PAGE>
BARON ADVISORS, INC.
BALANCE SHEET
FEBRUARY 28, 1998
ASSETS
Current Assets:
Cash $100
====
SHAREHOLDER'S EQUITY
Shareholder's Equity:
Common shares, no par value; 1,000 shares
authorized; none issued and outstanding $ --
Additional paid-in-capital 100
----
$100
====
F-11
<PAGE>
BARON ADVISORS, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1998
NOTE 1. ORGANIZATION
Baron Advisors, Inc., the Managing Shareholder of the Baron Capital Trust
("the Trust") was incorporated in July 1997 as a Delaware corporation.
As Managing Shareholder of the Trust, Baron Advisors, Inc. will have direct
and exclusive discretion in management and control of the affairs of the
Trust and Baron Capital Properties, L.P. (the "Operating Partnership"),
subject to general supervision and review by the Independent Trustees and
the Managing Shareholder acting together as the Board of the Trust and to
prior approval authority of a majority of the Board and a majority of the
Independent Trustees in respect of certain specified actions. The Corporate
Trustee, Baron Capital Properties, Inc. (an affiliate of the Managing
Shareholder), will act on the instructions of the Managing Shareholder, and
will not take independent discretionary action on behalf of the Trust.
NOTE 2. TRUST MANAGEMENT AGREEMENT
The Trust will enter into a Trust Management Agreement with the Managing
Shareholder under which the Managing Shareholder will be obligated to
provide management, administrative and investment advisor services to the
Trust from the commencement of the Offering. The services to be rendered
will include, among other things, communicating with and reporting to
investors, administering accounts, providing to the Trust office space,
equipment and facilities and other services necessary for the Trust's
operation, and representing the Trust in its relations with custodians,
depositories, accountants, attorneys, brokers and dealers, corporate
fiduciaries, insurers, banks and others, as required. The Managing
Shareholder will also be responsible for determining which real estate
investments and non-real estate investments (including the temporary
investment of the Trust's available funds prior to their commitment to
particular real estate investments) the Trust will make and for making
divestment decisions, subject to the provisions of the Declaration. The
Trust Management Agreement has an initial term of one year and may be
extended on a year-to-year basis on approval of (i) the Board or a majority
of the shareholders entitled to vote on such matter or (ii) a majority of
the Independent Trustees.
The Trust will reimburse the Managing Shareholder for all Trust expenses
paid by it. As compensation for the Managing Shareholder's performance
under the Trust Management Agreement, beginning June 1, 1998, the Trust
will pay to the Managing Shareholder, on a monthly basis during the term of
the agreement, an annual management fee in an amount equal to 1% of the
aggregate subscription price paid for common shares in the proposed public
offering of the Trust's common shares and of the initial value of units
issued in connection with the proposed exchange offering. The Managing
Shareholder in its sole discretion may elect to receive payment for its
service in the form of common shares with an equivalent value.
F-12
<PAGE>
EXHIBIT D
FINANCIAL STATEMENTS OF THE EXCHANGE PROPERTIES
<PAGE>
EXHIBIT D
BARON CAPITAL PROPERTIES, L.P.
INDEX TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF EXCHANGE PROPERTIES PURSUANT TO REGULATION SB 310
EXCHANGE PROPERTIES (Combined):
Independent Auditors Report
Combined Statement of Revenues and Certain Expenses
for the Years Ended December 31, 1996 and 1997
Combined Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
BLOSSOM CORNERS APARTMENTS PHASE I:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
BRIDGEPOINT APARTMENTS PHASE II:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
BROOKWOOD WAY APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
CAMELLIA COURT APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
EAGLE LAKE APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
FOREST GLEN APARTMENTS PHASE I:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
FOREST GLEN APARTMENTS PHASE II:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
FOREST GLEN APARTMENTS PHASE III:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
<PAGE>
FOREST GLEN APARTMENTS PHASE IV:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
GLEN LAKE ARMS APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
GROVE HAMLET APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
LAMPLIGHT COURT APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
STADIUM CLUB APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
STEEPLECHASE APARTMENTS:
Independent Auditors Report
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997
Notes to Statement of Revenues and Certain Expenses
Statement of Revenues and Certain Expenses
for the Five-Month Period Ended May 31, 1998 (unaudited)
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying combined statement of revenues and certain
expenses (defined as being operating revenues less direct operating expenses) of
the following properties for the years ended December 31, 1996 and 1997:
Blossom Corners Apartments, Phase I
Bridge Point Apartments, Phase II
Brookwood Way Apartments
Camellia Court Apartments
Eagle Lake Apartments
Forest Glen Apartments, Phases I-IV
Glen Lake Apartments
Grove Hamlet Apartments
Lamplight Court Apartments
Stadium Club Apartments
Steeplechase Apartments
This combined financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the combined statement of revenues and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined statement of
revenues and certain expenses. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall presentation of the combined statement of revenues and
certain expenses. I believe that my audit provides a reasonable basis for my
opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Registration Statement
on Form SB-2 of Baron Capital Trust, a Delaware business trust) and excludes
material expenses described in Note 1 to the combined statement of revenues and
certain expenses, that would not be comparable to those resulting from the
proposed future operations of the properties.
In my opinion, the combined statement of revenues and certain expenses presents
fairly, in all material respects, the combined revenues and certain expenses, as
defined above, of the above listed properties, for the years ended December 31,
1996 and 1997 in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 31, 1998
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying combined statement of revenues and certain
expenses (defined as being operating revenues less direct operating expenses) of
the following properties for the years ended December 31, 1996 and 1997:
Blossom Corners Apartments, Phase I
Bridge Point Apartments, Phase II
Brookwood Way Apartments
Camellia Court Apartments
Eagle Lake Apartments
Forest Glen Apartments, Phases I-IV
Glen Lake Apartments
Grove Hamlet Apartments
Lamplight Court Apartments
Stadium Club Apartments
Steeplechase Apartments
This combined financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the combined statement of revenues and certain expenses
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined statement of
revenues and certain expenses. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall presentation of the combined statement of revenues and
certain expenses. I believe that my audit provides a reasonable basis for my
opinion.
The accompanying combined statement of revenues and certain expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the Registration Statement
on Form S-4 of Baron Capital Properties, L.P., a Delaware limited partnership)
and excludes material expenses described in Note 1 to the combined statement of
revenues and certain expenses, that would not be comparable to those resulting
from the proposed future operations of the properties.
In my opinion, the combined statement of revenues and certain expenses presents
fairly, in all material respects, the combined revenues and certain expenses, as
defined above, of the above listed properties, for the years ended December 31,
1996 and 1997 in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 31, 1998
<PAGE>
NOTE TO COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying combined financial statement
is not representative of the actual operations for the period presented as
certain expenses, which may not be comparable to the expenses expected to
be incurred by Baron Capital Properties, L.P., a Delaware limited
partnership which will conduct the future real property operations of Baron
Capital Trust, have been excluded. Expenses excluded consist of
depreciation due to basis and method changes, professional fees, and other
costs not directly related to the future operations of the properties.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
<PAGE>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997:
Blossom Bridge Forest
Corners Point Brookwood Camellia Eagle Glen Glen
Phase I Phase II Way Court Lake Phase I-IV Lake
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income $ 273,596 $ 212,608 $ 248,950 $ 213,718 $ 346,154 $ 705,170 $ 745,649
Other income 20,987 6,605 7,988 16,516 21,065 23,688 22,536
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 294,583 219,213 256,938 230,234 367,219 728,858 768,185
---------- ---------- ---------- ---------- ---------- ---------- ----------
CERTAIN EXPENSES
Personnel 38,493 14,531 22,296 35,481 34,983 79,318 85,191
Advertising and promotion 9,946 5,783 6,998 9,056 9,811 18,292 20,726
Utilities 23,989 36,174 20,793 25,805 26,117 20,547 120,687
Repairs and maintenance 30,808 17,054 15,092 24,685 30,289 87,761 67,235
Real estate taxes and insurance 33,224 24,715 17,645 35,934 49,694 100,094 118,041
Mortgage interest expense 94,358 69,345 96,565 98,851 158,727 277,043 310,603
Management fees 20,039 14,751 15,720 13,884 26,702 39,306 42,276
Other operating expenses 6,673 3,036 2,972 5,359 4,833 12,631 14,932
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total certain expenses 257,530 185,389 198,081 249,055 341,156 634,992 779,691
---------- ---------- ---------- ---------- ---------- ---------- ----------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 37,053 $ 33,824 $ 58,857 ($ 18,821) $ 26,063 $ 93,866 ($ 11,506)
========== ========== ========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1996:
REVENUES
Rental income $ 278,590 $ 228,451 $ 236,466 $ 255,025 $ 348,348 $ 739,124 $ 695,308
Other income 26,698 7,884 6,293 19,693 32,140 28,307 60,265
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues 305,288 236,335 242,759 274,718 380,488 767,431 755,573
---------- ---------- ---------- ---------- ---------- ---------- ----------
CERTAIN EXPENSES
Personnel 40,705 11,767 27,583 20,430 29,559 68,595 81,963
Advertising and promotion 8,660 5,075 4,626 6,756 5,020 13,401 25,227
Utilities 19,108 28,846 20,213 30,769 30,819 18,726 122,890
Repairs and maintenance 40,641 21,224 14,234 21,320 25,777 75,906 36,584
Real estate taxes and insurance 36,627 26,194 12,941 37,559 49,359 105,642 118,627
Mortgage interest expense 98,805 68,759 96,745 78,273 159,163 255,729 312,704
Management fees 21,186 17,019 16,637 14,525 24,129 48,622 43,434
Other operating expenses 6,016 2,515 2,727 3,300 5,275 9,240 6,280
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total certain expenses 271,748 181,399 195,706 212,932 329,101 595,861 747,709
---------- ---------- ---------- ---------- ---------- ---------- ----------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 33,540 $ 54,936 $ 47,053 $ 61,786 $ 51,387 $ 171,570 $ 7,864
========== ========== ========== ========== ========== ========== ==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1997:
Grove Lamplight Stadium Steeple- Combined
Hamlet Court Club chase Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $ 221,070 $ 303,933 $ 458,687 $ 234,305 $3,963,840
Other income 7,510 14,083 27,710 10,733 179,421
---------- ---------- ---------- ---------- ----------
Total revenues 228,580 318,016 486,397 245,038 4,143,261
---------- ---------- ---------- ---------- ----------
CERTAIN EXPENSES
Personnel 31,912 39,363 72,107 50,624 504,299
Advertising and promotion 1,530 6,648 11,885 11,417 112,092
Utilities 13,915 48,903 49,370 49,085 435,385
Repairs and maintenance 8,245 19,279 31,966 31,930 364,344
Real estate taxes and insurance 35,289 38,313 36,528 33,112 522,589
Mortgage interest expense 125,177 126,175 146,120 93,448 1,596,412
Management fees 14,028 18,581 25,469 15,227 245,983
Other operating expenses 3,912 4,690 15,278 7,495 81,811
---------- ---------- ---------- ---------- ----------
Total certain expenses 234,008 301,952 388,723 292,338 3,862,915
---------- ---------- ---------- ---------- ----------
REVENUES IN EXCESS
OF CERTAIN EXPENSES ($ 5,428) $ 16,064 $ 97,674 ($ 47,300) $280,346
========== ========== ========== ========== ==========
YEAR ENDED DECEMBER 31, 1996:
REVENUES
Rental income $ 228,459 $ 325,019 $ 427,919 $ 231,630 $3,994,339
Other income 10,945 14,901 21,809 13,663 242,598
---------- ---------- ---------- ---------- ----------
Total revenues 239,404 339,920 449,728 245,293 4,236,937
---------- ---------- ---------- ---------- ----------
CERTAIN EXPENSES
Personnel 42,952 49,403 67,232 57,299 497,488
Advertising and promotion 1,388 6,747 10,074 6,207 93,181
Utilities 18,450 45,192 39,341 56,241 430,595
Repairs and maintenance 27,052 19,456 26,020 21,149 329,363
Real estate taxes and insurance 32,966 41,360 30,980 37,786 530,041
Mortgage interest expense 126,382 134,591 122,433 95,540 1,549,124
Management fees 15,889 21,187 28,041 11,792 262,461
Other operating expenses 4,748 7,093 11,296 7,612 66,102
---------- ---------- ---------- ---------- ----------
Total certain expenses 269,827 325,029 335,417 293,626 3,758,355
---------- ---------- ---------- ---------- ----------
REVENUES IN EXCESS
OF CERTAIN EXPENSES ($ 30,423) $ 14,891 $ 114,311 ($ 48,333) $ 478,582
========== ========== ========== ========== ==========
</TABLE>
<PAGE>
COMBINED STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE-MONTH PERIOD ENDED MAY 31, 1998
<TABLE>
<CAPTION>
FIVE-MONTH PERIOD ENDED MAY 31, 1998:
Blossom Bridge Forest
Corners Point Brookwood Camellia Eagle Glen Glen
Phase I Phase II Way Court Lake Phase I-IV Lake
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental income $145,329.20 $ 98,226.59 $106,424.36 $102,254.43 $155,660.76 $322,150.02 $389,104.49
Other income 833.88 2,126.08 1,964.62 6,835.59 8,944.41 18,198.00 3,616.16
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues 146,163.08 100,352.67 108,388.98 109,090.02 164,605.17 340,348.02 392,720.65
----------- ----------- ----------- ----------- ----------- ----------- -----------
CERTAIN EXPENSES
Personnel 15,277.41 6,133.44 9,620.12 17,155.90 21,773.59 39,416.09 69,515.90
Advertising and promotion 2,399.14 2,604.88 3,163.71 3,020.68 4,727.99 5,138.61 8,827.90
Utilities 7,379.00 11,240.16 8,591.94 5,401.55 9,048.35 7,543.10 31,173.88
Repairs and maintenance 9,199.76 5,659.00 3,836.29 11,602.36 12,832.49 30,243.61 77,847.71
Real estate taxes and insurance 13,843.00 10,297.92 7,352.08 14,972.50 20,705.83 41,705.84 47,532.75
Mortgage interest expense 39,316.00 28,893.75 40,235.42 41,187.92 66,136.25 115,434.58 129,417.92
Management fees 9,343.71 6,686.93 7,136.69 7,089.83 9,816.62 18,138.84 0.00
Other operating expenses 3,215.20 897.91 1,322.90 2,815.17 2,851.58 8,596.03 6,249.28
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total certain expenses 99,973.22 72,413.99 81,259.15 103,245.91 147,892.70 266,216.70 370,565.34
----------- ----------- ----------- ----------- ----------- ----------- -----------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 46,189.86 $ 27,938.68 $ 27,129.83 $ 5,844.11 $ 16,712.47 $ 74,131.32 $ 22,155.31
=========== =========== =========== =========== =========== =========== ===========
<CAPTION>
FIVE-MONTH PERIOD ENDED MAY 31, 1998:
Grove Lamplight Stadium Steeple- Combined
Hamlet Court Club chase Total
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES
Rental income $108,133.29 $142,667.59 $179,409.18 $110,704.22 $1,860,064.13
Other income 9,011.18 6,400.94 10,174.69 8,118.09 76,223.64
----------- ----------- ----------- ----------- -------------
Total revenues 117,144.47 149,068.53 189,583.87 118,822.31 1,936,287.77
----------- ----------- ----------- ----------- -------------
CERTAIN EXPENSES
Personnel 14,452.76 12,535.70 23,627.39 25,570.39 255,078.69
Advertising and promotion 928.46 803.26 4,203.60 1,363.13 37,181.36
Utilities 3,418.41 15,454.32 13,968.22 23,188.33 136,407.26
Repairs and maintenance 10,986.23 5,924.06 9,851.78 20,453.44 198,436.73
Real estate taxes and insurance 14,703.75 15,963.75 15,220.00 13,796.67 216,094.09
Mortgage interest expense 52,157.08 52,572.92 60,883.33 38,936.67 665,171.84
Management fees 6,816.12 9,420.94 13,370.59 7,127.43 94,947.70
Other operating expenses 2,562.90 2,920.31 3,905.18 3,065.43 38,401.89
----------- ----------- ----------- ----------- -------------
Total certain expenses 106,025.71 115,595.26 145,030.09 133,501.49 1,641,719.56
----------- ----------- ----------- ----------- -------------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 11,118.76 $ 33,473.27 $ 44,553.78 $(14,679.18) $ 294,568.21
=========== =========== =========== =========== =============
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Blossom Corners Apartments, Phase I, for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Blossom Corners Apartments, Phase I, for the years ended December 31,
1996 and 1997 in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 9, 1998
<PAGE>
BLOSSOM CORNERS APARTMENTS, PHASE I
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
----------- ------------
REVENUES
Rental income $273,596 $278,590
Other income 20,987 26,698
-------- --------
Total revenues 294,583 305,288
-------- --------
CERTAIN EXPENSES
Personnel 38,493 40,705
Advertising and promotion 9,946 8,660
Utilities 23,989 19,108
Repairs and maintenance 30,808 40,641
Real estate taxes and insurance 33,224 36,627
Mortgage interest expense 94,358 98,805
Management fees 20,039 21,186
Other operating expenses 6,673 6,016
-------- --------
Total certain expenses 257,530 271,748
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 37,053 $ 33,540
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
BLOSSOM CORNERS APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Blossom Corners Apartments, Phase I, consist of 70 units located in
Orlando, Florida. The property was acquired by purchase July 7, 1995 by
Florida Income Growth Fund V, Ltd. The following percentage of units were
occupied at the various period ending dates:
December 31, 1996 83%
December 31, 1997 93%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Blossom Corners Apartments, Phase
I.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Blossom Corners Apartments, Phase I
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $145,329.20
Other Income 833.88
-----------
Total Revenue 146,163.08
-----------
Certain Expenses
Personnel 15,277.41
Advertising and Promotion 2,399.14
Utilities Expense 7,379.00
Repairs and Maintenance 9,199.76
Real Estate Taxes and Insurance 13,843.00
Mortgage Interest Expense 39,316.00
Management Fees 9,343.71
Other Operating Expense 3,215.20
-----------
Total Operating Expense 99,973.22
-----------
Revenues in Excess
of Certain Expenses $ 46,189.86
===========
<PAGE>
BLOSSOM CORNERS APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Blossom Corners Apartments, Phase I, consist of 70 units located in
Orlando, Florida. The property was acquired by purchase July 7, 1995 by
Florida Income Growth Fund V, Ltd. The following percentage of units were
occupied at the period ending date:
May 31, 1998 94%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Blossom Corners I Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of
Bridgepoint Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of Bridgepoint Apartments for the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
BRIDGEPOINT APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $212,608 $228,451
Other income 6,605 7,884
-------- --------
Total revenues 219,213 236,335
-------- --------
CERTAIN EXPENSES
Personnel 14,531 11,767
Advertising and promotion 5,783 5,075
Utilities 36,174 28,846
Repairs and maintenance 17,054 21,224
Real estate taxes and insurance 24,715 26,194
Mortgage interest expense 69,345 68,759
Management fees 14,751 17,019
Other operating expenses 3,036 2,515
-------- --------
Total certain expenses 185,389 181,399
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 33,824 $ 54,936
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
BRIDGEPOINT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Bridgepoint Apartments consist of 48 units located in Jacksonville,
Florida. The property was acquired by purchase July 17, 1995 by Florida
Capital Income Fund III, Ltd. The following percentage of units that were
occupied at the various period ending dates:
December 31, 1996 92%
December 31, 1997 85%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Bridgepoint Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Bridgepoint Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $ 98,226.59
Other Income 2,126.08
-----------
Total Revenue 100,352.67
-----------
Certain Expenses
Personnel 6,133.44
Advertising and Promotion 2,604.88
Utilities Expense 11,240.16
Repairs and Maintenance 5,659.00
Real Estate Taxes and Insurance 10,297.92
Mortgage Interest Expense 28,893.75
Management Fees 6,686.93
Other Operating Expense 897.91
-----------
Total Operating Expense 72,413.99
-----------
Revenues in Excess of Certain Expenses $ 27,938.68
===========
<PAGE>
BRIDGEPOINT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Bridgepoint Apartments consist of 48 units located in Jacksonville,
Florida. The property was acquired by purchase July 17, 1995 by Florida
Capital Income Fund III, Ltd. The following percentage of units were
occupied at the period ending date:
May 31, 1998 93%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Bridgepoint Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Brookwood Way Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Brookwood Way Apartments for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 28, 1998
<PAGE>
BROOKWOOD WAY APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
----------- -----------
REVENUES
Rental income $248,950 $236,466
Other income 7,988 6,293
-------- --------
Total revenues 256,938 242,759
-------- --------
CERTAIN EXPENSES
Personnel 22,296 27,583
Advertising and promotion 6,998 4,626
Utilities 20,793 20,213
Repairs and maintenance 15,092 14,234
Real estate taxes and insurance 17,645 12,941
Mortgage interest expense 96,565 96,745
Management fees 15,720 16,637
Other operating expenses 2,972 2,727
-------- --------
Total certain expenses 198,081 195,706
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 58,857 $ 47,053
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
BROOKWOOD WAY APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Brookwood Way Apartments consist of 66 units located in Mansfield, Ohio.
The property was acquired by purchase in November 1996 by Midwest Income
Growth Fund VI, Ltd. The following percentage of units were occupied at the
various period ending dates:
December 31, 1996 94%
December 31, 1997 88%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Brookwood Way Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Brookwood Way Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $106,424.36
Other Income 1,964.62
-----------
Total Revenue 108,388.98
-----------
Certain Expenses
Personnel 9,620.12
Advertising and Promotion 3,163.71
Utilities Expense 8,591.94
Repairs and Maintenance 3,836.29
Real Estate Taxes and Insurance 7,352.08
Mortgage Interest Expense 40,235.42
Management Fees 7,136.69
Other Operating Expense 1,322.90
-----------
Total Operating Expense 81,259.15
-----------
Revenues in Excess of Certain Expenses $ 27,129.83
===========
<PAGE>
BROOKWOOD WAY APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Brookwood Way Apartments consist of 66 units located in Mansfield, Ohio.
The property was acquired by purchase in November, 1996 by Midwest Income
Growth Fund VI, Ltd. The following percentage of units were occupied at the
period ending date:
May 31, 1998 95%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Brookwood Way Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Camellia Court Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Camellia Court Apartments for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
June 13, 1998
<PAGE>
CAMELLIA COURT APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
--------- ---------
REVENUES
Rental income $ 213,718 $ 255,025
Other income 16,516 19,693
--------- ---------
Total revenues 230,234 274,718
--------- ---------
CERTAIN EXPENSES
Personnel 35,481 20,430
Advertising and promotion 9,056 6,756
Utilities 25,805 30,769
Repairs and maintenance 24,685 21,320
Real estate taxes and insurance 35,934 37,559
Mortgage interest expense 98,851 78,273
Management fees 13,884 14,525
Other operating expenses 5,359 3,300
--------- ---------
Total certain expenses 249,055 212,932
--------- ---------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ (18,821) $ 61,786
========= =========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
CAMELLIA COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Camellia Court Apartments consist of 60 units located in Daytona Beach,
Florida. The property was acquired by purchase March 6, 1995 by Florida
Opportunity Income Partners, Ltd. The following percentage of units were
occupied at the various period ending dates:
December 31, 1996 88%
December 31, 1997 78%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Camellia Court Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Camellia Court Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $102,254.43
Other Income 6,835.59
-----------
Total Revenue 109,090.02
-----------
Certain Expenses
Personnel 17,155.90
Advertising and Promotion 3,020.68
Utilities Expense 5,401.55
Repairs and Maintenance 11,602.36
Real Estate Taxes and Insurance 14,972.50
Mortgage Interest Expense 41,187.92
Management Fees 7,089.83
Other Operating Expense 2,815.17
-----------
Total Operating Expense 103,245.91
-----------
Revenues in Excess of Certain Expenses $ 5,844.11
===========
<PAGE>
CAMELLIA COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Camellia Court Apartments consist of 60 units located in Daytona Beach,
Florida. The property was acquired by purchase March 6, 1995 by Florida
Opportunity Income Partners, Ltd. The following percentage of units were
occupied at the period ending date:
May 31, 1998 88%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Camellia Court Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Eagle Lake Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Eagle Lake Apartments for the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
EAGLE LAKE APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $346,154 $348,348
Other income 21,065 32,140
-------- --------
Total revenues 367,219 380,488
-------- --------
CERTAIN EXPENSES
Personnel 34,983 29,559
Advertising and promotion 9,811 5,020
Utilities 26,117 30,819
Repairs and maintenance 30,289 25,777
Real estate taxes and insurance 49,694 49,359
Mortgage interest expense 158,727 159,163
Management fees 26,702 24,129
Other operating expenses 4,833 5,275
-------- --------
Total certain expenses 341,156 329,101
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 26,063 $ 51,387
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
EAGLE LAKE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Eagle Lake Apartments consist of 77 units located in Port Orange, Florida.
The property was acquired by purchase July 12, 1994 by Florida Capital
Income Fund, Ltd. The following percentage of units were occupied at the
various period ending dates:
December 31, 1996 96%
December 31, 1997 94%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Eagle Lake Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Eagle Lake Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $155,660.76
Other Income 8,944.41
-----------
Total Revenue 164,605.17
-----------
Certain Expenses
Personnel 21,773.59
Advertising and Promotion 4,727.99
Utilities Expense 9,048.35
Repairs and Maintenance 12,832.49
Real Estate Taxes and Insurance 20,705.83
Mortgage Interest Expense 66,136.25
Management Fees 9,816.62
Other Operating Expense 2,851.58
-----------
Total Operating Expense 147,892.70
-----------
Revenues in Excess of Certain Expenses $ 16,712.47
===========
<PAGE>
EAGLE LAKE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Eagle Lake Apartments consist of 77 units located in Port Orange, Florida.
The property was acquired by purchase July 12, 1994 by Florida Capital
Income Fund, Ltd. The following percentage of units were occupied at the
period ending date.
May 31, 1998 94%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Eagle Lake Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Forest Glen Apartments, Phase I, for the years ended December 31, 1996 and 1997.
This financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Forest Glen Apartments, Phase I, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
FOREST GLEN APARTMENTS, PHASE I
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $319,763 $319,640
Other income 7,968 16,405
-------- --------
Total revenues 327,731 336,045
-------- --------
CERTAIN EXPENSES
Personnel 35,958 30,797
Advertising and promotion 7,548 5,897
Utilities 8,955 8,939
Repairs and maintenance 38,692 35,151
Real estate taxes and insurance 45,223 49,696
Mortgage interest expense 149,908 130,820
Management fees 17,219 20,223
Other operating expenses 5,358 4,017
-------- --------
Total certain expenses 308,861 285,540
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 18,870 $ 50,505
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
FOREST GLEN APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen Apartments, Phase I, consist of 52 units located in Daytona
Beach, Florida. All four phases of the Forest Glen Property are owned by a
trustee on behalf of four beneficiaries (including Florida Capital Income
Fund II, Ltd. and three other limited partnerships). Under a land trust
agreement, Florida Capital Income Fund II, Ltd. owns beneficial interest
in, and is obligated to pay operating expenses in respect of, the
residential units comprising Phase I of the Forest Glen Property.
The following percentage of units were occupied at the various period
ending dates:
December 31, 1996 98%
December 31, 1997 87%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen Apartments, Phase I.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Forest Glen Apartments, Phase I
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $143,222.25
Other Income 8,581.50
-----------
Total Revenue 151,803.75
-----------
Certain Expenses
Personnel 17,908.95
Advertising and Promotion 2,295.19
Utilities Expense 3,655.61
Repairs and Maintenance 15,292.39
Real Estate Taxes and Insurance 18,842.92
Mortgage Interest Expense 62,461.67
Management Fees 7,881.11
Other Operating Expense 4,131.98
-----------
Total Operating Expense 132,469.81
-----------
Revenues in Excess of Certain Expenses $ 19,333.94
===========
<PAGE>
FOREST GLEN APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen I Apartments consist of 52 units located in Daytona Beach,
Florida. All four phases of the Forest Glen property are owned by a trustee
on behalf of four beneficiaries (including Florida Capital Income Fund II,
Ltd. and three other limited partnerships). Under a land trust agreement,
Florida Capital Income Fund II, Ltd. owns beneficial interest in, and is
obligated to pay operating expenses in respect of, the residential units
comprising Phase I of the Forest Glen property.
The following percentage of units were occupied at the May 31, 1998 period
ending date:
May 31, 1998 91%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen I Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Forest Glen Apartments, Phase II, for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Forest Glen Apartments, Phase II, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
FOREST GLEN APARTMENTS, PHASE II
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $159,093 $181,587
Other income 6,252 3,616
-------- --------
Total revenues 165,345 185,203
-------- --------
CERTAIN EXPENSES
Personnel 20,767 17,966
Advertising and promotion 4,802 3,462
Utilities 5,827 4,397
Repairs and maintenance 23,120 20,667
Real estate taxes and insurance 25,939 26,594
Mortgage interest expense 60,222 59,048
Management fees 9,454 12,281
Other operating expenses 3,307 2,047
-------- --------
Total certain expenses 153,438 146,462
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 11,907 $ 38,741
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
FOREST GLEN APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen Apartments, Phase II, consist of 30 units located in Daytona
Beach, Florida. All four phases of the Forest Glen Property are owned by a
trustee on behalf of four beneficiaries (including Realty Opportunity
Income Fund VIII, Ltd. and three other limited partnerships). Under a land
trust agreement, Realty Opportunity Income Fund VIII, Ltd. owns beneficial
interest in, and is obligated to pay operating expenses in respect of, the
residential units comprising Phase II of the Forest Glen Property.
The following percentage of units were occupied at the various period
ending dates:
December 31, 1996 77%
December 31, 1997 70%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen Apartments, Phase II.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Forest Glen Apartments, Phase II
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $84,547.96
Other Income 5,859.19
----------
Total Revenue 90,407.15
----------
Certain Expenses
Personnel 10,219.59
Advertising and Promotion 1,364.31
Utilities Expense 2,067.99
Repairs and Maintenance 6,221.56
Real Estate Taxes and Insurance 10,807.92
Mortgage Interest Expense 25,092.50
Management Fees 4,635.72
Other Operating Expense 1,948.59
----------
Total Operating Expense 62,358.18
Revenues in Excess of Certain Expenses $28,048.97
==========
<PAGE>
FOREST GLEN APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen II Apartments consist of 30 units located in Daytona Beach,
Florida. All four phases of the Forest Glen property are owned by a trustee
on behalf of four beneficiaries (including Realty Opportunity Income Fund
VIII, Ltd. and three other limited partnerships). Under a land trust
agreement, Realty Opportunity Income Fund VIII, Ltd. owns beneficial
interest in, and is obligated to pay operating expenses in respect of, the
residential units comprising Phase II of the Forest Glen property.
The following percentage of units were occupied at the May 31, 1998 period
ending date:
May 31, 1998 91%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen II Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Forest Glen Apartments, Phase III, for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Forest Glen Apartments, Phase III, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
FOREST GLEN APARTMENTS, PHASE III
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $170,175 $180,549
Other income 7,031 5,721
-------- --------
Total revenues 177,206 186,270
-------- --------
CERTAIN EXPENSES
Personnel 17,461 15,378
Advertising and promotion 4,557 3,033
Utilities 4,271 4,050
Repairs and maintenance 19,603 15,315
Real estate taxes and insurance 21,947 22,105
Mortgage interest expense 49,070 49,964
Management fees 8,646 11,062
Other operating expenses 2,807 2,106
-------- --------
Total certain expenses 128,362 123,013
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 48,844 $ 63,257
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
FOREST GLEN APARTMENTS, PHASE III
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen Apartments, Phase III, consist of 26 units located in Daytona
Beach, Florida. All four phases of the Forest Glen Property are owned by a
trustee on behalf of four beneficiaries (including Florida Income Advantage
Fund I, Ltd. and three other limited partnerships). Under a land trust
agreement, Florida Income Advantage Fund I, Ltd. owns beneficial interest
in, and is obligated to pay operating expenses in respect of, the
residential units comprising Phase III of the Forest Glen Property.
The following percentage of units were occupied at the various period
ending dates:
December 31, 1996 96%
December 31, 1997 96%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen Apartments, Phase III.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Forest Glen Apartments, Phase III
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $72,721.63
Other Income 3,387.94
----------
Total Revenue 76,109.57
----------
Certain Expenses
Personnel 8,708.46
Advertising and Promotion 1,122.08
Utilities Expense 1,262.92
Repairs and Maintenance 6,746.20
Real Estate Taxes and Insurance 9,144.58
Mortgage Interest Expense 20,445.83
Management Fees 4,028.81
Other Operating Expense 1,421.76
----------
Total Operating Expense 52,880.65
----------
Revenues in Excess of Certain Expenses $23,228.92
==========
<PAGE>
FOREST GLEN APARTMENTS, PHASE III
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen III Apartments consist of 26 units located in Daytona Beach,
Florida. All four phases of the Forest Glen property are owned by a trustee
on behalf of four beneficiaries (including Florida Income Advantage Fund I,
Ltd. and three other limited partnerships). Under a land trust agreement,
Florida Income Advantage Fund I, Ltd. owns beneficial interest in, and is
obligated to pay operating expenses in respect of, the residential units
comprising Phase III of the Forest Glen property.
The following percentage of units were occupied at the May 31, 1998 period
ending date:
May 31, 1998 98%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen III Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Forest Glen Apartments, Phase IV, for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Forest Glen Apartments, Phase IV, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
FOREST GLEN APARTMENTS, PHASE IV
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $56,139 $57,348
Other income 2,437 2,565
------- -------
Total revenues 58,576 59,913
------- -------
CERTAIN EXPENSES
Personnel 5,132 4,454
Advertising and promotion 1,385 1,009
Utilities 1,494 1,340
Repairs and maintenance 6,346 4,773
Real estate taxes and insurance 6,985 7,247
Mortgage interest expense 17,843 15,897
Management fees 3,987 5,056
Other operating expenses 1,159 1,070
------- -------
Total certain expenses 44,331 40,846
------- -------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $14,245 $19,067
======= =======
See Note to Statement of Revenues and Certain Expenses
<PAGE>
FOREST GLEN APARTMENTS, PHASE IV
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen Apartments, Phase IV, consist of 8 units located in Daytona
Beach, Florida. All four phases of the Forest Glen Property are owned by a
trustee on behalf of four beneficiaries (including Florida Income
Appreciation Fund I, Ltd. and three other limited partnerships). Under a
land trust agreement, Florida Income Appreciation Fund I, Ltd. owns
beneficial interest in, and is obligated to pay operating expenses in
respect of, the residential units comprising Phase IV of the Forest Glen
Property.
The following percentage of units were occupied at the various period
ending dates:
December 31, 1996 100%
December 31, 1997 100%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen Apartments, Phase IV.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Forest Glen Apartments, Phase IV
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $21,658.18
Other Income 369.37
----------
Total Revenue 22,027.55
----------
Certain Expenses
Personnel 2,579.09
Advertising and Promotion 357.03
Utilities Expense 556.58
Repairs and Maintenance 1,983.46
Real Estate Taxes and Insurance 2,910.42
Mortgage Interest Expense 7,434.58
Management Fees 1,593.20
Other Operating Expense 1,093.70
----------
Total Operating Expense 18,508.06
----------
Revenues in Excess of Certain Expenses $ 3,519.49
==========
<PAGE>
FOREST GLEN APARTMENTS, PHASE IV
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Forest Glen IV Apartments consist of 8 units located in Daytona Beach,
Florida. All four phases of the Forest Glen property are owned by a trustee
on behalf of four beneficiaries (including Florida Income Appreciation Fund
I, Ltd. and three other limited partnerships). Under a land trust
agreement, Florida Income Appreciation Fund I, Ltd. owns beneficial
interest in, and is obligated to pay operating expenses in respect of, the
residential units comprising Phase IV of the Forest Glen property.
The following percentage of units were occupied at the May 31, 1998 period
ending date:
May 31, 1998 87%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Forest Glen IV Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the Glen
Lake Arms Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Glen Lake Arms Apartments for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 3, 1998
<PAGE>
GLEN LAKE ARMS APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $ 745,649 $ 695,308
Other income 22,536 60,265
--------- ---------
Total revenues 768,185 755,573
--------- ---------
CERTAIN EXPENSES
Personnel 85,191 81,963
Advertising and promotion 20,726 25,227
Utilities 120,687 122,890
Repairs and maintenance 67,235 36,584
Real estate taxes and insurance 118,041 118,627
Mortgage interest expense 310,603 312,704
Management fees 42,276 43,434
Other operating expenses 14,932 6,280
--------- ---------
Total certain expenses 779,691 747,709
--------- ---------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ (11,506) $ 7,864
========= =========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
GLEN LAKE ARMS APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Glen Lakes Arms Apartments consist of 144 units located in St. Petersburg,
Florida. The property was acquired by purchase May 18, 1995 by Glen Lake
Investors, Ltd. in which Florida Capital Income Fund IV, Ltd. owns a 99%
limited partnership interest. The following percentage of units were
occupied at the various period ending dates:
December 31, 1996 79%
December 31, 1997 81%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Glen Lake Arms Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Glen Lake Arms Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $389,104.49
Other Income 3,616.16
-----------
Total Revenue 392,720.65
-----------
Certain Expenses
Personnel 69,515.90
Advertising Expense 8,827.90
Repairs/Maintenance 31,173.88
Utilities Expense 77,847.71
Real Estate Tax and Insurance 47,532.75
Mortgage Interest Expense 129,417.92
Management Fees 0.00
Other Operating Expenses 6,249.28
-----------
Total Operating Expense 370,565.34
-----------
Revenues in Excess of Certain Expenses $ 22,155.31
===========
<PAGE>
GLEN LAKE ARMS APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Glen Lake Arms consists of 144 units located in St. Petersburg, Florida.
The property was acquired by purchase May 18, 1995 by Glen Lake Investors,
Ltd. in which Florida Capital Income Fund IV, Ltd. owns a 99% limited
partnership interest. The following percentage of units were occupied at
the period ending date:
May 31, 1998 73%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of Glen Lake Arms.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Grove Hamlet Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Grove Hamlet Apartments for the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
February 27, 1998
<PAGE>
GROVE HAMLET APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $ 221,070 $ 228,459
Other income 7,510 10,945
--------- ---------
Total revenues 228,580 239,404
--------- ---------
CERTAIN EXPENSES
Personnel 31,912 42,952
Advertising and promotion 1,530 1,388
Utilities 13,915 18,450
Repairs and maintenance 8,245 27,052
Real estate taxes and insurance 35,289 32,966
Mortgage interest expense 125,177 126,382
Management fees 14,028 15,889
Other operating expenses 3,912 4,748
--------- ---------
Total certain expenses 234,008 269,827
--------- ---------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ (5,428) $ (30,423)
========= =========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
GROVE HAMLET APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Grove Hamlet Apartments consist of 57 units located in Deland, Florida. The
property was acquired by purchase December 29, 1993 by Central Florida
Income Appreciation Fund, Ltd. The following percentage of units were
occupied at the various period ending dates:
December 31, 1996 86%
December 31, 1997 82%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Grove Hamlet Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Grove Hamlet Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $108,133.29
Other Income 9,011.18
-----------
Total Revenue 117,144.47
-----------
Certain Expenses
Personnel 14,452.76
Advertising and Promotion 928.46
Utilities Expense 3,418.41
Repairs and Maintenance 10,986.23
Real Estate Taxes and Insurance 14,703.75
Mortgage Interest Expense 52,157.08
Management Fees 6,816.12
Other Operating Expense 2,562.90
-----------
Total Operating Expense 106,025.71
-----------
Revenues in Excess of Certain Expenses $ 11,118.76
===========
<PAGE>
GROVE HAMLET APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Grove Hamlet Apartments consist of 57 units located in Deland, Florida. The
property was acquired by purchase December 29, 1993 by Central Florida
Income Appreciation Fund, Ltd. The following percentage of units were
occupied at the period ending date:
May 31, 1998 84%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Grove Hamlet Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Lamplight Court Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Lamplight Court Apartments for the years ended December 31, 1996 and 1997
in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 28, 1998
<PAGE>
LAMPLIGHT COURT APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
-------- --------
REVENUES
Rental income $303,933 $325,019
Other income 14,083 14,901
-------- --------
Total revenues 318,016 339,920
-------- --------
CERTAIN EXPENSES
Personnel 39,363 49,403
Advertising and promotion 6,648 6,747
Utilities 48,903 45,192
Repairs and maintenance 19,279 19,456
Real estate taxes and insurance 38,313 41,360
Mortgage interest expense 126,175 134,591
Management fees 18,581 21,187
Other operating expenses 4,690 7,093
-------- --------
Total certain expenses 301,952 325,029
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 16,064 $ 14,891
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
LAMPLIGHT COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Lamplight Court Apartments consist of 80 units located in Bellefontaine,
Ohio. The property was acquired by purchase in 1985 by Independence
Village, Ltd. The following percentage of units were occupied at the
various period ending dates:
December 31, 1996 86%
December 31, 1997 90%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Lamplight Court Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Lamplight Court Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $142,667.59
Other Income 6,400.94
-----------
Total Revenue 149,068.53
-----------
Certain Expenses
Personnel 12,535.70
Advertising and Promotion 803.26
Utilities Expense 15,454.32
Repairs and Maintenance 5,924.06
Real Estate Taxes and Insurance 15,963.75
Mortgage Interest Expense 52,572.92
Management Fees 9,420.94
Other Operating Expense 2,920.31
-----------
Total Operating Expense 115,595.26
-----------
Revenues in Excess of Certain Expenses $ 33,473.27
===========
<PAGE>
LAMPLIGHT COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Lamplight Court Apartments consist of 80 units located in Bellefontaine,
Ohio. The property was acquired by purchase in 1985 by Independence
Village, Ltd. The following percentage of units were occupied at the period
ending date:
May 31, 1998 95%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Lamplight Court Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Stadium Club Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Stadium Club Apartments for the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles.
/s/ ELROY D. MIEDEMA
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 3, 1998
<PAGE>
STADIUM CLUB APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $458,687 $427,919
Other income 27,710 21,809
-------- --------
Total revenues 486,397 449,728
-------- --------
CERTAIN EXPENSES
Personnel 72,107 67,232
Advertising and promotion 11,885 10,074
Utilities 49,370 39,341
Repairs and maintenance 31,966 26,020
Real estate taxes and insurance 36,528 30,980
Mortgage interest expense 146,120 122,433
Management fees 25,469 28,041
Other operating expenses 15,278 11,296
-------- --------
Total certain expenses 388,723 335,417
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 97,674 $114,311
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
STADIUM CLUB APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Stadium Club Apartments consist of 229 units located in Statesboro,
Georgia. The property was acquired by purchase June 30, 1995 by GSU Stadium
Student Apartments, Ltd. The following percentage of units were occupied at
the various period ending dates:
December 31, 1996 90%
December 31, 1997 86%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Stadium Club Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units, which are student housing, are rented under lease
agreements that correspond to the school semesters.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Stadium Club Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $179,409.18
Other Income 10,174.69
-----------
Total Revenue 189,583.87
-----------
Certain Expenses
Personnel 23,627.39
Advertising and Promotion 4,203.60
Utilities Expense 13,968.22
Repairs and Maintenance 9,851.78
Real Estate Taxes and Insurance 15,220.00
Mortgage Interest Expense 60,883.33
Management Fees 13,370.59
Other Operating Expense 3,905.18
-----------
Total Operating Expense 145,030.09
-----------
Revenues in Excess of Certain Expenses $ 44,553.78
===========
<PAGE>
STADIUM CLUB APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Stadium Club Apartments consist of 229 units located in Statesboro,
Georgia. The property was acquired by purchase June 30, 1995 by GSU Stadium
Student Apartments, Ltd. The following percentage of units were occupied at
the period ending date:
May 31, 1998 86%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of Stadium Club Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Steeplechase Apartments for the years ended December 31, 1996 and 1997. This
financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Steeplechase Apartments for the years ended December 31, 1996 and 1997 in
conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
June 13, 1998
<PAGE>
STEEPLECHASE APARTMENTS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
-------- ---------
REVENUES
Rental income $ 234,305 $ 231,630
Other income 10,733 13,663
--------- ---------
Total revenues 245,038 245,293
--------- ---------
CERTAIN EXPENSES
Personnel 50,624 57,299
Advertising and promotion 11,417 6,207
Utilities 49,085 56,241
Repairs and maintenance 31,930 21,149
Real estate taxes and insurance 33,112 37,786
Mortgage interest expense 93,448 95,540
Management fees 15,227 11,792
Other operating expenses 7,495 7,612
--------- ---------
Total certain expenses 292,338 293,626
--------- ---------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ (47,300) $ (48,333)
========= =========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
STEEPLECHASE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Steeplechase Apartments consist of 72 units located in Anderson, Indiana.
The property was acquired on October 1, 1996 by Income Partners III, Ltd.
in which Baron Strategic Investment Fund II, Ltd. owns a 99% limited
partnership interest. The following percentage of units were occupied at
the various period ending dates:
December 31, 1996 65%
December 31, 1997 65%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Steeplechase Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed during 1996 and 1997, a property manager
was paid a property management fee equal to 5% of collected rental income
from the property, a performance fee of $2.00 per residential apartment
unit for each month the property manager collected more than 96% of gross
potential rents and a monthly bookkeeping fee of in the range of $275 to
$325.
<PAGE>
Steeplechase Apartments
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $110,704.22
Other Income 8,118.09
-----------
Total Revenue 118,822.31
-----------
Certain Expenses
Personnel 25,570.39
Advertising and Promotion 1,363.13
Utilities Expense 23,188.33
Repairs and Maintenance 20,453.44
Real Estate Taxes and Insurance 13,796.67
Mortgage Interest Expense 38,936.67
Management Fees 7,127.43
Other Operating Expense 3,065.43
-----------
Total Operating Expense 133,501.49
-----------
Revenues in Excess of Certain Expenses $(14,679.18)
===========
<PAGE>
STEEPLECHASE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Steeplechase Apartments consist of 72 units located in Anderson, Indiana.
The property was acquired on October 1, 1996 by Income Partners III, Ltd.
in which Baron Strategic Investment Fund II, Ltd. owns a 99% limited
partnership interest The following percentage of units were occupied at the
period ending date:
May 31, 1998 74%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Steeplechase Apartments.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
Property Management
In exchange for services performed in January through May 1998, a property
manager was paid a property management fee equal to 5% of collected rental
income from the property, a performance fee of $2.00 per residential
apartment unit for each month the property manager collected more than 96%
of gross potential rents and a monthly bookkeeping fee of in the range of
$275 to $325. In JUne 1998, the property management agreement was
terminated, and since that time the property has been self-managed.
<PAGE>
EXHIBIT E
FINANCIAL STATEMENTS OF ACQUIRED PROPERTIES
<PAGE>
EXHIBIT E
BARON CAPITAL PROPERTIES, L.P.
INDEX TO STATEMENTS OF REVENUES AND CERTAIN EXPENSES
OF ACQUIRED PROPERTIES PURSUANT TO REGULATION SB 310
CRYSTAL COURT APARTMENTS PHASE II:
Independent Auditors Report
Statement of Revenues and Certain Expenses
for the Years Ended December 31, 1996 and 1997 Notes to Statement of
Revenues and Certain Expenses Statement of Revenues and Certain
Expenses for the
Five-Month Period Ended May 31, 1998
HEATHERWOOD APARTMENTS PHASE I:
Independent Auditors Report
Statement of Revenues and Certain Expenses
for the Years Ended December 31, 1996 and 1997 Notes to Statement of
Revenues and Certain Expenses Statement of Revenues and Certain
Expenses for the
Five-Month Period Ended May 31, 1998
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Crystal Court Apartments, Phase II, for the years ended December 31, 1996 and
1997. This financial statement is the responsibility of the Company's
management. My responsibility is to express an opinion on this financial
statement based upon my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Crystal Court Apartments, Phase II, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
March 28, 1998
<PAGE>
CRYSTAL COURT APARTMENTS, PHASE II
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
------------ ------------
REVENUES
Rental income $307,069 $295,906
Other income 9,081 2,484
-------- --------
Total revenues 316,150 298,390
-------- --------
CERTAIN EXPENSES
Personnel 26,477 32,567
Advertising and promotion 1,755 3,136
Utilities 19,228 23,165
Repairs and maintenance 23,590 35,231
Real estate taxes and insurance 34,471 34,691
Mortgage interest expense 120,919 127,738
Management fees 20,777 21,537
Other operating expenses 4,341 3,897
-------- --------
Total certain expenses 251,558 281,962
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 64,592 $ 16,428
======== ========
See Note to Statement of Revenues and Certain Expenses
<PAGE>
CRYSTAL COURT APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Crystal Court Apartments, Phase II, consist of 80 units located in
Lakeland, Florida. The property was acquired by purchase in 1982 by Crystal
Court Apartments II, Ltd. The following percentage of units were occupied
at the various period ending dates:
December 31, 1996 95%
December 31, 1997 95%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Crystal Court Apartments, Phase II.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
<PAGE>
Crystal Court Apartments, Phase II
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $139,468.00
Other Income 5,240.00
-----------
Total Revenue 144,708.00
-----------
Certain Expenses
Personnel 11,957.00
Advertising and Promotion 2,086.00
Utilities Expense 8,181.00
Repairs and Maintenance 9,905.00
Real Estate Taxes and Insurance 9,340.00
Mortgage Interest Expense 63,345.00
Management Fees 6,460.00
Other Operating Expense 0.00
-----------
Total Operating Expense 111,274.00
-----------
Revenues in Excess of Certain Expenses $ 33,434.00
===========
<PAGE>
CRYSTAL COURT APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Crystal Court Apartments, Phase II, consist of 80 units located in
Lakeland, Florida. The property was acquired by purchase in 1982 by Crystal
Court Apartments II, Ltd. The following percentage of units were occupied
at the period ending date:
May 31, 1998 93%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Crystal Court Apartments Phase II.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Baron Capital Trust:
I have audited the accompanying statement of revenues and certain expenses
(defined as being operating revenues less direct operating expenses) of the
Heatherwood Apartments, Phase I, for the years ended December 31, 1996 and 1997.
This financial statement is the responsibility of the Company's management. My
responsibility is to express an opinion on this financial statement based upon
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits to obtain reasonable
assurance about whether the statement of revenues and certain expenses is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the statement of revenues and certain expenses. I believe that
my audit provides a reasonable basis for my opinion.
The accompanying statement of revenues and certain expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the Registration Statement on Form S-4 of
Baron Capital Properties, L.P., a Delaware limited partnership) and excludes
material expenses described in Note 1 to the statement of revenues and certain
expenses, that would not be comparable to those resulting from the proposed
future operations of the property.
In my opinion, the statement of revenues and certain expenses presents fairly,
in all material respects, the revenues and certain expenses, as defined above,
of the Heatherwood Apartments, Phase I, for the years ended December 31, 1996
and 1997 in conformity with generally accepted accounting principles.
