As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 333-55753
- --------------------------------------------------------------------------------
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 2 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)
Delaware 6798 31-1574856
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
Baron Capital Trust
(Exact name of registrant as specified in its charter)
Delaware 6798 31-1584691
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
Gregory K. McGrath
7826 Cooper Road 7826 Cooper Road
Cincinnati, Ohio 45242 Cincinnati, Ohio 45242
(513) 984-5001 (513) 984-5001
(Address, including ZIP Code and (Address, including ZIP Code and
telephone number, including area telephone number, including area
code, of registrants' principal code, of registrants' principal
executive offices) executive offices)
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.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Dollar amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per unit aggregate offering price registration fee (1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,500,000 Units of
Limited Partnership
Interest $25,000,000 $10.00 $25,000,000 $7,576.00
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Previously paid.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Location or Heading in
Item Number Caption Prospectus
<S> <C> <C>
Item 1 Forepart of Registration Statement and Outside Front Cover Outside Front Cover
Page of Prospectus
Item 2 Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover; Outside Back Cover, Additional
Information; Summary of Declaration of Trust -
Quarterly and Annual Reports
Item 3 Risk Factors, Ratio of Earnings to Fixed Charges and Other Outside Front Cover; Summary of the Trust and the
Information Operating 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 Exhibit C
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 Summary of Declaration of Trust - Liability and
Securities Act Liabilities 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
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Item 14 Information with Respect to Registrants Other than S-2 or S-3 Summary of the Trust and the Operating Partnership;
Registrants The Exchange Offering; Initial Real Estate
Investments; Litigation; Exhibits C, D and E.
Item 15 Information with Respect to S-3 Companies Not Applicable
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 Not Applicable
Companies
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 Summary of the Trust and the Operating Partnership;
be Solicited or in an Exchange Offer 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 Statements
Item 22 Undertakings Part II of Registration Statements
</TABLE>
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Date of Issuance: ________________, 1999
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.
_________, 1999 2,500,000 Units of Limited Partnership Interest
Exchange Partnerships
Baron Strategic Investment Fund, Ltd.
Baron Strategic Investment Fund II, Ltd.
Baron Strategic Investment Fund IV, Ltd.
Baron Strategic Investment Fund V, Ltd.
Baron Strategic Investment Fund VI, Ltd.
Baron Strategic Investment Fund VIII, Ltd.
Baron Strategic Investment Fund IX, Ltd.
Baron Strategic Investment Fund X, Ltd.
Baron Strategic Vulture Fund I, Ltd.
Brevard Mortgage Program, Ltd.
Central Florida Income Appreciation Fund, Ltd.
Florida Capital Income Fund, Ltd.
Florida Capital Income Fund II, Ltd.
Florida Capital Income Fund III, Ltd.
Florida Capital Income Fund IV, Ltd.
Florida Income Advantage Fund I, Ltd.
Florida Income Appreciation Fund I, Ltd.
Florida Income Growth Fund V, Ltd.
Florida Opportunity Income Partners, Ltd.
GSU Stadium Student Apartments, Ltd.
Lamplight Court of Bellefontaine Apartments, Ltd.
Midwest Income Growth Fund VI, Ltd.
Realty Opportunity Income Fund VIII, Ltd.
THE EXCHANGE OFFERING WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON THE EXPIRATION DATE DESCRIBED IN THE ELECTION FORM, UNLESS EXTENDED.
Baron Capital Properties, L.P. (the "Operating Partnership"), a Delaware
limited partnership, hereby offers, upon the terms and subject to the conditions
set forth in this prospectus (as the same may be amended or supplemented from
time to time, the "Prospectus") and in the accompanying Letter of Transmittal
and Election Form (which together constitute the "Exchange Offering"), to issue
up to 2,500,000 units of limited partnership interest in the Operating
Partnership ("Operating Partnership Units" or "Units"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a Registration Statement of which this Prospectus constitutes a
part, in exchange for units of limited partnership interest ("Exchange
Partnership Units") owned by individual limited partners ("Exchange Limited
Partners") in 23 limited partnerships (the "Exchange Partnerships") which
directly or indirectly own equity and/or mortgage interests in one or more
residential apartment properties. The Exchange Partnerships are managed by
corporate general partners (the "Corporate General Partners") which are
affiliated with one of the founders of the Operating Partnership.