Elroy D. Miedema
Certified Public Accountant
Ft. Lauderdale, Florida
June 11, 1998
<PAGE>
HEATHERWOOD APARTMENTS, PHASE I
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
REVENUES
Rental income $294,513 $284,886
Other income 9,380 16,566
-------- --------
Total revenues 303,893 301,452
-------- --------
CERTAIN EXPENSES
Personnel 42,317 31,851
Advertising and promotion 4,243 4,942
Utilities 29,999 27,255
Repairs and maintenance 36,667 48,649
Real estate taxes and insurance 38,221 36,052
Mortgage interest expense 60,327 63,986
Management fees 14,489 14,400
Other operating expenses 7,678 5,052
-------- --------
Total certain expenses 233,941 232,187
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 69,952 $ 69,265
======== ========
</TABLE>
See Note to Statement of Revenues and Certain Expenses
<PAGE>
HEATHERWOOD APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1. Descriptions and Summary of Significant Accounting Policies
Description
Heatherwood Apartments, Phase I, consist of 68 units located in Kissimmee,
Florida. The property was acquired June 30, 1998, by Heatherwood Kissimmee,
Ltd. The following percentage of units were occupied at the various period
ending dates:
December 31, 1997 97%
Basis Of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Heatherwood Apartments Phase I.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
<PAGE>
Heatherwood Apartments, Phase I
Statement of Revenues and Certain Expenses
For the Five Month Period Ended May 31, 1998
Revenue May 31, 1998
------------
Rent Base $134,989.00
Other Income 6,846.00
-----------
Total Revenue 141,835.00
-----------
Certain Expenses
Personnel 24,809.00
Advertising and Promotion 2,675.00
Utilities Expense 11,076.00
Repairs and Maintenance 7,248.00
Real Estate Taxes and Insurance 8,820.00
Mortgage Interest Expense 58,502.00
Management Fees 8,960.00
Other Operating Expense 0.00
-----------
Total Operating Expense 122,090.00
-----------
Revenues in Excess of Certain Expenses $ 19,745.00
===========
<PAGE>
HEATHERWOOD APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE FIVE MONTH PERIOD ENDED MAY 31, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Heatherwood Apartments consist of 68 units located in Kissimmee, Florida.
The property was acquired by purchase November 10, 1997 by Heatherwood
Kissimee, Ltd. The following percentage of units were occupied at the
period ending date:
May 31, 1998 96%
Basis of Presentation
Operating revenues and direct operating expenses are presented on the
accrual basis of accounting. The accompanying financial statement is not
representative of the actual operations for the period presented as certain
expenses, which may not be comparable to the expenses expected to be
incurred by Baron Capital Properties, L.P., a Delaware limited partnership
which will conduct the future real property operations of Baron Capital
Trust, have been excluded. Expenses excluded consist of depreciation due to
basis and method changes, professional fees, and other costs not directly
related to the future operations of the Heatherwood Apartments Phase I.
Income Recognition
Rental income attributable to residential leases is recorded when due from
tenants.
Leases
Apartment units are rented under lease agreements with terms of one year or
less.
<PAGE>
EXHIBIT F
EXCHANGE PROPERTY APPRAISAL VALUES UNDER THREE APPRAISAL METHODS
<TABLE>
<CAPTION>
Appraised Date of Cost Income
Apartment Property Value Appraisal Approach Approach
- ------------------ ----- ---------- -------- --------
<S> <C> <C> <C> <C>
Blossom Corners I $2,195,000 1/98 $2,195,000 $2,244,000
(Florida Income Growth Fund V, Ltd.)
Bridge Point Phase II $1,610,000 2/98 $1,608,000 $1,672,000
(Florida Capital Income Fund III, Ltd.)
Brookwood Way* $1,764,000 6/96 $1,655,000 $1,677,000
(Midwest Income Growth Fund VI, Ltd.)
Camellia Court $1,833,000 8/98 $1,828,000 $1,832,000
(Florida Opportunity Income Partners, Ltd.)
Eagle Lake $2,530,000 1/98 $2,511,000 $2,421,000
(Florida Capital Income Fund, Ltd.)
Forest Glen Phase I $2,990,845 11/97 $3,122,838 $2,954,640
(Florida Capital Income Fund II, Ltd.)
Forest Glen Phase II $2,173,162 11/97 $2,322,111 $2,197,040
(Realty Opportunity Income Fund VIII, Ltd.)
Forest Glen Phase III $1,940,339 11/97 $2,081,892 $1,969,760
(Florida Income Advantage Fund I, Ltd.)
Forest Glen Phase IV $ 471,679 11/97 $ 480,437 $ 454,560
(Florida Income Appreciation Fund I, Ltd.)
Glen Lake $5,550,000 3/98 $5,544,000 $5,726,000
(Florida Capital Income Fund IV, Ltd.) 933,079 3/98 933,079 933,079
---------- ---------- ----------
$6,483,079 $6,477,079 $6,659,079
Grove Hamlet* $2,575,887 11/97 - -
(Central Florida Income Appreciation Fund, Ltd.)
Lamplight Court* $2,147,000 6/96 $2,237,000 $2,124,000
(Lamplight Court of Bellefontaine Apartments, Ltd.)
Stadium Club* $2,800,000 8/97 $2,762,000 $2,749,000
(GSU Stadium Student Apartments, Ltd.)
Steeplechase* $2,125,000 oral est. - -
(Baron Strategic Investment Fund II, Ltd.) 7/98
<CAPTION>
Market
Apartment Property Approach Appraiser
- ------------------ -------- ---------
<S> <C> <C>
Blossom Corners I $2,144,000 Consortium Appraisal, Inc.
(Florida Income Growth Fund V, Ltd.)
Bridge Point Phase II $1,545,000 Consortium Appraisal, Inc.
(Florida Capital Income Fund III, Ltd.)
Brookwood Way* $1,436,000 Consortium Appraisal and
(Midwest Income Growth Fund VI, Ltd.) Consulting Services, Inc.
Camellia Court $1,827,000 Consortium Appraisal, Inc.
(Florida Opportunity Income Partners, Ltd.)
Eagle Lake $2,531,000 Consortium Appraisal, Inc.
(Florida Capital Income Fund, Ltd.)
Forest Glen Phase I $3,016,940 Richards Appraisal Service, Inc.
(Florida Capital Income Fund II, Ltd.)
Forest Glen Phase II $2,243,367 Richards Appraisal Service, Inc.
(Realty Opportunity Income Fund VIII, Ltd.)
Forest Glen Phase III $2,011,294 Richards Appraisal Service, Inc.
(Florida Income Advantage Fund I, Ltd.)
Forest Glen Phase IV $ 464,145 Richards Appraisal Service, Inc.
(Florida Income Appreciation Fund I, Ltd.)
Glen Lake $5,364,000 Consortium Appraisal, Inc. (real property)
(Florida Capital Income Fund IV, Ltd.) 933,079 Allied Appraisal Services, Inc.
(furniture and equipment)
----------
$6,297,079
Grove Hamlet* - Richards Appraisal Service, Inc.
(Central Florida Income Appreciation Fund, Ltd.)
Lamplight Court* $1,934,000 Consortium Appraisal and
(Lamplight Court of Bellefontaine Apartments, Ltd.) Consulting Services, Inc.
Stadium Club* $2,907,000 Consortium Appraisal and
(GSU Stadium Student Apartments, Ltd.) Consulting Services, Inc.
Steeplechase* - -
(Baron Strategic Investment Fund II, Ltd.)
</TABLE>
- ---------------------------
* Appraisals in process of being updated.
<PAGE>
SUMMARY OF TABLE OF CONTENTS
Page
Summary of the Trust and the Operating
Partnership ...........................................................
Description of Exchange Partnerships .....................................
Summary of Risk Factors ..................................................
Tax Status of the Trust ..................................................
Compensation of Managing Persons and Affiliates ..........................
Conflicts of Interest ....................................................
Fiduciary Responsibility .................................................
Special Note Regarding Forward-Looking Statements ........................
Risk Factors .............................................................
The Exchange Offering ....................................................
Prior Performance of Affiliates of Managing Shareholder ..................
Management ...............................................................
The Trust and the Operating Partnership ..................................
Investment Objectives and Policies .......................................
Initial Real Estate Investments ..........................................
Selected Financial Data ..................................................
Management's Discussion and Analysis of
Financial Condition and Results of Operations of
the Exchange Properties ................................................
Federal Income Tax Considerations ........................................
Summary of the Operating Partnership Agreement ...........................
Summary of Declaration of Trust ..........................................
Reports to Unitholders and Shareholders ..................................
Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership
Units and Trust Common Shares .........................................
Capital Stock of the Trust ...............................................
Capitalization ...........................................................
Terms of the Cash Offering ...............................................
Amendments to Partnership Agreements of Participating Exchange
Partnerships with Non-participating Limited Partners ..................
Other Information ........................................................
Litigation ...............................................................
Experts ..................................................................
Legal Matters ............................................................
Expenses of the Exchange Offering ........................................
Additional Information ...................................................
Glossary .................................................................
Exhibits
A ... Prior Performance of Affiliates
of Managing Shareholder
B ... Summary of Exchange Property and
Exchange Partnership Information
C ... Financial Statements of the Trust, the Operating
Partnership and the Managing Shareholder
D ... Financial Statements of the Exchange Properties
E ... Financial Statements of the Acquired Properties
F ... Exchange Property Appraisal Values Under Three Appraisal Methods
BARON CAPITAL PROPERTIES, L.P.
------------
2,500,000 Units
of
Limited Partnership Interest
PROSPECTUS
_____________, 1998
------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Under Section 17-108 of the Delaware Revised Uniform Limited Partnership
Act, subject to such standards and restrictions, if any, contained in its
limited partnership agreement, a limited partnership organized in Delaware may,
and shall have the power to, indemnify and hold harmless any partner or other
person from and against any and all claims and demands whatsoever.
Under Section 7.7(a) of the Agreement of Limited Partnership of the
Registrant ("Partnership Agreement"), the Registrant shall indemnify an
Indemnitee (defined as any person made a party to a proceeding by reason of his
status as (i) the General Partner of the Registrant (including as a guarantor of
any debt of the Registrant) or (ii) an officer of the Registrant or a trustee,
officer or member of the Board of the General Partner of the Registrant, and (b)
such other persons (including affiliates of the General Partner of the
Registrant or the Registrant) as the General Partner of the Registrant may
designate from time to time, in its sole and absolute discretion) from and
against any and all losses, claims, damages, liabilities, joint or several,
expenses (including legal fees and expenses), judgments, fines, settlements, and
other amounts arising from any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative, that relate to
the operations of the Registrant as set forth in its Partnership in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, unless it is established that: (i) the act or omission of the
Indemnitee was material to the matter giving rise to the proceeding and either
was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the Indemnitee actually received an improper personal benefit
in money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the Indemnitee did not meet the requisite
standard of conduct set forth in Section 7.7(a). The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent, or
an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified in
Section 7.7(a). Any indemnification pursuant to Section 7.7 shall be made only
out of the assets of the Registrant.
Under Section 7.7(b) of the Partnership Agreement, reasonable expenses
incurred by an Indemnitee who is a party to a proceeding may be paid or
reimbursed by the Registrant in advance of the final disposition of the
proceeding upon receipt by the Registrant of (a) a written affirmation by the
Indemnitee of the Indemnitee's good faith belief that the standard of conduct
necessary for indemnification by the Registrant as authorized in Section 7.7 of
the Partnership Agreement has been met, and (b) a written undertaking by or on
behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
Item 21. Exhibits and Financial Statement Schedules.
A list of exhibits included as part of this Registration Statement is set
forth in the Index to Exhibits which immediately precedes such exhibits.
II-1
<PAGE>
Item 22. Undertakings.
The Registrant undertakes to do the following:
1. If the Registrant is registering the securities under Rule 415 of the
Securities Act of 1933, as amended (the "Securities Act"), the
Registrant will:
(a) File, during the period in which it offers or sell securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the Registration Statement; and
(iii)Include any additional or changed material information on
the plan of distribution.
(b) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that
time to be the initial bona fide offering.
(c) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
2. The Registrant will deliver to Offerees who accept the Exchange
Offering certificates representing Units in such nominations and
registered in such names as such Offerees shall indicate in their
Subscription Documents.
3. If the Registrant requests acceleration of the effective date of the
registration statement under Rule 461 under the Securities Act:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
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 of whether such indemnification
is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
II-2
<PAGE>
4. If the Registrant relies on Rule 430A under the Securities Act, the
Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the
Securities Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
5. The Registrant undertakes to file a sticker supplement pursuant to
Rule 424(c) under the Act during the distribution period describing
each property not identified in the Prospectus at such time as there
arises a reasonable probability that such property will be acquired
and to consolidate all such stickers into a post-effective amendment
filed at least once every three months, with the information contained
in such amendment provided simultaneously to the existing Unitholders.
Each sticker supplement should disclose all compensation and fees
received by the Managing Shareholder and its affiliates in connection
with any such acquisition. The post-effective amendment shall include
audited financial statements meeting the requirements of Rule 3-14 of
Regulation S-X (or Rule 310 of Regulation S-B, if applicable) only for
properties acquired during the distribution period.
6. The Registrant also undertakes to file, after the end of the
distribution period, a current report on Form 8-K containing the
financial statements and any additional information required by Rule
3-14 of Regulation S-X (or Rule 310 of Regulation S-B, if applicable),
to reflect each commitment (i.e., the signing of a binding purchase
agreement) made after the end of the distribution period involving the
use of 10% or more (on a cumulative basis) of the net proceeds of the
offering and to provide the information contained in such report to
the Unitholders at least once each quarter after the distribution
period of the offering has ended.
7. The Registrant hereby undertakes to respond to requests for
information that is incorporated by reference in the Prospectus
pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the Registration Statement through the date of responding to
the request.
8. The Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the Registrant Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Amendment No. 1 to its Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cincinnati, State of Ohio on September 21, 1998.
BARON CAPITAL PROPERTIES, L.P.
By: Baron Capital Trust,
General Partner
By: Baron Advisors, Inc.,
Managing Shareholder
By: /s/Gregory K. McGrath
------------------------------------
Gregory K. McGrath, President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registrant's Registration Statement has been signed by the
following person in the capacity and on the date stated.
Name Title Date
---- ----- ----
/s/Gregory K. McGrath Chief Executive Officer of September 21, 1998
- ---------------------- Baron Advisors, Inc.,
Gregory K. McGrath Managing Shareholder of Baron Capital
Trust, General Partner of Registrant
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Document Description Page No.
- ------ -------------------- --------
<S> <C> <C>
3.1* Certificate of Limited Partnership of the Registrant. --
3.2* Agreement of Limited Partnership of Registrant, dated as of May 15, 1998
(incorporated herein by reference to Exhibit 10.6 to Amendment No. 3 to
the Form SB-2 Registration Statement of Baron Capital Trust filed with
the Securities and Exchange Commission on May 15, 1998 (Registration No.
333-35063). --
4.1* Form of Unit Certificate --
5.1* Form of Opinion of Schoeman, Marsh & Updike, LLP as to legality of
securities being registered --
5.2* Form of Opinion of Keating, Muething & Klekamp P.L.L. on certain tax
matters --
10.1* Trust Management Agreement, dated as of May 15, 1998, between the
Registrant and Baron Advisors, Inc. (incorporated herein by reference to
Exhibit 10.1 to Amendment No. 3 to the Form SB-2 Registration Statement
of Baron Capital Trust filed with the Securities and Exchange Commission
on May 15, 1998 (Registration No. 333-35063). --
10.2 Amended and Restated Declaration of Trust for Baron Capital Trust made
as of August 11, 1998 _____
10.3 Indemnification Agreement among the Registrant, Baron Capital Trust (its
General Partner), officers of the Registrant and trustees, officers and
members of the Board of Baron Capital Trust and such other persons as
Baron Capital Trust may designate (included in Section 7.7 of the --
Agreement of Limited Partnership of the Registrant attached hereto as
Exhibit 3.2)
10.4* Security Escrow Agreement dated as of May 15, 1998 among Gregory K.
McGrath, Robert S. Geiger, Baron Capital Trust
and American Stock Transfer & Trust Company --
23.1* Consent of Schoeman, Marsh & Updike, LLP (included in the opinion filed
as Exhibit 5.1 to this Registration Statement). --
23.2* Consent of Keating, Muething & Klekamp, P.L.L. (included in the opinion
filed as Exhibit 5.2 to this Registration Statement). --
99.1 Consent of Elroy D. Miedema, Certified Public Accountant. ____
99.2 Consent of Rachlin Cohen & Holtz, Independent Certified Public
Accountants. ____
99.3 Prior Performance Table VI: Acquisitions of Properties by Program
required under Guide 5 relating to preparation of registration
statements relating to interests in real estate limited partnerships. ____
99.4 Consent of Consortium Appraisal, Inc. and Consortium Appraisal and
Consulting Services, Inc., Appraisal Firms
99.5 Consent of Richards Appraisal Service, Inc., Appraisal Firm ____
99.6 Appraisal Reports Relating to Exchange Properties ____
99.7 Prospectus Supplements Relating to Each Exchange Partnership ____
* Previously filed
</TABLE>
AMENDED AND RESTATED
DECLARATION OF TRUST
FOR
BARON CAPITAL TRUST
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article and
Section
Number Heading Page
------ ------- ----
<S> <C> <C>
Article 1 Organization and Powers.............................................................. 1
1.1 Trust Estate; Name................................................................... 1
1.2 Purpose.............................................................................. 2
1.3 Relationship among Shareholders; No Partnership...................................... 2
1.4 Organization Certificates............................................................ 2
1.5 Principal Place of Business......................................................... 2
1.6 Admission of Shareholders............................................................ 3
1.7 Duration of the Trust................................................................ 4
1.8 Powers of the Trust.................................................................. 4
1.9 Provisions, Restrictions and Prohibitions regarding Trust Operations................. 5
Article 2 Shares............................................................................... 13
2.1 Shares, Certificates of Beneficial Interest.......................................... 13
2.2 Sale of Shares....................................................................... 14
2.3 Offering of Shares................................................................... 14
2.4 Treasury Shares...................................................................... 14
2.5 Transferability of Shares............................................................ 15
2.6 Effect of Transfer of Shares or Death, Insolvency or Incapacity of Shareholders.... 15
2.7 Repurchase of Shares................................................................. 15
2.8 Distribution Reinvestment Plan....................................................... 15
Article 2A Restriction on Transfer, Acquisition and Redemption of Shares........................ 15
2A.1 Definitions.......................................................................... 15
"Beneficial Ownership"............................................................... 15
"Beneficiary"........................................................................ 15
"Debt"............................................................................... 15
"Equity Shares"...................................................................... 15
"Excess Share Trust"................................................................. 16
"Existing Holder".................................................................... 16
"Existing Holder Limit".............................................................. 16
"Initial Public Offering"............................................................ 16
"Market Price"....................................................................... 16
"Ownership Limit".................................................................... 16
"Person"............................................................................. 16
"Purported Beneficial Transferee".................................................... 16
"Purported Record Transferee"........................................................ 17
"Restriction Termination Date"....................................................... 17
"Transfer"........................................................................... 17
"Units".............................................................................. 17
2A.2 Ownership Limitation................................................................. 17
2A.3 Excess Shares........................................................................ 18
2A.4 Prevention of Transfer............................................................... 18
2A.5 Notice to Trust...................................................................... 18
2A.6 Information for Trust................................................................ 18
2A.7 Other Action by Board................................................................ 19
2A.8 Ambiguities.......................................................................... 19
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
2A.9 Modification of Existing Holder Limits............................................... 19
2A.10 Increase or Decrease in Ownership Limit.............................................. 19
2A.11 Limitations on Changes in Existing Holder and Ownership Limits....................... 19
2A.12 Waivers by Managing Shareholder...................................................... 20
2A.13 Legend............................................................................... 20
2A.14 Severability......................................................................... 20
2A.15 Trust for Excess Shares.............................................................. 20
2A.16 No Distribution for Excess Shares.................................................... 21
2A.17 No Voting Rights for Excess Shares................................................... 21
2A.18 Non-Transferability of Excess Shares................................................. 21
2A.19 Call by Trust on Excess Shares....................................................... 21
Article 3 Liabilities.......................................................................... 21
3.1 Liability and Obligations of Corporate Trustee....................................... 21
3.2 Liability and Obligations of Managing Shareholder, Independent Trustees,
and Other Members of the Board..................................................... 22
3.3 Liability of Managing Shareholder, Independent Trustees and Other Members
of the Board to Third Parties...................................................... 22
3.4 Liability of Shareholders in General................................................. 22
3.5 Liability of Shareholders to the Trust, Managing Shareholder, Trustees, Members
of the Board and Other Shareholders................................................ 22
3.6 Liability of Managing Persons to Trust and Shareholders.............................. 23
3.7 Indemnification of Managing Persons.................................................. 23
3.8 General Provisions................................................................... 23
3.9 Dealings with Trust.................................................................. 24
Article 4 Payment of Trust Expenses............................................................ 24
4.1 Selling Commissions.................................................................. 24
4.2 Organization and Offering Expenses................................................... 25
4.3 Investment Expenses.................................................................. 25
4.4 [Intentionally omitted].............................................................. 25
4.5 Other Expenses....................................................................... 25
4.6 Payment and Recoupment of Fees....................................................... 25
Article 5 Accounting and Reports............................................................... 26
5.1 Elections............................................................................ 26
5.2 Books and Records.................................................................... 26
5.3 Reports.............................................................................. 26
5.4 Bank Accounts........................................................................ 27
5.5 Interim Assets....................................................................... 27
Article 6 Rights and Obligations of Shareholders............................................... 27
6.1 Participation in Management.......................................................... 27
6.2 Rights to Engage in Other Ventures................................................... 27
6.3 Transferability of Shares............................................................ 27
6.4 Information.......................................................................... 27
6.5 Shareholders' Meetings............................................................... 28
6.6 Voting............................................................................... 29
6.7 Distributions........................................................................ 30
6.8 Notice of Non-liability.............................................................. 30
Article 7 Powers, Duties and Limitations on Managing Shareholder, Board and
Independent Trustees............................................................... 31
7.1 Management of the Trust............................................................. 31
7.2 Acceptance of Subscriptions.......................................................... 31
7.3 Specific Limitations................................................................. 31
7.4 Powers of Managing Shareholder....................................................... 32
7.5 Independent Trustees................................................................. 34
7.6 Board of the Trust................................................................... 35
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
7.7 Officers of Trust.................................................................... 36
7.8 Presumption of Power................................................................. 36
7.9 Obligations Not Exclusive............................................................ 36
7.10 Rights to Deal with Affiliates...................................................... 37
7.11 Removal of Managing Shareholder...................................................... 37
Article 8 Dissolution, Termination and Liquidation............................................. 37
8.1 Dissolution.......................................................................... 37
8.2 Continuation of the Trust............................................................ 37
8.3 Obligations on Dissolution........................................................... 37
8.4 Liquidation Procedure................................................................ 38
8.5 Liquidating Trustee.................................................................. 38
8.6 Death, Insanity, Dissolution or Insolvency of Managing Shareholder, a Trustee
or a Shareholder................................................................... 38
8.7 Withdrawal of Offering............................................................... 38
Article 9 Miscellaneous........................................................................ 39
9.1 Notices.............................................................................. 39
9.2 Delaware Laws Govern................................................................. 39
9.3 Power of Attorney................................................................... 39
9.4 Disclaimer........................................................................... 39
9.5 Corporate Trustee Resignation and Replacement........................................ 39
9.6 Amendment and Construction of Declaration............................................ 39
9.7 Bonds and Accounting................................................................. 40
9.8 Binding Effect....................................................................... 40
9.9 Headings............................................................................. 40
9.10 Bylaws............................................................................... 40
9.11 Severability......................................................................... 40
Article 10 Definitions.......................................................................... 40
Exhibit
A Shareholders' Names, Addresses and Share Ownership
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST
FOR
BARON CAPITAL TRUST
This AMENDED AND RESTATED DECLARATION OF TRUST (the "Declaration") is made
as of August 11, 1998, by BARON CAPITAL PROPERTIES, INC., a Delaware corporation
("Baron Properties"), which, with its successors as trustees under this
Declaration, is referred to as the "Corporate Trustee," and BARON ADVISORS,
INC., the Managing Shareholder of the Trust, for the benefit of those persons
who are accepted as holders of shares of beneficial interest under this
Declaration.
WHEREAS, the Corporate Trustee has organized BARON CAPITAL TRUST (the
"Trust") as a business trust under the Delaware Business Trust Act, to provide
for the management of the Trust by Baron Advisors, Inc., a Delaware corporation
("Baron Advisors," or "Managing Shareholder" when acting hereunder in such
capacity), and to provide for the sale of beneficial interests in the Trust, the
operation of the Trust and the rights of the Corporate Trustee, other persons
acting as trustees (together with the Corporate Trustee, the "Trustees") and
owners of beneficial interests;
WHEREAS, a Certificate of Trust (the "Certificate") was filed by the
Corporate Trustee on July 31, 1997 with the Secretary of State of Delaware to
evidence the existence of the Trust;
WHEREAS, the Corporate Trustee and the Managing Shareholder executed a
Declaration of Trust for the Trust as of August 31, 1997;
WHEREAS, the Corporate Trustee and the Managing Shareholder amended and
restated the Declaration of Trust as of May 15, 1998;
WHEREAS, the Corporate Trustee and the Managing Shareholder desire to amend
and restate the Amended and Restated Declaration of Trust to include the terms
and conditions set forth herein;
WHEREAS, the Corporate Trustee and the Managing Shareholder desire that the
Trust qualify as a "real estate investment trust" ("REIT") under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, the Corporate Trustee declares that it constitutes and
appoints itself trustee of the sum of $10.00 owned by it, together with all
other property that it acquires under this Declaration as trustee, together with
the proceeds thereof, to hold, IN TRUST, to manage and dispose of for the
benefit of the holders, from time to time, of beneficial interests in the Trust,
subject to the provisions of this Declaration as follows. Capitalized terms used
in this Declaration shall have the respective meanings ascribed to them in
Article 10 hereof, and, in the absence of any such definition, shall have the
respective meanings ascribed to them in the Prospectus (as defined in Article
10) if defined therein, unless the context indicates otherwise. All references
to section numbers herein shall refer to section numbers of this Declaration
unless otherwise stated herein.
ARTICLE 1
ORGANIZATION AND POWERS
1.1 Trust Estate; Name. The Trust, comprised of the Trust estate created
under this Declaration and the business conducted hereunder, shall be designated
as "Baron Capital Trust," which name shall refer to the trust
<PAGE>
estate and to the Corporate Trustee in its capacity as trustee of the trust
estate but not in any other capacity and which shall not refer to the officers,
agents, other trustees or beneficial owners of the Trust. To the extent
possible, the Trustees shall conduct all business and execute all documents
relating to the Trust in the name of the Trust and not as trustees. The Trustees
may conduct the business of the Trust or hold its property under other names as
necessary to comply with law or to further the affairs of the Trust as it deems
advisable in their sole discretion. This Declaration, the Certificate and any
other documents, and any amendments of any of the foregoing, required by law or
appropriate, shall be recorded in all offices or jurisdictions where the Trust
shall determine such recording to be necessary or advisable for the conduct of
the business of the Trust.
1.2 Purpose. (a) The purpose of the Trust is to acquire equity interests in
and/or provide or acquire mortgage loans (including without limitation Junior
Mortgage Loans and First Mortgage Loans) secured by mortgages on existing
residential apartment properties located in the United States, and the
acquisition, ownership, management, operation, acquire by leasing, leasing to
others, improvement, administration and disposition of such types of real
property or any interest therein (the "Property") as the Trust may designate.
The Trust may invest its funds or participate in entities organized for the
purpose of acquiring, owning, managing, operating, acquiring by leasing, leasing
to others, improving, administering or disposing of properties described in the
preceding sentence. The Trust shall have the power to perform any and all acts
and activities with respect to this general purpose that are customary or
incidental thereto including by way of illustration the acquisition, ownership,
management, operation, leasing, improvement, administration and disposition of
such properties or any interest therein as the Trust shall designate. Pending
the commitment of Trust funds to investments in such types of property,
distribution of Trust funds to Shareholders (as defined in Article 10) or
application of reserve funds to their purposes, the Trust shall have full
authority and discretion to utilize Trust funds as provided in Section 5.5. The
Trust shall have all the powers granted to real estate investment trusts
generally by the Code or any successor statute and shall have any other and
further powers as are not inconsistent with and are appropriate to promote and
attain the purposes of the Trust as set forth in this Declaration.
(b) The Trust may engage in real estate operations with others when, in the
judgment of the Trust, it is prudent and desirable under the circumstances. In
any such operations, the Trust may acquire, own, hold, manage, operate, acquire
by lease, lease to others, improve, administer and dispose of the types of
property described in the preceding paragraph, either as principal, agent,
partner, syndicate member, associate, joint venturer or otherwise and may invest
funds in any such business, and may do any and all things necessary or
incidental to the conduct of any such activities. Without limiting the
foregoing, the Trust may supply security for debt of properties or enter into
lease transactions or acquire goods and services for the benefit of a property.
1.3 Relationship among Shareholders; No Partnership. As among the Trust,
the Managing Shareholder, the Trustees, the Shareholders and the officers and
agents of the Trust, a trust and not a partnership is created by this
Declaration irrespective of whether any different status may be held to exist as
far as others are concerned for tax purposes or in any other respect. The
Shareholders hold only the relationship of trust beneficiaries to the Trustees
with only such rights as are conferred on them by this Declaration.
1.4 Organization Certificates. The parties hereto shall cause to be
executed and filed (a) the Certificate, (b) such certificates as may be required
by so-called "assumed name" laws in each jurisdiction in which the Trust has a
place of business, (c) all such other certificates, notices, statements or other
instruments required by law or appropriate for the formation and operation of a
Delaware business trust in all jurisdictions where the Trust may elect to do
business, and (d) any amendments of any of the foregoing required by law or
appropriate.
1.5 Principal Place of Business. The principal place of business of the
Trust shall be 7826 Cooper Road, Cincinnati, Ohio 45242 or such other place as
the Trust may from time to time designate by notice to all Shareholders. The
Trust's office in the State of Delaware and the principal place of business of
Baron Properties, the Corporate Trustee, are located at 1105 North Market
Street, Wilmington, Delaware 19899, or such other place as the Trust may
designate from time to time by notice to all Shareholders. The Trust may
maintain such other offices at such other places as the Trust may determine to
be in the best interests of the Trust.
2
<PAGE>
1.6 Admission of Shareholders. (a) The Trust is authorized to offer for
sale in a public offering (the "Initial Offering") pursuant to the prospectus
(the "Prospectus") dated May 15, 1998, as it may be supplemented or amended from
time to time, at a purchase price of $10 per Share, up to 2,500,000 of the
Shares authorized for issuance under Article 2 of this Declaration, and such
Shares sold shall be designated as Common Shares. The Trust shall have the
unrestricted right at all times prior to the Termination Date (as defined in
Article 10) of the Initial Offering to admit to the Trust such Shareholders as
it may deem advisable, provided the aggregate subscriptions received for the
purchase of Common Shares (as defined in Article 10) of the Shareholders and
accepted by the Trust do not exceed $25,000,000 immediately following the
admission of such Shareholders. After the Termination Date of the Initial
Offering, any sale of Shares (including Common Shares and Preferred Shares) by
the Trust shall be governed by Section 2. The Trust is also authorized to cause
Baron Capital Properties, L.P. (the "Operating Partnership"), its Affiliate
through which it will conduct its real estate operations, to register up to
2,500,000 units of limited partnership interest ("Units") in the Operating
Partnership to use to acquire interests in residential apartment properties
(consistent with the Trust's investment objectives and policies) in connection
with the proposed Exchange Offering described in the Prospectus. In connection
therewith, the Trust is authorized (i) to exchange unissued Common Shares (in
addition to the 2,500,000 to be offered for sale in the Initial Offering) on a
one for one basis for Units tendered by holders of Units requesting such
exchange and (ii) file a registration statement in respect of such additional
Common Shares on the applicable form of the Securities and Exchange Commission.
(b) Each Shareholder who acquires Common Shares in the Initial Offering
shall execute Subscription Documents (as defined in Article 10) and pay the
purchase therefor to the Trust as subscribed by the Shareholder. Subject to the
acceptance thereof by the Trust, each Shareholder who executes Subscription
Documents shall be admitted to the Trust as an Shareholder. All funds received
from such subscriptions will be deposited in the Trust's name in an
interest-bearing escrow account at American Stock Transfer & Trust Company until
the Escrow Date (as defined in Article 10). The Trust will not accept any
subscriptions from New York investors, and no sales will be completed in New
York, unless and until the Trust has sold, and collected the proceeds from, at
least 250,000 Common Shares in this Offering ($2,500,000 gross proceeds). The
Trust will not accept any subscriptions from Ohio investors and no sales will be
completed in Ohio, unless and until the Trust has sold, and collected the
proceeds from, at least 100,000 Common Shares in this Offering (gross proceeds
of $1,000,000).
(c) If, by the close of business on December 31, 1998, at least 50,000
Common Shares (representing $500,000 of gross Initial Offering proceeds) have
not been sold or if the Trust withdraws the Initial Offering of Common Shares in
accordance with the terms of this Declaration, the Trust shall be immediately
dissolved at the expense of the Managing Shareholder and all subscription funds
shall be forthwith returned to the respective subscribers together with any
interest earned thereon. As soon after the Termination Date as practicable, the
Trust shall advise each Shareholder of the Termination Date and the aggregate
amount of proceeds raised by the Trust in the Initial Offering. Any proceeds
from this Offering which are not invested or committed for investment within two
years following the date of effectiveness of the Initial Offering (less any
amounts retained as necessary operating capital) will be distributed pro rata to
the Shareholders as a return of capital.
(d) The full cash price for Shares must be paid to the Trust at the time of
subscription.
(e) Shareholders who acquire Common Shares from the Trust in the Initial
Offering shall meet the following suitability standards prior to consummating
such acquisition:
(i) Minimum annual gross income of $45,000 and a minimum net worth
(determined exclusive of home, home furnishings, and automobiles) of
$45,000; or
(ii) Minimum net worth of $150,000 (determined exclusive of home, home
furnishings, and automobiles).
In addition, the Trust may not sell Common Shares in the Initial Offering to, or
accept as a Shareholder, any Ohio investor whose investment would exceed 10% of
his liquid net worth. The Trust also may not sell Common Shares in the Initial
Offering to, or accept as a Shareholder, any Arkansas, Pennsylvania or Texas
investor whose
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investment would exceed 10% of his net worth (exclusive of home, home
furnishings and automobiles). The Managing Shareholder and each participating
broker-dealer selling Common Shares in connection with the Initial Offering
shall make every reasonable effort to determine that the acquisition of Common
Shares in the Initial Offering is a suitable and appropriate investment for each
Shareholder by ascertaining that the prospective Shareholder meets the following
qualifications:
(i) Meets the minimum income and net worth standards set forth in this
Section 1.6;
(ii) Can reasonably benefit from the Trust based on the prospective
Shareholder's overall investment objectives and portfolio structure;
(iii) Is able to bear the economic risk of the investment based on the
prospective Shareholder's overall financial situation;
(iv) Has apparent understanding of the fundamental risks of the
investment; of the risk that the Shareholder may lose the entire
investment; of the lack of liquidity of Common Shares; of the restrictions
on transferability of Common Shares as a result of the Trust's status as a
REIT for federal income tax purposes; of the background and qualifications
of the Managing Shareholder; and of the tax consequences of the investment.
Such suitability determination will be made on the basis of all information
obtained from a prospective Shareholder, including at least the age, investment
objectives, net worth, financial situation and other investments of the
prospective Shareholder, and other pertinent factors. The Managing Shareholder
or the participating broker-dealer who sells the particular Common Shares shall
maintain records of the information used to make the suitability determination
for at least six years from the date of sale. The securities administrator of
any state in which the Trust may sell Common Shares in connection with the
Initial Offering may require minimum initial and subsequent cash investment
amounts.
1.7 Duration of the Trust. For all purposes, this Declaration, as it may be
amended or restated from time to time in accordance with its terms, shall be
effective until the Trust is terminated in accordance with Section 8.1.
1.8 Powers of the Trust. Without limiting any powers granted to the Trust
under this Declaration or applicable law, the Trust shall have the following
additional powers, subject to applicable law:
(a) To borrow money or to loan money and to pledge or mortgage any and all
Trust Property and to execute conveyances, mortgages, security agreements,
assignments and any other contract or agreement deemed proper and in furtherance
of the Trust's purposes and affecting it or any Trust Property (including
without limitation the Trust Management Agreement (as defined in Article 10));
provided, however, that the Trust shall not loan money to the Managing
Shareholder, the Trustees or any other Managing Person except as provided in
Section 1.9(z) below or to any wholly owned subsidiary of the Trust;
(b) To pay all indebtedness, taxes and assessments due or to be due with
regard to Trust Property and to give or receive notices, reports or other
communications arising out of or in connection with the Trust's business or
Trust Property;
(c) To collect all moneys due the Trust;
(d) To establish, maintain and supervise the deposit of funds or Trust
Property into, and the withdrawals of the same from, Trust bank accounts or
securities accounts;
(e) To employ accountants to prepare required tax returns and provide other
professional services and to pay their fees as a Trust expense;
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(f) To make election to be treated as a REIT for federal income tax
purposes under Section 856 through 860 of the Code;
(g) To employ legal counsel for Trust purposes and to pay their fees and
expenses as a Trust expense;
(h) To conduct the affairs of the Trust with the general objective of
achieving capital appreciation and distributable income from the Trust Property;
(i) To serve as the general partner of the Operating Partnership and of any
other real estate limited partnership, including, without limitation, any
Exchange Partnership, which directly or indirectly owns property interests,
regardless of whether the Trust or the Operating Partnership owns all or a
portion of such partnership's limited partnership interest; and
(j) To waive the payment of all or a part of a commission by one or more
investors in connection with offerings of the Trust's securities, in which case
the cost of such securities acquired by such investors will be less than the
cost of equivalent securities to an investor paying a commission, provided,
however, the Trust will exercise such waiver right on a case by case basis
according to the facts and circumstances involved.
1.9 Provisions, Restrictions and Prohibitions regarding Trust Operations.
Notwithstanding anything to the contrary set forth in this Declaration, the
Trust, Operating Partnership, Managing Shareholder and Trustees, as the case may
be, shall conform to the following provisions, restrictions and prohibitions in
the operations of the Trust and the Operating Partnership:
(a) A majority of the Independent Trustees shall confirm that prior to the
completion of the Initial Offering and the proposed Exchange Offering, the
Original Investors have contributed to the Operating Partnership as an initial
investment in the Operating Partnership cash in the total amount of $50,000 and
other consideration described in the Prospectus. In exchange for such
consideration, each Original Investor shall be entitled to receive an amount of
Units which are exchangeable (subject to the provisions of a securities escrow
agreement entered into with the escrow agent for the Initial Offering which is
referred to in Section 1.6(b) hereof) into 9.5% of the Common Shares outstanding
after the completion of the Initial Offering and the proposed Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those owned by the Trust) have been exchanged into an equivalent number of
Common Shares. The Units issuable to the Original Investors and the Common
Shares into which they are exchangeable shall be in addition to the 2,500,000
Common Shares which the Trust is offering for sale in the Initial Offering, the
2,500,000 Units to be registered by the Operating Partnership in connection with
proposed Exchange Offering, and the 2,500,000 additional Common Shares into
which the registered Units are exchangeable. To the extent the Units issuable to
the Original Investors are released from escrow in accordance with the
securities escrow agreement referred to above, the Original Investors may
dispose of all or a portion of such Units or Common Shares in the same manner in
which other Unitholders or Shareholders may dispose of their Units or Common
Shares.
(b) At, or prior to, the initial meeting of the Board of the Trust, this
Declaration and the Operating Partnership Agreement shall be reviewed and
ratified by a majority vote of the Board and of the Independent Trustees.
(c) The Board shall establish written policies on investments and any
borrowing to be made by the Trust and Operating Partnership and monitor the
administrative procedures, investment operations and performance of the Trust,
Operating Partnership and the Managing Shareholder to ensure that such policies
are being carried out.
(d) The Board shall evaluate the performance of the Managing Shareholder
(and any successor Advisor of the Trust) prior to entering into or renewing a
management agreement (including without limitation the Trust Management
Agreement which is described in the Prospectus) relating to the administration
and management of the Trust (other than the initial term of the Trust Management
Agreement, which shall be deemed to have been approved by Shareholders who
acquire Common Shares in the Offering and by a majority of the Board and a
majority of the Independent Trustees). The criteria used in such evaluation
shall be reflected in the minutes of such
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Board meeting. Any such management agreement shall not have a term of more than
one year and shall be terminable by a majority of the Independent Trustees or
the Managing Shareholder (or any successor Advisor, as the case may be) on at
least 60 days prior written notice without cause or penalty. Upon the
termination of the Trust Management Agreement or any other management agreement
that may be entered into by the Trust and the Managing Shareholder (or any
successor Advisor), the Managing Shareholder or other Advisor, as the case may
be, shall cooperate with the Trust and take all reasonable steps requested to
assist the Board in making an orderly transition of the advisory function. The
Board shall determine that any successor to the Managing Shareholder (or any
successor Advisor) possesses sufficient qualifications to perform the
management, administrative and investment advisory function for the Trust and
justify the compensation provided for in the applicable management agreement.
(e) A majority of the Board and a majority of the Independent Trustees
shall determine whether the conditions set forth in Section 3.7 have been fully
satisfied for indemnification or for advancement of Trust and Operating
Partnership funds for legal expenses and other costs incurred as a result of any
legal action for which indemnification is being sought in respect of the
Managing Shareholder, any Trustee, a broker-dealer, or any Affiliate of the
Managing Shareholder or a Trustee, provided, however, any party seeking
indemnification under Section 3.7 which is the Managing Shareholder, a Trustee
or an Affiliate of the Managing Shareholder or a Trustee shall not be eligible
to participate in making any such determination.
(f) The Independent Trustees shall determine, at least annually, that the
total fees and expenses of the Trust and the Operating Partnership are
reasonable in light of their investment performance, their net assets, their net
income, and the fees and expenses of other comparable unaffiliated REITs. Each
such determination shall be reflected in the minutes of the meeting of the
Board. Duplicate payment of fees and expenses of the Trust and Operating
Partnership shall be prohibited.
(g) The Independent Trustees shall determine that the Organization and
Offering Expenses (as defined below) (including the reimbursable distribution,
due diligence and organizational expenses specified in Section 4.2 of this
Declaration) payable by the Trust and the Operating Partnership in connection
with the formation of the Trust and the Operating Partnership and any offerings
of Shares or Units is reasonable and in no event exceeds an amount equal to 15%
of the gross proceeds of the particular offering. For purposes of this
Declaration, the term "Organization and Offering Expenses" means all expenses
incurred by and to be paid from the assets of the Trust and the Operating
Partnership in connection with and in preparing the Trust and the Operating
Partnership for registration and subsequently offering and distributing Shares
and Units to the public, including, but not limited to, total underwriting and
brokerage discounts and commissions (including any fees of the underwriters'
attorneys payable by the Trust or the Operating Partnership), warrants to
acquire Common Shares issued to the Dealer Manager as additional compensation
for effecting sales of Common Shares in the Initial Offering (which warrants,
for purposes of the limitation set forth in this Section 1.9(g) of this
Declaration, will be valued in accordance with the Statement of Policy Regarding
Underwriters Warrants issued by the North American Securities Administrators
Association, Inc.), expenses for printing, engraving, mailing, salaries of
employees while engaged in sales activity, charges of transfer agents,
registrars, trustees, escrow holders, depositaries, experts, expenses of
qualification of the sale of the securities under Federal and State laws,
including taxes and fees, accountants' and attorneys' fees.
(h) The Independent Trustees shall determine that the total amount of any
Acquisition Fee and Acquisition Expense (as such terms are defined below and
including without limitation the Managing Shareholder's reimbursable expenses
incurred prior to and during the Initial Offering for investigating, evaluating
and consummating investments of the Trust and the Operating Partnership as
specified in Section 4.3 of this Declaration) payable by the Trust or the
Operating Partnership is reasonable and in no event exceeds an amount equal to
six percent of the purchase price of the subject property (including the amount
actually paid or allocated to the purchase, development, construction or
improvement of a property, exclusive of Acquisition Fees and Acquisition
Expenses), or in the case of a mortgage loan made or acquired by the Trust or
the Operating Partnership, six percent of the funds advanced, unless a majority
of the "disinterested" members of the Board and a majority of the
"disinterested" Independent Trustees approve payment of an Acquisition Fee in
excess of such amounts based upon their determination that such excess fee is
commercially competitive, fair and reasonable to the Trust and the Operating
Partnership. For purposes of this Declaration, the term "Acquisition Fee" means
the total of
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all fees and commissions paid by any party to any other party in connection with
making or investing in Mortgage Loans or the purchase, development or
construction of property by the Trust or the Operating Partnership, including
any real estate commission, selection fee, development fee, construction fee,
non-recurring management fee, loan fees or points or any fee of a similar
nature, however designated, but excluding development fees and construction fees
paid to persons not affiliated with the Managing Shareholder in connection with
the actual development and construction of a project. For purposes of this
Declaration, the term "Acquisition Expenses" means all expenses related to the
selection and acquisition of properties, whether or not acquired, including, but
not limited to legal fees and expenses, travel and communications expenses,
costs of appraisals, nonrefundable option payment on property not acquired,
accounting fees and miscellaneous expenses. For purposes of this Declaration,
disinterested members of the Board and disinterested Independent Trustees with
respect to a particular transaction or matter concerning the Trust's or the
Operating Partnership's operations shall include those persons who have no other
interest in any such transaction or matter beyond their role on the Board or as
Independent Trustees.
(i) The Independent Trustees shall have the fiduciary responsibility of
limiting the Total Operating Expenses (as defined below) of each of the Trust
and the Operating Partnership in any fiscal year to the greater of (i) two
percent of their respective Average Invested Assets (as defined below) or (ii)
twenty-five percent of their respective Net Income (as defined below) for such
year unless the Independent Trustees make a finding that, based on such unusual
and non-recurring factors which they deem sufficient, a higher level of such
operating expenses is justified for such year. Any such finding and the reasons
in support thereof shall be reflected in the minutes of the meeting of the
Board. Within 60 days after the end of each fiscal quarter for which the Trust
or the Operating Partnership incurs Total Operating Expenses for the 12 months
then ended in excess of such amount, the Trust shall send to the Shareholders
and Unitholders written disclosure of such fact, together with an explanation of
the factors the Independent Trustees considered in arriving at their finding
that such higher operating expenses were justified. If the Independent Trustees
do not determine such excess expenses are justified, the Managing Shareholder
shall reimburse the Trust or the Operating Partnership, as the case may be, at
the end of such 12-month period the amount by which the Total Operating Expenses
paid or incurred by the Trust or the Operating Partnership, respectively, exceed
the limitations herein provided.
For purposes of this Declaration, "Total Operating Expenses" means the
aggregate expenses of every character paid or incurred by the Trust and the
Operating Partnership as determined under generally accepted accounting
principles, including fees and reimbursable expenses, if any, payable to the
Managing Shareholder and any successor Advisor in accordance with this
Declaration, but excluding the following: (a) the expenses of raising capital
such as Organization and Initial Offering Expenses (defined above), legal,
audit, accounting, underwriting, brokerage, listing, registration and other
fees, printing and other such expenses, and tax incurred in connection with the
issuance, distribution, transfer, registration, and stock exchange listing, if
any, of the Trust's Shares or the Operating Partnership's Units; (b) interest
payments; (c) taxes; (d) non-cash expenditures such as depreciation,
amortization and bad debt reserves; (e) incentive fees paid in compliance with
subsection (ee) below; (e) Acquisition Fees and Acquisition Expenses (defined
above), real estate commissions on resale of property and other expenses
connected with the acquisition, disposition, and ownership of real estate
interests, mortgage loans, or other property (such as the costs of foreclosure,
insurance premiums, legal services, maintenance, repair, and improvement of
property).
For purposes of this Declaration, "Average Invested Assets" means, for any
period, the average of the aggregate book value of the assets of each of the
Trust and the Operating Partnership invested, directly or indirectly, in equity
interests in and loans secured by real estate, before reserves for depreciation
or bad debts or other similar non-cash reserves computed by taking the average
of such values at the end of each month during such period.
For purposes of this Declaration, "Net Income" means, for any period, total
revenues applicable to such period, less the expenses applicable to such period
other than additions to reserves for depreciation or bad debts or other similar
non-cash reserves. If the Managing Shareholder receives an incentive fee paid in
compliance with subsection (ee) below, Net Income, for purposes of calculating
Total Operating Expenses in this subsection, shall exclude the gain from the
sale of the assets of the Trust or the Operating Partnership, as applicable.
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(j) A majority of the Independent Trustees shall determine that the
conditions set forth in Section 4.5(b) for payment to the Managing Shareholder,
a Trustee, or any of their respective Affiliates of real estate commissions on
purchase or sale of a Trust or Operating Partnership Property have been fully
satisfied, that any such commission payable does not exceed a real estate
commission which is reasonable, customary and competitive in light of the size,
type and location of such property and, in the case of the sale of Trust
property, in no event exceeds three percent of the sale price, and that, in the
case of the sale of Trust property, the amount of such commissions payable when
added to the commissions payable to unaffiliated real estate brokers does not
exceed the lesser of such competitive real estate commission or an amount equal
to six percent of the sale price.
(k) The Independent Trustees shall determine, at least annually, that the
compensation which the Trust contracts to pay to the Managing Shareholder (or
any successor Advisor) is reasonable in relation to the nature and quality of
services performed and that such compensation is within the limits prescribed in
subsection (f) above. The Independent Trustees shall also supervise the
performance of the Managing Shareholder (and any successor Advisor) and the
compensation payable to it by the Trust to determine that the terms and
conditions of the contract are being carried out. Each such determination shall
be based on the factors set forth below and all other factors the Independent
Trustees may deem relevant. The findings of the Independent Trustees on each of
such factors shall be recorded in the minutes of the meetings of the Board.
(i) The size of the management fee in relation to the size,
composition and profitability of the portfolio of the Trust and the
Operating Partnership.
(ii) The success of the Managing Shareholder in generating
opportunities that meet the investment objectives of the Trust.
(iii) The rates charged to other REITs and to investors other than
REITs by Advisors performing similar services.
(iv) Additional revenues realized by the Managing Shareholder and any
Affiliates through their relationship with the Trust and the Operating
Partnership, including loan administration, underwriting or broker
commissions, servicing, engineering, inspection and other fees, whether
paid by the Trust or the Operating Partnership or by others with whom the
Trust or the Operating Partnership does business.
(v) The quality and extent of service and advice furnished by the
Managing Shareholder.
(vi) The performance of the investment portfolio of the Trust and the
Operating Partnership, including income, conservation or appreciation of
capital, frequency of problem investments, and competence in dealing with
distress situations.
(vii) The quality of the portfolio of the Trust and the Operating
Partnership in relationship to the investments generated by the Managing
Shareholder for its own account.
(l) Neither the Trust nor the Operating Partnership shall purchase property
or any equity interest in any entity which owns title to one or more properties
from the Managing Shareholder, a Trustee, or any of their respective Affiliates
unless a majority of the disinterested members of the Board and a majority of
the disinterested Independent Trustees review the proposed transaction and
determine that it is fair and reasonable to the Trust and the Operating
Partnership and that the purchase price to the Trust or the Operating
Partnership for such property or equity interest is no greater than the cost of
the property or equity interest to such proposed seller, or if the purchase
price to the Trust or the Operating Partnership is in excess of such cost, that
substantial justification for such excess exists and such excess is reasonable,
provided, however, in no event may the purchase price for the property or equity
interest exceed its current appraised value. In addition, the Trust and the
Operating Partnership may not acquire any properties or assets presently held by
any affiliate of the Trust, the Operating Partnership, the Managing Shareholder
or any other promoter unless the possibility of such acquisitions is disclosed
in this Prospectus, as it may be amended or supplemented, and there is
appropriate disclosure of the material facts concerning each such acquisition.
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(m) Neither the Managing Shareholder, any Trustee, nor any of their
respective Affiliates shall acquire or lease any assets from the Trust or the
Operating Partnership unless a majority of the disinterested members of the
Board and a majority of the disinterested Independent Trustees determine that
the proposed transaction is fair and reasonable to the Trust and the Operating
Partnership.
(n) No loans may be made by the Trust or the Operating Partnership to the
Managing Shareholder, a Trustee, any officer, principal or promoter of the
Trust, the Operating Partnership or the Managing Shareholder or any of their
respective Affiliates or principals except as provided in subsection (z) below
or to any wholly owned subsidiary of the Trust or the Operating Partnership.
(o) Neither the Trust nor the Operating Partnership may borrow money from
the Managing Shareholder, a Trustee, or any of their respective Affiliates
unless a majority of the disinterested members of the Board and a majority of
the disinterested Independent Trustees determine that such proposed transaction
is fair, competitive, and commercially reasonable and no less favorable to the
Trust and the Operating Partnership than loans between unaffiliated parties
under the same circumstances.
(p) Neither the Trust nor the Operating Partnership shall invest in joint
ventures with the Managing Shareholder, a Trustee, or any of their respective
Affiliates unless a majority of the disinterested members of the Board and a
majority of the disinterested Independent Trustees determine that such proposed
transaction is fair and reasonable to the Trust and the Operating Partnership
and on substantially the same terms and conditions as those received by other
joint venturers.
(q) Neither the Trust nor the Operating Partnership shall invest in equity
securities unless a majority of the disinterested members of the Board and a
majority of the disinterested Independent Trustees determine that such proposed
transaction is fair, competitive, and commercially reasonable.
(r) The Independent Trustees shall review the investment policies of the
Trust with sufficient frequency at least annually to determine that the policies
being followed by the Trust at any time are in the best interests of the
Shareholders. Each such determination and the basis therefor shall be reflected
in the minutes of meetings of the Board.
(s) In the event that the Trust or the Operating Partnership and one or
more other investment programs sponsored by the Managing Shareholder or an
Affiliate of the Managing Shareholder seek to acquire similar properties, the
Board (including the Independent Trustees) shall review the method described in
the Prospectus for allocating the acquisition of properties among the Trust or
the Operating Partnership, as applicable, and such other programs in order to
determine that such method is applied fairly to the Trust and the Operating
Partnership.
(t) Any other transaction not described in this Section 1.9 between the
Trust or the Operating Partnership and the Managing Shareholder, a Trustee, or
any of their respective Affiliates shall require the determination of a majority
of the disinterested members of the Board and a majority of the disinterested
Independent Trustees that the proposed transaction is fair and reasonable to the
Trust and the Operating Partnership and on terms and conditions no less
favorable to the Trust and the Operating Partnership than those available from
unaffiliated parties.
(u) The consideration that the Trust and the Operating Partnership pays for
any property or for any equity interest in any entity owning title to one or
more properties shall be based on the fair market value of such property or
equity interest as determined by a majority of the Board, provided, however, in
cases in which a majority of the Independent Trustees in their sole discretion
determine, and in all cases in which the Trust or the Operating Partnership
proposes to acquire any property or equity interest in any entity owning title
to one or more properties from the Managing Shareholder, a Trustee, or any of
their respective Affiliates, such fair market value shall be determined by an
Independent Expert selected by the Independent Trustees. In addition, the Trust
and the Operating Partnership shall not make an equity investment in respect of
any property where the amount invested
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plus the amount of any existing indebtedness or refinancing indebtedness in
respect of such property exceeds the appraised value of the property.
(v) In connection with a proposed Roll-up (as defined below) involving the
assets of the Trust or the Operating Partnership, an appraisal of all such
assets shall be obtained from an Independent Expert. If the appraisal will be
included in a prospectus to be used to offer the securities of a Roll-up Entity
(as defined below), the appraisal shall be filed with the Commission and
applicable states as an exhibit to the registration statement for the offering.
The appraisal shall be based on an evaluation of all relevant information, shall
indicate the value of such assets as of a date immediately prior to the
announcement of the proposed transaction, and shall assume an orderly
liquidation of such assets over a 12-month period. The terms of the engagement
of the Independent Expert shall clearly state that the engagement is for the
benefit of the Trust, the Operating Partnership, the Shareholders and the
Unitholders. A summary of the appraisal, indicating all material assumptions
underlying the appraisal, shall be included in a report to the Shareholders and
Unitholders in connection with the proposed transaction.
In connection with a proposed Roll-up transaction involving such assets,
the sponsor of the transaction shall offer to Shareholders and Unitholders who
vote against the proposal the choice of:
(i) Accepting the securities of the Roll-up Entity offered in the
proposed transaction, or
(ii) One of the following:
(1) Remaining as Shareholders in the Trust or Unitholders of the
Operating Partnership, as applicable, and preserving their
interests therein on the same terms and conditions as existed
previously; or
(2) Receiving cash in an amount equal to their respective pro
rata share of the appraised value of the Net Assets (as defined
below) of the Trust or the Operating Partnership, as applicable.
Neither the Trust nor the Operating Partnership shall participate in any
proposed Roll-up transaction:
(i) which would result in the Shareholders or the Unitholders having rights
in the Roll-up Entity that are less favorable than those provided for
Shareholders under this Declaration or Unitholders under the Operating
Partnership Agreement, respectively;
(ii) which includes provisions which would operate to materially impede or
frustrate the accumulation of shares by any purchaser of the securities of the
Roll-up Entity (except to the minimum extent necessary to preserve the tax
status of the Roll-up Entity);
(iii) which would limit the ability of a Shareholder or Unitholder to
exercise the voting rights of its securities of the Roll-up Entity on the basis
of the number of the Trust's Shares held by such Shareholder or the Operating
Partnership's Units held by such Unitholder.
(iv) in which the rights of access of the Shareholder or the Unitholders to
the records of the Roll-up Entity will be less favorable than those provided for
under this Declaration or the Operating Partnership, respectively; or
(v) in which any of the costs of the transaction would be borne by the
Trust or the Operating Partnership if the Roll-up transaction is not approved by
the Shareholders or the Unitholders, respectively.
For purposes of this Declaration, "Roll-up" means a transaction involving
the acquisition, merger, conversion, or consolidation either directly or
indirectly of the Trust or the Operating Partnership and the issuance of
securities of a Roll-up Entity. Such term does not include the following: (a) a
transaction involving securities of the Trust or the Operating Partnership that
have been for at least 12 months listed on a national securities exchange or
traded through the National Association of Securities Dealers Automated
Quotation National Market System; or
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(b) a transaction involving the conversion to corporate, trust, or association
form of only the Trust or the Operating Partnership if, as a consequence of the
transaction there will be no significant adverse change in any of the following:
(i) voting rights of the Shareholders or Unitholders, as applicable; (ii) the
term of existence of the Trust or the Operating Partnership; (iii) compensation
payable to the sponsor or advisor of the Roll-up transaction; or (iv) the
Trust's investment objectives. For purposes of this Declaration, "Roll-Up
Entity" means a partnership, real estate investment trust, corporation, trust,
or other entity that would be created or would survive after the successful
completion of a proposed Roll-up transaction. For purposes of this Declaration,
"Net Assets" means the total assets (other than intangibles) at cost before
deducting depreciation or other non-cash reserves less total liabilities,
calculated at least quarterly on a basis consistently applied.
(w) The aggregate borrowings of each of the Trust and the Operating
Partnership, secured and unsecured, shall be reasonable in relation to their
respective Net Assets (defined above) and shall be reviewed at least quarterly
by the Board. The maximum amount of such borrowings in relation to such Net
Assets shall not exceed 300%, in the absence of a satisfactory showing that
higher level of borrowing is appropriate. Any borrowing in excess of such amount
shall require the approval of a majority of the Independent Trustees and be
disclosed to Shareholders and Unitholders in the next quarterly report of the
Trust, along with an explanation of the justification of such excess.
(x) Neither the Trust nor the Operating Partnership may invest more than
10% of its total assets in Unimproved Real Property (as defined below) or
mortgage loans on such type of property. For purposes of this Declaration,
"Unimproved Real Property" means the real property which has the following three
characteristics: (a) an equity interest in real property which was not acquired
for the purpose of producing rental or other operating income; (b) has no
development or construction in process on such land; and (c) no development or
construction on such land is planned in good faith to commence on such land
within one year.
(y) Neither the Trust nor the Operating Partnership may invest in
commodities or commodity future contracts, excluding future contracts used
solely for hedging purposes in connection with the Trust's and Operating
Partnership's ordinary business of investing in real estate assets and
mortgages.
(z) Neither the Trust nor the Operating Partnership may invest in or make
mortgage loans (other than loans insured or guaranteed by a government or
government agency) unless an appraisal is obtained concerning the underlying
properties. In cases in which a majority of the Independent Trustees in their
sole discretion determine, and in all cases in which the proposed transaction is
with the Managing Shareholder, a Trustee, or any of their respective Affiliates,
the appraisal must be obtained from an Independent Expert. The appraisal shall
be maintained in the Trust's records for at least five years, and shall be
available for inspection and duplication by any Shareholder or Unitholder at the
Shareholder's or Unitholder's own expense. In addition to the appraisal, the
Trust and the Operating Partnership must also obtain a mortgagee's or owner's
title insurance policy or commitment as to the priority of the mortgage or the
condition of the title. In addition, the Managing Shareholder and the Board
shall observe the following policies in connection with investing in or making
mortgage loans:
(i) The Trust and the Operating Partnership shall not invest in real
estate contracts of sale, otherwise known as land sale contracts, unless
such contracts are in recordable form and appropriately recorded in the
chain of title.
(ii) The Trust and the Operating Partnership shall not invest in or
make any mortgage loans, including construction loans, on any properties if
the aggregate amount of all mortgage loans outstanding on the properties,
including the loans of the Trust or the Operating Partnership, as
applicable, would exceed an amount equal to 80% of the estimated
replacement cost of the properties as determined by the Managing
Shareholder unless substantial justification exists because of the presence
of other underwriting criteria (such as the net worth of the borrower, the
credit rating of the borrower based on historical financial performance, or
collateral adequate to justify waiver from application of the foregoing
restriction) or of other factors (including without limitation, the
availability of loan insurance or guarantees from a government or
government agency, the existence of security for the loan in the form of a
pledge or assignment of other real estate or another real estate mortgage,
or the existence of an assignment of rents
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under leases where tenants have demonstrated the ability to satisfy the
terms of the leases). In applying such restriction, the aggregate amount of
all outstanding mortgage loans shall include all interest (other than
contingent participation in income and/or appreciation in value of the
mortgaged property) the current payment of which may be deferred under the
terms of such loans, to the extent that deferred interest on each loan
exceeds five percent per annum of the principal balance of the loan.
(iii) The Trust and the Operating Partnership shall not make or invest
in any mortgage loans that are subordinate to any mortgage or equity
interest of the Managing Shareholder, Trustees or any of their respective
Affiliates.
(aa) The Trust and the Operating Partnership may not issue redeemable
equity securities, provided, however, the Operating Partnership may issue Units
which by their terms are exchangeable into Common Shares of the Trust.
(bb) The Trust and the Operating Partnership may not issue debt securities
unless the historical debt service coverage (in the most recently completed
fiscal year) as adjusted for known changes is sufficient to properly service
such higher level of debt.
(cc) The Trust and the Operating Partnership may not issue options or
warrants to purchase Shares or Units to the Managing Shareholder, the Trustees
or any of their respective Affiliates except on the same terms as such options
or warrants are sold to the general public. The Trust and the Operating
Partnership may issue options or warrants to persons not so connected with the
Trust or the Operating Partnership but not at exercise prices less than the fair
market value of such Shares or Units on the date of grant and for consideration
(which may include services) that in the judgment of the Independent Trustees
has a market value less than the value of such option on the date of grant.
Options or warrants issuable to the Managing Shareholder, the Trustees or any of
their respective Affiliates shall not exceed an amount equal to 10% of the
outstanding Shares or of the Units on the date of grant of any options or
warrants.
(dd) The Trust and the Operating Partnership may not issue Shares or Units
on a deferred payment basis or other similar arrangement.
(ee) The payment by the Trust and the Operating Partnership of an interest
in the gain from the sale of their respective assets, for which full
consideration is not paid in cash or property of equivalent value, shall be
allowed provided the amount or percentage of such interest is reasonable. Such
an interest in gain from the sale of Trust or Operating Partnership assets shall
be considered presumptively reasonable if it does not exceed fifteen percent of
the balance of such net proceeds remaining after payment to Shareholders or
Unitholders, as applicable, in the aggregate, of an amount equal to the original
issue price of Shares or Units, plus an amount equal to six percent of the
original issue price of Shares or Units, per annum cumulative. For purposes of
this subsection, the calculation of the original issue price of Shares and the
Units may be reduced by prior cash distributions to Shareholders and
Unitholders, as applicable. In the case of multiple Trust Advisors (including
the Managing Shareholder), such Advisors and any of their respective Affiliates
shall be allowed incentive fees provided such fees are distributed by a
proportional method reasonably designed to reflect the value added to Trust and
Operating Partnership assets by each respective Advisor or any Affiliate.
(ff) The Managing Shareholder shall use its reasonable best efforts to
cause the Trust to qualify for federal income tax treatment as a REIT under
Sections 856 - 860 of the Code. In furtherance of the foregoing, the Managing
Shareholder shall use its reasonable best efforts to take such actions from time
to time as are necessary, and is authorized to take such actions as in its sole
judgment and discretion are desirable, to preserve the status of the Trust as a
REIT; provided, however, that if the Managing Shareholder determines, with the
affirmative vote of a Majority of Shareholders entitled to vote on such matter
approving the Managing Shareholder's determination, that it is no longer in the
best interests of the Trust to continue to have the Trust qualify as a REIT, the
Managing Shareholder may revoke or otherwise terminate the Trust's REIT election
pursuant to applicable federal tax law.
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(gg) No properties or assets held by the Trust may be acquired for the
account of the Managing Shareholder or any affiliated person, regardless of
whether the proposed price equals or is greater than the appraised value of such
properties or assets, provided, however, if a particular property or asset is in
distress, or is a debt obligation of an insolvent obligor, or otherwise has
substantially lost its value, the Managing Shareholder, if permitted by law, its
organizational documents (including without limitation Section 1.9(m) of this
Declaration of Trust) and the Statement of Policy Regarding Real Estate
Investment Trusts issued by the North American Securities Administrators
Association, may acquire such property or assets from the Trust at the full
unliquidated cost to the Trust with the approval of a majority of the
Independent Trustees.
ARTICLE 2
SHARES
2.1 Shares, Certificates of Beneficial Interest. (a) The units into which
the beneficial interest in the Trust shall be divided shall be designated as
Shares, with no par value per Share. Ownership of Shares shall be evidenced by
certificates in such form as shall be determined by the Managing Shareholder
from time to time in accordance with the law of the State of Delaware. The
owners of such Shares, who are the beneficiaries of the Trust, shall be
designated as Shareholders. The certificates shall be negotiable and title
thereto shall be transferred by assignment or delivery in all respects as a
stock certificate of a Delaware corporation. The Trust shall have authority to
issue an aggregate of 25,000,000 Shares. As specified in Section 1.6 of this
Declaration, the Trust will offer for sale in the Initial Offering up to
2,500,000 Shares designated as Common Shares at a purchase price per share of
$10. The consideration payable for the issuance of Shares other than those
offered in the Initial Offering shall be determined by the Managing Shareholder
and shall consist of money paid or property actually received. Shares shall not
be issued until the full amount of the consideration has been received by the
Trust. The Managing Shareholder may authorize Share dividends or Share splits.
All Shares issued hereunder shall be, when issued, fully paid, and no assessment
shall ever be made upon the Shareholders.
(b) The Shareholders shall have no legal title or interest in the property
of the Trust and no right to a partition thereof or to an accounting during the
continuance of the Trust but only to the rights expressly provided in this
Declaration.
(c) The Managing Shareholder may classify or reclassify any unissued Shares
from time to time by setting or changing the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of redemption of the Shares in accordance
with any applicable law of the State of Delaware. The Managing Shareholder is
authorized to issue from the authorized but unissued Shares of the Trust,
additional Common Shares as well as Preferred Shares in one or more series and
to establish from time to time the number of Preferred Shares to be included in
each such series and to fix the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
series, provided, however, (i) the Managing Shareholder will be authorized to
issue Preferred Shares only upon approval of either Shareholders of the Trust
holding a majority of the then outstanding Shares entitled to vote upon such
matter or a majority of the disinterested Independent Trustees and (ii) the
voting rights for each Preferred Share that may be so issued may not exceed one
vote per share. Except for Preferred Shares so classified or reclassified and
issued hereunder, all other Shares shall be designated as Common Shares, each of
which Common Shares shall be equal in all respects to every other Common Share.
Each Common Share shall entitle the holder to one vote on all matters requiring
a vote of Shareholders, including the election of members of the Board of the
Trust. The authority of the Managing Shareholder with respect to each unissued
series of Preferred Shares shall include, but not be limited to, determination
of the following:
(i) The number of Shares constituting that series and the distinctive
designation of that series;
(ii) The dividend rate on the Shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on Shares of that
series;
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(iii) Whether that series shall have voting rights, in addition to the
voting rights provided by law, if any, and, if so, the terms of such voting
rights;
(iv) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provisions for
adjustment of the conversion rate in such events as the Board shall
determine;
(v) Whether or not the Shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or
dates upon or after which they shall be redeemable, and the amount per
Share payable in case of redemption, which amount may vary under different
conditions and at different redemption rates; provided however, that any
proposed issuance of Shares which are redeemable at the option of the
holder shall be approved by Shareholders holding a majority of the Trust's
outstanding Shares of all classes;
(vi) Whether that series shall have a sinking fund for the redemption
or purchase of Shares of that series, and, if so, the terms and amount of
such sinking fund;
(vii) The rights of the Shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Trust, and the relative rights of priority, if any, of payment of Shares of
that series;
(viii) Any other relative rights, preferences and limitations of that
series.
2.2 Sale of Shares. The Managing Shareholder, in its discretion, may from
time to time cause the Trust to issue or sell or contract to issue or sell
Shares, including Shares held in the treasury, to such party or parties and for
money or property actually received, as allowed by the laws of the State of
Delaware, at such time or times, and on such terms as the Managing Shareholder
may deem appropriate, subject to any prior approval of the Board and/or the
Independent Trustees whenever required under Section 1.9 of this Declaration. In
connection with any sale or issuance of Shares, the Managing Shareholder, in its
discretion, may provide for the sale or issuance of fractional Shares or may
provide for the sale or issuance of scrip for fractions of Shares and determine
the terms of such scrip including, without limiting the generality of the
foregoing, the time within which any such scrip must be surrendered in exchange
for Shares and the right, if any, of holders of scrip upon the expiration of the
time so fixed, the right, if any, to receive proportional distributions, and the
right, if any, to redeem scrip for cash, or the Managing Shareholder may, in its
discretion, or if it sees fit at the option of each holder, provide in lieu of
scrip for the adjustment of fractions in cash. The Shareholders shall have no
preemptive rights of any kind whatsoever (preemptive rights hereby defined as
including, but not limited to, the right to purchase or subscribe for or
otherwise acquire any Shares of the Trust of any class, whether now or hereafter
authorized, or any securities or obligations convertible into or exchangeable
for, or any right, warrant or option to purchase such Sharers whether or not
such Shares are issued and/or disposed of for cash, property, or other
consideration of any kind). Options or warrants issued by the Trust to purchase
Shares shall not be exercisable later than five years from the date of issuance
thereof.
2.3 Offering of Shares. The Managing Shareholder is authorized to cause to
be made from time to time offerings of the Shares of the Trust to the public at
public offering prices deemed appropriate. For this purpose, the Managing
Shareholder is authorized to enter into a contract with an underwriter or
distributing company (hereinafter referred to as the "Distributor"), which shall
be granted such commissions for its services as may be agreed upon by the
parties. Any such contract shall be for an initial term of not more than two
years, and thereafter terminable at will by the Managing Shareholder upon 60
days written notice to the Distributor. Such contract shall not be assignable by
the Distributor, without the written consent of the Trust.
2.4 Treasury Shares. The Trust may repurchase or otherwise acquire its own
Shares at the prevailing market price and for this purpose the Trust may create
and maintain such reserves as are deemed necessary and proper. Shares issued
hereunder and purchased or otherwise acquired for the account of the Trust shall
not, so long as they belong to the Trust, either receive distributions (except
that they shall be entitled to receive distributions payable in Shares of the
Trust) or be voted at any meeting of the Shareholders. Such Shares may, in the
discretion of the Managing Shareholder, be held in the treasury and be disposed
of by the Managing Shareholder at such time or times, to such party or parties,
and for such consideration, as it may deem appropriate.
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2.5 Transferability of Shares. (a) Except as otherwise provided in Article
2A and elsewhere in this Declaration, Shares in the Trust shall be transferable
in accordance with the procedure prescribed from time to time in the Trust
Bylaws. The persons in whose name the Shares are registered on the books of the
Trust shall be deemed the absolute owners thereof and, until a transfer is
effected on the books of the Trust, the Managing Shareholder shall not be
affected by any notice, actual or constructive, of any transfer. In the sole
discretion of the Trust, any person acquiring Shares pursuant to any of the
provisions of this Section 2.5 may be required to bear all costs and expenses
necessary to effect a transfer of such Shares. No sale or assignment of Shares
shall release the transferor from those liabilities to the Trust which survive
such assignment or sale as a matter of law or that are imposed under Section
3.4. No transfer of Shares, whether voluntary, involuntary or by operation of
law, shall entitle the transferor to demand or obtain immediate valuation,
accounting or payment of the transferred Shares.
(b) Any sale, issuance, redemption or transfer of Shares which would
operate to disqualify the Trust as a real estate investment trust for purposes
of Federal income tax, is null and void (unless the Managing Shareholder with
the concurrence of a Majority of the Shareholders, prior to such acquisition,
shall have determined that the disqualification of the Trust is advantageous to
Shareholders), and such transaction will be canceled when so determined in good
faith by the Managing Shareholder.
2.6 Effect of Transfer of Shares or Death, Insolvency or Incapacity of
Shareholders. Neither the transfer of Shares nor the death, insolvency or
incapacity of any Shareholder shall operate to dissolve or terminate the Trust,
nor shall it entitle any transferee, legal representative or other person to a
partition of the property of the Trust or to any accounting.
2.7 Repurchase of Shares. The Trust is not obligated to repurchase any
issued Shares unless it specifically agrees to do so in writing. The Trust may
elect to repurchase Shares if such repurchase does not impair the capital or
operations of the Trust and is effected in compliance with any applicable
federal or state securities laws or other applicable laws. The Managing
Shareholder (and any successor Advisor of the Trust), the Trustees, and any of
their respective Affiliates may not receive a fee in connection with any such
repurchase.
2.8 Distribution Reinvestment Plan. Any distribution reinvestment plan that
the Trust may adopt shall, at a minimum, provide that: (i) all material
information regarding the distribution to the Shareholders and the effect of
reinvesting such distribution, including the tax consequences thereof, shall be
provided to the Shareholders at least annually, and (ii) each participating
Shareholder shall have a reasonable opportunity to withdraw from the plan at
least annually after the receipt of such information.
ARTICLE 2A
RESTRICTION ON TRANSFER, ACQUISITION
AND REDEMPTION OF SHARES
2A.1 Definitions. For the purposes of this Article 2A, the following terms
shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Equity Shares by a Person
who would be treated as an owner of such Equity Shares under Section 542(a)(2)
of the Code either directly or constructively through the application of Section
544 of the Code, as modified by Section 856(h)(1)(B) of the Code. The terms
"Beneficial Owner," "Beneficially Owns," "Beneficially Own" and "Beneficially
Owned" shall have the correlative meanings.
"Beneficiary" shall mean the beneficiary of the Excess Share Trust as
determined pursuant to Section 2A.18.
"Debt" shall mean indebtedness of (a) the Trust or (b) any partnership
formed or acquired by the Trust in which all or a portion of its real estate
assets might be held and its operations might be conducted.
"Equity Shares" shall mean Shares that are either Common Shares or
Preferred Shares.
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"Excess Share Trust" shall mean the trust created pursuant to Section
2A.15.
"Existing Holder" shall mean (a) any Person who is, or would be upon the
exchange of Units, Debt or any other security of the Trust, the Beneficial Owner
of Common Shares and/or Preferred Shares in excess of the Ownership Limit both
upon and immediately after the closing of the Initial Public Offering, so long
as, but only so long as, such Person Beneficially Owns or would, upon exchange
of Units, Debt or any other security of the Trust, Beneficially Own Common
Shares and/or Preferred Shares in excess of the Ownership Limit and (b) any
Person to whom an Existing Holder Transfers, subject to the limitations provided
in this Article 2A, Beneficial Ownership of Common Shares and/or Preferred
Shares causing such transferee to Beneficially Own Common Shares and/or
Preferred Shares in excess of the Ownership Limit.
"Existing Holder Limit" (a) for any Existing Holder who is an Existing
Holder by virtue of clause (a) of the definition thereof, shall mean, initially,
the percentage of the outstanding Equity Shares Beneficially Owned, or which
would be Beneficially Owned upon the exchange of Units, Debt or any other
security of the Trust, by such Existing Holder upon and immediately after the
date of the closing of the Initial Public Offering, and, after any adjustment
pursuant to Section 2A.9, shall mean such percentage of the outstanding Equity
Shares as so adjusted, and (b) for any Existing Holder who becomes an Existing
Holder by virtue of clause (b) of the definition thereof, shall mean, initially,
the percentage of the outstanding Equity Shares Beneficially Owned by such
Existing Holder at the time that such Existing Holder becomes an Existing
Holder, but in no event shall such percentage be greater than the Existing
Holder Limit for the Existing Holder who Transferred Beneficial Ownership of the
Common Shares and/or Preferred Shares or, in the case of more than one
transferor, in no event shall such percentage be greater than the smallest
Existing Holder Limit of any transferring Existing Holder, and, after any
adjustment pursuant to Section 2A.9, shall mean such percentage of the
outstanding Equity Shares as so adjusted. From the date of the Initial Public
Offering and until the Restriction Termination Date, the Trust shall maintain
and, upon request, make available to each Existing Holder, a schedule which sets
forth the then current Existing Holder Limits for each Existing Holder.
"Initial Public Offering" shall mean the sale of Common Shares pursuant to
the Trust's first effective registration statement for such Common Shares filed
under the Securities Act of 1933, as amended.
"Market Price" shall mean the last reported sales price reported on the New
York Stock Exchange of Common Shares or Preferred Shares, as the case may be, on
the trading day immediately preceding the relevant date, or if not then traded
on the New York Stock Exchange, the last reported sales price of the Common
Shares or Preferred Shares, as the case may be, on the trading day immediately
preceding the relevant date as reported on any exchange or quotation system over
or through which the Common Shares or Preferred Shares, as the case may be, may
be traded, or if not then traded over or through any exchange or quotation
system, then the market price of the Common Shares and/or Preferred Shares, as
the case may be, on the relevant date as determined in good faith by the
Managing Shareholder of the Trust.
"Ownership Limit" shall initially mean 5.0%, in number of shares or value,
of the outstanding Equity Shares of the Trust, and after any adjustment as set
forth in Section 2A.10, shall mean such greater percentage of the outstanding
Equity Shares as so adjusted. The number and value of the outstanding Equity
Shares of the Trust shall be determined by the Managing Shareholder in good
faith, which determination shall be conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, estate, trust
(including a trust qualified under Section 401(a) or 501(c)(17) of the Code),
portion of a trust permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock company
or other entity; but does not include an underwriter which participated in a
public offering of the Common Shares and/or Preferred Shares for a period of 25
days following the purchase by such underwriter of the Common Shares and/or
Preferred Shares.
"Purported Beneficial Transferee" shall mean, with respect to any purported
Transfer which results in Excess Shares as defined below in Section 2A.3, the
purported beneficial transferee for whom the Purported Record
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Transferee would have acquired shares of Equity Shares, if such Transfer had
been valid under Section 2A.2.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer which results in Excess Shares, the record holder of the Equity Shares
if such Transfer had been valid under Section 2A.2.
"Restriction Termination Date" shall mean the first day after the date of
the Initial Public Offering on which the Managing Shareholder determines, which
determination must be approved by the Shareholders, that it is no longer in the
best interests of the Trust to attempt to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or other
disposition of Equity Shares (including (a) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Equity Shares, (b) the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for Equity Shares, but
excluding the exchange of Units, Debt or any other security of the Trust for
Equity Shares and (c) any transfer or other disposition of any interest in
Equity Shares as a result of a change in the marital status of the holder
thereof), whether voluntary or involuntary, whether of record or beneficially
and whether by operation of law or otherwise. The terms "Transfers" and
"Transferred" shall have the correlative meanings.
"Units" shall mean units of limited partnership of any partnership formed
or acquired by the Trust in which all or a portion of the Trust's real estate
assets might be held and its operations might be conducted.
2A.2 Ownership Limitation.
(a) Except as provided in Section 2A.12, from the date of the Initial
Public Offering and until the Restriction Termination Date, no Person (other
than an Existing Holder) shall Beneficially Own Common Shares and/or Preferred
Shares in excess of the Ownership Limit and no Existing Holder shall
Beneficially Own Common Shares and/or Preferred Shares in excess of the Existing
Holder Limit for such Existing Holder.
(b) Except as provided in Sections 2A.9 and 2A.12, from the date of the
Initial Public Offering and until the Restriction Termination Date, any Transfer
that, if effective, would result in any Person (other than an Existing Holder)
Beneficially Owning Common Shares and/or Preferred Shares in excess of the
Ownership Limit shall be void ab initio as to the Transfer of such Common Shares
and/or Preferred Shares which would be otherwise Beneficially Owned by such
Person in excess of the Ownership Limit; and the intended transferee shall
acquire no rights in such Common Shares and/or Preferred Shares.
(c) Except as provided in Sections 2A.9 and 2A.12, from the date of the
Initial Public Offering and until the Restriction Termination Date, any Transfer
that, if effective, would result in any Existing Holder Beneficially Owning
Common Shares and/or Preferred Shares in excess of the applicable Existing
Holder Limit shall be void ab initio as to the Transfer of such Common Shares
and/or Preferred Shares which would be otherwise Beneficially Owned by such
Existing Holder in excess of the applicable Existing Holder Limit; and such
Existing Holder shall acquire no rights in such Common Shares and/or Preferred
Shares.
(d) Except as provided in Section 2A.12, from the date of the Initial
Public Offering and until the Restriction Termination Date, any Transfer that,
if effective, would result in the Common Shares and/or Preferred Shares being
beneficially owned (as provided in Section 856(a) of the Code) by less than 100
Persons (determined without reference to any rules of attribution) shall be void
ab initio as to the Transfer of such Common Shares and/or Preferred Shares which
would be otherwise beneficially owned (as provided in Section 856(a) of the
Code) by the transferee; and the intended transferee shall acquire no rights in
such Common Shares and/or Preferred Shares.
(e) From the date of the Initial Public Offering and until the Restriction
Termination Date, any Transfer that, if effective, would result in 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 Common Shares and/or Preferred Shares
which would cause the Trust to be "closely held" within the meaning of Section
856(h) of the Code; and the intended transferee shall
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acquire no rights in such Common Shares and/or Preferred Shares.
(f) Nothing contained in this Article 2A shall impair the settlement of
transactions entered into on the facilities of the New York Stock Exchange, the
American Stock Exchange, the NASDAQ National Market or any other securities
exchange.
2A.3 Excess Shares.
(a) If, notwithstanding the other provisions contained in this Article 2A,
at any time after the date of the Initial Public Offering and until the
Restriction Termination Date, there is a purported Transfer or other change in
the capital structure of the Trust (except for a change resulting from the
exchange of Units for Equity Shares) such that any Person would Beneficially Own
Common Shares and/or Preferred Shares in excess of the applicable Ownership
Limit or Existing Holder Limit, then, except as otherwise provided in Sections
2A.9 and 2A.12, such Common Shares and/or Preferred Shares in excess of such
Ownership Limit or Existing Holder Limit (rounded up to the nearest whole share)
shall constitute "Excess Shares" and be treated as provided in this Article 2A.
Such designation and treatment shall be effective as of the close of business on
the business day prior to the date of the purported Transfer or change in
capital structure (except for a change resulting from the exchange of Units for
Equity Shares).
(b) If, notwithstanding the other provisions contained in this Article 2A,
at any time after the date of the Initial Public Offering and until the
Restriction Termination Date, there is a purported Transfer or other change in
the capital structure of the Trust (except for a change resulting from the
exchange of Units for Equity Shares) which, if effective, would cause the Trust
to become "closely held" within the meaning of Section 856(h) of the Code, then
the Common Shares and/or Preferred Shares being Transferred which would cause
the Trust to be "closely held" within the meaning of Section 856(h) of the Code
(rounded up to the nearest whole share) shall constitute Excess Shares and be
treated as provided in this Article 2A. Such designation and treatment shall be
effective as of the close of business on the business day prior to the date of
the purported Transfer or change in capital structure (except for a change
resulting from the exchange of Units for Equity Shares).
2A.4 Prevention of Transfer. If the Managing Shareholder or its designee
shall at any time determine in good faith that a Transfer has taken place in
violation of Section 2A.2 or that a Person intends to acquire or has attempted
to acquire beneficial ownership (determined without reference to any rules of
attribution) or Beneficial Ownership of any Shares of the Trust in violation of
Section 2A.2, the Managing Shareholder or its designee shall take such action as
it deems advisable to refuse to give effect to or to prevent such transfer,
including, but not limited to, refusing to give effect to such Transfer on the
books of the Trust or instituting proceedings to enjoin such Transfer; provided,
however, that any Transfers or attempted Transfers in violation of Sections
2A.2(b), 2(c), 2(d) and 2(e) shall automatically result in the designation and
treatment described in Section 2A.3, irrespective of any action (or non-action)
by the Managing Shareholder.
2A.5 Notice to Trust. Any Person who acquires or attempts to acquire Equity
Shares in violation of Section 2A.2, or any Person who is a transferee such that
Excess Shares results under Section 2A.3, shall immediately give written notice
or, in the event of a proposed or attempted Transfer, give at least 15 days
prior written notice to the Trust of such event and shall provide to the Trust
such other information as the Trust may request in order to determine the
effect, if any, of such Transfer or attempted Transfer on the Trust's status as
a REIT.
2A.6 Information for Trust. From the date of the Initial Public Offering
and until the Restriction Termination Date:
(a) every Beneficial Owner of more than 5.0% (or such other percentage,
between 1/2 of 1% and 5.0%, as provided in the income tax regulations
promulgated under the Code) of the number or value of outstanding Equity Shares
of the Trust shall, within 30 days after January 1 of each year, give written
notice to the Trust stating the name and address of such Beneficial Owner, the
number of Shares Beneficially Owned, and a description of how such Shares are
held. Each such Beneficial Owner shall provide to the Trust such additional
information as the Trust may reasonably request in order to determine the
effect, if any, of such Beneficial Ownership on the Trust's
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status as a REIT.
(b) each Person who is a Beneficial Owner of Common Shares and/or Preferred
Shares and each Person (including the Shareholder of record) who is holding
Common Shares and/or Preferred Shares for a Beneficial Owner shall provide to
the Trust in writing such information with respect to direct, indirect and
constructive ownership of Shares as the Managing Shareholder deems reasonably
necessary to comply with the provisions of the Code applicable to a REIT, to
determine the Trust's status as a REIT, to comply with the requirements of any
taxing authority or governmental agency or to determine any such compliance.
2A.7 Other Action by Board. Subject to clause (f) of Section 2A.2, nothing
contained in this Article 2A shall limit the authority of the Managing
Shareholder to take such other action as it deems necessary or advisable to
protect the Trust and the interests of its Shareholders by preservation of the
Trust's status as a REIT.
2A.8 Ambiguities. In the case of an ambiguity in the application of any of
the provisions of this Article 2A, including any definition contained in Section
2A.1, the Managing Shareholder shall have the power to determine the application
of the provisions of this Article 2A with respect to any situation based on the
facts known to it.
2A.9 Modification of Existing Holder Limits. The Existing Holder Limits may
be modified as follows:
(a) Subject to the limitations provided in Section 2A.11, the Managing
Shareholder of the Trust may grant options which result in Beneficial Ownership
of Common Shares and/or Preferred Shares by an Existing Holder pursuant to an
option plan approved by the Managing Shareholder, the Board of the Trust and/or
the Shareholders of the Trust. Any such grant shall increase the Existing Holder
Limit for the affected Existing Holder to the maximum extent possible under
Section 2A.11 to permit the Beneficial Ownership of the Common Shares and/or
Preferred Shares issuable upon the exercise of such option.
(b) Subject to the limitations provided in Section 2A.11, an Existing
Holder may elect to participate in a dividend reinvestment plan approved by the
Managing Shareholder or the Board of the Trust which results in Beneficial
Ownership of Common Shares and/or Preferred Shares by such participating
Existing Holder and any comparable reinvestment plan of any partnership formed
or acquired by the Trust in which all or a portion of its real estate assets
might be held and its operations might be conducted, wherein those Existing
Holders holding Units are entitled to purchase additional Units. Any such
participation shall increase the Existing Holder Limit for the affected Existing
Holder to the maximum extent possible under Section 2A.11 to permit Beneficial
Ownership of the Common Shares and/or Preferred Shares acquired as a result of
such participation.
(c) The Managing Shareholder will reduce the Existing Holder Limit for any
Existing Holder after any Transfer permitted in this Article 2A by such Existing
Holder by the percentage of the outstanding Equity Shares so Transferred or
after the lapse (without exercise) of an option described in Section 2A.9(a) by
the percentage of the Equity Shares that the option, if exercised, would have
represented, but in either case no Existing Holder Limit shall be reduced to a
percentage which is less than the Ownership Limit.
2A.10 Increase or Decrease in Ownership Limit. Subject to the limitations
provided in Section 1.2 or Section 2A.11, the Managing Shareholder may from time
to time increase or decrease the Ownership Limit; provided, however, that any
decrease may only be made prospectively as to subsequent holders (other than a
decrease as a result of a retroactive change in existing law, in which case such
decrease shall be effective immediately).
2A.11 Limitations on Changes in Existing Holder and Ownership Limits.
(a) Neither the Ownership Limit nor any Existing Holder Limit may be
increased (nor may any additional Existing Holder Limit be created) if, after
giving effect to such increase (or creation), five Beneficial Owners of Common
Shares (including all of the then Existing Holders) could Beneficially Own, in
the aggregate,
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more than 50% in number or value of the outstanding Equity Shares.
(b) Prior to the modification of any Ownership Limit or Existing Holder
Limit pursuant to Sections 2A.9 or 2A.10, the Managing Shareholder may require
such opinions of counsel, affidavits, undertakings or agreements as it may deem
necessary or advisable in order to determine or ensure the Trust's status as a
REIT.
(c) No Existing Holder Limit shall be reduced to a percentage which is less
than the Ownership Limit.
2A.12 Waivers by Managing Shareholder. The Managing Shareholder, upon
receipt of a ruling from the Internal Revenue Service or an opinion of counsel
or other evidence satisfactory to the Managing Shareholder and upon at least 15
days written notice from a transferee prior to the proposed Transfer which, if
consummated, would result in the intended transferee owning shares in excess of
Ownership Limit or Existing Holder Limit, as the case may be, and upon such
other conditions as the Managing Shareholder may direct, may in its discretion
waive the Ownership Limit or the Existing Holder Limit, as the case may be, with
respect to such transferee depending on the then existing facts and
circumstances surrounding the proposed transfer, including without limitation,
the identity and extent of ownership of Shares of the party requesting such
waiver, the number and extent of Share ownership of other Shareholders and the
aggregate number of outstanding Shares, and the extent of any contractual
restrictions (other than that contained in this Declaration) on any Shareholders
relating to transfer of their Shares.
2A.13 Legend. Each certificate for Common Shares and/or Preferred Shares
shall bear substantially the following legend:
The securities represented by this certificate are subject
to restrictions on transfer for the purpose of the Trust's
maintenance of its status as a real estate investment trust
under the Internal Revenue Code of 1986, as amended. Except
as otherwise provided pursuant to the Declaration of Trust
for the Trust, no Person may Beneficially Own Shares of
Common Shares and/or Preferred Shares in excess of 5.0% (or
such greater percentage as may be determined by the Managing
Shareholder of the Trust) of the number or value of the
outstanding Equity Shares of the Trust (unless such Person
is an Existing Holder). Any Person who attempts or proposes
to Beneficially Own Common Shares and/or Preferred Shares in
excess of the above limitations must notify the Trust in
writing at least 15 days prior to such proposed or attempted
Transfer. All capitalized terms in this legend have the
meanings defined in the Declaration of Trust for the Trust,
a copy of which, including the restrictions on transfer,
will be sent without charge to each Shareholder who so
requests. If the restrictions on transfer are violated, the
securities represented hereby will be designated and treated
as Excess Shares which will be held in trust by the Trust.
2A.14 Severability. If any provision of this Article 2A or any application
of any such provision is determined to be void, invalid or unenforceable by any
court having jurisdiction over the issue, the validity and enforceability of the
remaining provisions shall be affected only to the extent necessary to comply
with the determination of such court.
2A.15 Trust for Excess Shares. Upon any purported Transfer that results in
Excess Shares pursuant to Section 2A.3, such Excess Shares shall be deemed to
have been transferred to the Trust, as trustee of an "Excess Share Trust" for
the benefit of such Beneficiary or Beneficiaries to whom an interest in such
Excess Shares may later be transferred pursuant to Section 2A.18. Excess Shares
so held in trust shall be issued and outstanding Shares of the Trust. The
Purported Record Transferee shall have no rights in such Excess Shares except
the right to designate a Beneficiary of an interest in the Excess Share Trust
(representing the number of shares of Excess Shares held by the Trust
attributable to a purported Transfer that resulted in the Excess Shares) upon
the terms specified in Section 2A.18. The Purported Beneficial Transferee shall
have no rights in such Excess Shares except as provided in Section 2A.18.
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2A.16 No Distributions for Excess Shares. Excess Shares shall not be
entitled to any distributions (whether as dividends or as distributions upon
liquidation, dissolution or winding up). Any dividend or distribution paid prior
to the discovery by the Trust that the Common Shares and/or Preferred Shares
have been Transferred so as to be deemed Excess Shares shall be repaid to the
Trust upon demand.
2A.17 No Voting Rights for Excess Shares. The holders of Excess Shares
shall not be entitled to vote on any matter.
2A.18 Non-Transferability of Excess Shares. Excess Shares in the Excess
Share Trust shall not be transferable. The Purported Record Transferee may
freely designate a Beneficiary of an interest in the Excess Share Trust
(representing the number of Excess Shares held by the Trust attributable to a
purported Transfer that resulted in the Excess Shares), if (a) the Excess Shares
held in the Excess Share Trust would not be Excess Shares in the hands of such
Beneficiary and (b) the Purported Beneficial Transferee does not receive a price
for designating such Beneficiary that reflects a price per share for such Excess
Shares that exceeds (i) the price per share such Purported Beneficial Transferee
paid for the Common Shares and/or Preferred Shares, as the case may be, in the
purported Transfer that resulted in the Excess Shares, or (ii) if the Purported
Beneficial Transferee did not give value for such Excess Shares (through a gift,
devise or other transaction), a price per share equal to the Market Price for
the Excess Shares on the date of the purported Transfer that resulted in the
Excess Shares. Upon such transfer of an interest in the Excess Share Trust, the
corresponding Excess Shares in the Excess Share Trust shall be automatically
exchanged for an equal number of Common Shares and/or Preferred Shares, as
applicable, and such Common Shares and/or Preferred Shares, as applicable, shall
be transferred of record to the transferee of the interest in the Excess Share
Trust if such Common Shares and/or Preferred Shares, as applicable, would not be
Excess Shares in the hands of such transferee. Prior to any transfer of any
interest in the Excess Share Trust, the Purported Record Transferee must give
advance notice to the Trust of the intended transfer and the Trust must have
waived in writing its purchase rights under Section 2A.19.
Notwithstanding the foregoing, if a Purported Beneficial Transferee
receives a price for designating a Beneficiary of an interest in the Excess
Share Trust that exceeds the amounts allowable under this Section 2A.18, such
Purported Beneficial Transferee shall pay, or cause such Beneficiary to pay,
such excess to the Trust.
If any of the foregoing restrictions on transfer of Excess Shares are
determined to be void, invalid or unenforceable by any court of competent
jurisdiction, then the Purported Record Transferee may be deemed, at the option
of the Trust, to have acted as an agent of the Trust in acquiring such Excess
Shares and to hold such Excess Shares on behalf of the Trust.
2A.19 Call by Trust on Excess Shares. Excess Shares 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 Shares (or, in the case of a devise, gift or other transaction in which
no value was given for such Excess Shares, the Market Price at the time of such
devise, gift or other transaction) and (b) the Market Price of the Common Shares
and/or Preferred Shares to which such Excess Shares relates 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 90 days after the later of (x) the date of the
Transfer which resulted in such Excess Shares and (y) the date the Managing
Shareholder determines in good faith that a Transfer resulting in Excess Shares
has occurred, if the Trust does not receive a notice of such Transfer pursuant
to Section 2A.5 but in no event later than a permitted Transfer pursuant to and
in compliance with the terms of Section 2A.18.
ARTICLE 3
LIABILITIES
3.1 Liability and Obligations of Corporate Trustee. (a) To the fullest
extent permitted by the Delaware Act, the Corporate Trustee in its capacity as a
trustee of the Trust shall not be personally liable to any person other than the
Trust and its Shareholders for any act or omission of the Trustees or the Trust,
or any obligation of the Trust or the Trustees. The trust estate shall be
directly liable for the payment or satisfaction of all
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obligations and liabilities of the Trust incurred by the Trustees and the
officers and agents of the Trust within their authority.
(b) The Corporate Trustee, as trustee, may be made party to any action,
suit or proceeding to enforce any obligation, liability or right of the Trust,
but it shall not solely on account thereof be liable separate from the Trust and
it shall be a party in that case only insofar as may be necessary to enable such
obligation or liability to be enforced against the trust estate. The Corporate
Trustee shall not exercise any management or administrative powers in respect of
the Trust except at the direction of the Managing Shareholder or the Board.
3.2 Liability and Obligations of Managing Shareholder, Independent
Trustees, and other Members of the Board in General. (a) As permitted by Section
3808 of the Delaware Act, the Managing Shareholder, Independent Trustees and any
other members of the Board shall not hold title to or have any legal or
possessory interest in any Trust Property. It shall not be necessary or
effective for any of the Managing Shareholders, Independent Trustees or any
other member of the Board to be made a party to any action, suit or proceeding
to enforce any obligation, liability or right of the Trust.
(b) The Managing Shareholder, the Trustees and other members of the Board
of the Trust are deemed to be in a fiduciary relationship to the Trust and the
Shareholders. The Trustees and other members of the Board of the Trust also have
a fiduciary duty to the Shareholders to supervise the relationship of the Trust
with the Managing Shareholder. In performing their responsibilities under this
Declaration, the Managing Shareholder, the Trustees and other members of the
Board of the Trust shall be under a fiduciary duty and obligation to act in the
best interests of the Trust, including the safekeeping and use of all Trust
funds and assets for which they are responsible under this Declaration. In
interpreting the scope of this obligation, the Managing Shareholder, Independent
Trustees and other members of the Board will have the responsibilities of and
will be entitled to the defenses of directors of a Delaware corporation.
3.3 Liability of Managing Shareholder, Independent Trustees and other
Members of the Board to Third Parties. The Managing Shareholder, Independent
Trustees and any other members of the Board of the Trust shall have no rights of
indemnity or exoneration against any Shareholder individually with regard to any
liability or obligation of the Trust; but, as hereinafter provided, the Managing
Shareholder, Independent Trustees and any other members of the Board may satisfy
any claims they have against the Trust out of the Trust assets. Neither the
Managing Shareholder, Independent Trustees nor any other members of the Board
shall be liable for any act or neglect of any person or firm with respect to the
performance of any duty, service or act which has been delegated to such person
or firm by the Managing Shareholder, Independent Trustees or any other members
of the Board, as the case may be, pursuant to authority contained in this
Declaration; the Managing Shareholder, Independent Trustees and any other member
of the Board shall, however, use good faith in selecting and appointing agents
or representatives to whom authority to act on behalf of the Trust is delegated.
Neither the Managing Shareholder, Independent Trustees nor any other member of
the Board shall be individually liable for any obligation or liability incurred
by or on behalf of the Trust or by the Managing Shareholder, Independent
Trustees or any other member of the Board for the benefit and on behalf of the
Trust.
3.4 Liability of Shareholders in General. No Shareholder in his capacity as
an Shareholder shall have any liability for the debts and obligations of the
Trust in any amount beyond the unpaid amount, if any, of the subscriptions for
the purchase of Shares made by him in the Initial Offering or any subsequent
offerings of the Trust. Each Shareholder shall have the same limitation on his
liability for the Trust's debts and obligations as a stockholder of a Delaware
corporation has for debts and obligations of the corporation. Each written
contract to which the Trust is a party shall include a provision that the
Shareholders shall not be personally liable thereon.
3.5 Liability of Shareholders to the Trust, Managing Shareholder, Trustees,
Members of the Board and Other Shareholders. No Shareholder in his capacity as a
Shareholder shall be liable, responsible or accountable in damages or otherwise
to the Trust, the Managing Shareholder, the Trustees, any other members of the
Board or any other Shareholders for any claim, demand, liability, cost, damage
and cause of action of any nature whatsoever that arises out of or that is
incidental to the management of the Trust's affairs.