SEE "SUMMARY OF RISK FACTORS" AND "RISK FACTORS" ON PAGES ____ THROUGH
_______ AND PAGES _____ THROUGH ____, RESPECTIVELY, FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE
OFFERING AND THE OWNERSHIP OF OPERATING PARTNERSHIP UNITS AND TRUST COMMON
SHARES, INCLUDING 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 on a one-for-one basis), 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.
o The Original Investors (described below under "Compensation") and
affiliates have significant influence over the operation of the Trust, the
Operating Partnership, and the Exchange Partnerships, 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, Unitholders in the Operating
Partnership and limited partners in the Exchange Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms. Offerees should note, however,
that appraisals 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 property interests acquired will reflect their
fair market value.
o Offerees 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 may
participate in the offering, although such other partnerships may offer
higher future growth potential than the Exchange Partnerships.
<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.
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 the American Stock Exchange, 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.
The Operating Partnership and its general partner, Baron Capital Trust (the
"Trust" or the "General Partner"), a Delaware business trust, constitute an
integrated real estate company which has been organized to acquire equity
interests in residential apartment properties located in the United States and
to provide or acquire mortgage loans secured by such types of property. The
Trust, indirectly through the Operating Partnership, intends to acquire, own,
operate, manage and improve residential apartment property interests 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," "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 its sole General Partner, will control the activities of the Operating
Partnership. The Trust will also acquire a limited partner interest in the
Operating Partnership with the net proceeds of the Trust's ongoing $25,000,000
best efforts 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 at $10.00 per share (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, each Operating Partnership Unit
being offered hereby has been arbitrarily assigned an initial 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 each outstanding Unit and Common
Share will be 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% 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.
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.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR 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)
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY OF THE TRUST AND THE OPERATING PARTNERSHIP ......................................................... 10
Summary of the Trust and the Operating Partnership .................................................... 10
Background and Reasons for the Exchange Offering ...................................................... 17
Summary of Use of Proceeds of Cash Offering ........................................................... 19
Summary of Fees and Reimbursable Expenses ............................................................. 20
DESCRIPTION OF EXCHANGE PARTNERSHIPS ....................................................................... 23
Baron Strategic Investment Fund, Ltd. ................................................................. 23
Baron Strategic Investment Fund II, Ltd. .............................................................. 23
Baron Strategic Investment Fund IV, Ltd. .............................................................. 24
Baron Strategic Investment Fund V, Ltd. ............................................................... 24
Baron Strategic Investment Fund VI, Ltd. .............................................................. 24
Baron Strategic Investment Fund VIII, Ltd. ............................................................ 24
Baron Strategic Investment Fund IX, Ltd. .............................................................. 25
Baron Strategic Investment Fund X, Ltd. ............................................................... 25
Baron Strategic Vulture Fund I, Ltd. .................................................................. 25
Brevard Mortgage Program, Ltd. ........................................................................ 25
Central Florida Income Appreciation Fund, Ltd. ........................................................ 26
Florida Capital Income Fund, Ltd. ..................................................................... 26
Florida Capital Income Fund II, Ltd. .................................................................. 26
Florida Capital Income Fund III, Ltd. ................................................................. 26
Florida Capital Income Fund IV, Ltd. .................................................................. 26
Florida Income Advantage Fund I, Ltd. ................................................................. 27
Florida Income Appreciation Fund I, Ltd. .............................................................. 27
Florida Income Growth Fund V, Ltd. .................................................................... 27
Florida Opportunity Income Partners, Ltd. ............................................................. 27
GSU Stadium Student Apartments, Ltd. .................................................................. 27
Lamplight Court of Bellefontaine Apartments, Ltd. ..................................................... 28
Midwest Income Growth Fund VI, Ltd. ................................................................... 28
Realty Opportunity Income Fund VIII, Ltd. ............................................................. 28
SUMMARY OF RISK FACTORS .................................................................................... 31
TAX STATUS ................................................................................................. 35
The Operating Partnership ............................................................................. 35
Exchange of Exchange Partnership Units for Operating Partnership Units ................................ 36
The Trust ............................................................................................. 36
COMPENSATION OF MANAGING PERSONS AND AFFILIATES ............................................................ 37
CONFLICTS OF INTEREST ...................................................................................... 43
FIDUCIARY RESPONSIBILITY ................................................................................... 46
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS .......................................................... 47
RISK FACTORS ............................................................................................... 47
Arbitrary Offering Price .............................................................................. 47
No Separate Representation of Offerees ................................................................ 47