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3.6 Liability of Managing Persons to Trust and Shareholders. (a) No
Managing Person (as defined in Section 10) shall have liability to the Trust or
to any other Shareholder for any loss suffered by the Trust that arises out of
any action or inaction of the Managing Person if the Managing Person, in good
faith, determined that such course of conduct was in the Trust's best interest
and such course of conduct was within the scope of this Declaration and did not
constitute (i) negligence or misconduct in the case of any Managing Person who
is a Trustee (excluding the Independent Trustees), Managing Shareholder or an
Affiliate of such Trustee or Managing Shareholder or (ii) gross negligence or
willful misconduct in the case of any Managing Person who is an Independent
Trustee.
(b) No act of the Trust shall be affected or invalidated by the fact that a
Managing Person may be a party to or has an interest in any contract or
transaction of the Trust if the interest of the Managing Person has been
disclosed or is known to the Shareholders or such contract or transaction is at
prevailing rates or is on terms at least as favorable to the Trust as those
available from persons who are not Managing Persons.
3.7 Indemnification of Managing Persons. (a) Each Managing Person shall be
indemnified out of the Trust Property against any losses, liabilities,
judgments, expenses and amounts paid in settlement of any claims sustained by
him in connection with the Trust or claims by the Trust, in right of the Trust
or by or in right of any Shareholders, if the Managing Person would not be
liable under the standards of Section 3.6 and, in the case of Managing Persons
other than the Managing Shareholder, Trustees and other members of the Board,
the indemnitees were acting within the scope of authority validly delegated to
them by the Managing Shareholder, Trustees or any other members of the Board.
The termination of any action, suit or proceeding by judgment, order or
settlement shall not, of itself, create a presumption that the Managing Person
charged did not act in good faith and in a manner that he reasonably believed
was in the Trust's best interests. To the extent that any Managing Person is
successful on the merits or otherwise in defense of any action, suit or
proceeding or in defense of any claim, issue or matter therein, the Trust shall
indemnify that Managing Person against the expenses, including attorneys' fees,
actually and reasonably incurred by him in connection therewith.
(b) Notwithstanding the foregoing, no Managing Person nor any broker-dealer
shall be indemnified, nor shall expenses be advanced on its behalf, for any
losses, liabilities or expenses arising from or out of an alleged violation of
federal or state securities laws, unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities law
violations as to the particular indemnitee, or (ii) those claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee or (iii) a court of competent jurisdiction approves
a settlement of the claims against the particular indemnitee and finds that
indemnification of the settlement and the related costs should be made. In any
claim for federal or state securities law violations, the party seeking
indemnification shall place before the court the published positions of the
Securities and Exchange Commission and of securities administrators of states in
which securities of the Trust were offered or sold to the extent required by
them with respect to the issue of indemnification for securities law violations.
(c) The Trust shall not incur the cost of that portion of any insurance,
other than public liability insurance, that insures any person against any
liability for which indemnification hereunder is prohibited.
3.8 General Provisions. The following provisions shall apply to all rights
of indemnification and advances of expenses under this Declaration and all
liabilities described in this Article 3:
(a) Expenses, including attorneys' fees, incurred by a Managing Person in
defending any action, suit or proceeding may be paid by the Trust in advance of
the final disposition of the action, suit or proceeding only if all of the
following conditions are satisfied:
(i) The action, suit or proceeding relates to acts or omissions with
respect to the performance of duties or services on behalf of the Trust;
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(ii) The action, suit or proceeding is initiated by a third party who
is not a Shareholder or it is initiated by a Shareholder acting in its
capacity as such and a court of competent jurisdiction specifically
approves such advancement; and
(iii) The Managing Person seeking advancement of expenses undertakes
to repay such amount, together with the applicable legal rate of interest
thereon, if it shall ultimately be determined that the Managing Person is
not entitled to be indemnified by the Trust under this Declaration or
otherwise and if at least one of the following conditions is satisfied:
(1) The Managing Person provides appropriate security for the
undertaking;
(2) The Managing Person is insured against losses or expenses of
defense or settlement so that the advances may be recovered or
(3) Either a majority of the Independent Trustees who are not
parties to the action, suit or proceeding, or independent legal
counsel in a written opinion, determines, based upon a review of the
then readily available facts, that there is reason to believe that the
Managing Person will be found to be entitled to indemnification under
Section 3.7. In so doing, it shall not be necessary to employ hearing
or trial-like procedures.
(b) Rights to indemnification and advances of expenses under this
Declaration are not exclusive of any other rights to indemnification or advances
to which a Managing Person may be entitled, both as to action in a
representative capacity or as to action in another capacity taken while
representing another.
(c) Each Managing Person shall be entitled to rely upon the opinion or
advice of or any statement or computation by any counsel, engineer, accountant,
investment banker or other person retained by such Managing Person or the Trust
which he believes to be within such person's professional or expert competence.
In so doing, he will be deemed to be acting in good faith and with the requisite
degree of care unless he has actual knowledge concerning the matter in question
that would cause such reliance to be unwarranted.
3.9 Dealings with Trust. With regard to all rights of the Trust and all
actions to be taken on its behalf, the Trust and not the Trustees, nor the
Managing Shareholder, the Board or its members, the Trust's officers and agents,
or the Shareholders shall be the principal and the Trust shall be entitled as
such to the extent permitted by law to enforce the same, collect damages and
take all other action. All agreements, obligations and actions of the Trust
shall be executed or taken in the name of the Trust, by an appropriate nominee,
or by the Corporate Trustee as trustee but not in its individual capacity. Money
may be paid and property delivered to any duly authorized officer or agent of
the Trust who may receipt therefor in the name of the Trust and no person
dealing in good faith thereby shall be bound to see to the application of any
moneys so paid or property so delivered. No entity whose securities are held by
the Trust shall be affected by notice of such fact or be bound to see to the
execution of the Trust or to ascertain whether any transfer of its securities by
or to the Trust or the Corporate Trustee is authorized.
ARTICLE 4
PAYMENT OF TRUST EXPENSES
4.1 Selling Commissions. The Trust shall be authorized to pay out of Trust
Property to the Dealer Manager (as defined in Section 10)or to any broker-dealer
selected by the Trust or the Dealer Manager who effects the sale of one or more
whole or fractional Shares (including Common Shares in the Initial Offering),
cash selling commissions in an aggregate amount equal to up to eight percent of
the gross proceeds from the sale of Share as determined by the Managing
Shareholder. Such commissions payable in respect of sales of Common Shares in
the Initial Offering shall be due and payable promptly after the later to occur
of (i) acceptance by the Trust of an Shareholder's subscription, (ii) the Escrow
Date or (iii) the receipt by the Trust of the gross purchase price for the
Shares. Such commissions in respect of additional sales of Shares by the Trust
subsequent to completion of the Initial Offering shall be due and payable upon
the later of such date on which purchase proceeds are accepted and
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collected by the Trust or the fulfillment of any applicable escrow conditions.
4.2 Organization and Offering Expenses. (a) The Trust shall be authorized
to reimburse the Managing Shareholder for Organization and Offering Expenses (as
defined in Section 1.9(g)) incurred by it which conform with Section 1.9(g) in
connection with any offering of Shares.
(b) The Trust shall be authorized to reimburse the Managing Shareholder out
of Trust Property for (i) distribution, due diligence and organizational
expenses incurred by it in connection with the formation of the Trust and the
Operating Partnership and with the Initial Offering, in an amount not to exceed
one percent of gross proceeds from the sale of Common Shares in the Initial
Offering and (ii) for legal, accounting and consulting fees and printing,
filing, recording, postage and other miscellaneous costs incurred in connection
with the Offering, in an amount not to exceed one percent of gross proceeds from
the sale of Common Shares in the Initial Offering. Such reimbursements shall be
payable at the same time that selling commissions are payable. To the extent
that the amount of the expenses described above exceeds the reimbursable amount,
those expenses will be payable by the Managing Shareholder.
4.3 Investment Expenses. The Trust shall be authorized to reimburse the
Managing Shareholder out of Trust Property for expenses incurred prior to and
during the Initial Offering for investigating and evaluating real estate
investment opportunities and effecting transactions for investing the net sale
proceeds of the Initial Offering, in an amount not to exceed four percent of the
gross proceeds from the sale of Common Shares in the Initial Offering. Such
reimbursement is payable from available net proceeds of the Initial Offering or
as cash flow permits as determined by the Board of the Trust.
4.4 [Intentionally omitted.]
4.5 Other Expenses. (a) The Trust shall be authorized to reimburse the
Managing Shareholder for all other actual and necessary direct expenses paid or
incurred in connection with the operation of the Trust, including but not
limited to accounting, legal and consulting fees, to the extent that those
expenses were incurred by the Managing Shareholder in carrying out
responsibilities assigned to it by this Declaration, were consistent with this
Declaration and do not constitute payment of expenses covered by other fees
payable under this Declaration. The Trust shall reimburse the Corporate Trustee
for all actual and necessary expenses paid or incurred in connection with the
operation of the Trust, including the Trust's allocable share of the Corporate
Trustee's overhead.
(b) In respect of the acquisition or disposition of all or a portion of the
investments that the Trust may make in properties, the Trust may be required to
or may find it most advantageous to engage a broker or similar adviser and to
pay a brokerage fee to the broker or other persons responsible for bringing the
acquisition or disposition opportunity to the Trust's attention or for
investigating, evaluating or negotiating the acquisition or disposition of the
Trust's interest therein. Where permitted, if the Managing Shareholder or an
Affiliate performs those services in respect of an investment acquisition or
disposition opportunity for the Trust relating to a particular property, the
Managing Shareholder or Affiliate so providing those services shall be entitled
to receive a brokerage fee from the Trust which conforms with the limitations
set forth in Section 1.9(j) of this Declaration.
(c) The Trust shall be authorized to make an annual payment to the Managing
Shareholder to reimburse it for its operating expenses relating to the business
of the Trust and the Operating Partnership, in an amount up to one percent of
the gross proceeds of the Initial Offering plus one percent of the initial value
of Units issued in the proposed Exchange Offering.
4.6 Payment and Recoupment of Fees. As soon as proceeds from the Initial
Offering have been released to the Trust from the escrow account referred to in
Section 1.6, they may be used to pay the commissions and expenses referred to in
Sections 4.1, 4.2, 4.3, and 4.4 then due. If the Managing Shareholder withdraws
the Initial Offering under the terms of this Declaration, any person that has
received payments from the proceeds of the Initial Offering shall return such
payments to the Trust upon demand by the Managing Shareholder.
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ARTICLE 5
ACCOUNTING AND REPORTS
5.1 Elections. The Trust shall elect the calendar year as its fiscal year.
The Trust shall adopt the accrual method of accounting or such other method of
accounting as the Trust shall determine. The Trust shall elect to be taxed as a
REIT, unless the Board determines that it is in the best interest of the
Shareholders as a group that the Trust terminate its status as a REIT and a
Majority of the Shareholders entitled to vote, at a Shareholders' meeting duly
convened under the terms and conditions of this Declaration, votes to cause the
Trust to terminate its REIT status.
5.2 Books and Records. The Trust's books and records shall be kept at the
principal place of business of the Trust and shall be maintained on the basis
utilized in preparing the Trust's federal income tax return with such
adjustments in accounting as the Trust determines would be in the best interests
of the Trust.
5.3 Reports. (a) Quarterly. The Trust will keep each Shareholder currently
advised as to activities of the Trust by reports furnished at least quarterly.
Each quarterly report will contain a condensed statement of "cash flow from
operations" for the year to date as determined by the Managing Shareholder in
conformity with generally accepted accounting principles on a basis consistent
with that of the annual financial statements and showing its derivation from net
income.
(b) Annual. Within 120 days after the end of each fiscal year following the
completion of the Initial Offering, the Trust shall cause to be prepared and
mailed or delivered to each Shareholder as of a record date determined by the
Managing Shareholder, an annual report which shall include the following:
(i) Financial statements prepared in accordance with generally
accepted accounting principles which are audited and reported on by
independent certified public accountants selected by the Trust;
(ii) The ratio of the costs of raising capital during the period to
the capital raised;
(iii) The aggregate amount of management fees and the aggregate amount
of other fees paid to the Managing Shareholder and any of its Affiliates
during the period by the Trust and including fees or charges paid to them
by third parties doing business with the Trust;
(iv) The Total Operating Expenses (as defined in Section 1.9(i)) of
the Trust, stated as a percentage of Average Invested Assets (as defined in
Section 1.9(i)) and as a percentage of its Net Income (as defined in
Section 1.9(i));
(v) A report from the Independent Trustees that the policies being
followed by the Trust are in the best interests of its Shareholders and the
basis for such determination; and
(vi) Full disclosure of all material terms, factors, and circumstances
surrounding any and all transactions involving the Trust, Managing
Shareholder, Trustees, any other members of the Board and any of their
respective Affiliates occurring in the year for which the annual report is
made.
Independent Trustees shall examine and comment in the report on the fairness of
the transactions referred to in item (iv) above. The Board, including the
Independent Trustees, shall be required to take reasonable steps to insure that
the requirements set forth in this Section 5.3 are met.
(c) Tax. An independent certified public accounting firm selected by the
Trust will prepare the Trust's federal income tax return as soon as practicable
after the conclusion of each year and each Shareholder will be furnished, at
that time, with the necessary accounting information for each Shareholder to
take into account and report separately such Shareholder's distributive share of
the income and deductions of the Trust. The Trust will
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use its reasonable best efforts to obtain the information necessary for the
accounting firm as soon as practicable and to transmit the resulting accounting
and tax information to the Shareholders as soon as possible after receipt from
the accounting firm.
5.4 Bank Accounts. The Trust shall maintain separate segregated accounts in
its name at one or more commercial banks, and the cash funds of the Trust shall
be kept in any of those accounts as determined by the Trust.
5.5 Interim Assets. The Trust may purchase, to the extent the Trust's funds
are not otherwise committed to real estate transactions or required for other
purposes, either or both of the following:
(a) Obligations of banks or savings and loan associations that either (i)
have assets in excess of $5 billion or (ii) are insured in their entirety by
agencies of the United States government; and
(b) Obligations of or guaranteed by the United States government or its
agencies.
ARTICLE 6
RIGHTS AND OBLIGATIONS OF SHAREHOLDERS
6.1 Participation in Management. No Shareholder (other than the Managing
Shareholder, a Trustee or any other member of the Board acting in his or its
management capacity) shall have the right, power, authority or responsibility to
participate in the ordinary and routine management of the Trust's affairs or to
bind the Trust in any manner.
6.2 Rights to Engage in Other Ventures. No Shareholder or any officer,
director, shareholder, member or other person holding a legal or beneficial
interest in any Shareholder shall, by virtue of his ownership of a direct or
indirect interest in the Trust, be in any way prohibited from or restricted in
engaging in, or possessing an interest in, any other business venture of a like
or similar nature including any venture involving the residential real estate
industry.
6.3 Transferability of Shares. Shares in the Trust shall be transferable in
accordance with Section 2.5, subject to certain limitations set forth in Article
2A.
6.4 Information. Each Shareholder's rights to obtain information from the
Trust from time to time are set forth in this Section.
(a) In addition to information provided under Section 5.3, each Shareholder
shall be provided on request with the following:
(1) True and full information regarding the status of the Trust's
business and financial condition;
(2) Promptly after becoming available, a copy of the Trust's federal,
state and local income tax returns or information returns for the preceding
year and prior years to the extent reasonably available;
(3) A copy of the Certificate and this Declaration and all amendments
thereto and restatements thereof;
(4) True and full information regarding the amount of cash and a
description and statement of the agreed value of any other property or
services contributed by each Shareholder and which any Shareholder has
agreed to contribute in the future, and the date on which each current
Shareholder acquired his Shares; and
(5) Such other information regarding the Trust's affairs as is just
and reasonable.
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(b) Upon prior written demand, any Shareholder and any representative
thereof specifically designated as such in writing shall be permitted reasonable
access to records of the Trust at all reasonable times, and may inspect and copy
any of them. Inspection of the Trust's books and records by the securities
administrator of any state in which the Trust offers and sells Shares shall be
provided upon reasonable notice and during normal business hours.
(c) The Trust shall maintain as part of the books and records of the Trust
an alphabetical list of the names, addresses, and telephone numbers of the
Shareholders along with the number of Shares held by each of them (the
"Shareholder List") and, upon receipt of prior written demand stating a proper
Trust purpose, make it reasonably available for inspection at the home office of
the Trust by any Shareholder or his representative specifically designated as
such in writing. The Trust shall update the Shareholder List at least quarterly
to reflect changes in the information contained therein. Alternatively, the
Trust may mail a copy of the Shareholder List to any Shareholder requesting it
for a proper Trust purpose specified in writing. The Trust may charge a
reasonable fee for such copy. The purposes for which a Shareholder may request a
copy of the Shareholder List include, without limitation, matters relating to
Shareholders' voting rights under the Declaration and the exercise of
Shareholders' rights under federal securities laws relating to proxies. If the
Managing Shareholder, the Independent Trustees or any other member of the Board
of the Trust neglects or refuses to exhibit, produce or mail a copy of the
Shareholder List as requested, such party or parties shall be liable to any
Shareholder requesting the list for the costs, including attorneys' fees,
incurred by that Shareholder for compelling the production of the list and for
actual damages suffered by any Shareholder by reason of such neglect or refusal.
It shall be a defense from any such liability that the actual purpose and reason
for the requests for inspection or for a copy of the list is to secure such list
or other information for the purpose of selling such list or of using them for a
commercial purpose other than in the interest of the requesting Shareholder in
his capacity as a Shareholder relative to the affairs of the Trust or the
Operating Partnership. As a condition to the release of the Shareholder List,
the Trust may require the requesting Shareholder to represent that the list is
not requested for a commercial purpose unrelated to the Shareholder's interest
in the Trust. The remedies provided in this provision to Shareholders requesting
copies of the list are in addition to, and shall not in any way limit, other
remedies available to Shareholders under federal law or the laws of any state.
(d) Costs of providing information and documents shall be borne by the
requesting Shareholder except for de minimis amounts consistent with the Trust's
ordinary practices.
(e) The Trust may keep confidential from Shareholders for such period of
time as it deems reasonable any information that it reasonably believes to be in
the nature of trade secrets or other information that the Trust in good faith
believes would not be in the best interests of the Trust to disclose or that
could damage the Trust or its business or that the Trust is required by law or
by agreement with a third party to keep confidential.
(f) The Trust may keep its records in other than written form if capable of
conversion into written form within a reasonable time.
(g) All requests or demands for information under this Section shall be in
writing and shall state the purpose of the demand; the Trust's acceptance of
oral requests shall not waive or limit the scope of this provision. Any action
to enforce rights under this Section may be brought in the Delaware Court of
Chancery, subject to Section 9.4.
6.5 Shareholders' Meetings. (a) There shall be an annual meeting of the
Shareholders at such time and place, either within or without the State of
Delaware, as the Managing Shareholder shall prescribe, at which all members of
the Board (including all Independent Trustees) (except in the case of staggered
elections which have been approved by the Managing Shareholder and a Majority of
the Shareholders entitled to vote, in which case, only the class up for election
or reelection) shall be elected or reelected and any other proper business may
be conducted. The annual meeting of Shareholders shall be held upon reasonable
notice and within a reasonable period (not less than 30 days) following delivery
of the annual report specified in Section 5.3(b), but in any event such meeting
must be held within six months after the end of each full fiscal year. Special
meetings of Shareholders may be called by the Managing Shareholder, a majority
of the members of the Board, a majority of the Independent Trustees, or by any
officer of the Trust, and shall be called upon the written request of
Shareholders holding in the aggregate not
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less than ten percent of the outstanding Shares of the Trust entitled to vote at
such meeting in the manner provided in the Bylaws. Unless requested by the
Shareholders entitled to cast a majority of all votes entitled to be cast at
such meeting, a special meeting need not be called to consider any matter which
is substantially the same as a matter voted on at any special meeting of the
Shareholders held during the preceding 12 months. If there shall be no Managing
Shareholder and no remaining members of the Board, the officers of the Trust
shall promptly call a special meeting of the Shareholders for the election of
successor members of the Board. Written or printed notice stating the place,
date and hour of the Shareholders' meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered not less than 10 nor more than 60 days before the day of the meeting
either personally or by mail, by or at the direction of the Managing Shareholder
or any officer or person calling the meeting, to each Shareholder of record
entitled to vote at such meeting. No other business than that which is stated in
the call for a special meeting shall be considered at such meeting.
(b) A majority of the outstanding Shares entitled to vote at any meeting
represented in person or by proxy shall constitute a quorum at any such meeting.
Whenever any action is to be taken by the Shareholders, it shall, except as
otherwise authorized by law or this Declaration or the Bylaws, be authorized by
a majority of the votes cast at a meeting of Shareholders by holders of Shares
entitled to vote thereon.
(c) At the discretion of the Managing Shareholder or Shareholders holding
ten percent or more of the outstanding Shares entitled to vote on a particular
matter, as the case may be, any consent required by this Declaration or any vote
or action by the Shareholders or any subgroup thereof may be effected without a
meeting by a consent or consents in writing signed by the persons required to
give such consent, to vote or to take action. The Managing Shareholder may
solicit consents or Shareholders holding ten percent or more of the outstanding
Shares entitled to vote on the matter may demand a solicitation of consents by
giving notice to the Trust stating the purpose of the consent and including a
form of consent. The Trust shall effect a solicitation of consents by giving all
Shareholders entitled to vote a notice of solicitation stating the purpose of
the consent, a form of consent and the date on which the consents are to be
tabulated, which shall be not less than 15 days nor more than 45 days after the
Trust transmits the notice of solicitation for consents. If Shareholders holding
ten percent or more of the outstanding Shares entitled to vote on the matter
demand a solicitation, the Trust shall transmit the notice of solicitation not
later than 20 days after receipt of the demand.
(d) To the extent not inconsistent with this Declaration, Delaware law
governing stockholders' meetings, proxies and consents for corporations shall
apply as to the procedure, validity and use of meetings, proxies and consents.
Any Shareholder may waive notice of or attendance at any meeting or notice of
any consent, whether before or after any action is taken. The date on which the
Trust transmits the notice of meeting or notice soliciting consents shall be the
record date for determining the right to vote or consent.
6.6 Voting. (a) At each meeting of the Shareholders, each Shareholder
entitled to vote shall have the right to vote, in person or by proxy, the number
of Shares of the Trust owned by him upon each matter upon which the vote of the
Shareholders is taken. In any election in which more than one vacancy on the
Board is to be filled, each Shareholder may vote the number of Shares of the
Trust owned by him for each such vacancy to be filled. There shall be no right
of cumulative voting. Each outstanding Common Share shall be entitled to one
vote on each matter submitted to a vote at a meeting of Shareholders except (a)
to the extent that this Declaration (to the extent permitted by Delaware law)
limits or denies voting rights to the holders of the Shares of any class or
series, or (b) as otherwise provided by Delaware law. Preferred Shares shall
have such voting rights as the Managing Shareholder may designate in accordance
with Section 2.1(c).
(b) In addition to any other actions of the Trust requiring the approval of
Shareholders under this Declaration (including without limitation Section
7.3(b)), a Majority (as such term is defined in Article 10 of this Declaration)
of the Shareholders present in person or by proxy at an annual meeting at which
a quorum is present, may, without the necessity for concurrence by the Board,
vote to amend this Declaration, terminate the Trust, and elect and/or remove one
or more members of the Board.
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(c) Shares in the Trust owned by the Managing Shareholder, the Trustees,
other members of the Board of the Trust, the Original Investors and any of their
respective affiliates may not vote regarding the removal of the Managing
Shareholder, the Trustees or any other member of the Board or any transaction
between the Trust and any of them. In determining the requisite percentage in
interest of Shares necessary to approve a matter on which the foregoing may not
vote, any Shares owned by any of them will not be included.
6.7 Distributions. (a) The Managing Shareholder may from time to time
declare and pay to Shareholders such dividends or distributions in cash,
property or other assets of the Trust or in Shares or from any other source as
the Managing Shareholder in its discretion shall determine. Any such dividends
and distributions shall be made to Shareholders on a pro rata basis for each
class of Shares taking into account the relative rights of priority of each
class of Shares entitled thereto. The Managing Shareholder shall endeavor to
declare and pay such dividends and distributions as shall be necessary for the
Trust to qualify as a REIT under the Code (so long as such qualification, in the
opinion of the Managing Shareholder, is in the best interests of the
Shareholders); however, Shareholders shall have no right to any dividend or
distribution unless and until declared by the Managing Shareholder. The exercise
of the powers and rights of the Managing Shareholder pursuant to this Section
shall be subject to the provisions of any class or series of Shares at the time
outstanding. The receipt by any person in whose name any Shares are registered
on the records of the Trust or by his duly authorized agent shall be a
sufficient discharge for all dividends or distributions payable or deliverable
in respect of such Shares and from all liability to see to the application
thereof.
(b) Distributions in Kind. (i) The Trust may make distributions in kind of
any asset of the Trust only if the distribution in kind is comprised of (1)
readily marketable securities, (2) beneficial interests in a liquidating trust
established for the dissolution of the Trust and the liquidation of its assets
in accordance with the terms and conditions of this Declaration, or (3) other
property, in which case the Managing Shareholder must advise each Shareholder of
the risks associated with direct ownership of such other property; offer each
Shareholder the election of receiving the property; and distribute the property
only to those Shareholders who accept the Managing Shareholder's offer.
(ii) If the Trust elects to make distribution in kind of any of its assets,
the Managing Shareholder shall give notice of the Trust's election to each
Shareholder, specifying the nature and value of all such assets to be
distributed in kind, the deadline for giving notice of refusal to accept a
distribution in kind and to the extent advisable, the estimated time necessary
for the Trust to liquidate assets if those assets are not distributed and other
information as required. In making such election, the Trust shall not
arbitrarily value assets to be distributed in kind nor shall it specify assets
to be distributed in kind in such a manner as to unreasonably advantage or
disadvantage any Shareholder. A Shareholder may refuse to accept a distribution
in kind by giving written notice to the Trust not later than 30 days after the
effective date of the Trust's notice of distribution. If a Shareholder refuses
distribution in kind, the Trust shall retain in the Trust's name the portion of
the assets which were to be distributed in kind and which were to be allocated
to the refusing Shareholder (the "Retained Assets") and shall liquidate the
Retained Assets in accordance with this Declaration. Upon liquidation of the
Retained Assets, the sum realized shall be distributed to the Shareholder
refusing distribution in kind in full discharge of the Trust's obligation to
distribute the Retained Assets.
6.8 Notice of Non-liability. The Managing Shareholder shall use every
reasonable means to assure that all persons having dealings with the Trust shall
be informed that the private property of the Shareholders, the Managing
Shareholder, the Trustees, and any other members of the Board shall not be
subject to claims against and obligations of the Trust to any extent whatever.
The Trustee shall cause to be inserted in every written agreement, undertaking
or obligation made or issued on behalf of the Trust, an appropriate provision to
the effect that the Shareholders, the Managing Shareholder, the Trustees and any
other members of the Board shall not be personally liable thereunder, and that
all parties concerned shall look solely to the Trust Property for the
satisfaction of any claim thereunder, and appropriate reference shall be made to
this Declaration. The omission of such a provision from any such agreement,
undertaking or obligation, or the failure to use any other means of giving such
notice, shall not, however, render the Shareholders, the Managing Shareholder,
the Trustees or any other members of the Board personally liable.
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ARTICLE 7
POWERS, DUTIES AND LIMITATIONS ON MANAGING SHAREHOLDER, BOARD
AND INDEPENDENT TRUSTEES
7.1 Management of the Trust. The Managing Shareholder shall have full,
exclusive and complete discretion in the management and control of the Trust,
except as otherwise provided herein. The Managing Shareholder agrees to manage
and control the affairs of the Trust to the best of its ability and to conduct
the operations contemplated under this Declaration in a careful and prudent
manner and in accordance with good industry practice. The Managing Shareholder
may bind the Trust.
7.2 Acceptance of Subscriptions. The Managing Shareholder shall not cause
the Trust to accept any subscription for Common Shares in connection with the
Initial Offering except as provided Section 1.6.
7.3 Specific Limitations. (a) The Managing Shareholder shall not take any
of the following actions:
(1) Any act in contravention of this Declaration or the Certificate;
(2) Any act that would make it impossible to carry on the Trust's
ordinary business;
(3) Effecting a confession of judgment against the Trust in an amount
exceeding 10% of the aggregate Capital Contributions;
(4) Causing the dissolution or termination of the Trust prior to the
expiration of its term, except as provided under Article 8;
(5) Possessing Trust Property or assigning rights in specific Trust
Property for other than a Trust purpose; or
(6) Constituting any other person as a Managing Shareholder, except as
provided in Article 8.
(b) The Managing Shareholder shall not cause the Trust to take any of the
following actions without the approval of a Majority (as such term is defined in
Article 10 of this Declaration) of the Shareholders given at a duly convened
Shareholders' meeting at which a quorum is present or by written consent:
(i) Amend this Declaration except as otherwise specified in this
Declaration and except for amendments which do not adversely affect the
rights, preferences and privileges of Shareholders, including amendments to
provisions relating to qualifications of the Trustees and members of the
Board, fiduciary duty, liability and indemnification, conflicts of
interest, investment policies or investment restrictions.
(ii) Sell, exchange, lease, mortgage, pledge or transfer all or
substantially all of the Trust's assets if not in the ordinary course of
operation of Trust Property or in connection with liquidation and
dissolution.
(iii) Merge or otherwise reorganize the Trust.
(iv) Dissolve or liquidate the Trust, other than before its initial
investment in property.
(c) The Trustees, the Trust and the Trust's agents shall not take any
action that is prohibited to the Managing Shareholder by this or any other
provision of this Declaration and shall take all actions necessary or advisable
to carry out actions specified in this Section that are approved as specified
herein.
(d) The Managing Shareholder (or any successor Advisor of the Trust), a
majority of the Independent
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Trustees, or a Majority of the Shareholders (by voting at an annual or special
meeting at which a quorum is present, without the necessity for concurrence by
the Board) may terminate the Trust Management Agreement (or subsequent
management, administrative and investment advisory agreement), and the Managing
Shareholder (or any successor Advisor) may resign as Managing Shareholder (or
Advisor) of the Trust in accordance with the terms and conditions of Section
1.9(d) and, if not inconsistent with the Section 1.9(d), the terms and
conditions of the Trust Management Agreement (or any subsequent agreement)
entered into by the Managing Shareholder (or any successor Advisor) and the
Trust.
7.4 Powers of Managing Shareholder. The Managing Shareholder shall have all
the powers necessary, convenient or appropriate to effectuate the purposes of
the Trust and may take any action which it deems necessary or desirable and
proper to carry out such purposes, except as otherwise provided in this
Declaration. Any determination of the purposes of the Trust made by the Managing
Shareholder in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of the grant of powers to
the Managing Shareholder. In addition to the powers and duties otherwise
provided in this Declaration, the Managing Shareholder has the following powers
and duties, subject to (i) the supervision and review by the Board under Section
7.5; (ii) the obligations and prior approval rights of the Board and/or
Independent Trustees set forth in Section 1.9 and elsewhere in this Declaration;
and (iii) any other limitations, restrictions or other provisions set forth
herein, including without limitation, Section 1.9:
(a) To purchase, acquire through the issuance of Shares in the Trust,
obligations of the Trust or otherwise, and to acquire, sell, mortgage, own,
acquire on lease, hold, manage, operate, lease to others, improve, option,
exchange, release, and partition real estate interests of every nature,
including freehold, leasehold, mortgage, ground rent and other interests
therein, and to erect, construct, alter, repair, demolish or otherwise change
buildings and structures of every nature.
(b) To purchase, acquire through the issuance of Shares in the Trust,
obligations of the Trust or otherwise, option, sell and exchange stocks, bonds,
notes, certificates of indebtedness and securities of every nature.
(c) To purchase, acquire through the issuance of Shares in the Trust,
obligations of the Trust or otherwise, acquire, sell, mortgage, own, acquire on
lease, hold, manage, improve, lease to others, option and exchange personal
property of every nature.
(d) To hold legal title to Trust Property in the name of the Trust, or in
the name of one or more of the Trustees for the Trust, or of any other person as
nominee for the Trust, without disclosure of the interest of the Trust therein.
(e) To borrow money for the purposes of the Trust (including without
limitation the payment of dividends to Shareholders, working capital, property
acquisitions, refinancings of existing indebtedness and acquisitions of
additional interests in any partnership formed or acquired by the Trust in which
all or a portion of the Trust's real estate assets might be held and its
operations might be conducted) and to give notes or other negotiable or
nonnegotiable instruments of the Trust therefor; to enter into other obligations
or guarantee the obligations of others on behalf of and for the purposes of the
Trust; and to mortgage or pledge or cause to be mortgaged or pledged real and
personal property of the Trust to secure such notes, debentures, bonds,
instruments or other obligations.
(f) To lend money on behalf of the Trust and to invest the funds of the
Trust.
(g) To create reserve funds for such purposes as it deems advisable.
(h) To deposit funds of the Trust in banks and other depositories without
regard to whether such accounts will draw interest.
(i) To pay taxes and assessments imposed upon or chargeable against the
Trust, the Managing Shareholder or the Trustees by virtue of or arising out of
the existence, property, business or activities of the Trust.
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(j) To purchase, issue, sell or exchange Shares of the Trust as provided in
Article 2 hereof.
(k) To exercise with respect to Trust Property, all options, privileges and
rights, whether to vote, assent, subscribe or convert, or of any other nature;
to grant proxies; and to participate in and accept securities issued under any
voting trust agreement.
(l) To participate in any reorganization, readjustment, consolidation,
merger, dissolution, sale or purchase of assets, lease, or similar proceedings
of any corporation, partnership or other organization in which the Trust shall
have an interest and in connection therewith to delegate discretionary powers to
any reorganization, protective or similar committee and to pay assessments and
other expenses in connection therewith.
(m) To engage or employ agents, representatives and employees of any
nature, or independent contractors, including, without limiting the generality
of the foregoing, transfer agents for the transfer of Shares in the Trust,
registrars, underwriters for the sale of Shares in the Trust, independent
certified public accountants, attorneys at law, appraisers, and real estate
agents and brokers; and to delegate to one or more Trustees, agents,
representatives, employees, independent contractors or other persons such powers
and duties as the Managing Shareholder deems appropriate.
(n) To determine conclusively the allocation between capital and income of
the receipts, holdings, expenses and disbursements of the Trust, regardless of
the allocation which might be considered appropriate in the absence of this
provision.
(o) To determine conclusively the value from time to time and to re-value
the real estate, securities and other property of the Trust by means of
independent appraisals.
(p) To compromise or settle claims, questions, disputes and controversies
by, against or affecting the Trust.
(q) To solicit proxies of the Shareholders.
(r) To adopt a fiscal year for the Trust and to change such fiscal year.
(s) To adopt and use a seal.
(t) To merge the Trust with or into any other trust or corporation in
accordance with the laws of the State of Delaware and any other applicable law.
(u) To deal with the Trust Property in every way, including joint ventures,
partnerships and any other combinations or associations, that it would be lawful
for an individual to deal with the same, whether similar to or different from
the ways herein and hereinabove specified.
(v) To determine whether or not, at any time or from time to time, to
attempt to cause the Trust to qualify for taxation as a REIT.
(w) To make, adopt, amend or repeal Bylaws containing provisions relating
to the business of the Trust, the conduct of its affairs, its rights or powers
and the rights or powers of the Managing Shareholder and the Trust's
Shareholders, Trustees or officers not inconsistent with applicable law or this
Declaration.
(x) To direct or supervise the Corporate Trustee, the Trust and the Trust's
agents in the exercise of any action relating to the Trust's affairs, including
without limitation the powers described in Section 1.8.
(y) To take the actions specified in Section 7.3 if the approvals specified
therein are obtained.
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(z) To amend this Declaration as specified in Section 9.8(a) or other
provisions of this Declaration.
(aa) To lend money to the Trust in accordance with Section 1.9(o).
(bb) To terminate the Initial Offering at any time prior to the Termination
Date, provided that the Escrow Date has occurred.
(cc) To withdraw the Initial Offering at any time as provided in Section
1.6.
(dd) To acquire on behalf of the Trust such assets or properties, real or
personal, including without limitation residential properties, undeveloped land,
stocks, bonds, notes, partnership interests and other securities, as the
Managing Shareholder in its sole discretion deems necessary or appropriate for
the conduct of the Trust's business and to sell, exchange, distribute to
Shareholders in kind or otherwise dispose of any part of the Trust Property in
the ordinary course of the operation of the Trust Property.
(ee) To take such steps as may be necessary to cause any partnership formed
or acquired by the Trust in which all or a portion of the Trust's real estate
assets might be held and its operations might be conducted, to distribute to its
partners an amount sufficient to permit the Trust to meet the annual
distribution requirements of the REIT provisions of the Code.
(ff) To do all such other acts and things as are incident to any of the
foregoing and to exercise all powers which are necessary or useful to carry on
the business of the Trust, to promote any of the purposes of the Trust, and to
carry out the provisions of this Declaration.
7.5 Independent Trustees. (a) There shall be at least two Independent
Trustees of the Trust at all times. The Independent Trustees shall have such
responsibilities and rights as are prescribed in this Declaration. The number of
Independent Trustees may be increased (but to not more than five) or decreased
(but to not fewer than two) from time to time by action of a majority of the
Managing Shareholder and the Independent Trustees, acting together
(collectively, the "Board").
(b) To qualify to serve the Trust as an Independent Trustee, a person may
not be "associated" (as such term is defined below) or have been "associated"
within the last two years, directly or indirectly, with the Managing Shareholder
(or any successor Advisor to the Trust). A person is deemed to be associated
with the Managing Shareholder if he (i) owns an interest in, is employed by, or
is an officer, director or trustee of the Managing Shareholder or any of its
Affiliates; (ii) performs services, other than as a Trustee, for the Trust;
(iii) is a Trustee for more than three REITs organized or advised by the
Managing Shareholder; or (iv) has any "material business or professional
relationship" with the Managing Shareholder or any of its Affiliates. For
purposes of determining whether there exists such a material business or
professional relationship, the gross revenue derived by the prospective
Independent Trustee from the Managing Shareholder and its Affiliates is deemed
to be material per se if it exceeds five percent of the prospective Independent
Trustee's (i) annual gross revenue, derived from all sources, during either of
the last two years, or (ii) net worth, on a fair market value basis. For
purposes of determining the qualification of a person to serve the Trust as an
Independent Trustee, an indirect relationship shall include circumstances in
which any spouse, parent, child, sibling, mother- or father-in-law, son- or
daughter-in-law, or brother- or sister-in-law of a prospective Independent
Trustee is or has been associated with the Trust, the Managing Shareholder (or
any successor Advisor of the Trust) or any of the Managing Shareholder's (or
successor Advisor's) Affiliates.
(c) The term of each Independent Trustee shall be one year (subject to a
shorter term in the case of an Independent Trustee who resigns, dies or is
incapacitated or removed prior to the end of the term or was elected to replace
a vacancy). Each Independent Trustee (other than one who is elected to fill the
unexpired term of another Independent Trustee) shall be elected by a vote of the
Shareholders. Any person may serve an unlimited number of terms. Vacancies
created in the authorized number of Independent Trustees prior to the end of a
term shall be filled by a majority of the remaining Board members. If, in such
case, no member of the Board remains, the Managing Shareholder shall call a
special meeting of Shareholders for the purpose of electing Independent Trustees
to fill such
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vacancy within 90 days after the last vacancy occurs. The Independent Trustees
shall nominate replacements for vacancies created in the authorized number of
Independent Trustees prior to the end of a term.
(d) The Independent Trustees shall supervise and review, in accordance with
the terms and conditions of this Declaration, the actions of the Managing
Shareholder in managing the Trust and shall have the right to require action by
the Managing Shareholder to the extent necessary to carry out the fiduciary
duties of the Independent Trustees. Except as expressly authorized by this
Declaration, the Independent Trustees shall not have any management,
administrative or investment advisory powers over the Trust or the Trust
Property. The Independent Trustees shall not take any action except at a meeting
of the Board or by unanimous written consent of the Independent Trustees and the
Managing Shareholder.
(e) Any Independent Trustee may resign if he gives notice to the Trust of
his intent to resign and cooperates fully with any successor Independent Trustee
appointed under this Section 7.5. Such resignation shall be effective on the
designation of the successor Independent Trustee.
(f) Any Independent Trustee may be removed (x) for cause by the action of
at least two-thirds of the remaining members of the Board or (y) by action of
the holders of at least a majority of the then outstanding Common Shares.
Removal of an Independent Trustee shall not affect the validity of any actions
taken prior to the date of removal.
7.6 Board of the Trust. (a) The Trust shall have a Board of the Trust which
shall have such responsibilities and rights as shall be prescribed in this
Declaration. There shall be at least three members of the Board at all times.
The number of members of the Board may be increased (but to not more than nine)
or decreased (but to not fewer than three) from time to time by action of a
majority of the members of the Board. At all times a majority of the members of
the Board shall be Independent Trustees. No person shall qualify as a member of
the Board until he shall have agreed in writing to be bound by this Declaration.
Each member of the Board shall have had at least three years of relevant
experience demonstrating the knowledge and experience required to successfully
acquire and manage the type of assets to be acquired by the Trust. At least one
of the Independent Trustees must have at least three years of relevant real
estate experience. The term of each member of the Board shall be one year
(subject to a shorter term in the case of a member who resigns, dies, is
incapacitated or removed prior to the end of the term, or was elected to replace
a vacancy). Each member of the Board (other than one who is elected to fill the
unexpired term of another member) shall be elected by a vote of the
Shareholders. Each member of the Board may serve an unlimited number of terms.
Vacancies created in the authorized number of Board members prior to the end of
a term shall be filled by a majority of the remaining Board members. If, in such
case, no member of the Board remains, the Managing Shareholder shall call a
special meeting of Shareholders for the purpose of electing members to fill such
vacancies within 90 days after the last vacancy occurs. The Independent Trustees
shall nominate replacements for vacancies created in the authorized number of
members of the Board prior to the end of a term.
(b) The Board shall supervise and review, in accordance with the terms and
conditions of this Declaration, the actions of the Managing Shareholder in
managing the Trust and shall have the right to require action by the Managing
Shareholder to the extent necessary to carry out the fiduciary duties of the
Board's members. The Board may establish such committees they deem appropriate,
provided, the majority of the members of any such committee are Independent
Trustees.
(c) The Board shall meet at least annually on the call of the Managing
Shareholder and at such other times as determined by the Board. Except to the
extent conflicting with the Delaware Act or this Declaration, the law of
Delaware governing meetings of directors of corporations shall govern meetings,
voting and consents by the members of the Board. The Managing Shareholder may be
represented for any purpose by any of its officers.
(d) As compensation for services rendered to the Trust, each Independent
Trustee and each other member of the Board who is not affiliated or associated
with the Trust or the Managing Shareholder or any of its Affiliates shall be
paid by the Trust the sum of $6,000 annually in quarterly installments and shall
be reimbursed for all reasonable out-of-pocket expenses relating to attendance
at meetings or otherwise performing his duties hereunder. The Board may review
annually the compensation payable to the Independent Trustees and such other
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members of the Board and may increase or decrease it as the Board sees
reasonable. No compensation shall be payable by the Trust to other Managing
Persons for their services except as specified by this Declaration, under a
management agreement or other agreement approved under the terms and conditions
of this Declaration or indirectly as an officer, director, stockholder or
employee of the Managing Shareholder or other Managing Person otherwise entitled
to receive compensation hereunder.
(e) Any member of the Board may resign if he gives notice to the Trust of
his intent to resign and cooperates fully with any successor member appointed
under this Section 7.5. Any such resignation shall be effective on the
designation of the successor member.
(f) Any member of the Board may be removed (x) for cause by the action of
at least two-thirds of the remaining members of the Board or (y) by action of
the holders of at least a majority of the then outstanding Common Shares.
Removal of any member shall not affect the validity of any actions of the Board
taken prior to the date of removal.
7.7 Officers of Trust. (a) The Managing Shareholder shall appoint a Chief
Executive Officer, President, Chief Operating Officer, one or more Vice
Presidents as designated by the Managing Shareholder, a Secretary and such other
officers and agents of the Trust as the Managing Shareholder may from time to
time consider appropriate, none of whom need be a Shareholder. Except as
otherwise prescribed by the Managing Shareholder or in this Declaration or the
Bylaws of the Trust, each officer shall have the powers and duties usually
appertaining to a similar officer of a Delaware corporation under the direction
of the Managing Shareholder and shall hold office during the pleasure of the
Managing Shareholder. Any two or more offices may be held by the same person.
Any officer may resign by delivering a written resignation to the Managing
Shareholder and such resignation shall take effect upon delivery or as specified
therein.
(b) All conveyances of real property or any interest therein by the Trust
may be made by the Corporate Trustee, which shall execute on behalf of the Trust
any instruments necessary to effect the conveyance. A certificate of the
Secretary of the Trust stating compliance with this Section 7.7(b) shall be
conclusive in favor of any person relying thereon.
(c) All other documents, agreements, instruments and certificates that are
to be made, executed or endorsed on behalf of the Trust shall be made, executed
or endorsed by such officers or persons as the Managing Shareholder shall from
time to time authorize and such authority may be general or confined to specific
instances. In the absence of other provisions, the President is authorized to
execute any document, to take any action on behalf of the Trust under this
Section 7.7(c), and to authorize other officers to execute confirmatory
documents or certificates.
7.8 Presumption of Power. The execution by the Corporate Trustee, the
Managing Shareholder or the officers on behalf of the Trust of leases,
assignments, conveyances, contracts or agreements of any kind whatsoever shall
be sufficient to bind the Trust. No person dealing with the Managing Shareholder
or the Trust's officers shall be required to determine their authority to make
or execute any undertaking on behalf of the Trust, nor to determine any fact or
circumstances bearing upon the existence of their authority nor to see the
application or distributions of revenues or proceeds derived therefrom, unless
and until such person has received written notice to the contrary.
7.9 Obligations Not Exclusive. The Managing Shareholder, Trustees and any
other members of the Board shall be required to devote only such part of their
time as is reasonably needed to manage the business of the Trust, it being
understood that they have and shall have other business interests and therefore
shall not be required to devote their time exclusively to the Trust. The
Managing Shareholder, Trustees and any other members of the Board shall in no
way be prohibited from or restricted in engaging in, or possessing an interest
in, any other business venture of a like or similar nature including any venture
involving the residential real estate industry. Nothing in this Section 7.9
shall relieve the Managing Shareholder, Trustees or any other members of the
Board of other fiduciary obligations to the Shareholders, except as limited in
Article 3. Notwithstanding anything to the contrary contained in this Article or
elsewhere in this Declaration, the Managing Shareholder shall have no duty to
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take any affirmative action with respect to management of the Trust business or
the Trust Property which might require the expenditure of moneys by the Trust or
the Managing Shareholder unless the Trust is then possessed of such moneys
available for the proposed expenditure. Under no circumstances shall the
Managing Shareholder be required to expend its own funds in connection with the
day to day operation of Trust business.
7.10 Right to Deal with Affiliates. No act of the Trust shall be affected
or invalidated by the fact that a Managing Person may be a party to or have an
interest in any contract or transaction of the Trust, provided that (i) such
arrangement involving the Managing Person conforms with any applicable
provisions of Section 1.9, and (ii) the fact of the Managing Person's interest
shall be disclosed or shall have been known to the Shareholders or the contract
or transaction is at prevailing rates or on terms at least as favorable to the
Trust as those available from persons who are not Managing Persons.
7.11 Removal of Managing Shareholder. The holders of at least ten percent
of the Common Shares may propose the removal of the Managing Shareholder (or any
successor Advisor of the Trust), either by calling a meeting or soliciting
consents in accordance with the terms of this Declaration. On the affirmative
vote of a Majority of the Shareholders entitled to vote (excluding Common Shares
held by the Managing Shareholder that is the subject of the vote or by its
Affiliates), such Managing Shareholder shall be removed. A majority of the
Independent Trustees may also remove the Managing Shareholder. In the event of
any such removal or the death, dissolution, resignation, insolvency, bankruptcy
or other legal incapacity of the Managing Shareholder or any other event which
would legally disqualify the Managing Shareholder from acting hereunder, the
former Managing Shareholder shall not be entitled to payment for reimbursable
expenses specified in Article 4 which are incurred after the date of such
removal or other incapacity.
ARTICLE 8
DISSOLUTION, TERMINATION AND LIQUIDATION
8.1 Dissolution. The Trust shall be dissolved promptly if prior to the
Termination Date of the Initial Offering the Managing Shareholder decides to
withdraw the Initial Offering in accordance with Section 7.4(cc). On or after
the Termination Date, the Trust shall be dissolved and its business shall be
wound up upon the earliest to occur of the following events, unless the
provisions of Section 8.2 are elected:
(a) December 31, 2098;
(b) The sale of all or substantially all of the Trust Property in one
transaction or in a series of related transactions;
(c) The vote of a Majority of Shareholders; or
(d) The occurrence of any other event which, by law, would require the
Trust to be dissolved.
8.2 Continuation of the Trust. Upon the occurrence of any event of
dissolution described in Sections 8.1(a) through (c), the Trust shall be
dissolved and wound up unless (i) the Managing Shareholder and a Majority of the
Shareholders (calculated without regard to Common Shares owned by the Managing
Shareholder or its Affiliates) within 90 days after the occurrence of any such
event of dissolution elect to continue the Trust or, (ii) if there is no
remaining Managing Shareholder, within 90 days after the occurrence of any such
event of dissolution, a Majority of the Shareholders shall elect, in writing,
that the Trust shall be continued on the terms and conditions herein contained
and shall designate one or more persons willing to be substituted as a Managing
Shareholder or Managing Shareholders. In the event there is no remaining
Managing Shareholder and a Majority of the Shareholders elect to continue the
Trust, it shall be continued with the new Managing Shareholder or Managing
Shareholders who shall succeed to and assume all of the powers, privileges and
obligations of the previous Managing Shareholder or Managing Shareholders
hereunder.
8.3 Obligations on Dissolution. The dissolution of the Trust shall not
release any of the parties
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hereto from their contractual obligations under this Declaration.
8.4 Liquidation Procedure. Upon dissolution of the Trust for any reason:
(a) A reasonable time shall be allowed for the orderly liquidation of the
assets of the Trust and the discharge of liabilities to creditors so as to
enable the Trust to minimize the losses normally attendant to a liquidation;
(b) The Shareholders shall continue to receive dividends or distributions
as may be declared by the Managing Shareholder; and
(c) The Managing Shareholder (or in its absence, any other liquidating
trustee appointed under Section 8.5) shall proceed to liquidate the Trust
Properties to the extent that they have not already been reduced to cash unless
the Managing Shareholder (or other liquidating trustee) elects to make
distributions in kind to the extent and in the manner provided herein, and such
net cash proceeds, if any, and property in kind, shall be applied and
distributed to the Shareholders on a pro rata basis for each class of Shares
taking into account the relative rights of priority of each class.
8.5 Liquidating Trustee. (a) If the dissolution of the Trust is caused by
circumstances under which no Managing Shareholder shall be acting as a Managing
Shareholder or if all liquidating Managing Shareholders are unable or refuse to
act, a majority of the Board shall appoint a liquidating trustee who shall
proceed to wind up the business affairs of the Trust. The liquidating trustee
shall have no liability to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of the liquidating
trustee if the liquidating trustee, in good faith, determined that such course
of conduct was in the best interests of the Shareholders and such course of
conduct did not constitute negligence or misconduct of the liquidating trustee.
The liquidating trustee shall be indemnified by the Trust against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by it in connection with the Trust, provided that the same were not
the result of negligence or misconduct of the liquidating trustee.
(b) Notwithstanding the above, the liquidating trustee shall not be
indemnified and no expenses shall be advanced on its behalf for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws, unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities law violations as to the
particular indemnitee, or (2) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the particular indemnitee,
or (3) a court of competent jurisdiction approves a settlement of the claims
against a particular indemnitee.
(c) In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission and of any applicable state
securities administrators, if required, with respect to the issue of
indemnification for securities law violations.
(d) The Trust shall not incur the cost of that portion of any insurance,
other than public liability insurance, which insures any party against any
liability the indemnification of which is herein prohibited.
8.6 Death, Insanity, Dissolution or Insolvency of Managing Shareholder, a
Trustee or a Shareholder. The death, insanity, dissolution, winding up,
insolvency, bankruptcy, receivership or other legal termination of the Managing
Shareholder, a Trustee, a member of the Board or a Shareholder shall have no
effect on the life of the Trust and the Trust shall not be dissolved thereby.
8.7 Withdrawal of Offering. Dissolution of the Trust resulting from
withdrawal of the Initial Offering is governed by Section 1.6(c) and Section
7.4(cc).
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ARTICLE 9
MISCELLANEOUS
9.1 Notices. Notices or instruments of any kind which may be or are
required to be given hereunder by any person to another shall be in writing and
deposited in the United States Mail, first class, certified or registered or
overnight mail by a nationally recognized mail service, postage prepaid,
addressed to the respective person at the address appearing in the records of
the Trust. Any Shareholder may change his address by giving notice in writing,
stating his new address, to the Trust. Any notice shall be deemed to have been
given effective as of 72 hours, excluding Saturdays, Sundays and holidays, after
the depositing of such notice in an official United States Mail receptacle and
as of the next business day after depositing of such notice with any such
overnight mail service. Notice to the Trust may be addressed to its principal
office.
9.2 Delaware Laws Govern. This Declaration shall be governed and construed
in accordance with the laws of the State of Delaware, and venue for any
litigation between or against any of the parties hereto may be maintained in New
Castle County, Delaware.
9.3 Power of Attorney. Each Shareholder irrevocably constitutes and
appoints the Managing Shareholder as his true and lawful attorney-in-fact and
agent to effectuate and to act in his name, place and stead, in effectuating the
purposes of the Trust including the execution, verification, acknowledgment,
delivery, filing and recording of this Declaration as well as all authorized
amendments thereto and hereto, all assumed name and doing business certificates,
documents, bills of sale, assignments and other instruments of conveyances,
leases, contracts, loan documents and counterparts thereof; and all other
documents which may be required to effect a continuation of the Trust and which
the Trust deems necessary or reasonably appropriate, including documents
required to be executed in order to correct typographical errors in documents
previously executed by such Shareholder, documents required to maintain the
federal tax status of the Trust (unless the Managing Shareholder determines that
it is in the best interests of Shareholders to change the Trust's tax status and
a Majority of the Shareholders concur) and all conveyances and other instruments
or other certificates necessary or appropriate to effect an authorized
dissolution and liquidation of the Trust. The power of attorney granted herein
shall be deemed to be coupled with an interest, shall be irrevocable and shall
survive the death, incompetency or legal disability of an Shareholder.
9.4 Disclaimer. In forming this Trust, all Shareholders recognize that the
residential apartment real estate business is highly speculative and that
neither the Trust nor the Managing Shareholder, any Trustee, any other member of
the Board, or any other Managing Person makes any guaranty or representation to
any Shareholder as to the probability or amount of gain or loss from the conduct
of Trust business.
9.5 Corporate Trustee Resignation and Replacement. The Managing Shareholder
may increase or decrease the number of Corporate Trustees so long as there is at
least one Corporate Trustee which meets the requirements of Section 3807 of the
Delaware Act. A Corporate Trustee may resign by delivering a written resignation
to the Managing Shareholder not less than 60 days prior to the effective date of
the resignation. The Managing Shareholder may remove a Corporate Trustee at any
time, provided that if there is no incumbent, at least one new Corporate Trustee
is concurrently appointed. In the event of the absence, death, resignation,
removal, dissolution, insolvency, bankruptcy or legal incapacity of a Corporate
Trustee or if an additional Corporate Trustee is to be appointed, the Managing
Shareholder shall appoint the Corporate Trustee in writing and shall
subsequently give notice to the Shareholders, although such notice is not
necessary to the validity of the appointment. A Corporate Trustee so appointed
shall qualify by filing his written acceptance at the Trust's principal place of
business. If there are multiple Corporate Trustees, each is vested with an
undivided interest in the trust estate and may exercise all powers vested in the
Corporate Trustee as directed by the Managing Shareholder.
9.6 Amendment and Construction of Declaration. (a) This Declaration may be
amended by the Managing Shareholder, without notice to or the approval of the
Shareholders, from time to time for the following purposes: (1) to effect any
amendment without notice to or approval by Shareholders as specified in other
provisions of this Declaration; (2) to maintain the federal tax status of the
Trust (unless the Managing Shareholder determines that it is in the best
interests of Shareholders to change the Trust's tax status and a Majority of the
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Shareholders concur); and (3) to comply with law.
(b) Other amendments to this Declaration may be proposed by either the
Managing Shareholder or Shareholders owning 10% or more of the outstanding
Shares entitled to vote, in each case by calling a meeting of Shareholders or
requesting consents under Section 9.2(b) and specifying the text of the
amendment and the reasons therefor. Unless otherwise provided herein, all
amendments must be approved by the holders of a Majority of the outstanding
Shares entitled to vote (calculated without regard to Shares owned by the
Managing Shareholder and its Affiliates), and, if the terms of a series of
Shares so require, by the vote of the holders of such class, series or group
specified therein.
(c) The Managing Shareholder has power to construe this Declaration and to
act upon any such construction. Its construction of the same and any action
taken pursuant thereto by the Trust or a Managing Person in good faith shall be
final and conclusive.
9.7 Bonds and Accounting. The Trustees and other Managing Persons shall not
be required to give bond or otherwise post security for the performance of their
duties and the Trust waives all provisions of law requiring or permitting the
same. No person shall be entitled at any time to require the Trust, Managing
Shareholder, Trustees, any other member of the Board or any Shareholder to
submit to a judicial or other accounting or otherwise elect any judicial,
administrative or executive supervisory proceeding applicable to non-business
trusts.
9.8 Binding Effect. This Declaration shall be binding upon and shall inure
to the benefit of the Shareholders (and their spouses if the Shares of such
Shareholders shall be community property) as well as their respective heirs,
legal representatives, successors and assigns. This Declaration constitutes the
entire agreement among the Trust, the Trustees and the Shareholders with respect
to the formation and operation of the Trust, other than the Subscription
Agreement entered into between the Trust and each Shareholder and the Trust
Management Agreement.
9.9 Headings. Headings of Articles and Sections used herein are for
descriptive purposes only and shall not control or alter the meaning of this
Declaration as set forth in the text.
9.10 Bylaws. The Bylaws of the Trust may be altered, amended or repealed,
and new Bylaws may be adopted, at any meeting of the Board by a majority of the
Board, subject to repeal or change by action of the Shareholders entitled to
vote thereon.
9.11 Severability. If any provision of this Declaration shall be invalid or
unenforceable, such invalidity or unenforceability shall attach only to such
provision and shall not in any manner affect or render invalid or unenforceable
any other provision of this Declaration, and the Declaration shall be carried
out, if possible, as if such invalid or unenforceable provision were not
contained therein.
ARTICLE 10
DEFINITIONS
The following terms, whenever used herein, shall have the meanings assigned
to them in this Article 10 unless the context indicates otherwise. References to
sections and articles without further qualification denote sections and articles
of this Declaration. The singular shall include the plural and the masculine
gender shall include the feminine, and vice versa, as the context requires, and
the terms "person" and "he" and their derivations whenever used herein shall
include natural persons and entities, including, without limitation,
corporations, partnerships and trusts, unless the context indicates otherwise.
"Advisor" refers to any Person (including the Managing Shareholder)
responsible for directing or performing the day-to-day business affairs of a
real estate investment trust.
"Affiliate" - An "affiliate" of, or person "affiliated" with, a specified
person includes any of the following:
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(a) Any person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the person specified.
(b) Any person directly or indirectly owning, controlling or holding, with
power to vote 10% or more of the outstanding voting securities of such other
person.
(c) Any person 10% or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held, with power to vote, by such
other person.
(d) Any executive officer, director, trustee or general partner of such
other person.
(e) Any legal entity for which such person acts as an executive officer,
director, trustee or general partner.
"Baron Advisors" refers to Baron Advisors, Inc., a Delaware corporation
which is the initial Managing Shareholder of the Trust.
"Baron Properties" refers to Baron Capital Properties, Inc., a Delaware
corporation having its principal office at 1105 North Market Street, Wilmington,
Delaware 19899, which is the initial Corporate Trustee.
"Board" refers to the Managing Shareholder and the Independent Trustees, or
their successors as members of the Board of the Trust, acting together as the
Board of the Trust in accordance with the terms hereof.
"Certificate" refers to the Certificate of Trust for the Trust, as amended
from time to time.
"Code" refers to the Internal Revenue Code of 1986, as amended from time to
time, and any rules and regulations promulgated thereunder.
"Commission" means the Securities and Exchange Commission.
"Common Share" refers to a share of beneficial interest in the Trust
designated as a Common Share by the Trust in accordance with Section 2.1 of this
Declaration.
"Corporate Trustee" refers to Baron Properties or its successors as
Corporate Trustee, which acts as legal title holder of the Trust Property,
subject to the terms of this Declaration.
"Dealer Manager" refers to Sigma Financial Corporation, a Michigan
corporation, with its principal place of business at 4261 Park Road, Ann Arbor,
Michigan 48103.
"Declaration" refers to this Amended and Restated Declaration of Trust, as
amended from time to time.
"Delaware Act" refers to the Delaware Business Trust Act, as amended from
time to time (currently codified as title 12, chapter 38 of the Delaware Code).
"Exchange Offering" refers to the proposed offering of Units by the
Operating Partnership in exchange for property interests as contemplated in the
Prospectus.
"Escrow Date" refers to the later to occur of the dates on which the Trust
(i) accepts the subscription that results in the gross proceeds from the Initial
Offering exceeding $500,000, and (ii) deposits at least $500,000 in collected
funds in escrow under Section 1.6(b), provided, however, the Escrow Date shall
not be later than December 31, 1998.
"Exchange Act" refers to the federal Securities Exchange Act of 1934, as
amended.
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"First Mortgage" refers to a Mortgage which takes priority or precedence
over liens of Junior Mortgages on a particular property.
"First Mortgage Loan" means a Mortgage Loan secured or collateralized by a
First Mortgage.
"Independent Expert" refers to a person with no material current or prior
business or personal relationship with the Managing Shareholder, any Trustee or
any other member of the Board of the Trust who is engaged to substantial extent
in the business of rendering opinions regarding the value of assets of the type
to be held by the Trust.
"Independent Trustee" refers to any individual meeting certain
qualifications under Section 7.5(b) who becomes an Independent Trustee of the
Trust under the terms of this Declaration.
"Initial Offering" refers to the initial public offering and sale of up to
2,500,000 Common Shares by the Trust pursuant to the Prospectus.
"Junior Mortgage" refers to a Mortgage which (i) has the same priority or
precedence over charges or encumbrances upon real property as that required for
a First Mortgage except that it is subject to the priority of one or more
Mortgages and (ii) must be satisfied before such other charges or liens (other
than prior Mortgages) are entitled to participate in the proceeds of any sale.
"Junior Mortgage Loan" refers to a Mortgage Loan secured or collateralized
by a Junior Mortgage.
"Majority" - Unless otherwise specified herein, when used with respect to
any consent to be given or decision to be made or action to be taken by the
Shareholders or group of Shareholders entitled to vote on a particular matter, a
majority in interest of all the then current Shareholders or members of the
group entitled to vote.
"Managing Person" refers to any of the following: (a) Trust officers,
agents, or Affiliates, the Managing Shareholder, the Trustees, any other members
of the Board, Affiliates of the Managing Shareholder, a Trustee, or any other
member of the Board, and (b) any directors, officers or agents of any
organizations named in (a) above when acting for a Trustee, the Managing
Shareholder, any other member of the Board or any of their Affiliates on behalf
of the Trust.
"Managing Shareholder" refers to Baron Advisors and any substitute or
different Managing Shareholder as may subsequently be created under the terms of
this Declaration.
"Mortgage" refers to a mortgage, deed of trust or other security interest
in real property or in rights or interests in real property.
"Mortgage Loan" refers to a note, bond or other evidence of indebtedness or
obligation which is secured or collateralized by a Mortgage.
"Operating Partnership" refers to Baron Capital Properties, L.P., a
Delaware limited partnership which will conduct all the Trust's real estate
operations and hold all property interests acquired by the Trust. The Trust is
the general partner of the Operating Partnership and by virtue of the
acquisition of Units in the Operating Partnership will own an economic interest
therein.
"Original Investors" refers to Gregory K. McGrath and Robert S. Geiger, the
founders of the Trust and the Operating Partnership.
"Person" refers to any natural person, partnership, corporation,
association, trust, limited liability company or other legal entity.
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"Preferred Share" refers to a share of beneficial interest with such
preferences and rights (in relation to other Shares authorized and issued by the
Trust) as the Managing Shareholder may designate under Section 2.1(c) of this
Declaration for sale or issuance subsequent to completion of the Initial
Offering.
"Prospectus" refers to the Prospectus dated May 15, 1998, as supplemented
and amended from time to time, pursuant to which the Trust will offer the Common
Shares for sale to the public.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"Second Mortgage" means a Mortgage which (i) has the same priority or
precedence over charges or encumbrances upon real property as that required for
a First Mortgage except that it is subject to the priority of a First Mortgage
and (ii) must be satisfied before such other charges or encumbrances (other than
the First Mortgage) are entitled to participate in the proceeds of any sale.
"Second Mortgage Loan" means a Mortgage Loan secured or collateralized by a
Second Mortgage.
"Securities Act" refers to the federal Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder.
"Share" refers to a share of beneficial interest in the Trust which is
either a Common Share or a Preferred Share authorized for issuance and
designated as such by the Managing Shareholder in accordance with Section 2.1(c)
of this Declaration.
"Shareholder" refers to an owner of Shares (which will include the Managing
Shareholder to the extent it acquires Shares).
"Subscription Documents" refers to the form of subscription
documents which each prospective Shareholder must execute in order to subscribe
for Common Shares in the Initial Offering.
"Termination Date" refers to the date the Initial Offering terminates,
which date shall be December 31, 1998, or an earlier or later date determined by
the Trust in its discretion as follows:
(a) The Trust may designate any date prior to December 31, 1998 as the
Termination Date if the Escrow Date has occurred prior to such date;
(b) The Trust from time to time may designate any date after December 31,
1998, but no later than November 30, 2000 as the Termination Date if the Escrow
Date has occurred prior to the extension of the Termination Date; and
(c) If the Trust elects to withdraw the Initial Offering of Common Shares
under this Declaration, the Termination Date shall be the date of that election.
"Trust" refers to Baron Capital Trust, a Delaware business trust which is
the issuer of Shares of the Trust.
"Trustee" and "Trustees"- "Trustee" means a person serving as a Corporate
Trustee or an Independent Trustee of the Trust under this Declaration; the term
"Trustees" refers to the Corporate Trustee and the Independent Trustees
collectively.
"Trust Management Agreement" refers to the Trust Management Agreement dated
as of May 15, 1998 between the Trust and the Managing Shareholder under which
the Managing Shareholder will perform certain management, administrative and
investment advisory services for the Trust as described in the Prospectus.
"Trust Property" refers to all real and personal property owned or acquired
by the Corporate Trustee as
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part of the trust estate under this Declaration, which is expected to include
but not be limited to (i) the land, buildings and improvements comprising one or
more existing residential apartment properties in which the Trust may make an
equity investment, and (ii) its rights in connection with Mortgage Loans it may
acquire or make which are secured by Mortgages on the land, buildings and
improvements comprising residential apartment properties.
"Units" refers to units of limited partnership interest in the Operating
Partnership.
IN WITNESS WHEREOF, the undersigned have signed this Declaration as of the
date first above written.
BARON CAPITAL PROPERTIES, INC.,
Grantor and Corporate Trustee
By: /s/ Gregory K. McGrath
------------------------------
Gregory K. McGrath, President
BARON ADVISORS, INC.,
Managing Shareholder
By: /s/ Gregory K. McGrath
------------------------------
Gregory K. McGrath, President
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EXHIBIT A
Number of Shares
Shareholder Name Address Owned and Class
- ---------------- ------- ---------------
45
EXHIBIT 99.1
CONSENT OF ELROY D. MIEDEMA,
CERTIFIED PUBLIC ACCOUNTANT
<PAGE>
Exhibit 99.1
Consent of Independent Auditor
The Board of Baron Capital Trust:
I consent to the use of all my reports in respect of 16 residential
apartment properties and a combined report relating to 14 of such properties
included in this Form S-4 Registration Statement of Baron Capital Properties,
L.P. and incorporated herein by reference and to the reference to my firm and
such reports under the heading "Experts" and "Selected Financial Data" in the
prospectus.
/s/ Elroy D. Miedema
---------------------------
Elroy D. Miedema
Certified Public Accountant
Miami, Florida
September 18, 1998
EXHIBIT 99.2
CONSENT OF RACHLIN COHEN & HOLTZ,
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-4 of our report dated March 20, 1998 relating
to the financial statements of Baron Capital Trust appearing in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
RACHLIN COHEN & HOLTZ
Miami, Florida
September 18, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-4 of our report dated March 20, 1998 relating
to the financial statements of Baron Capital Properties, L.P. appearing in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
RACHLIN COHEN & HOLTZ
Miami, Florida
September 18, 1998
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-4 of our report dated March 26, 1998 relating
to the financial statements of Baron Advisors, Inc. appearing in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
RACHLIN COHEN & HOLTZ
Miami, Florida
September 18, 1998
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
The following table includes information concerning real property in which 41
prior programs sponsored by Affiliates of the Managing Shareholder of the Trust,
Baron Advisors, Inc., have acquired direct or indirect equity or debt interests
in the most recent three years. The prior programs have investment objectives
similar to those of the Trust in that the programs provided financing in respect
of residential properties (and in one case, a retail shopping center) for
current income and capital appreciation (other than the mortgage funds).
Florida Income Advantage Fund I, Ltd.
Name, location, type of Phase III
property: Forest Glen Apartments
Daytona Beach, Florida
Residential Apartment Community
Number of units and total 26 Units
square feet of units: 30,654 total square feet
Date investment made: 2/94
Principal amount of mortgage
financing existing at date of
investment: $625,000
Contract Investment Price (1): $846,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $846,000
Realty Opportunity Income Fund VIII, Ltd.
Name, location, type of Phase II
property: Forest Glen Apartments
Daytona Beach, Florida
Residential Apartment Community
Number of units and total 30 Units
square feet of units: 38,802 total square feet
Date investment made: 3/94
Principal amount of mortgage
financing existing at date of
investment: $784,000
Contract Investment Price (1): $849,600
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $849,600
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-1
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Florida Income Appreciation Fund I, Ltd.
Name, location, type of Phase IV
property: Forest Glen Apartments
Daytona Beach, Florida
Residential Apartment Community
Number of units and total 8 Units
square feet of units: 9,800 total square feet
Date investment made: 4/94
Principal amount of mortgage
financing existing at date of
investment: $173,000
Contract Investment Price (1): $184,500
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $184,500
Florida Capital Income Fund, Ltd.
Name, location, type of
property: Eagle Lake Apartments
Port Orange, Florida
Residential Apartment Community
Number of units and total 77 units
square feet of units: 45,504 total square feet
Date investment made: 11/94
Principal amount of mortgage
financing existing at date of
investment: $1,443,000
Contract Investment Price (1): $656,300
Cash Reserve: $0
Acquisition Fee: $60,000
Total Investment Cost: $716,300
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-2
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Tampa Capital Income Fund, Ltd.
Name, location, type of
property: Lakewood Apartments
Brandon, Florida
Residential Apartment Community
Number of units and total 83 Units
square feet of units: 44,928 total square feet
Date investment made: 12/94
Principal amount of mortgage
financing existing at date of
investment: $1,500,000
Contract Investment Price (1): $589,500
Cash Reserve: $165,500
Acquisition Fee: $180,000
Total Investment Cost: $935,000
Florida Capital Income Fund II, Ltd.
Name, location, type of Phase I
property: Forest Glen Apartments
Daytona Beach, Florida
Residential Apartment Community
Number of units and total 52 Units
square feet of units: 62,696 total square feet
Date investment made: 1/95
Principal amount of mortgage
financing existing at date of
investment: $1,343,000
Contract Investment Price (1): $548,000
Cash Reserve: $199,000
Acquisition Fee: $71,000
Total Investment Cost: $818,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-3
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Florida Opportunity Income Partners, Ltd.
Name, location, type of
property: Camellia Court Apartments
Daytona Beach, Florida
Residential Apartment Community
Number of units and total 60 Units
square feet of units: 34,848 total square feet
Date investment made: 3/95
Principal amount of mortgage
financing existing at date of
investment: $900,000
Contract Investment Price (1): $543,000
Cash Reserve: $143,000
Acquisition Fee: $24,000
Total Investment Cost: $710,000
Florida Capital Income Fund III, Ltd.
Name, location, type of
property: Bridgepoint Apartments
Jacksonville, Florida
Residential Apartment Community
Number of units and total 48 Units
square feet of units: 27,360 total square feet
Date investment made: 7/95
Principal amount of mortgage
financing existing at date of
investment: $700,000
Contract Investment Price (1): $549,000
Cash Reserve: $121,000
Acquisition Fee: $40,000
Total Investment Cost: $710,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-4
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Florida Tax Credit Fund, Ltd.
Name, location, type of
property: Spring Glade Apartments
Tampa, Florida
Residential Apartment Community
Number of units and total 78 Units
square feet of units: 42,912 total square feet
Date investment made: 6/95
Principal amount of mortgage
financing existing at date of
investment: $564,000
Contract Investment Price (1): $546,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $546,000
Baron First Time Homebuyer Mortgage Fund, Ltd.
Name, location, type of
property: Pleasant Grove
Louisville, Kentucky
Residential Community
Number of units and total 39 Units
square feet of units: 54,600 total square feet
Date investment made: 1/96
Principal amount of mortgage
financing existing at date of
investment: $400,000
Contract Investment Price (1): $450,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $450,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-5
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Florida Capital Income Fund IV, Ltd.
Name, location, type of
property: Glen Lake Apartments
St. Petersburg, Florida
Residential Apartment Community
Number of units and total 144 Units
square feet of units: 79,200 total square feet
Date investment made: 5/94
Principal amount of mortgage
financing existing at date of
investment: $2,812,500
Contract Investment Price (1): $1,212,800
Cash Reserve: $305,200
Acquisition Fee: $100,100
Total Investment Cost: $1,618,100
GSU Stadium Student Apartments, Ltd.
Name, location, type of
property: Stadium Club Apartments
Statesboro, Georgia
Student Residential Apartments
Number of units and total 60 Units
square feet of units: 51,624 total square feet
Date investment made: 11/95
Principal amount of mortgage
financing existing at date of
investment: $1,372,000
Contract Investment Price (1): $690,000
Cash Reserve: $100,000
Acquisition Fee: $100,000
Total Investment Cost: $890,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-6
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Brevard Mortgage Program, Ltd.
Name, location, type of
property: Meadowdale Apartments
Melbourne, Florida
Residential Apartment Community
Number of units and total 64 Units
square feet of units: 39,168 total square feet
Date investment made: 12/95
Principal amount of mortgage
financing existing at date of
investment: $900,000
Contract Investment Price (1): $450,000
Cash Reserve: $57,500
Acquisition Fee: $0
Total Investment Cost: $507,500
Baron First Time Homebuyer Mortgage Fund II, Ltd.
Name, location, type of
property: East Bay Village
Louisville, Kentucky
Residential Community
Number of units and total 54 Units
square feet of units: 75,600 total square feet
Date investment made: 2/96
Principal amount of mortgage
financing existing at date of
investment: $450,000
Contract Investment Price (1): $455,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $455,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-7
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Clearwater First Time Homebuyer Program, Ltd.
Name, location, type of
property: Palm Bay Condominiums
Seminole, Florida
Residential Condominium
Community
Number of units and total 195 Units
square feet of units: 165,750 total square feet
Date investment made: 3/96
Principal amount of mortgage
financing existing at date of
investment: $4,900,000
Contract Investment Price (1): $672,500
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $672,500
Baron First Time Homebuyer Mortgage Fund III, Ltd.
Name, location, type of
property: Independence Condominiums
Independence, Kentucky
Residential Condominium
Community
Number of units and total 84 Units
square feet of units: 100,800 total square feet
Date investment made: 5/96
Principal amount of mortgage
financing existing at date of
investment: $5,600,000
Contract Investment Price (1): $450,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $450,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-8
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron First Time Homebuyer Mortgage Fund V, Ltd.
Name, location, type of
property: Independence Condominiums
Independence, Kentucky
Residential Condominium
Community
Number of units and total 84 Units
square feet of units: 100,800 total square feet
Date investment made: 1/96
Principal amount of mortgage
financing existing at date of
investment: $5,600,000
Contract Investment Price (1): $425,000
Cash Reserve: $25,000
Acquisition Fee: $0
Total Investment Cost: $450,000
Baron First Time Homebuyer Mortgage Fund IV, Ltd.
Name, location, type of
property: Villas at Meadowview
Louisville, Kentucky
Residential Community
Number of units and total 84 Units
square feet of units: 88,200 total square feet
Date investment made: 6/96
Principal amount of mortgage
financing existing at date of
investment: $375,000
Contract Investment Price (1): $430,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $430,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-9
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Florida Income Growth Fund V, Ltd.
Name, location, type of
property: Blossom Corners Apartments
Orlando, Florida
Residential Apartment
Community
Number of units and total 70 Units
square feet of units: 37,728 total square feet
Date investment made: 4/96
Principal amount of mortgage
financing existing at date of
investment: $1,050,000
Contract Investment Price (1): $825,500
Cash Reserve: $142,000
Acquisition Fee: $57,500
Total Investment Cost: $1,025,000
Lamplight Court of Bellefontaine Apartments, Ltd.
Name, location, type of
property: Lamplight Court Apartments
Bellefontaine, Ohio
Residential Apartment Community
Number of units and total 80 Units
square feet of units: 46,944 total square feet
Date investment made: 7/96
Principal amount of mortgage
financing existing at date of
investment: $1,400,000
Contract Investment Price (1): $580,000
Cash Reserve: $0
Acquisition Fee: $40,000
Total Investment Cost: $620,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-10
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Strategic Vulture Fund I, Ltd.
Name, location, type of
property: Curiosity Creek Apartments
Tampa, Florida
Residential Apartment Community
Number of units and total 81 Units
square feet of units: 44,064 total square feet
Date investment made: 10/96
Principal amount of mortgage
financing existing at date of
investment: $1,200,000
Contract Investment Price (1): $601,000
Cash Reserve: $90,000
Acquisition Fee: $90,000
Total Investment Cost: $781,000
Baron Strategic Investment Fund, Ltd.
Name, location, type of
property: Blossom Corners II Apartments
Orlando, Florida
Residential Apartment Community
Number of units and total 68 Units
square feet of units: 36,576 total square feet
Date investment made: 10/96
Principal amount of mortgage
financing existing at date of
investment: $1,000,000
Contract Investment Price (1): $796,000
Cash Reserve: $120,000
Acquisition Fee: $144,000
Total Investment Cost: $1,060,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-11
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Strategic Investment Fund II, Ltd.
Name, location, type of
property: Gaslight Apartments
Anderson, Indiana
Residential Apartment Community
Number of units and total 72 Units
square feet of units: 42,720 total square feet
Date investment made: 11/96
Principal amount of mortgage
financing existing at date of
investment: $1,254,307
Contract Investment Price (1): $524,000
Cash Reserve: $80,000
Acquisition Fee: $96,000
Total Investment Cost: $700,000
Baron Strategic Investment Fund VI, Ltd.
Name, location, type of
property: Pine View Apartments
Orlando, Florida
Residential Apartment Community
Number of units and total 91 Units
square feet of units: Approximately 50,000 total
square feet
Date investment made: 10/97
Principal amount of mortgage
financing existing at date of
investment: $1,620,000
Contract Investment Price (1): $806,000
Cash Reserve: $120,000
Acquisition Fee: $144,000
Total Investment Cost: $1,070,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-12
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Development Fund IX, Ltd.
Name, location, type of
property: Glen Oaks
Louisville, Kentucky
Single Family Homes
Number of units and total 320 Units
square feet of units: Development Only
Date investment made: 1/97
Principal amount of mortgage
financing existing at date of
investment: $0
Contract Investment Price (1): $678,000
Cash Reserve: $120,000
Acquisition Fee: $120,000
Total Investment Cost: $918,000
Baron Income Property Mortgage Fund VI, Ltd.
Name, location, type of
property: Brentwood at Independence
Apartments Phase I
Independence, Kentucky
Residential Apartment Community
Number of units and total 150 Units
square feet of units: 136,500 total square feet
Date investment made: 8/96
Principal amount of mortgage
financing existing at date of
investment: $6,900,000
Contract Investment Price (1): $645,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $645,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-13
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Mortgage Development Fund VII, Ltd.
Name, location, type of
property: Brentwood at Alexandria
Apartments Phase I
Alexandria, Kentucky
Residential Apartment Community
Number of units and total 84 Units
square feet of units: 76,440 total square feet
Date investment made: 12/96
Principal amount of mortgage
financing existing at date of
investment: $3,875,000
Contract Investment Price (1): $585,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $585,000
Baron Mortgage Development Fund X, Ltd.
Name, location, type of
property: Townhomes at Aspen Glen
Cincinnati, Ohio
Residential Condominium
Community
Number of units and total 226 Units
square feet of units: 305,100 total square feet
Date investment made: 12/96
Principal amount of mortgage
financing existing at date of
investment: $450,000
Contract Investment Price (1): $678,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $678,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-14
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Mortgaqe Development Fund XI, Ltd.
Name, location, type of
property: The Villas at Lake Sycamore
Cincinnati, Ohio
Residential Condominium
Community
Number of units and total 168 Units
square feet of units: 226,800 total square feet
Date investment made: 4/97
Principal amount of mortgage
financing existing at date of
investment: $900,000
Contract Investment Price (1): $678,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $678,000
Baron Mortgage Development Fund XVIII, L.P.
Name, location, type of
property: Brentwood at Independence
Apartments Phase II
Independence, Kentucky
Residential Apartment Community
Number of units and total 150 Units
square feet of units: 136,500 total square feet
Date investment made: 7/97
Principal amount of mortgage
financing existing at date of
investment: $6,900,000
Contract Investment Price (1): $668,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $668,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-15
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Strategic Investment Fund V, Ltd.
<TABLE>
<CAPTION>
Name, location, type of
property: Sunrise I Apartments Curiosity Creek Apartments
Titusville, Florida Tampa, Florida
Residential Apartment Residential Apartment
Community Community
<S> <C> <C>
Number of units and total 60 Units 81 Units
square feet of units: 36,288 total square feet 43,776 total square feet
Date investment made: 1/97 1/97
Principal amount of mortgage
financing existing at date of
investment: $1,079,582 $1,300,000
Contract Investment Price (1): $488,000 $218,100
Cash Reserve: $54,000 $66,000
Acquisition Fee: $54,000 $66,000
Total Investment Cost: $596,000 $350,100
<CAPTION>
Baron Strategic Investment Fund VII, Ltd.
Name, location, type of
property: Crystal Court I Apartments Longwood II Apartments Sunrise II Apartments
Lakeland, Florida Cocoa Beach, Florida Titusville, Florida
Residential Apartment Residential Apartment Residential Apartment
Community Community Community
<S> <C> <C> <C>
Number of units and total 72 Units 36 Units 37 Units
square feet of units: 43,776 total square feet 22,176 total square feet 23,040 total square feet
Date investment made: 4/97 4/97 4/97
Principal amount of mortgage
financing existing at date of
investment: $1,216,741 $707,784 $637,654
Contract Investment Price (1): $42,654 $314,500 $392,522
Cash Reserve: $89,300 $53,200 $47,500
Acquisition Fee: $107,160 $63,840 $57,000
Total Investment Cost: $239,114 $431,540 $497,022
</TABLE>
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-16
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Mortgage Development Fund XV, Ltd.
Name, location, type of
property: Brentwood at Alexandria
Alexandria, Kentucky
Residential Apartment Community
Number of units and total 84
square feet of units: 81,648 total square feet
Date investment made: 7/97
Principal amount of mortgage
financing existing at date of
investment: $3,875,000
Contract Investment Price (1): $575,000
Cash Reserve: $0
Acquisition Fee: $20,000
Total Investment Cost: $595,000
Baron Strategic Investment Fund X, Ltd.
<TABLE>
<CAPTION>
Name, location, type of
property: Heatherwood Pine View Crystal Court I
Apartments II Apartments Apartments
Kissimmee, Florida Orlando, Florida Lakeland, Florida
Residential Apt. Residential Apt. Residential Apt.
Community Community Community
<S> <C> <C> <C>
Number of units and total 41 Units 91 Units 72 Units
square feet of units: 22,176 Sq. Feet 46,656 Sq. Feet 43,776 Sq. Feet
Date investment made: 10/97 10/97 10/97
Principal amount of mortgage
financing existing at date of
investment: $710,000 $1,620,000 $1,222,000
Contract Investment Price (1): $174,000 $263,000 $359,000
Cash Reserve: $26,200 $39,650 $54,100
Acquisition Fee: $31,477 $45,578 $64,944
Total Investment Cost: $231,677 $348,228 $478,044
</TABLE>
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-17
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Mortgage Development Fund XIV, Ltd.
Name, location, type of
property: The Shoppes of Burlington
Burlington, Kentucky
Retail Shopping Center
Number of units and total
square feet of units: 97,000 square feet
Date investment made: 3/98
Principal amount of mortgage
financing existing at date of
investment: $3,000,000
Contract Investment Price (1): $840,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $840,000
Baron Strategic Investment Fund IV, Ltd.
Name, location, type of
property: Country Square Phase I
Tampa, Florida
Residential Apartment Community
Number of units and total 73 units
square feet of units: 40,150 square feet
Date investment made: 1/97
Principal amount of mortgage
financing existing at date of
investment: $1,600,000
Contract Investment Price (1): $690,000
Cash Reserve: $100,000
Acquisition Fee: $100,000
Total Investment Cost: $890,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-18
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Baron Strategic Investment Fund VIII, Ltd.
<TABLE>
<CAPTION>
Name, location, type of
property: Longwood Heatherwood The Shoppes
Apartments I Apartments II of Burlington
Cocoa, Florida Kissimmee, Florida Burlington, Kentucky
Residental Residental Retail
Apartment Apartment (48%) Shopping
Community Community Center
<S> <C> <C> <C>
Number of units and total 58 Units 41 Units
square feet of units: 35,712 sq. feet 22,176 sq. feet 97,000 sq. feet
Date investment made: 10/97 10/97 7/97
Principal amount of mortgage
financing existing at date of
investment: $1,037,000 $710,000 $3,000,000
Contract Investment Price (1): $525,150 $160,500 $98,000
Cash Reserve: $80,000 $24,000 $15,000
Acquisition Fee: $96,500 $29,500 $18,000
Total Investment Cost: $701,650 $214,000 $131,000
</TABLE>
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-19
<PAGE>
Note: Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
<TABLE>
<CAPTION>
Florida Tax
Credit Fund II, Ltd.
Name, location, type of
property: Bear Creek Apartments
Bartow, Florida
Residential Apartment
Community
<S> <C>
Number of units and total 47 Units
square feet of units: 34,560 total square feet
Date investment made: 8/97
Principal amount of mortgage
financing existing at date of
investment: $427,346
Contract Investment Price (1): $259,000
Cash Reserve: $0
Acquisition Fee: $0
Total Investment Cost: $259,000
<CAPTION>
Baron Strategic
Investment Fund IX, Ltd.
Name, location, type of
property: Crystal Court I Apartments
Lakeland, Florida
Residential Apartment
Community
<S> <C>
Number of units and total 72 Units
square feet of units: 43,776 total square feet
Date investment made: 12/97
Principal amount of mortgage
financing existing at date of
investment: $1,216,741
Contract Investment Price (1): $289,000
Cash Reserve: $120,000
Acquisition Fee: $120,000
Total Investment Cost: $529,000
</TABLE>
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-20
<PAGE>
Table VI: ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
Central Florida Income Appreciation Fund, Ltd.
Name, location, type of
property: Grove Hamlet Apartments
Deland, Florida
Residential Apartment Community
Number of units and total
square feet of units: 56 units
45,504 square feet
Date investment made: 6/95
Principal amount of mortgage
financing existing at date of
investment: $1,400,000
Contract Investment Price (1): $725,000
Cash Reserve: $105,000
Acquisition Fee: $28,000
Total Investment Cost: $858,000
Midwest Income Growth Fund VI, Ltd.
Name, location, type of
property: Brookwood Way Apartments
Mansfield, Ohio
Residential Apartment Community
Number of units and total 66 units
square feet of units: 38,016 total square feet
Date investment made: 8/96
Principal amount of mortgage
financing existing at date of
investment: $1,075,000
Contract Investment Price (1): $219,000
Cash Reserve: $90,000
Acquisition Fee: $15,000
Total Investment Cost: $304,000
- --------------------------------------------------------------------------------
Footnote:
(1) Program applied net investment proceeds to acquire record title to
property, to provide or acquire subordinated debt secured by property or to
redeem limited partnership interests of prior limited partners in limited
partnership which owns record title to property or a mortgage debt interest
secured by property. For the specific type of investment made, see Table I
above and the footnotes thereto.
VI-21
EXHIBIT 99.4
CONSENT OF CONSORTIUM APPRAISAL, INC.
APPRAISAL FIRM
<PAGE>
Exhibit 99.4
Consent of Appraisal Firm
To the Board of Baron Capital Trust:
Each of the undersigned consent to the use of its name in this Form S-4
Registration Statement of Baron Capital Properties, L.P. and the Prospectus
which constitutes a portion thereof. This consent is based upon the language as
attached hereto and is subject to verification of appraised values and the cost
of deferred maintenance items referred therein.
Consortium Appraisal, Inc.
By: /s/ Philip F. Wood
--------------------------------
Name: Philip F. Wood
Title: President
Consortium Appraisal and Consulting
Services, Inc.
By: /s/ Philip F. Wood
--------------------------------
Name: Philip F. Wood
Title: President
Winter Park, Florida
August 27, 1998
EXHIBIT 99.5
CONSENT OF RICHARDS APPRAISAL SERVICE, INC.
<PAGE>
Exhibit 99.5
Consent of Appraisal Firm
To the Board of Baron Capital Trust:
The undersigned consents to the use of its name in this Form S-4
Registration Statement of Baron Capital Properties, L.P. and the Prospectus
which constitutes a portion thereof.
Richards Appraisal Service, Inc.
By: /s/ Sarah Richards
-----------------------------
Name: Sarah Richards
Title: Appraiser
Melbourne, Florida
August 27, 1998
THE APPRAISAL OF
BLOSSOM CORNERS I APARTMENTS
LOCATED AT 2001 RAPIER DAIRY ROAD,
IN THE CITY OF ORLANDO,
ORANGE COUNTY, FLORIDA 32822
PREPARED FOR
BARON CAPITAL XI, INC.
DATE OF VALUATION
JANUARY 5, 1998
DATE OF REPORT
JANUARY 14, 1998
<PAGE>
January 14, 1998
Baron Capital XI, Inc.
7826 Cooper Road
Cincinnati, OH 45242
Gentlemen:
At your request, our firm has inspected and appraised the Blossom Corners I
apartment community which contains 70 apartment units. The subject property is
located at 2001 Raper Dairy Road, Orlando, Orange County, Florida.
The objective of this appraisal was to estimate the market value of the fee
simple interest in the real estate, including chattels, under market conditions
prevailing on January 5, 1998. The function of this appraisal report was to
provide the client with an unbiased opinion of value that can be of assistance
to the client when making business decisions pertaining to the acquisition of
the subject property. This appraisal report is one of the many documents of
information that can be considered by the client in making an informed decision
regarding the subject property.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1980. The property's management reports a
current occupancy of 100.0%. The Appraiser inspected the exterior of the
apartment community, however, access to the interior of the units was not
available due to the high occupancy rate of the property. Interior
photographs of the subject units contained herein were taken during a July
2, 1996 inspection of the subject property.
2. A current certified survey of the subject project verifying the site
dimensions, area calculations, access, building locations, building area
calculations, unit mix and the legal description as set out herein.
3. The Appraiser did not review sub-soil, structural, mechanical or other
engineering reports depicting the current condition of the property. It is
recommended that such reports be obtained. The Appraiser's visual
inspections of the subject property indicates that it is in good overall
condition. Over the 1995 year, the subject property reportedly received
significant repairs and renovations. The most significant of these major
repairs and renovations have been summarized as follows:
A. The subject's roofs were replaced.
B. The building exteriors were painted and damaged and deteriorated
siding was repaired and replaced. In addition, those patio fences
which had deteriorated had been replaced.
<PAGE>
Baron Capital XI, Inc.
January 14, 1998
Page 2
C. The parking lot was repaired, re-sealed and re-striped.
D. Carpets and vinyl flooring were replaced in over 25 units. Eight
refrigerators, seven ovens and 12 A/C units were also been replaced.
Additional replacement of carpet, vinyl tile and appliances is ongoing
as units turn.
The Appraiser's inspection of the subject property revealed it to be in
good overall condition. However, minor deferred maintenance items including
1) deteriorated siding; 2) deteriorated trim; 3) patio fences in fair
condition; 4) deteriorated fascia; and 5) peeling and faded paint were
noted throughout the property. In addition, the property's irrigation
system was not functioning. Deferred maintenance has been estimated at
approximately $12,000.
4. The Appraiser has been provided with a Level I Environmental Assessment
relating to the subject site and improvements which was prepared by Akdoruk
and Associates, Inc. on September 23, 1992. This environmental assessment
reported no on-site or off-site concerns or contamination relating to the
subject property. This appraisal has been made contingent upon the absence
of hazardous contamination within the subject site, and upon the absence of
hazardous building materials being incorporated into the subject building
improvements.
5. This appraisal has been made anticipating the utilization of one of the
subject's studio units as an on-site rental and management office.
In my opinion the subject property had an estimated "as-is" market value, under
the foregoing contingencies, of:
TWO MILLION ONE HUNDRED NINETY-FIVE
THOUSAND DOLLARS
($2,195,000)
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conclusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or event resulting from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions, in value that favors the cause
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics
<PAGE>
Baron Capital XI, Inc.
January 14, 1998
Page 3
and the Standards of Professional Practice of The Appraisal Institute, The
Uniform Standards of Professional Appraisal Practice, and the requirements of
the state of Florida for state certified Appraisers. The use of this report is
subject to the requirements of The Appraisal Institute relating to review by its
duly authorized representatives.
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted and completed by
Charles B. Byrd. The report was reviewed by Philip F. Wood, MAI, and this review
process consisted of: "on-site" physical inspections of the comparable sales and
rentals; an on-site physical inspection of the subject property, the area, and
the subject neighborhood; and the reading and examination of the completed
report.
As of the date of this report, Philip F. Wood has completed the requirements
under the voluntary continuing education program of The Appraisal Institute. No
one provided significant professional assistance to the persons signing this
report. We do not authorize the out-of-context quoting from or partial
reprinting of this appraisal report. Further, neither all nor any part of this
appraisal report shall be disseminated to the general public by the use of media
for public communication without the prior written consent of the Appraiser(s)
signing this appraisal report.
Please refer to the attached, complete self-contained appraisal report for
documentation of this value estimate. If any additional information is needed,
please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part II, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
Respectfully submitted,
CONSORTIUM APPRAISAL, INC. CONSORTIUM APPRAISAL, INC.
Reviewed By:
Philip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida License No. 0000777 Florida Licence No. 0000908
96-065
<PAGE>
CONSORTIUM
THE APPRAISAL OF
BRIDGEPOINT II APARTMENTS
LOCATED AT 1500 MONUMENT ROAD,
JACKSONVILLE, DUVAL COUNTY,
FLORIDA
PREPARED FOR
BARON CAPITAL VII, INC.
DATE OF VALUATION
FEBRUARY 5, 1998
DATE OF REPORT
MARCH 24, 1998
<PAGE>
CONSORTIUM
March 24, 1998
Baron Capital VII, Inc.
7826 Cooper Road
Cincinnati, OH 45242
Gentlemen:
At your request, our firm has inspected and appraised the Bridgepoint II
apartment community which contains 48 rental apartment units. The subject
property is located at 1500 Monument Road, Jacksonville, Duval County, Florida.
The purpose of this appraisal was to estimate the market value of the fee simple
interest in the real estate, including chattels, under market conditions
prevailing on February 5, 1998. The function of this appraisal report was to
provide the client with an unbiased opinion of value that can be of assistance
to the client when making business decisions pertaining to the acquisition of
the subject property. This appraisal report is one of the many documents of
information that can be considered by the client in making an informed decision
regarding the subject property. The value estimate for the subject property
contemplates that sewer, water, and garbage expenses will be directly paid by
the individual tenants.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1988. The property's management reports a
current occupancy of 93.8%. The exterior of the apartment community and the
interiors of the vacant units were inspected. Access to all units was not
available due to the occupancy of the property.
2. A current certified survey of the subject project verifying the site
dimensions, area calculations, access, building locations, building area
calculations, unit mix and the legal description as set out herein.
3. The Appraiser did not review sub-soil, structural, mechanical or other
engineering reports depicting the current condition of the property. It is
recommended that such reports be obtained.
The Appraiser's inspection of the subject property revealed it to be in good
overall condition. However, minor deferred maintenance items including 1)
deteriorated siding; 2) deteriorated trim; 3) some deteriorated patio fences;
and 4) deteriorated fascia were noted throughout the property. In addition, it
appeared that a portion of one of the buildings could be infested with termites.
Deferred maintenance has been estimated at $6,000.
Mailing Address: Post Office Drawer 2129, Winter Park, Florida 32790
(407) 647-0800Fax # (407) 645-2301
<PAGE>
Baron Capital VII, Inc.
March 24, 1998
Page 2
4. The Appraiser has not been provided with environmental reports relating to
the subject site or improvements. This appraisal has been made contingent
upon the existence of no hazardous contamination of the subject site and
upon the absence of hazardous building materials being incorporated into
the subject building improvements. Environmental reports relating to the
subject site and improvements were not available and should be obtained.
By virtue of the Appraiser's inspection, investigation and analyses, it was
Appraiser's opinion that the estimated "As Is" market value of the fee simple
interest in the subject Bridgepoint Phase II Apartments, as described herein, as
of February 5, 1998, equaled:
ONE MILLION SIX HUNDRED TEN THOUSAND DOLLARS
($1,610,000)
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conclusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or event resulting, from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions in value that favors the cause
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and the Standards of
Professional Practice of The Appraisal Institute, The Uniform Standards of
Professional Appraisal Practice, and the requirements of the state of Florida
for state-certified Appraisers. The use of this report is subject to the
requirements of The Appraisal Institute relating to review by its duly
authorized representatives.
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted and completed by
Charles B. Byrd. The report was reviewed by Philip F. Wood, MAI, and this review
process consisted of "on-site" physical inspections of the comparable sales and
rentals; an on-site physical inspection of the subject property, the area, and
the subject neighborhood; and the reading and examination of the completed
report.
As of the date of this report, Philip F. Wood has completed the requirements of
the continuing education program of the Appraisal Institute. No one provided
significant professional assistance to the persons signing this report. We do
not authorize the out-of-context quoting from or partial reprinting of this
appraisal report. Further, neither all nor any part of this appraisal report
shall be disseminated to the general public by the use of media for public
communication without the prior
<PAGE>
Baron Capital VII, Inc.
March 24, 1998
Page 3
written consent of the Appraiser(s) signing this appraisal report.
Please refer to the attached, complete self-contained appraisal report for
documentation of this value estimate. If any additional information is needed,
please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part II, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
Respectfully submitted,
CONSORTIUM APPRAISAL
Phillip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida License No. 0000777 Florida Licence No. 0000908
98-017
<PAGE>
August 24, 1998
Baron Capital III, Inc.
7826 Cooper Road
Cincinnati, OH 45242
Dear Mr. McGrath:
At your request, our firm has inspected and appraised the existing Camellia
Court apartment community which contains 60 rental apartment units, a laundry
facility, and a manger's office. The subject property is located at 1401 S.
Clyde Morris Boulevard, in the city of Daytona Beach, Volusia County, Florida
32114.
The objective of this appraisal was to estimate the market value of the fee
simple interest in the subject real estate, including chattels, under market
conditions prevailing on August 17, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1977. The property reports a current
occupancy of 98.3%. The Appraiser inspected the exterior of the apartment
community and the interior of the one vacant unit. Access to most of the
units was not available due to the occupancy rate the property.
2. A current certified survey of the subject project verifying the site
dimensions, area calculations, access, building locations, building area
calculations, unit mix and the legal description as set out herein.
3. The Appraiser did not review sub-soil structural, mechanical or other
engineering reports depicting the current condition of the subject
property. It is recommended that such reports be obtained.
4. The Appraiser has not been provided with environmental reports relating to
the subject site or improvements. This appraisal has been made contingent
upon the existence of no hazardous contamination of the subject site and
upon the absence of hazardous building materials being incorporated into
the subject building improvements. Environmental reports relating to the
subject site and improvements were not available and should be obtained.
<PAGE>
Baron Capital III, Inc.
August 24, 1998
Page 2
5. The Appraiser's inspection of the subject property indicates that it is in
good overall condition, reflecting only minor items of deferred
maintenance. The most significant items of deferred maintenance noted
during the Appraiser's inspection of the subject property included 10
moderate amounts of deteriorated siding which should be repaired 20
deteriorated door frames and trim which should be repaired 30 a small
number of patio fences that require repair and 40 some areas of
deteriorated fascia and building trim that should be repaired. The cost to
repair these items of deferred maintenance has been estimated at $3,000.