Offerees May Not Have Information Available to Evaluate Property
Interests to be Acquired by the Operating Partnership, Prior to
Decision Whether to Accept the Exchange Offering ................................................... 48
Possible Adverse Influence of Original Investors ...................................................... 49
Conflicts of Interest ................................................................................. 49
No Assurance of Successful Performance of Partnership Interests
to be Acquired in Exchange Offering ................................................................ 50
Potential Loss of Future Appreciation on Exchange Properties .......................................... 50
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Investors in Successful Exchange Partnerships Could Lose Advantage
by Combining with Less Successful Exchange Partnerships............................................. 51
Several Factors Could Have Possible Adverse Effects on
Operation of Properties............................................................................. 51
No Assurance of Avoiding Operating Losses.............................................................. 53
Adverse Effects of Under-Performing Mortgage Investments............................................... 53
Valuation of Mortgage Interests to be Acquired May Exceed Actual Value................................. 53
Several Factors Could Have Possible Adverse Effects on Distributions
to Shareholders and Unitholders..................................................................... 53
Distributions to Shareholders and Unitholders Adversely Affected by Poor
Operating Results of Operating Partnership.......................................................... 54
Competition............................................................................................ 55
Lack of Liquidity of Real Estate....................................................................... 55
Cash Distributions Could be Reduced by Cost of Capital Improvements.................................... 55
Real Estate Investments May Fail to Perform to Expected Level.......................................... 55
Debt Service Obligations Could Adversely Affect Cash Flow.............................................. 56
Possible Adverse Effects as a Result of Loss of Key Management......................................... 57
Uncertainty of Successful Completion of Cash Offering and Exchange Offering............................ 57
Limited Marketability of Units and Common Shares....................................................... 58
Possible Adverse Effect on Market Price as a Result of Availability
of Units and Common Shares for Future Sale.......................................................... 59
Possible Adverse Effect of Market Interest Rates on Common Share Prices................................ 59
Potential Adverse Tax Consequences..................................................................... 59
Taxation of the Trust as a Corporation if It Fails to Qualify as a REIT........................... 59
Taxation of the Operating Partnership as a Corporation if It Fails to be
Classified as a Partnership....................................................................... 60
Deferral of Gain from Exchange Offering Subject to Certain Exceptions............................. 60
Investors Liable for State and Local Taxes........................................................ 61
Exchange Offering Procedures........................................................................... 61
Consequences of a Failure to Tender Exchange Partnership Units......................................... 61
Non-participating Limited Partners in Participating Exchange
Partnerships Will Have Significant Influence over Certain Actions of the Partnerships............... 62
Possible Dilution as a Result of Issuance of Additional Securities..................................... 62
Limits on Ownership and Transfers of Common Shares and Units Which May Delay
or Prevent a Takeover Offering a Premium Price...................................................... 63
Lack of Liquidity of Retained Interest in an Exchange Partnership Following
the Exchange Offering............................................................................... 64
No Operating History................................................................................... 64
Limited Participation Rights of Shareholders and Unitholders in Management............................. 64
Regulatory Non-compliance Could Result in Fines or Judgments........................................... 65
Fair Housing Amendments Act of 1988............................................................... 65
Americans with Disabilities Act................................................................... 65
Compliance with Environmental Laws................................................................ 65
Shareholders and Unitholders Could be Adversely Affected by
Limited Liability and Indemnification of the Managing Persons....................................... 65
No Assurance of Shareholder Limited Liability for Activities of Delaware Business Trust................ 66
No Assurance of Profitable Sale of Trust and Operating Partnership Property............................ 66
Property Losses May Not be Insurable................................................................... 66
Possible Lack of Independent Assessment of Prior Operating Results
of Acquired Property Interests...................................................................... 67
Initial Value Assigned to Operating Partnership Units Offered in Exchange for
Exchange Partnership Units Exceeds Current Book Value of Exchange Partnerships
Partnerships Exceeds Current Book Value of Exchange Partnerships.................................... 67
Changes in Laws Could Increase Operating Expenses...................................................... 67
No Rights of Dissent................................................................................... 67
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Possible Lack of Diversification in Property Investments .............................................. 67
Other Participants May Fail to Fulfill Obligations .................................................... 68
Extended and Uncertain Investing Period Could Adversely Affect Returns ................................ 68
Possible "Year 2000" Problems ......................................................................... 68
THE EXCHANGE OFFERING ...................................................................................... 69
Accounting Treatment .................................................................................. 72
Background of the Exchange Offering ................................................................... 72
Effects of Formation Transactions and Cash Offering and Exchange Offering ............................. 74
Exchange Property Appraisals .......................................................................... 75
CAI and CASI ..................................................................................... 76
RAS .............................................................................................. 78