This appraisal is subject to: a) the building components on and within the
subject buildings being structurally sound and in good physical condition,
excepting those deteriorated items so noted in this report; and b) the
verification of the curable physical deterioration estimates set out herein by a
qualified building contractor and is subject to revision based upon the findings
of the contractor.
By virtue of the Appraiser's inspection, investigation and analyses, it was the
opinion of the Appraiser that the estimated market value of the "as-is" fee
simple interest in the subject Camellia Court Apartments, based upon market
conditions prevailing on August 17, 1998, equaled:
ONE MILLION EIGHT HUNDRED THIRTY THOUSAND DOLLARS
($1,830,000)
At the request of the client, an estimate of the market value of the subject
property "as-if" the items of deferred maintenance were cured has been made.
This value estimate was calculated by adding the previously estimated costs to
cure the deferred maintenance to the "as-is" market value estimate as reported
above. The "as-complete" value of the subject property, based upon market
conditions existing on August 17, 1998, and subject to the limiting conditions
and contingencies set out herein, was:
ONE MILLION EIGHT HUNDRED THIRTY THREE THOUSAND DOLLARS
($1,833,000.00)
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conlcusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or even resulting from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions in value that favors the cause
<PAGE>
Baron Capital III, Inc.
August 24, 1998
Page 3
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and the Standards of
Professional Practice of The appraisal Institute, the Uniform Standards of
Professional Appraisal Practice, and the requirements of State of Florida for
state-certified Appraisers. The use of this report is subject to the
requirements of The Appraisal Institute relating to review by its duly
authorized representatives.
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted completed by Charles
B. Byrd. The report was reviewed by Philip F. Wood, MAI, and this review process
consisted of "on-site" physical inspections of the comparable sales and rentals;
an on-site physical inspection of the subject property, the area, and the
subject neighborhood; and the reading and examination of the completed report.
As of the date of this report, Philip F. Wood has completed the requirements of
the continuing education program of the Appraisal Institute. No one provided
significant professional assistance to the persons signed this report. Further,
neither all nor any part of this appraisal report shall be disseminated to the
general public by the use of media for public communication without the prior
written consent of the Appraiser(s) signing this appraisal report.
Please refer to the attached complete, self-contained appraisal report for
documentation of this value estimate. If any additional information is needed,
please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part II, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
<PAGE>
Baron Capital III, Inc.
August 24, 1998
Page 4
Respectfully submitted,
CONSORTIUM APPRAISAL, INC. CONSORTIUM APPRAISAL, INC.
Reviewed By:
Philip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida License No. 0000777 Florida License No. 0000908
98-057
<PAGE>
CONSORTIUM
THE APPRAISAL OF
EAGLE LAKE APARTMENTS
LOCATED AT 1025 EAGLE LAKE TRAIL, IN
PORT ORANGE, VOLUSIA COUNTY,
FLORIDA
PREPARED FOR
BARON CAPITAL II, INC.
DATE OF VALUATION
JANUARY 9, 1998
DATE OF REPORT
JANUARY 16, 1998
<PAGE>
CONSORTIUM
January 16, 1998
Baron Capital II, Inc.
7826 Cooper Road
Cincinnati, OH 45242
Gentlemen:
At your request, our firm has inspected and appraised the Eagle Lake apartment
community which contains 77 rental apartment units. The subject property is
located at 1025 Eagle Lake Trail, Port Orange, Volusia County, Florida, 32119.
The purpose of this appraisal was to estimate the market value of the fee simple
interest in the real estate, including chattels, under market conditions
prevailing on January 9, 1998. The function of this appraisal report was to
provide the client with an unbiased opinion of value that can be of assistance
to the client when making business decisions pertaining to the acquisition of
the subject property. This appraisal report is one of the many documents of
information that can be considered by the client in making an informed decision
regarding the subject property.
The market value estimate, as contained herein, is contingent upon the
following conditions:
1. The subject project opened in 1988. The property's management reports a
current occupancy of 90.9%. The exterior of the apartment community and the
interiors of the vacant units were inspected. Access to all units was not
available due to the occupancy of the property.
2. A current certified survey of the subject project verifying the site
dimensions, area calculations, access, building locations, building area
calculations, unit mix and the legal description as set out herein.
3. The Appraiser did not review sub-soil, structural, mechanical or other
engineering reports depicting the current condition of the property. It is
recommended that such reports be obtained.
The Appraiser's inspection of the subject property revealed it to be in good
overall condition. In 1995 the subject property reportedly received significant
repairs and renovations. However, minor deferred maintenance items including 1)
deteriorated siding; 2) deteriorated trim; 3) some deteriorated patio fences;
and 4) deteriorated fascia were noted throughout the property. Deferred
maintenance has been estimated at $10,000.
Mailing Address: Post Office Drawer 2129, Winter Park, Florida 32790
(407) 647-0800 Fax # (407) 645-2301
<PAGE>
Baron Capital II, Inc.
January 16, 1998
Page 2
4. The Appraiser has not been provided with environmental reports relating to
the subject site or improvements. This appraisal has been made contingent upon
the existence of no hazardous contamination of the subject site and upon the
absence of hazardous building materials being incorporated into the subject
building improvements. Environmental reports relating to the subject site and
improvements were not available and should be obtained.
In my opinion the subject property had an estimated "as-is" market value, under
the foregoing contingencies, of:
TWO MILLION FIVE-HUNDRED THOUSAND DOLLARS
($2,500,000)
The value estimate as set out above reflects the "as-is" market value of the
subject property. As set forth in contingency 3, minor deferred maintenance
items were noted during the physical inspection of the subject property. The
estimated cost to cure the deferred maintenance items totals $10,000. The cost
to cure the deferred maintenance items was deducted from each of the three
approaches in arriving at the "as-is" market value estimate for the subject
property. The client has reported to the Appraisers that the items of deferred
maintenance are scheduled for immediate repair and/or replacement. The value
indication reflected by each approach to value will increase by $10,000 as a
result of this work. The resulting value indication reflected by the Cost
Approach equals $2,52 1,000, the value indication reflected by the Income
Approach equals $2,431,000, and the value indication reflected by the Market
Approach equals $2,541,000. The correction of the items of deferred maintenance
will improve the visual appearance of the property and enhance its
marketability. The correction of the deferred maintenance items results in the
Appraisers correlating the value estimate closer to the upper limit of value
reflected by the Market Approach. As a result, it is the Appraiser's opinion
that the subject property has an estimated market value, based upon the deferred
maintenance being cured, under the foregoing contingencies, of:
TWO MILLION FIVE HUNDRED THIRTY THOUSAND DOLLARS
(2,530,000)
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conclusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or event resulting from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions in value that favors the cause
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and the Standards of
Professional Practice of The Appraisal Institute, The Uniform Standards of
Professional Appraisal Practice, and the requirements of the state of Florida
for state-certified Appraisers. The use of this report is subject to the
requirements of The Appraisal Institute relating to review by its duly
authorized representatives.
<PAGE>
Baron Capital II, Inc.
January 16, 1998
Page 3
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted and completed by
Charles B. Byrd. The report was reviewed by Philip F. Wood, MAI, and this review
process consisted of: "on-site" physical inspections of the comparable sales and
rentals; an on-site physical inspection of the subject property, the area, and
the subject neighborhood; and the reading and examination of the completed
report.
As of the date of this report, Philip F. Wood has completed the requirements of
the continuing education program of the Appraisal Institute. No one provided
significant professional assistance to the persons signing this report. We do
not authorize the out-of-context quoting from or partial reprinting of this
appraisal report. Further, neither all nor any part of this appraisal report
shall be disseminated to the general public by the use of media for public
communication without the prior written consent of the Appraiser(s) signing this
appraisal report.
Please refer to the attached, complete self-contained appraisal report for
documentation of this value estimate. If any additional information is needed,
please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part II, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
Respectfully submitted,
CONSORTIUM APPRAISAL, INC. CONSORTIUM APPRAISAL, INC.
Reviewed By:
Philip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida Licence No. 0000777 Florida Licence No. 0000908
95-057
<PAGE>
Richards Appraisal Service, Inc.
Thomas G. Richards, MAI . . . State Certified General Appraiser RZ 0000574
September 1, 1998
Mr. Gregory K. McGrath
Baron Capital, Inc.
7628 Cooper Road
Cincinnati, Ohio 45242
Dear Mr. McGrath,
On October 22, 1997 I prepared an appraisal report on the individual condominium
unit located at 108 Morris Road in Daytona Beach, Florida. This report carries a
file number of 2223.
This unit represented the standard 3 bedroom, 2.5 bath unit which contained 1358
square feet of living area. The estimated market value subject to the above
referenced appraisal and the limiting conditions affixed therefore was
$70,000.00.
The appraiser understands that the purpose of this letter is to accompany a REIT
package for the entire project. Therefore, the appraiser recommends the reader
not confuse this document as a complete appraisal of the above referenced
property. Rather, the appraiser recommends that the reader review this document
only in conjunction with the original appraisal reports so as not to be
misleading.
If any additional information is needed, please advise.
Respectfully,
Sarah Richards
State Certified Residential Appraiser RD 0002789
Sincerely,
Thomas G. Richards, MAI
State Certified General Appraiser RZ 0000574
598 Eau Gallie Blvd... Melbourne, Fla. 32935
Phone 407-255-5108 Fax 407-255-5109
<PAGE>
Richards Appraisal Service, Inc.
Thomas G. Richards, MAI . . . State Certified General Appraiser RZ 0000574
September 1, 1998
Mr. Gregory K. McGrath
Baron Capital, Inc.
7826 Cooper Road
Cincinnati, Ohio 45242
Dear Mr. McGrath,
On October 22, 1997 I prepared an appraisal report on the individual condominium
unit located at 272 Morris Road in Daytona Beach, Florida. This report carries a
file number of 2223.
This unit represented the standard 2 bedroom, 2.5 bath unit which contained 1358
square feet of living area. The estimated market value subject to the above
referenced appraisal and the limiting conditions affixed therefore was
$68,000.00.
The appraiser understands that the purpose of this letter is to accompany a REIT
package for the entire project. Therefore, the appraiser recommends the reader
not confuse this document as a complete appraisal of the above referenced
property. Rather, the appraiser recommends that the reader review this document
only in conjunction with the original appraisal reports so as not to be
misleading.
If any additional information is needed, please advise.
Respectfully,
Sarah Richards
State Certified Residential Appraiser RD 0002789
Sincerely,
Thomas G. Richards, MAI
State Certified General Appraiser RZ 0000574
598 Eau Gallie Blvd... Melbourne, Fla. 32935
Phone 407-255-5108. . . Fax 407-255-5109
<PAGE>
Richards Appraisal Service, Inc.
Thomas G. Richards, MAI . . . State Certified General Appraiser RZ 0000574
September 1, 1998
Mr. Gregory K. McGrath
Baron Capital, Inc.
7826 Cooper Road
Cincinnati, Ohio 45242
Dear Mr. McGrath,
On October 22, 1997 I prepared an appraisal report on the individual condominium
unit located at 100 Morris Road in Daytona Beach, Florida. This report carries a
file number of 2223.
This unit represented the standard 2 bedroom, 2 bath unit which contained 1044
square feet of living area. The estimated market value subject to the above
referenced appraisal and the limiting conditions affixed therefore was
$60,000.00.
The appraiser understands that the purpose of this letter is to accompany a REIT
package for the entire project. Therefore, the appraiser recommends the reader
not confuse this document as a complete appraisal of the above referenced
property. Rather, the appraiser recommends that the reader review this document
only in conjunction with the original appraisal reports so as not to be
misleading.
If any additional information is needed, please advise.
Respectfully,
Sarah Richards
State Certified Residential Appraiser RD 0002789
Sincerely,
Thomas G. Richards, MAI
State Certified General Appraiser RZ 0000574
598 Eau Gallie Blvd... Melbourne, Fla. 32935
Phone 407-255-5108. . . Fax 407-255-5109
<PAGE>
ALLIED APPRAISAL SERVICES, INC.
HYPOTHETICAL APPRAISAL
Glen Lake Suites
2000 Gandy Boulevard North
St. Petersburg, Florida 33702
Appraisal of
Furniture & Equipment
Market Value In Place
as of
March 13, 1998
Professional Appraisers Of Real And Personal Property
929 S.E. First Street 9 Pompano Beach, Florida 33060 * (954) 782-3130
Toll Free in South Florida (800) 273-4623 9 Fax (954) 942-7678
<PAGE>
March 18, 1998
Gregory K. McGrath
Baron Capital V, Inc.
7826 Cooper Road
Cincinnati, Ohio 45242
Dear Mr. McGrath:
ALLIED APPRAISAL SERVICES, INC.
In accordance with your request, we have made an appraisal of certain furniture,
and equipment identified to us as being the property of:
Glen Lake Suites
2000 Gandy Boulevard North
St. Petersburg, Florida 33702
Purpose of the Appraisal
The purpose of this appraisal is to estimate the current Market Value In Place
of the property assets appraised.
Function of the Appraisal
It is our understanding that this appraisal will be used to assist in
establishing values for various corporation purposes of the property appraised.
Description of Property Appraised
The property appraised comprises certain tangible property assets that are used
in the operation of an extended stay hotel.
Property Interest Appraised
No investigation has been made as to title or ownership of the property
appraised. An unencumbered clear title to ownership of the property appraised is
presumed in this appraisal. Any liens, loans or other encumbrances applicable to
any or all of the property appraised is disregarded.
<PAGE>
GLEN LAKE SUITES ALLIED APPRAISAL SERVICES, INC.
Hypothetical Premise
The subject property is currently being converted from rental property to an all
suite extended stay facility. The project is expected to be completed by May 1,
1998.
The appraiser has carefully reviewed the preliminary proposal in order to
develop a clear understanding of the type and extent of the renovations. It is
assumed in this appraisal that all furniture and special systems will be
completed as represented to the appraiser.
This appraisal also assumes appropriate quality construction, materials and
workmanship. This appraisal and the values reported herein are subject to
change, if and when the renovation is completed, inspected and found to be
substantially different from the proposed renovations.
Definitions
Definitions of terms as used in this report are as follows:
"Replacement Cost New" is defined as being the amount of money that would be
required to purchase, acquire or fabricate the same or identical items in new
condition from the normal and usual vendors and suppliers to the trade. In cases
where identical items no longer available new, replacement costs of items
similar utility and quality have been used. Items of a type no longer made are
valued as available rebuilt or as available in the used equipment market.
Included are appropriate sales taxes, labor, material, and installation cost
where applicable.
"Market Value In Place" is defined as being the amount of money that could be
realized in a sale between a willing buyer and a willing seller when the
property appraised is considered as a component part of a business enterprise or
business facility. This value can also be defined as the used retail value of
the components, increased to reflect taxes, freight, installation and the
assemblage value.
Date of Inspection
The property appraised was inspected on March 12 and 13, 1998.
Appraisal Date
The property is appraised as of the date March 13, 1998.
2
<PAGE>
GLEN LAKE SUITES ALLIED APPRAISAL SERVICES, INC.
Methods of Valuation
Property is generally appraised by using one or more of three approaches to
value briefly described as follows:
1. Cost Approach - in which the property is valued at its replacement
cost new less accrued depreciation.
2. Market Comparison Approach - in which the property is valued by
directly comparing it to other properties that have recently been
sold.
3. Income Approach - in which the property is valued based on its ability
to generate income and profit.
The subject property has been valued primarily by the cost approach and
secondarily by the market approach. The income approach is not considered a
valid approach in this appraisal.
Procedure
The procedures used in performing this inspection, analysis and appraisal
included, but were not limited to the following:
A detailed inspection and inventory was made of the qualifying property items to
be appraised. The inventory was in sufficient detail to enable anticipated
valuation research. Estimates of condition and utility were recorded based on
the inspection and/or the observed operation of the item.
The Replacement Cost New of the various property items were researched in
appropriate reference sources or manuals, or in direct contact with dealers
and/or manufacturers of the item. The replacement cost of certain home made or
specially fabricated items has been estimated based on the appraiser's judgement
as to the cost of labor and materials. Actual or recorded costs to the owner
were not researched.
An appropriate estimate of accrued depreciation was developed based on the
inspection and observation of the item's age, condition, functional utility and
economic obsolescence as well as other relevant data available.
The Market Value in Place for each item or group of items was developed by
subtracting the estimated accrued depreciation from the Replacement Cost New, or
from research into the used marketplace for that item, adjusting for freight and
installation where necessary.
3
<PAGE>
GLEN LAKE SUITES ALLIED APPRAISAL SERVICES, INC.
Detailed Inventory and Valuation Section
Included as a part of this appraisal report is a detailed Inventory and
Valuation Section in which the property items appraised are more fully described
and/or valued.
The inventory and valuation section is compiled by classification of property.
Summary and Conclusion
In our opinion the Hypothetical Market Value In Place of the property appraised,
as of March 13, 1998 is fairly stated as being:
Hypothetical
Market Value
In Place
Classification ----------
Furniture & Equipment $ 933,079.00
Assumptions and Limiting Conditions
The appraiser will not be responsible for matters of a legal nature that affect
either the property appraised or the title to it. It is assumed that the title
is good and marketable.
The appraiser has considered, in the estimate of depreciation, wear and tear,
physical deterioration, needed repairs and other adverse conditions observed at
the time of inspection. Unless otherwise stated in the appraisal report, the
appraiser has no knowledge of hidden or unapparent conditions that would make
the property more or less valuable, and has assumed that there are no such
conditions, and makes no guarantees or warranties, express or implied, regarding
the actual condition of any or all of the property items appraised.
The listing of property appraised is considered accurate and complete. The
appraiser has, to the best of his ability, inventoried all the property items
eligible for inclusion in this appraisal. In cases of highly mobile property, it
is possible some items may be included more than once, and some items, for
whatever reason, may not have been seen or were overlooked.
4
<PAGE>
GLEN LAKE SUITES ALLIED APPRAISAL SERVICES, INC.
Certification
The undersigned certify that to the best of his knowledge and belief:
The statements of fact contained in this report are true and correct.
The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions and are the appraiser's impartial
opinions and conclusions and were developed without outside influence.
Neither the appraiser, the firm or its employees have a present or prospective
interest in the property appraised, and have no personal interest or bias with
respect to the parties involved.
Compensation for the preparation of this appraisal is not contingent upon the
reporting of a predetermined value or direction in value that favors the cause
of the client, the amount of the value estimate, the attainment of a stipulated
result, or the occurrence of a subsequent event.
The property herein appraised has been physically inspected by the following
individual: Edward J. Weinert, ASA
The analyses, opinions and conclusions herein were developed, and this report
has been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice as developed and published by The Appraisal Standards Board
of The Appraisal Foundation.
The American Society of Appraisers has a mandatory recertification program for
all of its designated members. I am in compliance with that program.
Respectfully submitted,
Allied Appraisal Services, Inc.
Edward J. Weinert, ASA
Senior Appraiser
<PAGE>
CONSORTIUM
THE APPRAISAL OF
AN EXISTING 144-UNIT APARTMENT PROJECT
KNOWN AS GLEN LAKE ARMS APARTMENTS,
LOCATED ALONG THE SOUTHEAST SIDE OF THE GANDY
BOULEVARD FRONTAGE ROAD IN THE
CITY OF ST. PETERSBURG,
PINELLAS COUNTY, FLORIDA.
PREPARED FOR
BARON CAPITAL V, INC.
DATE OF INSPECTION
JANUARY 15, 1998
DATE OF VALUATION
DECEMBER 31, 1997
DATE OF REPORT
MARCH 13, 1998
<PAGE>
CONSORTIUM
March 13, 1998
Baron Capital V, Inc.
7826 Cooper Road
Cincinnati, OH 45242
Gentlemen:
At your request, our firm has inspected and appraised an existing 144-unit
multifamily rental apartment project known as Glen Lake Arms Apartments. The
subject property is located along the southeast side of the Gandy Boulevard
frontage road, in the city of St. Petersburg, Pinellas County, Florida. The
subject property reflects a current street address of 2000 Gandy Boulevard
North.
The purpose of this appraisal was to estimate the market value of the fee simple
interest in the real estate, including chattels, under market conditions
prevailing on December 31, 1997, and based upon the continued operation of the
subject property as a conventional rental apartment community offering primarily
long term (7-12 month) leases. The subject property is currently in the process
of being repositioned in the market to offer short term rentals including daily,
weekly, and monthly rentals, as well as 1-6 month and 7-12 month leases. In
order to reposition the subject in the market under the extended stay concept,
significant improvements are being made to the property including the complete
renovation of the unit interiors, the furnishing of all of the property's units
and the installation of other features and equipment. The subject property will
also offer significantly enhanced services including housekeeping and
7-day/24-hour staff accessibility. The repositioning of the subject property
under the extended stay concept reportedly began in January 1998.
This appraisal report is limited in scope in that, at the clients request, no
analyses or consideration has been given herein to the feasibility or impacts on
value of the repositioning of the property to the extended stay concept which is
currently underway at the subject. The function of this appraisal report was to
provide the client with an unbiased opinion of value that can be of assistance
to the client when making business decisions pertaining to the acquisition of
the subject property. This appraisal report is one of the many documents of
information that can be considered by the client in making an informed decision
regarding the subject property.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1986 and is currently 98.6% occupied. This
occupancy level recognizes two of the subject units which are vacant. The
Appraiser was unable to inspect the interior of the occupied units within
the subject development. Therefore, this report is subject to verification
of the unit mix as set out herein by survey.
Mailing Address: Post Office Drawer 2129, Winter Park, Florida 32790
(407) 647-0800 Fax # (407) 645-2301
<PAGE>
Baron Capital V, Inc.
March 13, 1998
Page 2
2. The Appraiser has visually inspected the subject project and found it to be
in good overall condition. The Appraiser has not reviewed subsoil,
structural, mechanical or other engineering reports as to the current
condition of the subject project. Such reports should be obtained.
3. The subject property has been valued as if unaffected by legal limitations
upon its operation.
4. The Appraiser has not been provided with environmental reports relating to
the subject site or improvements. This appraisal has been made contingent
upon the existence of no hazardous contamination of the subject site and
upon the absence of hazardous building materials being incorporated into
the subject building improvements. Environmental reports relating to the
subject site and improvements were not available and should be obtained.
In my opinion the subject property had an estimated "as-is" market value, under
the foregoing contingencies, of:
FIVE MILLION FIVE-HUNDRED FIFTY THOUSAND DOLLARS
($5,550,000)
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conclusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or event resulting from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions in value that favors the cause
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and the Standards of
Professional Practice of The Appraisal Institute, The Uniform Standards of
Professional Appraisal Practice, and the requirements of the state of Florida
for state certified Appraisers. The use of this report is subject to the
requirements of The Appraisal Institute relating to review by its duly
authorized representatives.
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted and completed by
Charles B. Byrd. The report was reviewed by
<PAGE>
Baron Capital V, Inc.
March 13, 1998
Page 3
Philip F. Wood, MAI, and this review process consisted of: "on-site" physical
inspections of the comparable sales and rentals; an on-site physical inspection
of the subject property, the area, and the subject neighborhood; and the reading
and examination of the completed report.
As of the date of this report, Philip F. Wood has completed the requirements of
the continuing education program of the Appraisal Institute. No one provided
significant professional assistance to the persons signing this report. We do
not authorize the out-of-context quoting from or partial reprinting of this
appraisal report. Further, neither all nor any part of this appraisal report
shall be disseminated to the general public by the use of media for public
communication without the prior written consent of the Appraiser(s) signing this
appraisal report.
Please refer to the attached, limited self-contained appraisal report for
documentation of this value estimate. If any additional information is needed,
please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part H, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
Respectfully submitted,
CONSORTIUM APPRAISAL, INC. CONSORTIUM APPRAISAL, INC.
Reviewed By:
Philip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida License No. 0000777 Florida Licence No. 0000908
98-021
<PAGE>
CONSORTIUM
March 4, 1998
Mr. Gregory McGrath
Baron Capital XVII, Inc.
7826 Cooper Road
Cincinnati, OH 45242
RE: Pineview Apartments
Dear Mr. McGrath:
Under market conditions prevailing on June 17, 1997, our firm prepared an
appraisal of the Pineview apartment community. The Pineview apartments, which
contain 91 units, are located at 4801 North Pine Hills Road in the city of
Orlando, Orange County, Florida. The appraisal of the Pineview apartment
community was prepared for GMAC Commercial Mortgage. The function of the
appraisal report was to provide a basis for the underwriting of a mortgage loan
by GMAC. The purpose of the appraisal was to estimate the market value of the
fee simple interest in the real estate, including chattels, under market
conditions prevailing on June 17, 1997. The appraisal of the Pineview apartment
community indicated that the property had an estimated "as-is" market value of
$2,550,000, which was subject to four specific contingencies.
This letter has been prepared as an addendum to the appraisal of the Pineview
apartment community. The purpose of this addendum is to address items of
deferred maintenance, proposed renovations, and utility sub-metering.
The appraisal of the Pineview apartment community recognized that deferred
maintenance existed at the property. The Appraiser found a significant amount of
deferred maintenance, primarily relating to the subject's roofs and deteriorated
siding. These items of deferred maintenance were described in detail within the
appraisal. The Appraiser estimated the cost to cure the deferred maintenance at
$70,000. The cost to cure the deferred maintenance was deducted from each of the
approaches to value considered in the valuation of the subject apartment
community. The valuation of the Pineview apartment community considered the
Cost, Income, and Market Approaches to value.
The Appraiser has subsequently been provided with a proposed deferred
maintenance repair budget for the Pineview apartment community. The budget for
implementing repairs currently proposed has been set out as follows:
Mailing Address: Post Office Drawer 2129, Winter Park, Florida 32790
(407) 647-0800 Fax # (407) 645-2301
<PAGE>
Mr. Gregory McGrath
March 4, 1998
Page 2
Roofing $ 10,000
Siding repair/replacement $ 29,000
Exterior painting $ 3,000
Landscaping $ 12,000
Asphalt repair/re-striping $ 4,000
Interior renovations $ 51,900
--------
Total repairs and unit upgrades proposed $109,900
On page 123 of the appraisal, the value of the subject property via the Income
Approach, as if curable deficiencies were corrected, was estimated at
$2,567,908. On page 142 of the appraisal, the market value of the subject
property via the Market Approach, as if curable deficiencies were corrected, was
estimated at $2,642,226. The Appraiser developed the Cost Approach to value for
the subject property recognizing the existing deferred maintenance. However, the
Cost Approach to value was not given significant consideration when estimating a
correlated value indication for the property. Based upon the review of the Cost,
Income and Market approaches to value, it is the Appraiser's opinion that the
correlated market value estimate for the subject property, as if curable
deficiencies were corrected, would approximate $2,620,000.
You have advised the Appraiser that a utility sub-metering system will be
installed at the Pineview apartment community. The cost to install the
sub-metering system approximates $17,500. Sub-metering utility systems like that
proposed at Pineview apartments enable the landlord to individually bill tenants
for their sewer and water consumption needs. The Florida market has been in a
transition during the past years from landlords typically providing sewer and
water services to the services being paid for by the tenants. The Appraiser has
reviewed the subject market and other comparable apartment communities in order
to determine the market acceptance of utility sub-metering and the impacts of
utility sub-metering upon the property's net operating income.
In general, it was found that approximately 65% of the sewer and water costs can
be passed through to the tenants by implementing this sub-metering equipment. In
addition, apartment communities instituting utility sub-metering programs are
able to maintain the same quoted street rents for the individual apartment
units. As a result, the utility sub-metering income tends to offset a
substantial portion of the property's utility expenses and becomes a direct
benefit to the property's net operating income.
On page 119 of the appraisal of the Pineview apartment community, a summary of
actual expenses incurred at the community during 1995 and 1996 was provided,
together with the estimated operating expenses as set forth by the Appraiser at
the date of valuation. This summary of operating expenses indicates that
utilities and trash removal were estimated at the date of valuation to reflect
$45,000 annually. The sub-metering of the Pineview apartment community should
result in the recovery of approximately $29,250 of this utility expense. This
reflects 65% of the total estimated utility costs.
<PAGE>
Mr. Gregory McGrath
March 4, 1998
Page 3
Recognizing the utility sub-metering benefits, the net operating income for the
subject property would equal approximately $279,621. In developing the Income
Approach to value, an overall capitalization rate of 9.50% was utilized. When
this estimated overall capitalization rate is applied to the adjusted net
operating income estimate of $279,621, the Income Approach to value reflects a
value indication for the subject property, as if fully sub-metered, of
$2,867,908. From this value indication it is necessary to subtract the cost to
install the utility sub-metering system, as previously reported at $17,500. This
results in a final value indication for the subject, as sub-metered, of
$2,850,408. This figure has been rounded slightly to $2,850,000.
In developing the Market Approach to value, the effective gross income
multiplier unit of comparison was relied upon when estimating a value indication
for the subject property. On page 142 of the original appraisal report, an
effective gross income multiplier of 6.00 was selected based upon a review of
eight comparable sales of similar apartment complexes.
The effective gross income multiplier of 6.00 utilized in the original appraisal
report was based upon comparable sales which reflected landlord paid sewer,
water and garbage expenses. When sub-metered, the subject property will reflect
operating expense levels below those reflected by the comparable sales and the
effective gross income multiplier should be adjusted to reflect the lower
operating expenses reflected by the subject property, as sub-metered.
Therefore, for the purposes of this addendum, an effective gross income
multiplier of 6.50 has been utilized when re-analyzing the Market Approach to
value for the subject property, as sub-metered. Applying this effective gross
income multiplier of 6.50 to the estimated effective gross income of $440,371
reported on page 142 of the original report, results in a value indication for
the subject property via the Market Approach to value, as if sub-metered, of
$2,862,412. From this value indication it is necessary to subtract the cost to
install the utility sub-metering system, as previously reported at $17,500. This
results in a final value indication for the subject, as sub-metered, of
$2,844,912. This figure has been rounded slightly to $2,845,000.
Based upon a re-analysis of the subject property, recognizing the impacts of
sub-metering, the Income and Market Approaches have reflected value indications
for the subject property of $2,850,000 and $2,845,000, respectively. The
correlated value indication for the subject property, as if sub-metered, has
been estimated at $2,848,000.
In summary, this letter addendum addresses the impacts upon value associated
with correcting the items of deferred maintenance and installing the
sub-metering system. The resulting value indications are reflected for the
Pineview apartment community:
Estimated as-is market value under market
conditions prevailing on June 17, 1997, as
originally reported: $2,500.000
<PAGE>
Mr. Gregory McGrath
March 4, 1998
Page 4
Estimated market value as if curable
deficiencies were corrected under market
conditions prevailing on June 17, 1997: $2,620,000
Estimated market value as if curable deficiencies were
corrected under market conditions prevailing on
June 17, 1997, and as if the sub-metering system were
installed and operational: $2,848,000
This letter addendum should be read and reviewed only in conjunction with the
self-contained appraisal report that was prepared on June 19, 1997. The
self-contained appraisal report is a document containing 152 pages plus
exhibits.
If any additional information is requested, please advise.
Respectfully submitted,
CONSORTIUM APPRAISAL, INC. CONSORTIUM APPRAISAL, INC.
Reviewed By:
Philip F. Wood, MAI, SRPA Charles B. Byrd
President (Corporate Seal) Staff Appraiser
State-Certified General Real State-Certified General Real
Estate Appraiser Estate Appraiser
Florida License No. 0000777 Florida License No. 0000908
<PAGE>
CONSORTIUM
APPRAISAL OF
STADIUM CLUB APARTMENTS
LOCATED ALONG THE EAST SIDE OF
LANIER DRIVE, IN THE CITY OF STATESBORO
BULLOCH COUNTY, GEORGIA
PREPARED FOR
MR. PARKER F. HECKNER
GMAC COMMERCIAL MORTGAGE
650 DRESHER ROAD
HORSHAM, PA 19044-8015
DATE OF VALUATION
AUGUST 22, 1997
DATE OF REPORT
AUGUST 25, 1997
<PAGE>
August 25, 1997
Mr. Parker F. Heckner, Vice President
GMAC Commercial Mortgage
650 Dresher Road
Horsham, PA 19044-8015
Dear Mr. Heckner:
At your request, our firm has inspected and appraised the existing Stadium Club
apartment community. The subject Stadium Club Apartments are located along the
east side of Lanier Drive, in the city of Statesboro, Bulloch County, Georgia
and reflect a current street address of 210 Lanier Drive. The subject property
contains 60 furnished apartment units, a laundry and a manager's office. The
subject property is marketed to, and occupied by, students of Georgia Southern
University and differs from typical apartment developments in that individual
leases are signed by each student occupying a rental unit. Essentially, each
student leases a bedroom in the apartment unit and the common living areas are
shared by all of the roommates. The subject property contains a total of 229
individual bedrooms, and a total of 345 rooms.
The objective of this appraisal was to estimate the market value of the fee
simple interest in the real estate, including chattels under market conditions
prevailing on August 22, 1997.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1988. The property reports a current
occupancy of 79.4%, based upon 228 available bedroom, with 181 bedrooms
occupied and 47 bedrooms vacant. The Appraiser inspected the exterior of
the apartment community and the interior of three of the subject units.
Access to all units was not available due to the occupancy of the property.
The interiors of the units that were inspected were in good condition. The
value estimate for the subject property is contingent upon all of the
interiors of the subject units and the furniture contained therein being in
good condition.
2. A current certified survey of the subject project verifying the site
dimensions, area calculations, access, building locations, building area
calculations, unit mix and the legal description as set out herein.
3. The Appraiser did not review sub-soil, structural, roof, mechanical or
other engineering reports depicting the current condition of the property.
It is recommended that such reports be obtained. It appears that
engineering reports relating to the subject property are currently being
prepared, but have not been completed. This appraisal is subject to
revision should these engineering reports reveal any negative conditions
affecting the subject property other than those described and considered
herein. Visual inspections of the subject property indicated that it is
generally in good overall condition. However, some deferred maintenance,
primarily relating to deteriorated siding, was noted by the Appraiser, and
these
<PAGE>
Mr. Parker F. Heckner
August 25, 1997
Page 2
items have been described in detail within the attached appraisal. The
Appraiser has estimated the cost to cure this deferred maintenance at
approximately $35,000. This appraisal is subject to: a) the building
components on and within the subject buildings being structurally sound and
in good physical condition, excepting those deteriorated items so noted in
this report; and b) the verification of the curable physical deterioration
estimates set out herein by a qualified building contractor, and is subject
to revision by the Appraiser based upon the findings of the contractor.
4. The Appraiser has not been provided with an environmental report relating
to the subject site and improvements. This appraisal has been made
contingent upon the absence of hazardous contamination within the subject
site, and upon the absence of hazardous building materials being
incorporated into the subject building improvements.
In my opinion the subject property had an estimated "as-is" market value, under
the foregoing contingencies, of:
TWO MILLION EIGHT HUNDRED THOUSAND DOLLARS
($2,800,000)
The estimated contributory value of the furniture within the subject apartment
units equates to $103, 100. Therefore, the value of the subject property has
been allocated as follows:
Estimated value of Furniture: $ 103,100
Estimated value of Real Estate: $2,696,900
----------
Total Estimated Value of the
Subject Property $2,800,000
Based upon the analysis of the available market data and our firm's experience
in the marketing of rental apartment communities similar to the subject, it was
my opinion that a typical marketing period of approximately one to two years
would be required to effect an arm's length market-driven sale of the subject.
The undersigned certify that, to the best of our knowledge and belief, the
statements of fact contained in this report are true and correct. The reported
analyses, opinions, and conclusions are limited only by the reported assumptions
and limiting conditions, and are our personal, unbiased professional analyses,
opinions, and conclusions. We have no present or prospective interest in the
property that is the subject of this report, and we have no personal interest or
bias with respect to the parties involved. Our compensation is not contingent on
an action or event resulting from the analyses, opinions, or conclusions in, or
the use of, this report. Our compensation is further not contingent upon the
reporting of a predetermined value or directions in value that favors the cause
<PAGE>
Mr. Parker F. Heckner
August 25, 1997
Page 3
of the client; the amount of the value estimate; the attainment of a stipulated
result; or the occurrence of a subsequent event. Our analyses, opinions, and
conclusions were developed, and this report has been prepared, in conformity
with the requirements of the Code of Professional Ethics and the Standards of
Professional Practice of The Appraisal Institute, the Uniform Standards of
Professional Appraisal Practice, and the requirements of the state of Georgia
for State Certified Appraisers. The use of this report is subject to the
requirements of The Appraisal Institute relating to review by its duly
authorized representatives.
The research, data accumulation, personal on-site inspections of the subject
property and comparables, verifications/confirmations, valuation analysis, and
composition of the attached appraisal report were conducted and completed by
Charles B. Byrd. The report was reviewed by Philip F. Wood, MAI, and this review
process consisted of: "on-site" physical inspections of the comparable sales and
rentals; an on-site physical inspection of the subject property, the area, and
the subject neighborhood; and the reading and examination of the completed
report.
As of the date of this report, Philip F. Wood has completed the requirements of
the continuing education program of the Appraisal Institute. No one provided
significant professional assistance to the persons signing this report. We do
not authorize the out-of-context quoting from or partial reprinting of this
appraisal report. Further, neither all nor any part of this appraisal report
shall be disseminated to the general public by the use of media for public
communication without the prior written consent of the Appraiser(s) signing this
appraisal report.
Please refer to the attached, self-contained appraisal report for documentation
of this value estimate. If any additional information is needed, please advise.
NOTE: The information contained in this report is copyrighted. The willful
unauthorized use of any contents of this report constitutes copyright
infringement which could subject the infringer to civil damages and criminal
penalties pursuant to ss.ss.504 and 506 of the Federal Copyright Revision Act of
1976. The Florida Real Estate License Law (Chapter 475-Part 11, Florida Statutes
defines an appraisal, an appraisal service, an appraisal assignment and an
analysis assignment. Be advised that this report falls within these definitions
only if properly executed herein. Proper execution includes an original blue-ink
signature by the Appraiser overlaid by a raised seal. Any deviation from this
means that the report is copyright infringed, unauthorized and does not
represent services provided by the Appraisers or the firm.
Respectfully submitted,
CONSORTIUM APPRAISAL AND
CONSULTING SERVICES, INC.
<PAGE>
Mr. Parker F. Heckner
August 25, 1997
Page 4
By: National Consortium Research Corporation, Inc.
Prepared By:
Charles B. Byrd
Staff Appraiser
State-Certified General Real Property Appraiser
Georgia License No. 006188
Reviewed By:
Philip F. Wood
Vice President (Corporate Seal)
State-Certified General Real Property Appraiser
Georgia License No. 006187
97-071
Blossom Corners - I
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Income Growth Fund V, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XI, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,195,000 125,475 Units ($1,254,750) 109 Units ($1,090) 8.95%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Income Growth Fund V, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
June 1995. In November 1995, Baron Capital XI, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 2,300 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $1,150,000).
The offering was fully subscribed and closed in February 1997. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 70-unit residential apartment property referred to as the Blossom Corners
Apartment Property (Phase I) located in Orlando, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,030,195, a fixed interest rate of 9.04% and a
maturity date of November 2006. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,195,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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<PAGE>
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $2,195,000
Cash and cash equivalent assets: $17,634
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,030,195
Other liabilities: $16,524
Value assigned to the Partnership(1): $2,195,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 125,475 Units ($1,254,750)
</TABLE>
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<TABLE>
<S> <C>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 109 Units ($1,090)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 8.95%
Capital contributions made by Original Investors to Partnership: $100,000 cash; waiver of all ongoing fees payable to
General Partner of Partnership; assignment to the
Operating Partnership of all back-end interests of
the General Partner in the Partnership; and
advancement to date of at least $300,000 in
formative expenses.
</TABLE>
- ------------------------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in June 1995 through May 31,
1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$10,000. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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<PAGE>
the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1996: $77,039.00
1997: $114,987.67
1998 (through
May 31st): $39,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The statements should be reviewed by the Limited Partners prior to making a
decision whether or not to accept
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<PAGE>
the Exchange Offering. The statements of revenues and certain expenses exclude
material expenses described in the notes thereto (including partnership
administrative expenses, major maintenance, depreciation, amortization and
professional fees) that would not be comparable to those resulting from the
proposed future operations of the Exchange Properties and the Acquired
Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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<PAGE>
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
14
<PAGE>
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective ownership of
Units, provided, however, that net losses are not allocable to any limited
partner to the extent
15
<PAGE>
that such allocation would cause such limited partner to have an adjusted
capital account deficit at the end of such taxable year (which excess losses are
allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the
16
<PAGE>
effect of making an attempted takeover of the entities more difficult for an
acquirer. See the Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the
17
<PAGE>
Limited Partners owning at least a majority of the Exchange Partnership Units
then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
18
<PAGE>
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
19
<PAGE>
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
20
<PAGE>
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
21
<PAGE>
exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Bridge Point
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Capital Income Fund III, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital VII, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and
other conditions on cash flows from real estate interests acquired by the
Trust and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$1,610,000 88,503 Units ($885,030) 111 Units ($1,110) 6.31%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Capital Income Fund III, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
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residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
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or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
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of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
April 1995. In May 1995, Baron Capital VII, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 1,600 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in November 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 48-unit residential apartment property referred to as the Bridge Point
Apartment Property located in Jacksonville, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $716,752, a fixed interest rate of 9.52% and a
maturity date of July 2006. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
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TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
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The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $1,610,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $1,610,000
Cash and cash equivalent assets: $9,591
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $716,752
Other liabilities: $10,791
Value assigned to the Partnership(1): $1,610,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 88,503 Units ($885,030)
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Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 111 Units ($1,110)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 6.31%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses. Value
assigned to the Original
Investors' contribution to
Partnership:
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1995 through May
31, 1998, the General Partner has not been paid any compensation in connection
with the operation of the partnership (excluding commissions and fees in
connection with the original private offering). During such period, the General
Partner has not received any cash distributions from the partnership. If the
compensation structure to be in effect after the partnership's participation in
the Exchange Offering had been in effect during such period, the General Partner
would not have been entitled to be paid any compensation or cash distributions
during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $22,482.00
1996: $79,867.00
1997: $80,000.00
1998 (through
May 31st): $17,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to
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the Prospectus and those for the Acquired Properties are included in Exhibit E
to the Prospectus. The statements should be reviewed by the Limited Partners
prior to making a decision whether or not to accept the Exchange Offering. The
statements of revenues and certain expenses exclude material expenses described
in the notes thereto (including partnership administrative expenses, major
maintenance, depreciation, amortization and professional fees) that would not be
comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
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Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
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Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to
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limited partners and the general partner in proportion to their respective
ownership of Units, and (ii) net losses are allocable to the limited partner and
the general partner in proportion to their respective ownership of Units,
provided, however, that net losses are not allocable to any limited partner to
the extent that such allocation would cause such limited partner to have an
adjusted capital account deficit at the end of such taxable year (which excess
losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
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Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not
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performing its powers, duties and obligations in the best interests of the
partnership. The General Partner may resign by delivering written notice to the
Limited Partners, provided, however, such resignation will be effective not less
than 90 days after notice thereof is delivered to the Limited Partners only if
the Limited Partners owning at least a majority of the Exchange Partnership
Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other
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consideration contributed by each limited partner and the date each limited
partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of
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any federal or state agency or contained in any federal or state law and (iv)
for certain other specified matters of an inconsequential nature and not
materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
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Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed
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<PAGE>
on a monthly basis for expenses incurred on behalf of the Operating Partnership.
The Trust will use net proceeds of the Cash Offering to acquire Operating
Partnership Units, and as the owner of such units will have the same economic
rights as other holders on a per unit basis, except that the Trust may not elect
to exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to
22
<PAGE>
elect a liquidator to oversee the winding up and dissolution of the Operating
Partnership and to perform a full accounting of the Operating Partnership's
liabilities and properties.
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Brookwood Way
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Midwest Income Growth Fund VI, Ltd.,
a Michigan limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital of Ohio III, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$1,764,000 30,513 Units ($305,130) 102 Units ($1,020) 2.18%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Midwest Income Growth Fund VI, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
3
<PAGE>
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the requity interest in a residential apartment property and, in
one case, a subordinated mortgage interest secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring from Exchange Limited Partners their units of limited partnership
interest in the respective partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold [SK fill in when
supplement is ready] Common Shares in the Cash Offering (representing gross
proceeds of $[SK fill in when supplement is ready]). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Michigan limited partnership in
March 1996. In March 1996, Baron Capital of Ohio III, Inc. (formerly named Sigma
Financial Capital VI, Inc.), the General Partner of the Exchange Partnership and
an affiliate of the Managing Shareholder, sponsored a private offering of 600
units of limited partner interest in the Exchange Partnership at a purchase
price of $500 per unit (gross proceeds of $300,000). The offering was fully
subscribed and closed in October 1996. The partnership invested the net proceeds
of its offering to acquire all of the limited partnership interests in a limited
partnership which holds a fee simple interest in a 66-unit residential apartment
property referred to as the Brookwood Way Apartment Property located in
Mansfield, Ohio.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,058,868, a fixed interest rate of 9.04% and a
maturity date of December 2006. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract highly
experienced management and financial personnel capable of managing a
substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of the
Exchange Partnerships, on the other hand, will benefit from a highly
qualified management team which has been assembled and the economy of scale
attendant to operation of the Exchange Properties as part of a single
business entity. The General Partner believes that a single self-managed
structure of ownership by the Exchange Partnerships and administration of
the property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far more
efficient, cost effective and advantageous for operations and for the
various program investors.
o The Trust and the Operating Partnership will be able to acquire interests
in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of taxable
gain until they exercise their right to exchange all or a portion of their
Units for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of each
Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in accordance
with its existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides equal
or greater value to the Limited Partners compared with any other considered
alternative. Continuation of the existing business plan and liquidation
have been determined to be impractical and disadvantageous for the Limited
Partners. The General Partner has either explored the sale of the
partnership assets or determined that such a sale would be premature as it
would not maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating Partnership,
the Managing Shareholder, the Original Investors and their affiliates with
respect to the formation and future operations of the Trust and the
Operating Partnership.
o The Original Investors have significant influence over the affairs of the
Trust and the Operating Partnership by virtue of their collective ownership
of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $1,764,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based upon
a qualified independent third party appraisal of the Exchange Partnership's
property interests and reflect a value greater than the Limited Partners'
original investments.
o The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or
her existing interest in the partnership on terms substantially the same as
those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property with
a greater opportunity that the interest received will be marketable in the
future.
o The Trust and the Operating Partnership have been able to attract highly
experienced management and financial personnel capable of managing a
substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an economy
of scale and provide the Exchange Partnership with a lower operating cost
per residential unit and as a consequence increase operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the property
interests which are controlled by them and which were projected to be
acquired by future affiliated programs would be far more efficient, cost
effective and advantageous for operations and for the various program
investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of taxable
gain until they exercise their right to exchange their Units for an
equivalent number of Common Shares of the Trust. The exchange to Common
Shares may be made at any time at the sole discretion of each Limited
Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's existing
business plan and sale or liquidation of the partnership assets held, and
has determined that the Exchange Offering provides equal or greater value
to the Limited Partners compared with any other considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $1,764,000
Cash and cash equivalent assets: $24,926
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,058,868
Other liabilities: $31,151
Value assigned to the Partnership(1): $1,764,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 30,513 Units ($305,130)
</TABLE>
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<TABLE>
<S> <C>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 102 Units ($1,020)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 2.18%
Capital contributions made by Original Investors to Partnership: $100,000 cash; waiver of all ongoing fees payable to
General Partner of Partnership; assignment to the
Operating Partnership of all back-end interests of
the General Partner in the Partnership; and
advancement to date of at least $300,000 in
formative expenses.
</TABLE>
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in June 1996 through May 31,
1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$_______. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1996: $12,847.23
1997: $30,000.00
1998 (through
May 31st): $15,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
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<PAGE>
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The statements should be reviewed by the Limited Partners prior to making a
decision whether or not to accept the Exchange Offering. The statements of
revenues and certain expenses exclude material expenses described in the notes
thereto (including partnership administrative expenses, major maintenance,
depreciation, amortization and professional fees) that would not be comparable
to those resulting from the proposed future operations of the Exchange
Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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<PAGE>
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
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<PAGE>
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive 70% of any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner, with the General Partner receiving the
remaining 30%.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net
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<PAGE>
losses are allocable to the limited partner and the general partner in
proportion to their respective ownership of Units, provided, however, that net
losses are not allocable to any limited partner to the extent that such
allocation would cause such limited partner to have an adjusted capital account
deficit at the end of such taxable year (which excess losses are allocable to
the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See
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the Prospectus at "Federal Income Tax Considerations - Taxation of the Trust -
Stock Ownership Tests" and "Capital Stock of the Trust - Restrictions on
Ownership and Transfer." The restrictions may have the effect of making an
attempted takeover of the entities more difficult for an acquirer. See the
Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will
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<PAGE>
be effective not less than 90 days after notice thereof is delivered to the
Limited Partners only if the Limited Partners owning at least a majority of the
Exchange Partnership Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
18
<PAGE>
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
19
<PAGE>
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
20
<PAGE>
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
21
<PAGE>
exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Camellia Court
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Opportunity Income Partners, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital III, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$1,833,000 84,000 Units ($840,000) 105 Units ($1,050) 5.99%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Opportunity Income Partners,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
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<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
December 1994. In May 1995, Baron Capital III, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 800 units of limited partner interest in the Exchange
Partnership at a purchase price of $1,000 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in December 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 60-unit residential apartment property referred to as the Camellia Court
Apartment Property located in Daytona Beach, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,082,394, a fixed interest rate of 9.04% and a
maturity date of November 2006. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract highly
experienced management and financial personnel capable of managing a
substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of the
Exchange Partnerships, on the other hand, will benefit from a highly
qualified management team which has been assembled and the economy of scale
attendant to operation of the Exchange Properties as part of a single
business entity. The General Partner believes that a single self-managed
structure of ownership by the Exchange Partnerships and administration of
the property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far more
efficient, cost effective and advantageous for operations and for the
various program investors.
o The Trust and the Operating Partnership will be able to acquire interests
in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $1,833,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
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<PAGE>
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $1,833,000
Cash and cash equivalent assets: $15,650
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property:
$1,082,394
Other liabilities: $19,638
Value assigned to the Partnership(1): $1,833,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 84,000 Units ($840,000)
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 105 Units ($1,050)
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.99%
Capital contributions made by Original Investors to Partnership: $100,000 cash; waiver of all ongoing fees payable to
General Partner of Partnership; assignment to the
Operating Partnership of all back-end interests of
the General Partner in the Partnership; and
advancement to date of at least $300,000 in
formative expenses.