S&W .............................................................................................. 78
Voyt ............................................................................................. 78
Historical Cash Distributions and Corporate General Partner Compensation .............................. 78
Terms of the Exchange Offering ........................................................................ 79
Expiration Date, Extensions, and Amendments ........................................................... 80
Acceptance for Exchange and Issuance of Operating Partnership Units ................................... 81
Procedures for Tendering Exchange Partnership Units ................................................... 81
Valid Tender ..................................................................................... 81
Certificates ..................................................................................... 82
Delivery ......................................................................................... 82
Determination of Validity ........................................................................ 82
Conditions to the Exchange Offering ................................................................... 83
Exchange Agent ........................................................................................ 83
Fees and Expenses of the Exchange Offering ............................................................ 84
PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER .................................................... 85
MANAGEMENT ................................................................................................. 96
Managing Shareholder .................................................................................. 96
Trust Management Agreement ............................................................................ 98
Officers of the Trust and the Operating Partnership ................................................... 99
The Board of the Trust, Committees and Trustees ....................................................... 100
The Board of the Trust ........................................................................... 101
Independent Trustees ............................................................................. 101
Corporate Trustee ................................................................................ 103
THE TRUST AND THE OPERATING PARTNERSHIP .................................................................... 104
The Operating Partnership ............................................................................. 104
Formation Transactions ................................................................................ 106
Ownership of the Trust and the Operating Partnership .................................................. 108
Regulations ........................................................................................... 111
General .......................................................................................... 111
Fair Housing Amendments of 1988 .................................................................. 111
Americans with Disabilities Act ("ADA") .......................................................... 111
Environmental Regulations ........................................................................ 112
Rent Control Legislation ......................................................................... 112
Employees ............................................................................................. 112
INVESTMENT OBJECTIVES AND POLICIES ......................................................................... 112
General ............................................................................................... 112
Trust Policies with Respect to Certain Activities ..................................................... 114
Investment Policies .............................................................................. 114
Disposition Policies ............................................................................. 116
Financing Policies ............................................................................... 116
Conflict of Interest Policies .................................................................... 116
INITIAL REAL ESTATE INVESTMENTS ............................................................................ 117
The Acquired Properties ............................................................................... 117
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Heatherwood Apartments.............................................................................. 118
Crystal Court Apartments............................................................................ 118
Riverwalk Apartments................................................................................ 119
Alexandria Property................................................................................. 120
Acquisition of Limited Partnership Interests........................................................ 120
Contract to Purchase Two Additional Properties ..................................................... 120
The Exchange Properties................................................................................ 121
Property Description.............................................................................. 159
Lease Agreements.................................................................................. 159
Competition....................................................................................... 159
Insurance......................................................................................... 159
Property Management............................................................................... 159
SELECTED FINANCIAL DATA..................................................................................... 160
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION .................................................. 163
Plan of Operation...................................................................................... 163
Year 2000.............................................................................................. 164
FEDERAL INCOME TAX CONSIDERATIONS........................................................................... 166
Classification as a Partnership........................................................................ 166
Exchange of Exchange Partnership Units for Operating Partnership Units................................. 167
Relief from Liabilities/Deemed Cash Distribution....................................................... 168
Disguised Sale Regulations............................................................................. 170
Effect of Assumption of Liabilities Under the Disguised Sale Regulations.......................... 170
Effect of Cash Distributions Under the Disguised Sale Regulations................................. 171
Effect of Right to Convert to a Share of the Trust................................................ 171
Effect of Disguised Sale Characterization......................................................... 171