</TABLE>
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in December 1994 through May
31, 1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$17,500. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including
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<PAGE>
the support of the activities of the entire operating staff of an affiliate of
the Managing Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $3,390.00
1996: $77,441.00
1997: $80,000.00
1998 (through
May 31st): $60,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The statements should be reviewed by the Limited Partners prior to making a
decision whether or not to accept the Exchange Offering. The statements of
revenues and certain expenses exclude material expenses
12
<PAGE>
described in the notes thereto (including partnership administrative expenses,
major maintenance, depreciation, amortization and professional fees) that would
not be comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
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Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective ownership of
Units, provided, however, that net losses are not allocable to any limited
partner to the extent
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that such allocation would cause such limited partner to have an adjusted
capital account deficit at the end of such taxable year (which excess losses are
allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the
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effect of making an attempted takeover of the entities more difficult for an
acquirer. See the Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the
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Limited Partners owning at least a majority of the Exchange Partnership Units
then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for
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the year to date as determined by the Managing Shareholder. Within 120 days
after the close of each fiscal year, the Trust is required to prepare and mail
to each Shareholder an annual report which includes the following: (i) audited
financial statements prepared in accordance with GAAP by the Trust's independent
certified public accountants; (ii) the ratio of the costs of raising capital
during the period to the capital raised; (iii) the aggregate amount of advisory
fees and other fees paid to the Managing Shareholder and its affiliates; (iv)
the total operating expenses stated as a percentage of the book amount of the
Trust's investments and as a percentage of its net income; (v) a report from the
Independent Trustees that the policies being followed by the Trust are in the
best interests of its Shareholders and the basis for such determination and;
(vi) full disclosure of all material terms, factors, and circumstances
surrounding any and all transactions involving the Trust, the Managing
Shareholder, the Trustees, any other members of the Board and any of their
respective affiliates occurring during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or
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her rights to receive distributions or allocations of partnership income, gains,
loss and deductions; cause the dissolution of the Operating Partnership other
than in accordance with the terms of the agreement; amend the amendment
provision of the agreement described in this paragraph; or amend Article VI of
the agreement or any definition used therein which would have the effect of
causing the allocations in Article VI to fail to comply with the requirements of
Section 514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners
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(other than the Trust but only in its capacity as general partner) have no
responsibility for the liabilities of the Operating Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
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exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at "- Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at "- Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at "- Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Eagle Lake
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Capital Income Fund, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital II, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,530,000 88,689 Units ($886,890) 110 Units ($1,100) 6.33%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
Eagle Lakle
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Capital Income Fund, Ltd. and
the term "Exchange Partnerships" shall refer collectively to such partnership
and all other partnerships whose limited partners will be offered the
opportunity to participate in the initial transactions of the Exchange Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units).Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold [SK fill in when
supplement is ready] Common Shares in the Cash Offering (representing gross
proceeds of $[SK fill in when supplement is ready]). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
August 1994. In November 1994, Baron Capital II, Inc., the General Partner of
the Exchange Partnership and an affiliate of the Managing Shareholder, sponsored
a private offering of 1,614 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $807,000).
The offering was fully subscribed and closed in June 1995. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 77-unit residential apartment property referred to as the Eagle Lake
Apartment Property located in Port Orange, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,447,811, a fixed interest rate of 8.56% and a
maturity date of November 2005. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,530,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $2,530,000
Cash and cash equivalent assets: $14,301
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,447,811
Other liabilities: $15,563
Value assigned to the Partnership(1): $2,530,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 88,689 Units ($886,890)
</TABLE>
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<TABLE>
<S> <C>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 110 Units ($1,100)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 6.33%
Capital contributions made by Original Investors to Partnership: $100,000 cash; waiver of all ongoing fees payable to
General Partner of Partnership; assignment to the
Operating Partnership of all back-end interests of
the General Partner in the Partnership; and
advancement to date of at least $300,000 in
formative expenses.
</TABLE>
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in August 1994 through May
31, 1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately $6,000.
During such period, the General Partner has not received any cash distributions
from the partnership. If the compensation structure to be in effect after the
partnership's participation in the Exchange Offering had been in effect during
such period, the General Partner would not have been entitled to be paid any
compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $56,059.00
1996: $80,700.00
1997: $80,700.00
1998 (through
May 31st): $15,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The
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<PAGE>
statements should be reviewed by the Limited Partners prior to making a decision
whether or not to accept the Exchange Offering. The statements of revenues and
certain expenses exclude material expenses described in the notes thereto
(including partnership administrative expenses, major maintenance, depreciation,
amortization and professional fees) that would not be comparable to those
resulting from the proposed future operations of the Exchange Properties and the
Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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<PAGE>
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
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<PAGE>
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions. Thereafter, the Limited
Partners are entitled to receive all remaining distributable cash during the
fiscal year less a reasonable cash reserve determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return (and, in
the case of a property sale, after the holders of second mortgage financing have
received 10% of the net sale proceeds remaining after the investors have
received an aggregate amount equal to their capital contributions), the General
Partner is entitled to receive any remaining net proceeds until it has received
a similar return on its capital contribution; thereafter, Limited Partners and
the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net
15
<PAGE>
losses are allocable to the limited partner and the general partner in
proportion to their respective ownership of Units, provided, however, that net
losses are not allocable to any limited partner to the extent that such
allocation would cause such limited partner to have an adjusted capital account
deficit at the end of such taxable year (which excess losses are allocable to
the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See
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the Prospectus at "Federal Income Tax Considerations - Taxation of the Trust -
Stock Ownership Tests" and "Capital Stock of the Trust - Restrictions on
Ownership and Transfer." The restrictions may have the effect of making an
attempted takeover of the entities more difficult for an acquirer. See the
Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will
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<PAGE>
be effective not less than 90 days after notice thereof is delivered to the
Limited Partners only if the Limited Partners owning at least a majority of the
Exchange Partnership Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
18
<PAGE>
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
19
<PAGE>
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
20
<PAGE>
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
21
<PAGE>
exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Forest Glen - I
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Capital Income Fund II, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital IV, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,990,845 117,169 Units ($1,171,690) 117 Units ($1,170) 8.36%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Capital Income Fund II, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
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or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
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of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
April 1993. In May 1995, Baron Capital IV, Inc., an affiliate of the Managing
Shareholder, became General Partner of the Exchange Partnership, which in the
first half of 1994 commenced a private offering of 1,840 units of limited
partner interest in the Exchange Partnership at a purchase price of $500 per
unit (gross proceeds of $920,000). (The partnership also issued 160 units to
four investors in exchange for property interests acquired by them in an
unrelated program which was terminated.) The offering was fully subscribed and
closed in July 1995. The partnership invested the net proceeds of its offering
to acquire all of the limited partnership interests in a limited partnership
which holds a beneficial interest in an unrecorded land trust which holds a fee
simple interest in a 52-unit residential apartment property referred to as the
Forest Glen Apartment Property (Phase I) located in Daytona Beach, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,834,103, a fixed interest rate of 7.01% and a
maturity date of March 2005. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying properties may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
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Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
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The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,990,845. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $2,990,845
Cash and cash equivalent assets: $24,311
Other assets: N/A
Current principal balance of mortgage financing
secured by property: $1,834,103
Other liabilities: $55,653
Value assigned to the Partnership(1): $2,990,845
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 117,169 Units ($1,171,690)
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Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 117 Units ($1,170)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 8.36%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses.
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1993 through May
31, 1998, the General Partner has not been paid any compensation in connection
with the operation of the partnership (excluding commissions and fees in
connection with the original private offering). During such period, the General
Partner has not received any cash distributions from the partnership. If the
compensation structure to be in effect after the partnership's participation in
the Exchange Offering had been in effect during such period, the General Partner
would not have been entitled to be paid any compensation or cash distributions
during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $52,468.00
1996: $92,000.00
1997: $0
1998 (through
May 31st): $23,310.58
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to
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the Prospectus and those for the Acquired Properties are included in Exhibit E
to the Prospectus. The statements should be reviewed by the Limited Partners
prior to making a decision whether or not to accept the Exchange Offering. The
statements of revenues and certain expenses exclude material expenses described
in the notes thereto (including partnership administrative expenses, major
maintenance, depreciation, amortization and professional fees) that would not be
comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
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Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
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Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions. Thereafter, the Limited
Partners are entitled to receive all remaining distributable cash during the
fiscal year less a reasonable cash reserve determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net
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losses are allocable to the limited partner and the general partner in
proportion to their respective ownership of Units, provided, however, that net
losses are not allocable to any limited partner to the extent that such
allocation would cause such limited partner to have an adjusted capital account
deficit at the end of such taxable year (which excess losses are allocable to
the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See
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the Prospectus at "Federal Income Tax Considerations - Taxation of the Trust -
Stock Ownership Tests" and "Capital Stock of the Trust - Restrictions on
Ownership and Transfer." The restrictions may have the effect of making an
attempted takeover of the entities more difficult for an acquirer. See the
Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will
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be effective not less than 90 days after notice thereof is delivered to the
Limited Partners only if the Limited Partners owning at least a majority of the
Exchange Partnership Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
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Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and "- Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
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The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
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Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
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exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at "- Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at "- Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at "- Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at "- Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Forest Glen - II
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Realty Opportunity Income Fund VIII, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital IV, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,173,162 111,108 Units ($1,111,080) 118 Units ($1,180) 7.93%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Realty Opportunity Income Fund VIII,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
April 1993. In January 1995, Baron Capital IV, Inc., an affiliate of the
Managing Shareholder, became General Partner of the partnership, which in
February 1994 commenced a private offering of 944 units of limited partner
interest in the Exchange Partnership at a purchase price of $1,000 per unit
(gross proceeds of $944,000). The offering was fully subscribed and closed in
June 1994. The partnership invested the net proceeds of its offering to acquire
all of the limited partnership interests in a limited partnership which holds a
beneficial interest in an unrecorded land trust which holds a fee simple
interest in a 30-unit residential apartment property referred to as the Forest
Glen Apartment Property (Phase II) located in Daytona Beach, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,070,688, a fixed interest rate of 7.01% and a
maturity date of March 2005. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
8
<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,173,162. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $2,173,162
Cash and cash equivalent assets: $25,433
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,070,688
Other liabilities: $30,214
Value assigned to the Partnership(1): $2,173,162
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 111,108 Units ($1,111,080)
</TABLE>
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<PAGE>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 118 Units ($1,180)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 7.93%
Capital contributions made by Original $100,000 cash;
Investors to Partnership: waiver of all
ongoing fees payable
to General Partner
of Partnership;
assignment to the
Operating
Partnership of all
back-end interests
of the General
Partner in the
Partnership; and
advancement to date
of at least $300,000
in formative
expenses.
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1993 through May
31, 1998, the General Partner has not been paid any compensation in connection
with the operation of the partnership (excluding commissions and fees in
connection with the original private offering). During such period, the General
Partner has not received any cash distributions from the partnership. If the
compensation structure to be in effect after the partnership's participation in
the Exchange Offering had been in effect during such period, the General Partner
would not have been entitled to be paid any compensation or cash distributions
during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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<PAGE>
the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1994: $42,124.00
1995: $94,400.00
1996: $80,800.00
1997: $0
1998 (through
May 31st): $17,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to
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<PAGE>
the Prospectus and those for the Acquired Properties are included in Exhibit E
to the Prospectus. The statements should be reviewed by the Limited Partners
prior to making a decision whether or not to accept the Exchange Offering. The
statements of revenues and certain expenses exclude material expenses described
in the notes thereto (including partnership administrative expenses, major
maintenance, depreciation, amortization and professional fees) that would not be
comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
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<PAGE>
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
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<PAGE>
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions. Thereafter, the Limited
Partners are entitled to receive all remaining distributable cash during the
fiscal year less a reasonable cash reserve determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net
15
<PAGE>
losses are allocable to the limited partner and the general partner in
proportion to their respective ownership of Units, provided, however, that net
losses are not allocable to any limited partner to the extent that such
allocation would cause such limited partner to have an adjusted capital account
deficit at the end of such taxable year (which excess losses are allocable to
the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See
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<PAGE>
the Prospectus at "Federal Income Tax Considerations - Taxation of the Trust
Stock Ownership Tests" and "Capital Stock of the Trust - Restrictions on
Ownership and Transfer." The restrictions may have the effect of making an
attempted takeover of the entities more difficult for an acquirer. See the
Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will
17
<PAGE>
be effective not less than 90 days after notice thereof is delivered to the
Limited Partners only if the Limited Partners owning at least a majority of the
Exchange Partnership Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
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Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
19
<PAGE>
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
20
<PAGE>
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
21
<PAGE>
exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at
"Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Forest Glen - III
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Income Advantage Fund I, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital IV, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$1,940,339 109,434 Units ($1,094,340) 116 Units ($1,160) 7.81%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Income Advantage Fund I, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each
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partnership interest acquired by the Operating Partnership is subordinated to
the priority economic return of the limited partners of the respective
partnership and is not eligible to participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
September 1993. In January 1995, Baron Capital IV, Inc., an affiliate of the
Managing Shareholder, became General Partner of the Exchange Partnership, which
in February 1994 commenced a private offering of 940 units of limited partner
interest in the Exchange Partnership at a purchase price of $1,000 per unit
(gross proceeds of $940,000). The offering was fully subscribed and closed in
June 1995. The partnership invested the net proceeds of its offering to acquire
all of the limited partnership interests in a limited partnership which holds a
beneficial interest in an unrecorded land trust which holds a fee simple
interest in a 26-unit residential apartment property referred to as the Forest
Glen Apartment Property (Phase III) located in Daytona Beach, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $853,557, a fixed interest rate of 7.01% and a
maturity date of March 2005. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
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Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
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The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $1,940,339. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
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o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $1,940,339
Cash and cash equivalent assets: $17,499
Other assets: N/A
May 31, 1998 principal balance of mortgage
financing secured by property: $853,557
Other liabilities: $26,593
Value assigned to the Partnership(1): $1,940,339
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 109,434 Units ($1,094,340)
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 116 Units ($1,160)
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Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 7.81%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses.
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in September 1993 through
May 31, 1998, the General Partner has not been paid any compensation in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering). During such period, the
General Partner has not received any cash distributions from the partnership. If
the compensation structure to be in effect after the partnership's participation
in the Exchange Offering had been in effect during such period, the General
Partner would not have been entitled to be paid any compensation or cash
distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
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As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1994: $45,464.00
1995: $94,000.00
1996: $82,500.00
1997: $0
1998 (through
May 31st): $28,958.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The statements should be reviewed by the Limited Partners prior to making a
decision whether or not to accept the Exchange Offering. The statements of
revenues and certain expenses exclude material expenses described in the notes
thereto (including partnership administrative expenses, major maintenance,
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depreciation, amortization and professional fees) that would not be comparable
to those resulting from the proposed future operations of the Exchange
Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities,
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<PAGE>
(i) the Trust must cause the Operating Partnership to issue to the Trust,
interests in the Operating Partnership which represent economic interests in the
Operating Partnership which are substantially similar to such additional
securities and (ii) the Trust must contribute to the Operating Partnership the
net proceeds from, or the property received in consideration for, the issuance
of any such additional securities and from the exercise of rights contained in
such additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
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Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive all remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective ownership of
Units, provided, however, that net losses are not allocable to any limited
partner to the extent that such allocation would cause such limited partner to
have an adjusted capital account deficit at the end of such taxable year (which
excess losses are allocable to the general partner).
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The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
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Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the Limited Partners owning at least a
majority of the Exchange Partnership Units then outstanding have consented to
such resignation.
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Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent
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certified public accountants; (ii) the ratio of the costs of raising capital
during the period to the capital raised; (iii) the aggregate amount of advisory
fees and other fees paid to the Managing Shareholder and its affiliates; (iv)
the total operating expenses stated as a percentage of the book amount of the
Trust's investments and as a percentage of its net income; (v) a report from the
Independent Trustees that the policies being followed by the Trust are in the
best interests of its Shareholders and the basis for such determination and;
(vi) full disclosure of all material terms, factors, and circumstances
surrounding any and all transactions involving the Trust, the Managing
Shareholder, the Trustees, any other members of the Board and any of their
respective affiliates occurring during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the
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agreement or any definition used therein which would have the effect of causing
the allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
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The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to exchange Units held for
an equivalent number of Trust Common Shares. The allocation of net liquidation
proceeds among the partners of the Operating Partnership is described above at
"-Economic Interest."
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Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
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conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Forest Glen - Phase IV
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Income Appreciation Fund I, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital IV, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$471,679 23,778 Units ($237,780) 116 Units ($1,160) 1.70%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Income Appreciation Fund I,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an inital value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each
5
<PAGE>
partnership interest acquired by the Operating Partnership is subordinated to
the priority economic return of the limited partners of the respective
partnership and is not eligible to participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
September 1993. In January 1995, Baron Capital IV, Inc., an affiliate of the
Managing Shareholder, became the General Partner of the partnership, which in
February 1994 commenced a private offering of 205 units of limited partner
interest in the Exchange Partnership at a purchase price of $1,000 per unit
(gross proceeds of $205,000). The offering was fully subscribed and closed in
September 1994. The partnership invested the net proceeds of its offering to
acquire all of the limited partnership interests in a limited partnership which
holds a beneficial interest in an unrecorded land trust which holds a fee simple
interest in an 8-unit residential apartment property referred to as the Forest
Glen Apartment Property (Phase IV) located in Daytona Beach, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $236,265, a fixed interest rate of 7.01% and a
maturity date of March 2005. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
6
<PAGE>
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
8
<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $471,679. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
9
<PAGE>
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $471,679
Cash and cash equivalent assets: $7,713
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $236,265
Other liabilities: $8,125
Value assigned to the Partnership(1): $471,679
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 23,778 Units ($237,780)
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Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 116 Units ($1,160)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 1.70%
Capital contributions made by Original $100,000 cash; waiver
Investors to Partnership: of all ongoing fees
payable to General
Partner of Partnership;
assignment to the
Operating Partnership
of all back-end
interests of the
General Partner in the
Partnership; and
advancement to date of
at least $300,000 in
formative expenses.
- ----------
(1)Based on the appraised market value of the Exchange Partnership's interest in
residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in September 1993 through
May 31, 1998, the General Partner has not been paid any compensation in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering). During such period, the
General Partner has not received any cash distributions from the partnership. If
the compensation structure to be in effect after the partnership's participation
in the Exchange Offering had been in effect during such period, the General
Partner would not have been entitled to be paid any compensation or cash
distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1994: $6,134.00
1995: $20,500.00
1996: $19,375.00
1997: $0
1998 (through
May 31st): $7,200.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and
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<PAGE>
certain expenses, including the notes thereto, for the 14 Exchange Partnerships
are included in Exhibit D to the Prospectus and those for the Acquired
Properties are included in Exhibit E to the Prospectus. The statements should be
reviewed by the Limited Partners prior to making a decision whether or not to
accept the Exchange Offering. The statements of revenues and certain expenses
exclude material expenses described in the notes thereto (including partnership
administrative expenses, major maintenance, depreciation, amortization and
professional fees) that would not be comparable to those resulting from the
proposed future operations of the Exchange Properties and the Acquired
Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
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<PAGE>
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
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<PAGE>
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to
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<PAGE>
limited partners and the general partner in proportion to their respective
ownership of Units, and (ii) net losses are allocable to the limited partner and
the general partner in proportion to their respective ownership of Units,
provided, however, that net losses are not allocable to any limited partner to
the extent that such allocation would cause such limited partner to have an
adjusted capital account deficit at the end of such taxable year (which excess
losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
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Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not
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performing its powers, duties and obligations in the best interests of the
partnership. The General Partner may resign by delivering written notice to the
Limited Partners, provided, however, such resignation will be effective not less
than 90 days after notice thereof is delivered to the Limited Partners only if
the Limited Partners owning at least a majority of the Exchange Partnership
Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
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Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
19
<PAGE>
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
20
<PAGE>
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
21
<PAGE>
exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at "-Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at "-Amendments of
Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at "-Amendments of Governing
Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
22
<PAGE>
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Glen Lake
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Florida Capital Income Fund IV, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital V, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$6,483,079 227,060 Units ($2,270,600) 125 Units ($1,250) 16.20%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Florida Capital Income Fund IV, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $333,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
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of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
August 1995. In August 1995, Baron Capital V, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 3,640 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $1,820,000).
The offering was fully subscribed and closed in June 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 144-unit residential apartment property referred to as the Glen Lake
Apartment Property located in St. Petersburg, Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $2,692,623, a fixed interest rate of 9.55% and a
maturity date of May 2000. The loan amortizes on a 25-year basis. The property
is also subject to a second mortgage having a principal balance at such time of
approximately $359,016, a fixed interest rate of 8.0% and a maturity date of May
2005. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
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Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
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The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $6,483,079. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
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o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $6,483,079
Cash and cash equivalent assets: $30,854
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $3,051,639
Other liabilities: $1,050,866
Value assigned to the Partnership(1): $6,483,079
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 227,060 Units ($2,270,600)
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Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 125 Units ($1,250)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 16.20%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses.
- ----------
(1)Based on the appraised market value of the Exchange Partnership's interest in
residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in August 1995 through May
31, 1998, the General Partner has not been paid any compensation in connection
with the operation of the partnership (excluding commissions and fees in
connection with the original private offering). During such period, the General
Partner has not received any cash distributions from the partnership. If the
compensation structure to be in effect after the partnership's participation in
the Exchange Offering had been in effect during such period, the General Partner
would not have been entitled to be paid any compensation or cash distributions
during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $676.00
1996: $149,240.00
1997: $182,000.00
1998 (through
May 31st): $136,500.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The
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statements should be reviewed by the Limited Partners prior to making a decision
whether or not to accept the Exchange Offering. The statements of revenues and
certain expenses exclude material expenses described in the notes thereto
(including partnership administrative expenses, major maintenance, depreciation,
amortization and professional fees) that would not be comparable to those
resulting from the proposed future operations of the Exchange Properties and the
Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
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Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive all remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return (and, in
the case of a property sale, after the holder of collateral mortgage financing
has received 10% of the net sale proceeds remaining after investors have
received an aggregate amount equal to their capital contributions), the General
Partner is entitled to receive any remaining net proceeds until it has received
a similar return on its capital contribution; thereafter the Limited Partners
and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to
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limited partners and the general partner in proportion to their respective
ownership of Units, and (ii) net losses are allocable to the limited partner and
the general partner in proportion to their respective ownership of Units,
provided, however, that net losses are not allocable to any limited partner to
the extent that such allocation would cause such limited partner to have an
adjusted capital account deficit at the end of such taxable year (which excess
losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
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Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not
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performing its powers, duties and obligations in the best interests of the
partnership. The General Partner may resign by delivering written notice to the
Limited Partners, provided, however, such resignation will be effective not less
than 90 days after notice thereof is delivered to the Limited Partners only if
the Limited Partners owning at least a majority of the Exchange Partnership
Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
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Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
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The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
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Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
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exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at "-Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at "-Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at "-Amendments of
Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at
"-Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at "-Amendments of Governing
Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
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Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
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Grove Hamlet
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Central Florida Income Appreciation Fund, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital of Florida, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,575,887 125,275 Units ($1,252,750) 119 Units ($1,190) 8.94%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Central Florida Income Appreciation
Fund, Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
April 1993. In July 1994, Baron Capital of Florida, Inc. (formerly named Sigma
Financial Capital, Inc.), the General Partner of the Exchange Partnership and an
affiliate of the Managing Shareholder, sponsored a private offering of 2,100
units of limited partner interest in the Exchange Partnership at a purchase
price of $500 per unit (gross proceeds of $1,050,000). The offering was fully
subscribed and closed in October 1995. The partnership invested the net proceeds
of its offering to acquire all of the limited partnership interests in a limited
partnership which holds a fee simple interest in a 56-unit residential apartment
property referred to as the Grove Hamlet Apartment Property located in Deland,
Florida.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,254,807, a fixed interest rate of 9.50% and a
maturity date of October 2005. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
8
<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,575,887. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
9
<PAGE>
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $2,575,887
Cash and cash equivalent assets: $4,344
Other assets: $66,987 (comprised of
equity contributed by
General Partner)
5/31/98 principal balance of mortgage financing
secured by property: $1,254,807
Other liabilities: $32,129
Value assigned to the Partnership(1): $2,575,887
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 125,275 Units ($1,252,750)
10
<PAGE>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 119 Units ($1,190)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 8.94%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses.
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1993 through May
31, 1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$________. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1994: $31,930.64
1995: $105,000.00
1996: $78,750.00
1997: $0
1998 (through
May 31st): $2,000.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to
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the Prospectus and those for the Acquired Properties are included in Exhibit E
to the Prospectus. The statements should be reviewed by the Limited Partners
prior to making a decision whether or not to accept the Exchange Offering. The
statements of revenues and certain expenses exclude material expenses described
in the notes thereto (including partnership administrative expenses, major
maintenance, depreciation, amortization and professional fees) that would not be
comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
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Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
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Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to
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limited partners and the general partner in proportion to their respective
ownership of Units, and (ii) net losses are allocable to the limited partner and
the general partner in proportion to their respective ownership of Units,
provided, however, that net losses are not allocable to any limited partner to
the extent that such allocation would cause such limited partner to have an
adjusted capital account deficit at the end of such taxable year (which excess
losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
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Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not
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performing its powers, duties and obligations in the best interests of the
partnership. The General Partner may resign by delivering written notice to the
Limited Partners, provided, however, such resignation will be effective not less
than 90 days after notice thereof is delivered to the Limited Partners only if
the Limited Partners owning at least a majority of the Exchange Partnership
Units then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other
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consideration contributed by each limited partner and the date each limited
partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of
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any federal or state agency or contained in any federal or state law and (iv)
for certain other specified matters of an inconsequential nature and not
materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
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<PAGE>
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed
21
<PAGE>
on a monthly basis for expenses incurred on behalf of the Operating Partnership.
The Trust will use net proceeds of the Cash Offering to acquire Operating
Partnership Units, and as the owner of such units will have the same economic
rights as other holders on a per unit basis, except that the Trust may not elect
to exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at " - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to
22
<PAGE>
elect a liquidator to oversee the winding up and dissolution of the Operating
Partnership and to perform a full accounting of the Operating Partnership's
liabilities and properties.
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Lamplight Court
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Lamplight Court of Bellefontaine Apartments, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital IX, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,147,000 78,098 Units ($780,980) 112 Units ($1,120) 5.57%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Lamplight Court of Bellefontaine
Apartments, Ltd. and the term "Exchange Partnerships" shall refer collectively
to such partnership and all other partnerships whose limited partners will be
offered the opportunity to participate in the initial transactions of the
Exchange Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
February 1996. In March 1996, Baron Capital IX, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 700 units of limited partner interest in the Exchange
Partnership at a purchase price of $1,000 per unit (gross proceeds of $700,000).
The offering was fully subscribed and closed in November 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interest in a limited partnership which holds a fee simple interest
in a 80-unit residential apartment property referred to as the Lamplight Court
Apartment Property located in Bellefontaine, Ohio and an unrecorded second
mortgage interest in the property.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,376,182, a fixed interest rate of 9.04% and a
maturity date of November 2006. The loan amortizes on a 25-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
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TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
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The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
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o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,147,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $2,147,000
Cash and cash equivalent assets: $4,359
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,376,182
Other liabilities: $20,383
Value assigned to the Partnership(1): $2,147,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 78,098 Units ($780,980)
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Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 112 Units ($1,120)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.57%
Capital contributions made by Original $100,000 cash; waiver
Investors to Partnership: of all ongoing fees
payable to General
Partner of Partnership;
assignment to the
Operating Partnership
of all back-end
interests of the
General Partner in the
Partnership; and
advancement to date of
at least $300,000 in
formative expenses.
- ----------
(1)Based on the appraised market value of the Exchange Partnership's interest in
residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1996 through May
31, 1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$20,000. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1996: $16,593.00
1997: $69,092.78
1998 (through
May 31st): $52,500.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The
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statements should be reviewed by the Limited Partners prior to making a decision
whether or not to accept the Exchange Offering. The statements of revenues and
certain expenses exclude material expenses described in the notes thereto
(including partnership administrative expenses, major maintenance, depreciation,
amortization and professional fees) that would not be comparable to those
resulting from the proposed future operations of the Exchange Properties and the
Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
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Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
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Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive 50% of any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner, and the General Partner the remaining 50%.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 50%/50%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective
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ownership of Units, provided, however, that net losses are not allocable to any
limited partner to the extent that such allocation would cause such limited
partner to have an adjusted capital account deficit at the end of such taxable
year (which excess losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests"
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and "Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the
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Limited Partners owning at least a majority of the Exchange Partnership Units
then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for
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the year to date as determined by the Managing Shareholder. Within 120 days
after the close of each fiscal year, the Trust is required to prepare and mail
to each Shareholder an annual report which includes the following: (i) audited
financial statements prepared in accordance with GAAP by the Trust's independent
certified public accountants; (ii) the ratio of the costs of raising capital
during the period to the capital raised; (iii) the aggregate amount of advisory
fees and other fees paid to the Managing Shareholder and its affiliates; (iv)
the total operating expenses stated as a percentage of the book amount of the
Trust's investments and as a percentage of its net income; (v) a report from the
Independent Trustees that the policies being followed by the Trust are in the
best interests of its Shareholders and the basis for such determination and;
(vi) full disclosure of all material terms, factors, and circumstances
surrounding any and all transactions involving the Trust, the Managing
Shareholder, the Trustees, any other members of the Board and any of their
respective affiliates occurring during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or
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her rights to receive distributions or allocations of partnership income, gains,
loss and deductions; cause the dissolution of the Operating Partnership other
than in accordance with the terms of the agreement; amend the amendment
provision of the agreement described in this paragraph; or amend Article VI of
the agreement or any definition used therein which would have the effect of
causing the allocations in Article VI to fail to comply with the requirements of
Section 514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners
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(other than the Trust but only in its capacity as general partner) have no
responsibility for the liabilities of the Operating Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
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exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at "-Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
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Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
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Stadium Club
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
GSU Stadium Student Apartments, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital X, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,800,000 105,000 Units ($1,050,000) 117 Units ($1,170) 7.49%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to GSU Stadium Student Apartments, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with a value of approximately $10,982,920) have not
yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
June 1995. In September 1995, Baron Capital X, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 2,000 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $1,000,000).
The offering was fully subscribed and closed in February 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 60-unit residential apartment property referred to as the Stadium Club
Apartment Property located in Statesboro, Georgia.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,740,736, a fixed interest rate of 7.87% and a
maturity date of October 2005. The loan amortizes on a 30-year basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
6
<PAGE>
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
8
<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,800,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
9
<PAGE>
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
Appraised value of property interests: $2,800,000
Cash and cash equivalent assets: $30,854
Other assets: N/A
Current principal balance of mortgage financing
secured by property: $1,740,736
Other liabilities: $28,885
Value assigned to the Partnership(1): $2,800,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 105,000 Units ($1,050,000)
10
<PAGE>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 117 Units ($1,170)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 7.49%
Capital contributions made by Original $100,000 cash; waiver of
Investors to Partnership: all ongoing fees payable
to General Partner of
Partnership; assignment to
the Operating Partnership
of all back-end interests
of the General Partner in
the Partnership; and
advancement to date of at
least $300,000 in
formative expenses.
- ----------
(1)Based on the appraised market value of the Exchange Partnership's interest in
residential apartment property and other considerations discussed herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering, each
Unit to be issued has an initial value of $10.00, which is the price per share
at which the Trust is currently offering Common Shares in the Cash Offering. As
described above at "The Exchange Offering," Unitholders may exchange all or a
portion of their Units for an equivalent number of Common Shares at any time
following the offering.
COMPENSATION
From the inception of the Exchange Partnership in June 1995 through May 31,
1998, the aggregate amount of compensation paid to the General Partner in
connection with the operation of the partnership (excluding commissions and fees
in connection with the original private offering) has been approximately
$29,500. During such period, the General Partner has not received any cash
distributions from the partnership. If the compensation structure to be in
effect after the partnership's participation in the Exchange Offering had been
in effect during such period, the General Partner would not have been entitled
to be paid any compensation or cash distributions during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
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the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1995: $25,000.00
1996: $84,961.00
1997: $203,105.00*
1998 (through
May 31st): $71,904.28
* $100,000 of such amount represents a return of capital attributable
to net proceeds in connection with a first mortgage refinancing with
an initial principal balance higher than the principal balance at the
time of refinancing.
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998.
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The data was derived from the statements of revenues and certain expenses of the
limited partnerships which directly or indirectly hold record title to the
Exchange Properties. The statements of revenues and certain expenses, including
the notes thereto, for the 14 Exchange Partnerships are included in Exhibit D to
the Prospectus and those for the Acquired Properties are included in Exhibit E
to the Prospectus. The statements should be reviewed by the Limited Partners
prior to making a decision whether or not to accept the Exchange Offering. The
statements of revenues and certain expenses exclude material expenses described
in the notes thereto (including partnership administrative expenses, major
maintenance, depreciation, amortization and professional fees) that would not be
comparable to those resulting from the proposed future operations of the
Exchange Properties and the Acquired Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
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Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
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Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to the Limited Partners until they have received a 10%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the General Partner receives all remaining distributable cash during
the fiscal year less a reasonable cash reserve determined by the General
Partner.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 10% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 70%/30%
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
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Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective ownership of
Units, provided, however, that net losses are not allocable to any limited
partner to the extent that such allocation would cause such limited partner to
have an adjusted capital account deficit at the end of such taxable year (which
excess losses are allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
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Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the effect of making an attempted takeover of the entities
more difficult for an acquirer. See the Prospectus at "RISK FACTORS -
Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
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give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the Limited Partners owning at least a
majority of the Exchange Partnership Units then outstanding have consented to
such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
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Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
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Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership
20
<PAGE>
interests and the management of the partnership's affairs within the scope of
the partnership agreement, unless such indemnified person's negligence or
intentional or criminal wrongdoing is involved; provided, however, such
indemnification will not be made with respect to any liability imposed by
judgment arising out of any violation of federal or state securities laws
associated with such offering. No indemnified person is liable to the
partnership or to any partner thereof for any loss suffered by the partnership
which arises out of any action or inaction of such person if such person, in
good faith, determined that such course of conduct was in the best interests of
the partnership and within the scope of the partnership agreement and did not
constitute the negligence or intentional or criminal wrongdoing of such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST - Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any
21
<PAGE>
partnership property, but in no event greater than 3% of the sales proceeds. The
corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to exchange Units held for
an equivalent number of Trust Common Shares. The allocation of net liquidation
proceeds among the partners of the Operating Partnership is described above at "
- - Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at " - Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at " - Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at " - Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating
22
<PAGE>
Partnership Agreement; or (d) any action that would subject a limited partner to
liability as a general partner in any jurisdiction or any other liability,
except as provided in the Operating Partnership Agreement or under the Delaware
Limited Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
23
<PAGE>
Steeplechase
SUPPLEMENT DATED _____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
Baron Strategic Investment Fund II, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XXXI, Inc.)
This Supplement relates to the offer (the "Exchange Offering") of Baron
Capital Properties, L.P. (the "Operating Partnership") to all limited partners
(the "Limited Partners") in the Exchange Partnership (and limited partners of
other real estate limited partnerships) to issue its units of limited
partnership interest ("Units" or "Operating Partnership Units") in exchange for
limited partnership interests in the Exchange Partnership (and in other limited
partnerships). Limited Partners who elect not to participate in the Exchange
Offering will be entitled to retain their limited partnership interest in the
Exchange Partnership on substantially the same terms and conditions as their
original investment.
Each Limited Partner should consider all factors discussed under the
heading "Risk Factors" set forth in the Prospectus (the "Prospectus") of the
Operating Partnership dated ________, 1998 in evaluating the Exchange Offering,
the Operating Partnership, Baron Capital Trust, the general partner of the
Operating Partnership (the "Trust"), and the business of the Operating
Partnership and the Trust, including the following material risk factors:
o The valuation of $10.00 per Unit used in the Exchange Offering is an
arbitrary amount, and it is possible that Common Shares of beneficial
interest in the Trust ("Common Shares") (into which the Units are
exchangeable), if listed on a national securities exchange, will trade at a
lower price.
o The terms of the Exchange Offering were determined by the founders of the
Trust and the Operating Partnership (the "Original Investors") (described
below under "Compensation") with no separate counsel or advisor for the
Limited Partners.
o Limited Partners may not have an opportunity prior to their decision to
accept the Exchange Offering to evaluate a significant number of properties
in which the Operating Partnership and the Trust may acquire an interest,
and they will not have the benefit of knowing the extent of the Operating
Partnership's investment in respect of properties involved in the Exchange
Offering until the offering is completed.
o The Original Investors and affiliates have significant influence over the
operation of the Trust and the Operating Partnership, and the Exchange
Offering involves transactions among them which involve conflicts of
interest which may result in decisions that do not fully represent the
interests of all Shareholders of the Trust and holders of Units in the
Operating Partnership (individually, a "Unitholder" and collectively, the
"Unitholders").
o Limited Partners who accept the offering may not experience returns
comparable to or in excess of those experienced by Limited Partners in the
Exchange Partnership.
o The current returns of the Exchange Partnership may not be achieved by the
Operating Partnership after completion of the offering and may be higher
than the current returns of other partnerships which participate in the
offering, although such other partnerships may offer higher future growth
potential than the Exchange Partnership.
<PAGE>
o Real estate investment risks exist such as the effect of economic and other
conditions on cash flows from real estate interests acquired by the Trust
and the Operating Partnership.
o Financing risks exist, including debt service obligations, the ability of
the Trust and the Operating Partnership to incur additional debt, the need
to refinance current indebtedness at various maturities, and the effect of
any increase in interest rates.
o The successful operation of the Trust and the Operating Partnership is
dependent on key management.
o There can be no assurance of the successful completion of the Exchange
Offering and the Trust's Cash Offering (described below).
o No public market for the sale of Units is expected to ever develop, and,
although Common Shares (into which Units are exchangeable) are expected to
eventually be listed on a national securities exchange, it is possible that
no public market for the Common Shares will ever develop or be maintained.
o Limited Partners who acquire Units in the Exchange Offering will pay a
higher price per Unit than the consideration the Original Investors paid
for Units issued to them in connection with the formation of the Trust and
the Operating Partnership.
o The Trust will be taxed as a corporation if it fails to qualify as a REIT.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
Valuation of Aggregate Number of Units Number of Units Percentage of Units offered
the Exchange offered to all Limited offered to each Limited to Limited Partners in the
Partnership(1) Partners in the Exchange Partner per $1,000 of Exchange Partnership in
Partnership (dollar value)(2) original investment relation to Units offered to
(dollar value)(2) limited partners in all
partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$2,125,000 87,606 Units (876,060) 110 Units ($1,100) 6.25%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed below
at "Valuation Method."
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in its
Cash Offering. As described below at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the completion of the offering.
2
<PAGE>
SUPPLEMENT DATED ____, 1998
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1998
INTRODUCTION
The Trust and the Operating Partnership constitute a self-administered and
self-managed real estate company which has been organized to acquire equity
interests in existing residential apartment properties located in the United
States and to provide or acquire debt financing secured by mortgages on such
types of property. The Trust is the sole general partner of the Operating
Partnership and thereby controls its activities. The Trust will also contribute
the net proceeds from its ongoing public offering of Common Shares (the "Cash
Offering") to acquire a limited partnership interest in the Operating
Partnership.
The Operating Partnership will conduct all of the Trust's real estate
operations and hold all of the Trust's real estate assets, including property
interests acquired. The Operating Partnership will use net proceeds from the
Cash Offering and Units it will issue in the Exchange Offering and other
transactions to make real estate investments and fund its operations.
This Supplement describes the Exchange Offering, the Cash Offering and
certain aspects of the business of the Exchange Partnership, the Operating
Partnership and the Trust and is a part of, and should be read in conjunction
with, the Prospectus.
Capitalized terms used in this Supplement and not otherwise defined herein
have the meanings ascribed to such terms in the Prospectus, provided that the
term "Exchange Partnership" shall refer to Baron Strategic Investment Fund II,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and all other partnerships whose limited partners will be offered
the opportunity to participate in the initial transactions of the Exchange
Offering.
Each Limited Partner should carefully review this Supplement together with
the Prospectus. The effects of the Exchange Offering may be different for
limited partners in various other Exchange Partnerships. A separate supplement
has been prepared for limited partners in each of the other Exchange
Partnerships who are being offered the opportunity to participate in the
Exchange Offering.
Each Limited Partner in the Exchange Partnership will receive a copy of
this Supplement but unless specifically requested will not receive a copy of the
various other supplements which contain information concerning other Exchange
Partnerships, the Operating Partnership and the Trust and which have been
distributed to their limited partners. Upon receipt of a written request by any
Limited Partner or his representative who has been so designated in writing, the
Operating Partnership will promptly deliver, without charge, copies of other
supplements to be delivered to limited partners in other Exchange Partnerships.
Limited Partners may make such request in writing to the Operating Partnership
at its principal executive office at the following address: Baron Capital
Properties, L.P., 7826 Cooper Road, Cincinnati, Ohio 45242, telephone
513-984-5001. Such request should be made to the attention of Sharon Studt.
THE EXCHANGE OFFERING
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue registered Units of the Operating Partnership
to each Limited Partner of the Exchange Partnership and each limited partner
(individually, an "Exchange Limited Partner" and collectively, the "Exchange
Limited Partners") in 13 other Exchange Partnerships in exchange for the limited
partnership interests held by such limited partners in such partnerships. The
Operating Partnership is investigating other investment opportunities to acquire
property interests with cash and/or Units in the Exchange Offering and other
transactions. Each of the Exchange Partnerships directly or indirectly owns all
or a portion of the equity interest in a
3
<PAGE>
residential apartment property and, in one case, a subordinated mortgage
interest secured by such type of property. The Operating Partnership will
acquire interests in particular properties by acquiring from Exchange Limited
Partners their units of limited partnership interest in the respective
partnership (the "Exchange Partnership Units").
The commencement of the Exchange Offering in respect of the 14 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder, serve as the members of the Board of the Trust.
The Managing Shareholder abstained from voting since Gregory K. McGrath, the
sole stockholder, director and executive officer of the corporate general
partner of each of the Exchange Partnerships, is also one of the founders of the
Trust and the Operating Partnership, the sole stockholder and director of the
Managing Shareholder, and Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder.
The General Partner of the Exchange Partnership recommends that each of the
Limited Partners elect to accept the Exchange Offering based on an analysis of
the benefits and disadvantages of the offering to the Limited Partners and the
Exchange Partnership and an analysis of possible alternative transactions.
The Operating Partnership will not complete the Exchange Offering in
respect of any particular Exchange Partnership if limited partners holding more
than 10% of the limited partnership interests in the partnership affirmatively
elect not to accept the offering. In addition, the Operating Partnership will
not complete any transaction in the offering whatsoever unless a sufficient
number of offerees accept the offering such that the offering involves the
issuance of Units with an initial value of at least $6,000,000. For the purposes
of this Supplement, the term "Participating Exchange Partnership," which applies
only if the Exchange Offering is completed, refers to each Exchange Partnership
whose limited partners holding at least 90% of the limited partnership interest
therein elect to accept the offering.
The initial transactions of the Exchange Offering involve 14 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties") which consist of an aggregate of 849 residential units (comprised
of studio, one, two, three and four-bedroom units). Ten of the properties are
located in Florida, one property in Georgia, one property in Indiana and two
properties in Ohio. The Exchange Properties are described in further detail in
the Prospectus at "Initial Real Estate Investments" and Exhibit B to the
Prospectus.
For purposes of the Exchange Offering, the 14 Exchange Partnerships have
been valued at $33,638,991. The value is based on an appraisal performed by a
qualified and licensed independent appraisal firm on each property in which a
respective partnership owns a direct or indirect interest. See the Prospectus at
"The Exchange Offering - Exchange Property Appraisals." Each Unit offered in the
offering has been arbitrarily valued at $10.00, which is the price per share at
which the Trust is currently offering Common Shares in its Cash Offering. As
described further herein, a Unitholder may elect to exchange Units for an
equivalent number of Common Shares. If the Exchange Offering is fully completed
in respect of all 14 Exchange Partnerships (i.e., all limited partners in the
Exchange Partnerships accept the offering), the property interests indirectly
acquired will have an aggregate purchase price of approximately $33,638,991,
comprised of Units to be issued with an initial value of approximately
$14,017,080 plus first mortgage and other indebtedness of approximately
$19,424,161 to which the underlying properties are subject. The property
interests to be acquired with the balance of the registered Units to be offered
in the Exchange Offering (with an initial value of approximately $10,982,920)
have not yet been finally determined.
In the Exchange Offering, each Limited Partner in the Exchange Partnership
has the option to acquire the number of Units per $1,000 of original investment
in the Exchange Partnership set forth on the inside cover of this Supplement in
exchange for all Exchange Partnership Units held by the Limited Partner. A
Limited Partner must exchange all of his or her Exchange Partnership Units if he
or she wishes to participate in the Exchange Offering; partial exchanges by a
Limited Partner will not be accepted. Limited Partners who accept the Exchange
Offering and thereby receive Units will be entitled to convert all
4
<PAGE>
or a portion of such units into an equivalent number of Common Shares of the
Trust at any time and from time to time, subject to certain restrictions
described in the Prospectus at "The Exchange Offering."
The Exchange Offering has been structured to permit each Limited Partner,
if desired, to elect not to accept the offering and instead retain his or her
existing interest in the Exchange Partnership on terms substantially the same as
those of his or her original investment. The Exchange Partnership will continue
to own the same interest in the same property it owned prior to completion of
the offering. Upon the completion of the offering and assuming the requisite
number of Limited Partners accept the offering, Limited Partners who elect not
to accept the offering ("Non-participating Partners") and the Operating
Partnership will constitute all the limited partners of the Exchange
Partnership. Non-participating Partners will retain all of their existing
economic and voting rights, rights to receive reports and other rights as set
forth under the partnership's original agreement of limited partnership. As
described in further detail in the Prospectus at "Amendments to Partnership
Agreements of Participating Exchange Partnerships," assuming the Exchange
Partnership is a Participating Exchange Partnership (as defined above),
following the Exchange Offering, the original partnership agreement of the
partnership will be amended to require the prior approval (majority or
unanimous, as the case may be) of Non-participating Partners voting as a class
in respect of matters as to which Limited Partners are entitled to vote under
the partnership agreement prior to the completion of the Exchange Offering. The
partnership agreement, as amended, will continue in full force and effect after
the completion of the offering as long as any Non-participating Partners remain
limited partners of the Exchange Partnership. See the Prospectus at "The
Exchange Offering."
THE CASH OFFERING
The Trust is currently offering on a best efforts basis a maximum of
2,500,000 Common Shares in the Cash Offering at a purchase price of $10 per
share. As of the date of this Supplement, the Trust has sold SK fill in when
supplement is ready Common Shares in the Cash Offering (representing gross
proceeds of $SK fill in when supplement is ready). The Trust will use all net
cash proceeds of the Cash Offering to acquire Units in the Operating
Partnership, which, in turn, will use such proceeds (i) to acquire real estate
investments, (ii) for capital improvements which may be required on properties
in which the Operating Partnership acquires an interest and (iii) for working
capital purposes. The Trust will apply for listing on the American Stock
Exchange (the "AMEX") of the Common Shares being offered in the Cash Offering
and the Common Shares into which Units issued in the Exchange Offering will be
exchangeable. The Trust will deliver at its own expense to each Limited Partner
who requests in writing, a copy of the Prospectus of the Trust relating to the
Cash Offering and any amendments and supplements thereto.
In June 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Heatherwood Kissimmee, Ltd., a Florida limited partnership which
owns fee simple title to a 67-unit residential apartment property referred to as
Heatherwood Apartments - Phase I located in Kissimmee, Florida. The purchase
price paid was $830,000. The property is subject to first mortgage financing
with a current principal balance of approximately $1,245,000.
In July 1998, the Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interest in Crystal Court Apartments II, Ltd., a Florida limited partnership
which owns fee simple title to an 80-unit residential apartment property
referred to as Crystal Court Apartments - Phase II located in Lakeland, Florida.
The purchase price paid was $756,293. The property is subject to first mortgage
financing with a current principal balance of approximately $1,488,000.
In July 1998, the Operating Partnership also made capital contributions in
the range of $8,000 to $14,000 (aggregate amount approximately $200,000) to
certain real estate partnerships managed by affiliates of the Managing
Shareholder, including each of the Exchange Partnerships. In exchange, the
Operating Partnership received a special non-voting limited partnership interest
in such partnerships. Each partnership interest acquired by the Operating
Partnership is subordinated to the priority economic return
5
<PAGE>
of the limited partners of the respective partnership and is not eligible to
participate in the Exchange Offering.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information describing the foregoing investments made by the
Operating Partnership to date, first mortgage financing to which property
interests acquired are subject and financial statements reflecting the results
of operations of the properties. Other than the transactions described above,
the Operating Partnership has not committed any of the remaining net proceeds of
the Cash Offering to any specific property interests. The Operating Partnership
continues to investigate other investment opportunities to acquire property
interests for cash and/or Units in the Exchange Offering and other transactions,
including but not limited to interests held in additional properties by
unaffiliated parties and by other limited partnerships managed by affiliates of
the Managing Shareholder.
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership by the Operating Partnerships after
they accept the Exchange Offering. Therefore, Limited Partners who elect to
accept the Exchange Offering may not have available any information on
additional real estate investments to be acquired with net proceeds of the Cash
Offering, in the Exchange Offering or other transactions, in which case they
will be required to rely on management's judgment regarding those acquisitions.
BUSINESS OF THE EXCHANGE PARTNERSHIP
The Exchange Partnership was organized as a Florida limited partnership in
April 1996. In May 1996, Baron Capital XXXI, Inc., the General Partner of the
Exchange Partnership and an affiliate of the Managing Shareholder, sponsored a
private offering of 1,600 units of limited partner interest in the Exchange
Partnership at a purchase price of $500 per unit (gross proceeds of $800,000).
The offering was fully subscribed and closed in October 1996. The partnership
invested the net proceeds of its offering to acquire all of the limited
partnership interests in a limited partnership which holds a fee simple interest
in a 72-unit residential apartment property referred to as the Steeplechase
Apartment Property located in Anderson, Indiana.
The property is subject to a first mortgage having a principal balance at
May 31, 1998 of approximately $1,244,892, a fluctuating interest rate of 7.25%
for the first two years of the loan, 7.75% for years three and four and 8.25%
thereafter, and a maturity date of October 2006. The loan amortizes on a 30-year
basis.
For further information concerning the Exchange Partnership, its original
private offering, the property interest it holds, the mortgage to which the
underlying property may be subject, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to the tables entitled "Property Information" and "Mortgage Information"
on pages ___ and ____ of the Prospectus and Exhibit B to the Prospectus.
CERTAIN RISKS
Limited Partners considering whether to exchange their Exchange Partnership
Units for Operating Partnership Units in the Exchange Offering should carefully
consider all the various risks described in the Prospectus. See the Prospectus
at "Risk Factors." Such risk factors include, among others, the risks described
in the Prospectus under "Risk Factors - Arbitrary Offering Price; No Separate
Representation of Offerees; Offerees May Not Have Information Available to
Evaluate Properties Prior to Decision Whether to Accept the Exchange Offering;
Possible Adverse Influence of Original Investors; Conflicts of Interest;
Investors in Successful Exchange Properties Could Lose Advantage by Combining
with Less Successful Exchange Properties; Several Factors Could Have Possible
Adverse Effects on Operation of Properties; Competition; Debt Service
Obligations Could Adversely Affect Cash Flow; Possible Adverse Effects as a
6
<PAGE>
Result of Loss of Key Management; Uncertainty of Successful Completion of Cash
Offering and Exchange Offering; Limited Marketability of Units and Common
Shares; and Potential Adverse Tax Consequences."
TAX CONSEQUENCES
The Operating Partnership
No ruling has been or will be sought from the Internal Revenue Service
("IRS") as to the status of the Operating Partnership as a partnership for
federal income tax purposes. Instead, the Operating Partnership has relied on
the opinion of special tax counsel that, based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations thereunder, published revenue
rulings and court decisions, the Operating Partnership will be classified as a
partnership for federal income tax purposes. In rendering its opinion, tax
counsel has relied on certain factual representations discussed in the
Prospectus made by the Operating Partnership and the Trust, as its general
partner. See the Prospectus at "Tax Status" and "Federal Income Tax
Considerations."
If the Operating Partnership were taxed as a corporation in any taxable
year, its items of income, gain, loss and deduction would be reflected only on
its tax return rather than being passed through to Unitholders, and its net
income would be taxed to the Operating Partnership at corporate rates currently
ranging to a maximum of 35%. In addition, any distribution made to a Unitholder
would be treated as either taxable dividend income at a rate currently ranging
to a maximum of 39.6% (to the extent of the Operating Partnership's current or
accumulated earnings and profits) or (in the absence of earnings and profits) a
non-taxable return of capital (to the extent of the Unitholder's tax basis in
his or her Units) or taxable capital gain (after the Unitholder's tax basis in
the Units has been reduced to zero). Accordingly, treatment of the Operating
Partnership as an association taxable as a corporation would result in a
material reduction in a Unitholder's cash flow and after-tax return and thus
would likely result in a substantial reduction of the value of the Units.
Exchange of Exchange Partnership Units for Operating Partnership Units
Based on certain factual representations made by the Operating Partnership
and the General Partner to special tax counsel, a contribution by a Limited
Partner of Exchange Partnership Units to the Operating Partnership in exchange
for Units of the Operating Partnership (the "Exchange") will not result in the
recognition of taxable gain at the time of the Exchange so long as the Limited
Partner does not receive in connection with the Exchange a cash distribution (or
a deemed cash distribution resulting from relief from liabilities) that exceeds
such Limited Partner's aggregate adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange. See the Prospectus at "Federal
Income Tax Considerations - Exchange of Exchange Partnership Units for Operating
Partnership Units" for a more detailed discussion of other factors that could
result in the recognition of gain upon the Exchange.
The Limited Partners will not receive any cash distributions in connection
with the Exchange Offering. Whether any Limited Partner will receive a deemed
cash distribution attributable to relief from liabilities in connection with the
Exchange that exceeds his or her adjusted basis in his or her Exchange
Partnership Units at the time of the Exchange will depend on a number of
variables, including such Limited Partner's adjusted tax basis in his or her
partnership interest at such time; the assets that the Limited Partner
originally contributed to the Exchange Partnership in exchange for such Exchange
Partnership Units; the indebtedness, if any, of the Exchange Partnership at the
time of the Exchange; the tax basis of any such contributed assets in the hands
of the Exchange Partnership at the time of the Exchange; the Limited Partner's
share of the "unrealized gain" with respect to the Exchange Partnership's assets
at the time of the Exchange; and the extent to which the Limited Partner
includes in his or her basis for his or her Exchange Partnership Units a share
of the Exchange Partnership's recourse liabilities by reason of indemnification
or "deficit restoration" obligations that will be eliminated by reason of the
Exchange. See "Federal Income Tax Considerations - Exchange of Exchange
Partnership Units for Operating Partnership Units."
7
<PAGE>
The Trust
The Trust will elect to be taxed as a real estate investment trust ("REIT")
under Sections 856 through 860 of the Code commencing with its taxable year
ending December 31, 1998. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute to its Shareholders at least 95% of its REIT taxable income
(determined without regard to the dividends paid deduction and by excluding net
capital gains). For taxable years beginning after August 5, 1997, the Taxpayer
Relief Bill of 1997 (the "1997 Act") (1) expands the class of excess noncash
items that are excluded from the distribution requirement to include income from
the cancellation of indebtedness and (2) extends the treatment of original issue
discount and coupon interest as excess noncash items to REITs, like the Trust,
that use an accrual method of accounting.
As a REIT, the Trust generally will not be subject to federal income tax on
net income it distributes currently to its Shareholders. If the Trust fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
at regular corporate rates and may not be able to qualify as a REIT for the four
subsequent taxable years. See the Prospectus at "Risk Factors - Potential
Adverse Tax Consequences - Taxation of the Trust as a Corporation if it Fails to
Qualify as a REIT" and "Federal Income Tax Considerations - Taxation of the
Trust." Even if the Trust qualifies for taxation as a REIT, the Trust may be
subject to certain federal, state and local taxes on its income and property.
EFFECTS OF THE FORMATION TRANSACTIONS,
CASH OFFERING AND EXCHANGE OFFERING
The transactions relating to the formation of the Trust and the Operating
Partnership and to the Cash Offering and Exchange Offering will have various
beneficial effects on the operations of the Trust, the Operating Partnership and
the Exchange Partnerships, including the operation of the Exchange Properties
and other properties to be acquired, but may have certain disadvantages for
Limited Partners who accept the Exchange Offering. See the Prospectus at "The
Exchange Offering - Effects of the Formation Transactions, Cash Offering and
Exchange Offering."
The principal benefits to Limited Partners who accept the Exchange Offering
include the following:
o The Limited Partners will be able to participate in a more diversified
investment in a more advantageous form of ownership with a greater
potential for marketability of the security.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The Trust and the Operating Partnership, on the one hand, and each of
the Exchange Partnerships, on the other hand, will benefit from a
highly qualified management team which has been assembled and the
economy of scale attendant to operation of the Exchange Properties as
part of a single business entity. The General Partner believes that a
single self-managed structure of ownership by the Exchange
Partnerships and administration of the property interests which are
controlled by them and which were projected to be acquired by future
affiliated programs would be far more efficient, cost effective and
advantageous for operations and for the various program investors.
o The Trust and the Operating Partnership will be able to acquire
interests in residential apartment properties with cash and Units.
o The Trust and the Operating Partnership will have enhanced ability to
obtain more favorable terms for the financing of its assets including,
where appropriate, the Exchange Properties.
8
<PAGE>
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange all or a
portion of their Units for an equivalent number of Common Shares of
the Trust. The exchange to Common Shares may be made at any time at
the sole discretion of each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership in
accordance with its existing business plan and sale or liquidation of
the partnership assets held, and has determined that the Exchange
Offering provides equal or greater value to the Limited Partners
compared with any other considered alternative. Continuation of the
existing business plan and liquidation have been determined to be
impractical and disadvantageous for the Limited Partners. The General
Partner has either explored the sale of the partnership assets or
determined that such a sale would be premature as it would not
maximize investor value.
The principal disadvantages to Limited Partners who accept the Exchange
Offering include the following (see the Prospectus at "Risk Factors"):
o Conflicts of interests exist among the Trust, the Operating
Partnership, the Managing Shareholder, the Original Investors and
their affiliates with respect to the formation and future operations
of the Trust and the Operating Partnership.
o The Original Investors have significant influence over the affairs of
the Trust and the Operating Partnership by virtue of their collective
ownership of Operating Partnership Units.
o Limited Partners who accept the Exchange Offering will pay greater
consideration per Unit than the Original Investors paid for their
Units.
VALUATION METHOD
The value of the Exchange Partnership has been estimated at $2,125,000. The
value is based on an appraisal performed on the partnership's direct or indirect
property interests by a qualified and licensed independent appraisal firm. See
the Prospectus at "The Exchange Offering - Exchange Property Appraisals." The
number of Units being offered in respect of the Exchange Partnership and each of
the other Exchange Partnerships differs based upon a number of factors,
including, among others, the estimated appraised market value and operating
history of the property in which the partnership owns an interest, the amount of
distributed cash flow generated by the property, the period of time that the
property has been held by the partnership and the property's overall condition.
The General Partner of the Exchange Partnership believes that the Exchange
Offering is fair to the Limited Partners and recommends that they accept the
Exchange Offering for the following reasons:
o The Units to be issued in the Exchange Offering have been valued based
upon a qualified independent third party appraisal of the Exchange
Partnership's property interests and reflect a value greater than the
Limited Partners' original investments.
o The Exchange Offering has been structured to permit each Limited
Partner, if desired, to elect not to accept the offering and instead
retain his or her existing interest in the partnership on terms
substantially the same as those of his or her original investment.
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<PAGE>
o The Exchange Offering will provide each Limited Partner with a
significantly more diverse interest in income producing real property
with a greater opportunity that the interest received will be
marketable in the future.
o The Trust and the Operating Partnership have been able to attract
highly experienced management and financial personnel capable of
managing a substantially larger real estate portfolio.
o The completion of the Exchange Offering is anticipated to create an
economy of scale and provide the Exchange Partnership with a lower
operating cost per residential unit and as a consequence increase
operating performance.
o The General Partner believes that a single self-managed structure of
ownership by the Exchange Partnerships and administration of the
property interests which are controlled by them and which were
projected to be acquired by future affiliated programs would be far
more efficient, cost effective and advantageous for operations and for
the various program investors.
o The Exchange Offering has been designed to afford Limited Partners who
accept the offering the benefit of a deferral of any recognition of
taxable gain until they exercise their right to exchange their Units
for an equivalent number of Common Shares of the Trust. The exchange
to Common Shares may be made at any time at the sole discretion of
each Limited Partner.
o The General Partner considered various alternatives to the Exchange
Offering, including continuation of the Exchange Partnership's
existing business plan and sale or liquidation of the partnership
assets held, and has determined that the Exchange Offering provides
equal or greater value to the Limited Partners compared with any other
considered alternative.
Set forth below is certain information relating to (i) the appraised value
of the property interests held by the Exchange Partnership, (ii) the current
principal balance of mortgage financing secured by the underlying property,
(iii) other assets and liabilities of the partnership and (iv) the valuation of
Units to be offered to the Limited Partners in the Exchange Offering:
<TABLE>
<S> <C>
Appraised value of property interests: $2,125,000
Cash and cash equivalent assets: $18,764
Other assets: N/A
5/31/98 principal balance of mortgage financing
secured by property: $1,244,892
Other liabilities: $78,757
Value assigned to the Partnership(1): $2,125,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(2): 87,606 Units ($876,060)
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(2): 110 Units ($1,100)
Percentage of all Units offered to the Limited
Partners in the Partnership in relation to the
maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 6.25%
Capital contributions made by Original Investors to Partnership: $100,000 cash; waiver of all ongoing fees payable to
General Partner of Partnership; assignment to the
Operating Partnership of all back-end interests of
the General Partner in the Partnership; and
advancement to date of at least $300,000 in
formative expenses.
</TABLE>
- ----------
(1) Based on the appraised market value of the Exchange Partnership's interest
in residential apartment property and other considerations discussed
herein.
(2) Valuation of Exchange Partnership less current principal balance of first
mortgage and other indebtedness. For purposes of the Exchange Offering,
each Unit to be issued has an initial value of $10.00, which is the price
per share at which the Trust is currently offering Common Shares in the
Cash Offering. As described above at "The Exchange Offering," Unitholders
may exchange all or a portion of their Units for an equivalent number of
Common Shares at any time following the offering.
COMPENSATION
From the inception of the Exchange Partnership in April 1996 through May
31, 1998, the General Partner has not been paid any compensation in connection
with the operation of the partnership (excluding commissions and fees in
connection with the original private offering). During such period, the General
Partner has not received any cash distributions from the partnership. If the
compensation structure to be in effect after the partnership's participation in
the Exchange Offering had been in effect during such period, the General Partner
would not have been entitled to be paid any compensation or cash distributions
during such period.
For the first year of operations of the Trust and the Operating
Partnership, Mr. McGrath, the sole stockholder, director and executive officer
of the General Partner of the Exchange Partnership and of the corporate general
partner of each of the other Exchange Partnerships, has agreed to serve as Chief
Executive Officer of the Trust, the Operating Partnership and the Managing
Shareholder for no cash compensation. In lieu of a salary, he has agreed to be
compensated in the form of Common Shares in an amount not to exceed 25,000
shares to be determined by the Executive Compensation Committee of the Board of
the Trust. He will also receive health benefits. Thereafter, Mr. McGrath's
compensation and benefits will be determined annually by the Executive
Compensation Committee.
In connection with the formation of the Trust and the Operating
Partnership, the Original Investors (comprised of Mr. McGrath and Robert S.
Geiger, who had no prior affiliation with the Trust, the Operating Partnership,
the Managing Shareholder or any of the Exchange Partnerships) have each received
an amount of Operating Partnership Units which are exchangeable (with certain
restrictions described below) into 9.5% of the Common Shares of the Trust
outstanding after the completion of the Cash Offering and the Exchange Offering,
on a fully diluted basis assuming that all then outstanding Units (other than
those acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. As described further below, Mr. McGrath and Mr. Geiger have
deposited such Units into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
The Original Investors' consideration for the Units issued to them include
(1) an initial cash contribution of $100,000 to the Operating Partnership; (2)
an assignment to the Operating Partnership or waiver of all future economic
interests (including back end interests and administrative fees) attributable to
11
<PAGE>
the corporate general partners including the General Partner, which manage
Participating Exchange Partnerships; and (3) the advancement to date of in
excess of $300,000 in formative expenses, including the support of the
activities of the entire operating staff of an affiliate of the Managing
Shareholder in connection with the offerings.
As noted above, under a security escrow agreement with American Stock
Transfer & Trust Company ("ASTTC") (the transfer agent and registrar for the
Common Shares being offered in the Cash Offering and the Units being offered in
the Exchange Offering), the Original Investors have deposited into an escrow
account with ASTTC the Units issued to them in connection with the formation of
the Trust and the Operating Partnership. Under the agreement, 25% of the
escrowed Units may be released from the escrow account on the sixth, seventh,
eighth and ninth anniversary dates of the commencement of the Cash Offering,
provided that the escrowed Units may be released in their entirety earlier if
either (i) the Trust achieves annual net earnings per Common Share of at least
$.50 (i.e., 5% of the public offering price per share), after taxes and
excluding extraordinary items, for any consecutive two-year period following the
commencement of the Cash Offering, or (ii) the Trust achieves average annual net
earnings per share of at least $.50 (after taxes and excluding extraordinary
items) for any consecutive five-year period following the commencement of the
Cash Offering, or (iii) the Common Shares have traded on a national stock market
at a price per share of at least $17.50 (i.e., 175% of the public offering price
per share) for at least 90 consecutive trading days following the first
anniversary of the commencement of the Cash Offering. In addition, the Original
Investors' Units will be subject to the trading restrictions under Rule 144
issued under the Securities Act of 1933, as amended.
The effect of the escrow arrangement described above is that as long as
their Units are held in the escrow account, the Original Investors will not be
able to cash out their investment in the Operating Partnership by exchanging
their Units into Common Shares and then selling the Common Shares. Furthermore,
although the Original Investors will retain any voting rights to which the
escrowed Units are entitled, as long as the Units are escrowed, any dividends
paid on the escrowed Units will be held in the escrow account and available for
distribution of the assets of the Operating Partnership (such as its
dissolution, liquidation, merger or sale of substantially all of its assets) to
the extent that the other Shareholders and Unitholders otherwise would not
receive in connection with such transaction, distributions in an amount equal to
at least the initial public offering price of the Common Shares.
CASH DISTRIBUTIONS TO LIMITED PARTNERS
During each year since inception, the Exchange Partnership has made cash
distributions to the Limited Partners in the following amounts:
1996: $2,942.00
1997: $76,600.60
1998 (through
May 31st): $19,600.00
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "Selected Financial Data" contains
selected audited operating data for the 14 Exchange Properties and two
properties in which the Operating Partnership has acquired an interest as of the
date of this Supplement (the "Acquired Properties"), on a consolidated basis for
the twelve-month periods ended December 31, 1996 and December 31, 1997, and
selected unaudited operating data for such properties on a consolidated basis
for the five-month period ended May 31, 1998. The data was derived from the
statements of revenues and certain expenses of the limited partnerships which
directly or indirectly hold record title to the Exchange Properties. The
statements of revenues and certain expenses, including the notes thereto, for
the 14 Exchange Partnerships are included in Exhibit D to the Prospectus and
those for the Acquired Properties are included in Exhibit E to the Prospectus.
The statements should be reviewed by the Limited Partners prior to making a
decision whether or not to accept
12
<PAGE>
the Exchange Offering. The statements of revenues and certain expenses exclude
material expenses described in the notes thereto (including partnership
administrative expenses, major maintenance, depreciation, amortization and
professional fees) that would not be comparable to those resulting from the
proposed future operations of the Exchange Properties and the Acquired
Properties.
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner and Limited Partners are
governed by the agreement of limited partnership of the Exchange Partnership
("Exchange Partnership Agreement"). The agreement is attached as Exhibit A to
the private placement memorandum delivered to the Limited Partners in connection
with the partnership's original private offering. Following the Exchange
Offering, each Non-participating Partner will retain his or her existing
interest in the Exchange Partnership. The Non-participating Partners will retain
all of their economic and voting rights, rights to receive reports and other
rights as set forth in the Exchange Partnership Agreement. As described in
further detail in the Prospectus at "Amendments to Partnership Agreements of
Participating Exchange Partnerships," assuming the Exchange Partnership is a
Participating Exchange Partnership (as defined herein), following the Exchange
Offering, the Exchange Partnership Agreement will be amended to require the
prior approval (majority or unanimous, as the case may be) of Non-participating
Partners voting as a class in respect of matters as to which Limited Partners
are entitled to vote under the partnership agreement prior to the completion of
the Exchange Offering. The partnership agreement, as amended, will continue in
full force and effect after the completion of the offering as long as any
Non-participating Partners remain limited partners of the Exchange Partnership.
See the Prospectus at "The Exchange Offering."
Limited Partners who accept the Exchange Offering will become limited
partners in the Operating Partnership and have rights set forth under the
Operating Partnership Agreement as summarized below and in the Prospectus at
"Comparison of Rights of Holders of Exchange Partnership Units, Operating
Partnership Units and Trust Common Shares." Limited Partners who accept the
Exchange Offering and thereby receive Operating Partnership Units will be
entitled to exchange all or a portion of such units for an equivalent number of
Common Shares of the Trust at any time and from time to time, subject to certain
restrictions described in the Prospectus at "The Exchange Offering." Holders of
Trust Common Shares will have the rights set forth under the Declaration of
Trust for the Trust which are summarized in the Prospectus at "Summary of
Declaration of Trust" and "Comparison of Rights of Holders of Exchange
Partnership Units, Operating Partnership Units and Trust Common Shares."
The rights of Limited Partners in the Exchange Partnership differ in
certain respects from the rights they will have as limited partners in the
Operating Partnership if they accept the Exchange Offering and the rights they
will have upon the exercise of their right to exchange Operating Partnership
Units for an equivalent number of Trust Common Shares. The following discussion
compares the material provisions of each type of security. For a more detailed
comparison of the respective rights and obligations of the General Partner and
Limited Partners of the Exchange Partnership, the Trust, as general partner of
the Operating Partnership, and Unitholders, and the Managing Shareholder of the
Trust and Shareholders, see the Prospectus at "Comparison of Rights of Holders
of Exchange Partnership Units, Operating Partnership Units and Trust Common
Shares."
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
Operating Partnership: Additional partnership interests may be sold in the
future in the sole discretion of the Trust, as general partner. See also "Trust"
below.
13
<PAGE>
Trust: The Managing Shareholder, with the approval of a majority of the
Independent Trustees, may cause the Trust to issue additional Common Shares and
Preferred Shares. If the Trust issues additional securities, (i) the Trust must
cause the Operating Partnership to issue to the Trust, interests in the
Operating Partnership which represent economic interests in the Operating
Partnership which are substantially similar to such additional securities and
(ii) the Trust must contribute to the Operating Partnership the net proceeds
from, or the property received in consideration for, the issuance of any such
additional securities and from the exercise of rights contained in such
additional securities.
In addition, upon the exercise of an option granted for Common Shares pursuant
to an employee stock option plan, the Trust must cause the Operating Partnership
to issue to the Trust one Unit for each Common Share issued upon such exercise
and the Trust must contribute to the Operating Partnership the net proceeds
received from such exercise. The Operating Partnership will also issue Units to
its employees or employees of any subsidiary upon the exercise by any such
employees of an option to acquire Units granted by the Operating Partnership
pursuant to an employee stock option plan.
The Trust will also issue Common Shares on a one-for-one basis to holders of
Units who exercise their rights to exchange their Units into an identical number
of Common Shares, subject to certain exceptions described in the Prospectus at
"The Exchange Offering."
Term of Existence
Exchange Partnership: Terminates on December 31, 2025 (the year of the fortieth
anniversary of its formation), unless terminated earlier by law or under the
provisions of the Exchange Partnership Agreement, including (i) the
determination of a majority in interest of Limited Partners to dissolve the
partnership, (ii) actions affecting the activities of the General Partner
(including, among other things, resignation or dissolution) unless a majority in
interest of the Limited Partners vote to continue the partnership and appoint a
successor general partner, and (iii) the sale of all or substantially all of the
property of the partnership.
Operating Partnership: Terminates on December 31, 2098 unless terminated earlier
by law or under the provisions of the Operating Partnership Agreement, including
(i) the withdrawal of the Trust as general partner, unless a majority in
interest vote to continue the Operating Partnership and appoint a successor
general partner, (ii) the general partner's election to dissolve the Operating
Partnership with the approval of limited partners holding a majority in interest
of the Units, (iii) the sale of all or substantially all of the properties of
the Operating Partnership, (iv) the merger of the Operating Partnership with or
into another entity, (v) the bankruptcy or insolvency of the Trust, and (vi) the
commencement of any proceedings against the Trust seeking its reorganization,
liquidation, dissolution or similar relief or the involuntary appointment of a
trustee to receive or liquidate the Trust or any substantial portion of its
properties and such proceeding or appointment has not been dismissed, vacated or
stayed within a specified period of time.
Trust: Terminates on December 31, 2098 unless terminated earlier (i) by law,
(ii) the determination of the holders of at least a majority of the Trust Shares
then outstanding, (iii) the sale of all or substantially all of the Trust's
property or (iv) the withdrawal of the Cash Offering by the Managing Shareholder
of the Trust prior to its termination date.
Management Control
Exchange Partnership: General Partner, subject to certain voting rights of
limited partners described below at "Meetings and Voting Rights."
Operating Partnership: The Trust, as general partner, subject to certain voting
rights of limited partners described below at "Meetings and Voting Rights."
14
<PAGE>
Trust: Managing Shareholder and Independent Trustees, acting together as the
Board, subject to certain voting rights of Shareholders.
Economic Interest
Exchange Partnership: The partnership will maintain for each of the Limited
Partners and the General Partner a capital account to which will be allocated
his, her or its share of all items of partnership income, gain, expense, loss,
deduction and credit determined in accordance with the Code and regulations
issued thereunder. After giving effect to certain technical special allocation
provisions, (i) taxable income is allocable 100% to the General Partner until
the profit allocated plus the cumulative profit allocable to the General Partner
for prior fiscal periods during which a profit was earned by the Partnership
equal the cumulative amounts distributable to the General Partner and the
balance, if any, is allocated to the Limited Partners and (ii) taxable losses
are allocable 99% to the Limited Partners and 1% to the General Partner,
provided, however, that losses are not allocable to any Limited Partner to the
extent that such allocation would cause such Limited Partner to have an adjusted
capital account deficit at the end of the taxable year (which excess losses are
allocable to the General Partner).
The partnership is required to distribute at least quarterly all distributable
cash flow (defined as all cash received by the partnership from any source,
other than capital contributions, loan proceeds and proceeds from the sale or
refinancing of property, less operating expenses, principal and interest
payments on indebtedness, capital expenditures, General Partner fees and
reasonable cash reserves). Cash distributions are allocable as follows:
Allocation of Distributable Cash: Each fiscal year, all distributable cash
is distributed to theLimited Partners until they have received a 12.5%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive a similar return on its capital contribution.
Thereafter, the Limited Partners are entitled to receive 50% of any remaining
distributable cash during the fiscal year less a reasonable cash reserve
determined by the General Partner, and the General Partner the remaining 50%.
Allocation of Net Proceeds from Property Sale or Refinancing: After Limited
Partners have received an aggregate amount (including prior distributions) equal
to their capital contributions plus a 12.5% yearly cash-on-cash return, the
General Partner is entitled to receive any remaining net proceeds until it has
received a similar return on its capital contribution; thereafter the Limited
Partners and the General Partner share any remaining net proceeds 50%/50%.
Upon liquidation of the partnership, the Limited Partners and General Partner
are entitled to receive a share of the net liquidation proceeds (remaining after
payment of, or the creation of a reasonable reserve for, all of the
partnership's liabilities) in proportion to their respective capital account
balances.
The corporate general partners, including the General Partner, of each of the
Exchange Partnerships have agreed to assign to the Operating Partnership or
waive all of their ongoing economic interest (including back-end interests and
administrative fees) in any partnership which participates in the Exchange
Offering. See the Prospectus at "The Exchange Offering."
Operating Partnership: The Operating Partnership will maintain for each of its
partners a capital account to which will be allocated the partner's share of all
items of partnership income, gain, expense, loss, deduction and credit
determined in accordance with the Code and regulations issued thereunder.
After giving effect to certain technical special allocation provisions, (i)
taxable income is allocable 100% to the general partner to the extent that, on a
cumulative basis, net losses previously allocated to the general partner exceed
net income previously allocated to the general partner, and the balance is
allocable to limited partners and the general partner in proportion to their
respective ownership of Units, and (ii) net losses are allocable to the limited
partner and the general partner in proportion to their respective ownership of
Units, provided, however, that net losses are not allocable to any limited
partner to the extent
15
<PAGE>
that such allocation would cause such limited partner to have an adjusted
capital account deficit at the end of such taxable year (which excess losses are
allocable to the general partner).
The Operating Partnership is required to distribute at least quarterly all
available cash flow (defined as (i) all cash revenues received from any source,
other than capital contributions to the Operating Partnership and cash flow
treated as net capital gains under the Code (which will be distributed in the
Trust's discretion), plus (ii) the amount of any reduction in reserves). Such
distributions are to be made in the following priority: (x) first to holders of
any class of partnership interest having a preference over Units (no such
preferred class exists as of the date of this Supplement or is currently
anticipated to be issued by the management of the Operating Partnership) and (y)
thereafter, to holders of Units. Each Unitholder will receive a share of such
distributions in proportion to his or her respective ownership of Units.
Upon liquidation of the Operating Partnership, the limited partners and the
general partner are entitled to receive a share of the net liquidation proceeds
of the partnership (remaining after payment of, or the creation of a reasonable
reserve for, all of the partnership's liabilities and obligations) in proportion
to their respective capital account balances.
Trust: The Managing Shareholder has full discretion as to the timing and amount
of distributions to be made by the Trust, provided, however, it is required to
endeavor to declare and make distributions as required for the Trust to qualify
as a REIT under the Code so long as it believes such qualification continues to
be in the best interest of the Trust. The Trust intends to make quarterly
distributions of available funds to its Shareholders. Shareholders will be
entitled to receive any such distributions on a pro rata basis for each
outstanding class of Shares taking into account the relative rights of priority
of each class entitled to receive distributions. No preferred class which has a
priority over Common Shares exists as of the date of this Supplement or is
currently anticipated to be issued by the management of the Trust.
Upon liquidation of the Trust, the Shareholders are entitled to receive the net
liquidation proceeds (remaining after payment of, or the creation of a
reasonable reserve for, all of the Trust's liabilities and obligations) on a pro
rata basis for each class of Shares taking into account the relative rights of
priority of each class.
Property Investments
Exchange Partnership: Investment made in residential apartment property as
described in the Prospectus at "Prior Performance of Affiliates of Managing
Shareholder" and "Initial Real Estate Investments" and in Exhibits A and B
thereto.
Operating Partnership and Trust: Securities and net proceeds from the sale of
securities, including Common Shares, to be used to acquire a diversified
portfolio of equity or debt interests in respect of residential apartment
properties.
Restrictions on Transfers of Securities
Exchange Partnership: Transfers prohibited unless the General Partner consents
and certain other conditions are fulfilled.
Operating Partnership: Transfers permitted except where, in the opinion of legal
counsel, such transfer would require the filing of a registration statement
under applicable securities laws or would otherwise violate applicable
securities laws.
Trust: Common Shares are freely transferable by Shareholders subject to certain
restrictions on transfer which the Managing Shareholder deems necessary to
comply with the REIT provisions of the Code. See the Prospectus at "Federal
Income Tax Considerations - Taxation of the Trust - Stock Ownership Tests" and
"Capital Stock of the Trust - Restrictions on Ownership and Transfer." The
restrictions may have the
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effect of making an attempted takeover of the entities more difficult for an
acquirer. See the Prospectus at "RISK FACTORS - Anti-Takeover Provisions."
Tax Status
Exchange Partnership and Operating Partnership: Designed to be classified and
treated as partnerships for federal income tax purposes. As partnerships, they
are not subject to federal income tax. Instead, each limited partner is required
to report annually on his or her personal income tax return his or her allocable
share of the partnership's income, gain, loss, deductions, credits and items of
tax preference regardless of whether any distribution of cash or property is
made by the partnership to limited partners during any given year. A
distribution results in the recognition of income by each limited partner to the
extent that any cash distributed the adjusted tax basis in his or her limited
partnership units at that time. A limited partner who sells or transfers
Exchange Partnership Units will realize gain or loss equal to the difference
between the amount realized on the sale or transfer and the adjusted basis of
the units disposed of.
Trust: As long as it qualifies as a REIT, the Trust generally will not be
subject to federal income tax on that portion of its REIT taxable income or gain
which it distributes to Shareholders. It may, however, be subject to tax at
normal corporate rates upon any taxable income or capital gain not distributed
in any given year. As long as the Trust qualifies as a REIT, distributions made
to the Trust's taxable domestic non-tax-exempt Shareholders out of current or
accumulated earnings and profits (and not designated as capital gain dividends)
will be taken by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions (and for taxable
years beginning after August 5, 1997, undistributed amounts) that are designated
as capital gain dividends will be taxed as long-term capital gains (to the
extent they do not exceed the Trust's actual net capital gain for the taxable
year) without regard to the period for which the Shareholder has held Common
Shares.
In general, any loss upon a sale or exchange of Common Shares by a Shareholder
who has held such shares for six months or less will be treated as a long-term
capital loss, to the extent of distributions from the Trust required to be
treated by such Shareholder as long-term capital gains. A more detailed
description of the foregoing tax considerations and those applying to tax-exempt
and foreign Shareholders is set forth in the Prospectus at "Federal Income Tax
Considerations." The federal income tax treatment of REITs and shareholders of a
REIT are complex and should be reviewed with each offeree's tax advisor.
Pre-emptive Rights
Exchange Partnership, Operating Partnership and Trust: Security holders have no
conversion, redemption, preemptive or exchange rights to subscribe to any
securities issued by the Exchange Partnership, the Operating Partnership or the
Trust in the future, except in two instances as follows. First, if the General
Partner of the Exchange Partnership determines that it is necessary or in the
best interest of the partnership to commit additional funds to its property and
that such funds should not be financed from the partnership's earnings or
through additional indebtedness, the General Partner may, in its discretion,
give Limited Partners the first opportunity to purchase any additional units
that may be offered by the partnership. Second, holders of Operating Partnership
Units are entitled to exchange such units into an equivalent number of Trust
Common Shares at any time, subject to certain conditions described in the
Prospectus at "The Exchange Offering."
Managing Entity Removal and Resignation Rights
Exchange Partnership: Limited Partners holding at least a majority of the
outstanding Exchange Partnership Units may remove the General Partner if they
determine that the General Partner is not performing its powers, duties and
obligations in the best interests of the partnership. The General Partner may
resign by delivering written notice to the Limited Partners, provided, however,
such resignation will be effective not less than 90 days after notice thereof is
delivered to the Limited Partners only if the
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Limited Partners owning at least a majority of the Exchange Partnership Units
then outstanding have consented to such resignation.
Operating Partnership: The Trust may not be removed as general partner of the
Operating Partnership by the limited partners with or without cause. The Trust
may not transfer any of its general partnership interest or withdraw as general
partner except in certain limited circumstances.
Trust: The holders of at least 10% of the outstanding Common Shares may propose
the removal of the Managing Shareholder, an Independent Trustee or any other
member of the Board of the Trust. Removal of the Managing Shareholder requires
either the affirmative vote of a majority of the outstanding Common Shares
(excluding Common Shares held by the Managing Shareholder or its affiliates) or
the affirmative vote of a majority of the Independent Trustees.
The Managing Shareholder or a majority of the Independent Trustees may terminate
the Trust Management Agreement, and the Managing Shareholder may resign as
Managing Shareholder without cause or penalty by giving the Trust at least 60
days' prior written notice. The holders of at least a majority of the
outstanding Common Shares may also vote to terminate the Trust Management
Agreement.
Any member of the Board may resign by giving notice to the Trust, and may be
removed (i) for cause by the action of at least two-thirds of the remaining
members of the Board or (ii) with or without cause by action of the holders of
at least a majority of the then outstanding Shares entitled to vote thereon.
Reporting Rights
Exchange Partnership: Limited Partners are entitled to receive annual financial
statements. On the written request of Limited Partners holding at least 20% of
the outstanding limited partnership interests, the statements must be audited by
an independent public accountant and presented in accordance with generally
accepted accounting principles ("GAAP"). Limited Partners also have the right to
obtain other information about their respective partnerships and receive a list
of names and addresses of the partners of the partnership for proper partnership
purposes. Within 90 days after the close of each year, the partnership is
required to provide each Limited Partner with data necessary to report his or
her distributive share of partnership income, deductions and credits for federal
income tax purposes.
Operating Partnership: Within 120 days after the close of each partnership year,
the Operating Partnership is required to mail to each limited partner, an annual
report containing financial statements presented in accordance with GAAP and
audited by a nationally recognized accounting firm. Within 60 days after the
close of each quarter (except the last calendar quarter), the Operating
Partnership is required to mail to each limited partner a report containing
unaudited financial statements. The Operating Partnership must use all
reasonable efforts to furnish to limited partners, within 90 days after the
close of each taxable year, the tax information reasonably required by them for
federal and state income tax reporting purposes.
Each limited partner is entitled, upon written request and at his or her
expense, to obtain for proper partnership purposes a copy of the following from
the Operating Partnership: (i) most recent annual and quarterly reports filed
with the Securities and Exchange Commission (the "Commission") by the Trust
under applicable securities laws, (ii) the partnership's federal, state and
local income tax returns for each year, (iii) a current list of the name and
address of each Unitholder, (iv) the Operating Partnership Agreement, the
Certificate of Limited Partnership of the Operating Partnership filed in the
State of Delaware and all amendments thereto, and (v) information relating to
the amount of cash and other consideration contributed by each limited partner
and the date each limited partner became a partner of the Operating Partnership.
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Trust: The Trust is required to keep each Shareholder currently advised as to
activities of the Trust by quarterly reports, which are required to contain a
condensed statement of "cash flow from operations" for the year to date as
determined by the Managing Shareholder. Within 120 days after the close of each
fiscal year, the Trust is required to prepare and mail to each Shareholder an
annual report which includes the following: (i) audited financial statements
prepared in accordance with GAAP by the Trust's independent certified public
accountants; (ii) the ratio of the costs of raising capital during the period to
the capital raised; (iii) the aggregate amount of advisory fees and other fees
paid to the Managing Shareholder and its affiliates; (iv) the total operating
expenses stated as a percentage of the book amount of the Trust's investments
and as a percentage of its net income; (v) a report from the Independent
Trustees that the policies being followed by the Trust are in the best interests
of its Shareholders and the basis for such determination and; (vi) full
disclosure of all material terms, factors, and circumstances surrounding any and
all transactions involving the Trust, the Managing Shareholder, the Trustees,
any other members of the Board and any of their respective affiliates occurring
during the year.
In addition, the Trust is required to file with the Commission periodic reports
required under the federal securities laws (i.e, Form 10-KSB or Form 10-K annual
reports, Form 10-QSB or Form 10-Q quarterly reports, and Form 8-KSB or Form 8-K
current reports) for the fiscal year in which the Trust's Cash Offering
registration statement becomes effective and thereafter if either (i) the Trust
registers Common Shares under the Securities Exchange Act of 1934, as amended,
and qualifies for the listing of such shares on a stock exchange, (ii) the Trust
has more than 300 Shareholders, or (iii) the Trust is otherwise required to do
so by the applicable exchange or applicable law.
The Trust is required to use its reasonable best efforts to obtain tax and
accounting information required for federal income tax returns as soon as
possible after the conclusion of each year and to cause the resulting
information to be delivered to the Shareholders as soon as possible after
receipt from the accounting firm responsible for preparing such reports.
Shareholders have the right under the terms of the Declaration to obtain other
information about the Trust and may, at their expense, obtain a list of the
names and addresses of the Shareholders for proper Trust purposes. See "Summary
of Declaration Of Trust - Quarterly and Annual Reports" and " - Books and
Records; Tax Information."
Assessments
Exchange Partnership, Operating Partnership and Trust: No future assessments may
be required of security holders.
Amendments of Governing Agreements
Exchange Partnership: Requires the consent of the Limited Partners holding at
least a majority of the outstanding limited partnership interests except that
(i) the General Partner may amend the agreement in respect of certain specified
matters which will not adversely affect limited partners, and (ii) any amendment
may not without a Limited Partner's consent increase his or her liability or
change capital contributions required, economic interests, rights on dissolution
or any voting rights.
Operating Partnership: May be proposed by the Trust or by holders of at least
25% of the outstanding Operating Partnership Units. Except in the cases
described below, the consent of holders of at least a majority of the
outstanding Units is required for amendments to the Operating Partnership
Agreement. The Trust may amend the agreement without the consent of any limited
partners for the following purposes: (i) to add to the obligations of the Trust
in its capacity as general partner or to surrender for the benefit of limited
partners any right or power granted to the Trust or any of its affiliates, (ii)
to set forth the rights, powers, duties and preferences of the holders of any
additional interests in the Operating Partnership which may be issued in the
future, (iii) to satisfy any requirements contained in an order, ruling or
regulation of any federal or state agency or contained in any federal or state
law and (iv) for certain other specified matters of an inconsequential nature
and not materially adversely affecting the limited partners.
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The Operating Partnership Agreement may not be amended, without a limited
partner's consent, to convert his or her partnership interest into a general
partner's interest; modify his or her limited liability; alter his or her rights
to receive distributions or allocations of partnership income, gains, loss and
deductions; cause the dissolution of the Operating Partnership other than in
accordance with the terms of the agreement; amend the amendment provision of the
agreement described in this paragraph; or amend Article VI of the agreement or
any definition used therein which would have the effect of causing the
allocations in Article VI to fail to comply with the requirements of Section
514(c)(9)(E) of the Code.
The consent of all limited partners of the Operating Partnership is also
required to alter the restrictions on the Trust's authority set forth in Section
7.3 of the Operating Partnership Agreement. In addition, the consent of the
holders of at least two-thirds of the outstanding Units is required to amend any
of the following sections of the agreement: (i) Section 4.2(a) (pertaining to
the Trust's authority, without the approval of any limited partner, to cause the
Operating Partnership to issue additional partnership interests in the Operating
Partnership in the future); (ii) the second sentence of Section 7.1(a) (which
provides that the Trust may not be removed as general partner of the Operating
Partnership by the limited partners); (iii) Section 7.5 (pertaining to
limitations on the outside activities of the Trust); (iv) Section 7.6
(pertaining to contracts among the Operating Partnership, the Trust and any of
their respective affiliates or subsidiaries); (v) Section 7.8 (pertaining to
limitations on the liability of the Trust as general partner of the Operating
Partnership); (vi) Section 11.2 (pertaining to limitations on the Trust's right
to transfer its interest in the Operating Partnership): (vii) Section 13.1(c)
(which provides that the Operating Partnership may be terminated prior to
December 31, 2098 with the consent of the holders of at least a majority of the
outstanding Units); (viii) Section 14.1(d) (which provides for super-majority
voting requirements described herein; or (ix) Section 14.2 (pertaining to
meetings of limited partners).
Trust: The Managing Shareholder of the Trust may amend the Declaration without
approval of the Shareholders to maintain the federal income tax status of the
Trust as a REIT (unless it determines that REIT status is no longer in the best
interests of the Shareholders and holders of at least a majority of the Trust
Common Shares approve such determination); and to comply with law. Other
amendments to the Declaration may be proposed either by the Managing Shareholder
or holders of at least 10% of the outstanding Common Shares. Such proposed
amendments require the approval of a majority in interest of the Shareholders
entitled to vote.
Liability and Indemnification
Exchange Partnership: The General Partner is generally liable for all
liabilities and obligations of the partnership to the extent such obligations
are not paid by the partnership and are not by their terms limited to recourse
against specific property. Each Limited Partner is generally not liable for the
liabilities and obligations of the partnership.
The partnership is required to indemnify the General Partner, each of its
affiliates, and each of their respective officers, directors, shareholders,
partners, agents and employees (provided such indemnified persons have acted
within the scope of the partnership agreement) against any loss, liability or
damage incurred by such indemnified person arising out of the partnership's
private offering of limited partnership interests and the management of the
partnership's affairs within the scope of the partnership agreement, unless such
indemnified person's negligence or intentional or criminal wrongdoing is
involved; provided, however, such indemnification will not be made with respect
to any liability imposed by judgment arising out of any violation of federal or
state securities laws associated with such offering. No indemnified person is
liable to the partnership or to any partner thereof for any loss suffered by the
partnership which arises out of any action or inaction of such person if such
person, in good faith, determined that such course of conduct was in the best
interests of the partnership and within the scope of the partnership agreement
and did not constitute the negligence or intentional or criminal wrongdoing of
such person.
Operating Partnership: The Trust, as general partner of the Operating
Partnership, is generally liable for all obligations of the Operating
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Partnership to the extent such obligations are not paid by the Operating
Partnership and are not by their terms limited to recourse against specific
property. The limited partners (other than the Trust but only in its capacity as
general partner) have no responsibility for the liabilities of the Operating
Partnership.
The Trust has no liability for monetary damages to the Operating Partnership or
any partners or assignees for losses sustained or liabilities incurred as a
result of errors in judgment for any act or omission, unless (i) the Trust
actually received an improper benefit in money, property or services (in which
case, such liability shall be for the amount of the benefit actually received),
or (ii) the Trust's action or inaction was the result of active and deliberate
dishonesty and was material to the cause of action being adjudicated.
The Operating Partnership is required to indemnify the Trust, officers of the
Operating Partnership and trustees, officers and members of the Board of the
Trust and any other persons the Trust may designate, against any and all losses,
claims, damages and other amounts arising from any claims, demands, actions,
suits or proceedings that relate to the operations of the Operating Partnership
in which any such indemnified person may be involved, or threatened to be
involved, unless it is established that: (i) the act or omission of the
indemnified person was material to the matter giving rise to the proceeding and
either was committed in bad faith or was the result of active and deliberate
dishonesty; (ii) the indemnified person actually received an improper personal
benefit; or (iii) in the case of any criminal proceeding, the indemnified person
had reasonable cause to believe that the act or omission was unlawful.
Trust: Neither the Managing Shareholder, the Trustees, any other members of the
Board or any of their respective affiliates nor any Shareholders of the Trust
are liable for the liabilities of the Trust to third parties. In addition, such
persons are not liable to the Trust or to any Shareholder for any loss suffered
by the Trust which arises out of any action or inaction of such person, if such
person, in good faith, determines that such course of conduct was in the Trust's
best interest and within the scope of the Declaration and did not constitute
negligence or misconduct, in the case of any such person who is not an
Independent Trustee, or gross negligence or wrongful misconduct, in the case of
any such person who is an Independent Trustee.
The Trust is required to indemnify the Managing Shareholder, the Trustees, other
members of the Board and their respective affiliates, and each of their
respective officers, directors, shareholders, partners, agents and employees
(provided such persons have acted within the scope of the Declaration) against
any loss, liability or damage incurred by such person arising out of the Cash
Offering and the management of the Trust's affairs within the scope of the
Declaration, unless such person's negligence or intentional or criminal
wrongdoing is involved. However, such persons will not be indemnified for
liabilities arising under the Securities Act of 1933, as amended, except under
certain limited circumstances. See "SUMMARY OF DECLARATION OF TRUST Liability
and Indemnification."
Compensation of Managing Persons and Affiliates
Exchange Partnership: The allocation between the Limited Partners and General
Partner of distributable cash flow, net proceeds from the sale or refinancing of
property, and net liquidation proceeds is described above under " - Economic
Interest." The General Partner or an affiliate is also entitled to earn a real
estate commission in an amount equal to 50% of any commissions paid to an
outside broker on the sale of any partnership property, but in no event greater
than 3% of the sales proceeds. The corporate general partners, including the
General Partner, of each of the Exchange Partnerships have agreed to assign to
the Operating Partnership or waive all of their ongoing economic interest
(including back-end interests and administrative fees) in any partnership which
participates in the Exchange Offering. See the Prospectus at "The Exchange
Offering."
Operating Partnership: The Trust is not entitled to receive any compensation for
services performed in its capacity as general partner of the Operating
Partnership. The Trust, however, is entitled to be reimbursed on a monthly basis
for expenses incurred on behalf of the Operating Partnership. The Trust will use
net proceeds of the Cash Offering to acquire Operating Partnership Units, and as
the owner of such units will have the same economic rights as other holders on a
per unit basis, except that the Trust may not elect to
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exchange Units held for an equivalent number of Trust Common Shares. The
allocation of net liquidation proceeds among the partners of the Operating
Partnership is described above at "- Economic Interest."
Trust: The table included in the Prospectus at "Compensation of Managing Persons
and Affiliates - The Trust" describes all the material fees, compensation, and
other payments that may be received by the Managing Shareholder and its
affiliates in exchange for their respective services and expenses in connection
with the preparation of the Prospectus for the Cash Offering, the Cash Offering,
the operation of the Trust and the acquisition and disposition of the Trust's
property. The allocation of net liquidation proceeds among the Shareholders is
described above at "- Economic Interest."
Meetings and Voting Rights
Exchange Partnership: Meetings of the partners may be called at any time, either
by the General Partner or by Limited Partners holding at least 25% of the
outstanding Exchange Partnership Units, for any matter on which Limited Partners
may vote. The following actions require the affirmative vote of Limited Partners
holding at least a majority of the outstanding Exchange Partnership Units: (a)
reforming the partnership to replace the General Partner; (b) acceptance of the
resignation of the General Partner; (c) revising any contract between the
partnership and any affiliate of the General Partner; (d) removal of the General
Partner; (e) dissolution of the partnership prior to the expiration of its term
except as otherwise provided in the partnership agreement or as required by law;
(f) removal and replacement of the party appointed to supervise a liquidation of
the partnership's assets upon its dissolution; (g) the sale of all or
substantially all of the partnership's property; and (h) amending the
partnership agreement in certain respects as described above at "- Amendments
of Governing Agreements."
The consent of all Limited Partners is required for the following actions by the
Exchange Partnership: (a) contravening the partnership agreement or certificate
of limited partnership; (b) actions making it impossible to carry on the
ordinary course of business of the partnership; (c) confession of a judgment in
excess of 20% of the partnership's assets; (d) allowing the General Partner to
possess partnership assets for other than a partnership purpose and (e) amending
the Exchange Partnership Agreements in certain respects as described above at "-
Amendments of Governing Agreements."
Operating Partnership: Meetings of the partners may be called by the Trust and
by limited partners holding at least 25% of the outstanding Operating
Partnership Units. The consent of limited partners holding at least a majority
of the outstanding Units is required for action by the limited partners, except
where otherwise provided in the Operating Partnership Agreement as described
below. Limited partners are entitled to vote on proposed amendments to the
Operating Partnership Agreement as described above at "- Amendments of
Governing Agreements."
The following actions of the Operating Partnership require the consent of all
limited partners: (a) any action that would make it impossible to carry on the
ordinary business of the Operating Partnership; (b) the possession of
partnership property, or the assignment of any right in specific partnership
property, for other than a partnership purpose, except as otherwise provided in
the Operating Partnership Agreement; (c) the admission of any new partner to the
Operating Partnership, except as otherwise provided in the Operating Partnership
Agreement; or (d) any action that would subject a limited partner to liability
as a general partner in any jurisdiction or any other liability, except as
provided in the Operating Partnership Agreement or under the Delaware Limited
Partnership Act.
In addition, the consent of the limited partners holding at least a majority of
the outstanding Units is required to approve the Trust's election to dissolve
the Operating Partnership prior to the termination of its term as specified in
the Operating Partnership Agreement. The limited partners holding a majority of
the outstanding Units are also entitled, in the absence of any general partner
of the Operating Partnership, to elect a liquidator to oversee the winding up
and dissolution of the Operating Partnership and to perform a full accounting of
the Operating Partnership's liabilities and properties.
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Trust: The Trust is required to conduct an annual meeting of Shareholders at
which all members of the Board (including all Independent Trustees) (except
where the Board is staggered, in which case only the class of the Board up for
election) will be elected or reelected and any other proper business may be
conducted. Each Trust Common Share entitles the holder to one vote on all
matters requiring a vote of Shareholders, including the election of members of
the Board. Special meetings of the Shareholders may be called at any time,
either by the Managing Shareholder, a majority of the Independent Trustees, any
officer of the Trust, or Shareholders holding at least 10% of the outstanding
Common Shares, for any matter on which such Shareholders may vote. The Trust may
not take any of the following actions without approval of Shareholders of at
least a majority of the Shares entitled to vote: (a) the sale, exchange, lease,
mortgage, pledge or transfer of all or substantially all of the Trust's assets
if not in the ordinary course of operation of the Trust or in connection with
liquidation and dissolution; (b) the merger or reorganization of the Trust; and
(c) the dissolution or liquidation of the Trust following its initial property
investment.
In addition, Shareholders holding at least a majority of Shares entitled to vote
present in person or by proxy at an annual meeting at which a quorum is present,
may, without the necessity for concurrence by the Board, vote to amend the
Declaration of Trust, terminate the Trust, and elect and/or remove one or more
members of the Board.
Accounting Method
Exchange Partnership, Operating Partnership and Trust: The accrual method of
accounting is used and the accounting period ends on December 31 of each year.
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