Section 465(E) Recapture............................................................................... 172
Transfer to an Investment Company...................................................................... 172
Withholding............................................................................................ 174
Tax Treatment of Unitholders Who Hold Operating Partnership Units After the Exchange................... 174
Income and Deductions in General.................................................................. 174
Treatment of Partnership Distributions............................................................ 174
Initial Basis of Operating Partnership Units...................................................... 174
Allocations of Partnership Income, Gain, Loss and Deductions...................................... 175
Effect of the Exchange on Depreciation............................................................ 175
Tax Allocations with Respect to Book-Tax Difference on Contributed Properties..................... 175
Dissolution of Partnership........................................................................ 176
Limitations on Deductibility of Losses: Treatment of Passive Activities and Portfolio Income..... 176
Section 754 Election.............................................................................. 176
Disposition of Operating Partnership Units by Unitholders......................................... 177
Tax Treatment of Conversion Right................................................................. 177
Constructive Termination.......................................................................... 177
Tax-Exempt Organizations and Certain Other Investors................................................... 178
Partnership Income Tax Information Returns and Partnership Audit Procedures............................ 178
Registration as a Tax Shelter.......................................................................... 179
Organizational and Syndication Fees.................................................................... 180
Anti-Abuse Regulations................................................................................. 180
Alternative Minimum Tax on Items of Tax Preference..................................................... 180
State and Local Taxes.................................................................................. 180
Income Tax Considerations with Respect to the Trust.................................................... 181
Taxation of the Trust.................................................................................. 182
General........................................................................................... 182
Stock Ownership Tests............................................................................. 182
Asset Tests....................................................................................... 183
Gross Income Tests................................................................................ 183
</TABLE>
<PAGE>
<TABLE>
<S> <C>
The 75% Test................................................................................. 183
The 95% Test................................................................................. 184
The 30% Test................................................................................. 184
Annual Distribution Requirements.................................................................. 184
Failure to Qualify................................................................................ 185
Tax Aspects of the Trust's Investment in the Operating Partnership..................................... 185
Entity Classification............................................................................. 186
Tax Allocations with Respect to Trust Properties.................................................. 186
Sale of Trust Properties.......................................................................... 186
Taxation of Shareholders............................................................................... 186
Taxation of Taxable Domestic Shareholders......................................................... 186
Backup Withholding................................................................................ 187
Taxation of Tax-Exempt Shareholders............................................................... 187
Taxation of Foreign Shareholders.................................................................. 187
Other Tax Considerations............................................................................... 188
Possible Legislative or Other Actions Affecting Tax Consequences.................................. 188
State and Local Taxes............................................................................. 188
SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT.............................................................. 189
SUMMARY OF DECLARATION OF TRUST............................................................................. 189
Term................................................................................................... 189
Control of Operations.................................................................................. 189
Liability and Indemnification.......................................................................... 193
Distributions.......................................................................................... 195
Quarterly and Annual Reports........................................................................... 195
Accounting............................................................................................. 195
Books and Records; Tax Information..................................................................... 195
Governing Law.......................................................................................... 195
Amendments and Voting Rights........................................................................... 195
Dissolution of Trust................................................................................... 196
Removal and Resignation of the Managing Shareholder.................................................... 196
Transferability of Shareholders' Interest.............................................................. 196
Independent Activities................................................................................. 196
Power of Attorney...................................................................................... 197
Meetings and Voting Rights............................................................................. 197
Additional Offerings of Shares......................................................................... 197
Temporary Investments.................................................................................. 198
REPORTS TO UNITHOLDERS AND SHAREHOLDERS..................................................................... 198
Operating Partnership Unitholders...................................................................... 198
Trust Shareholders..................................................................................... 198
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE PARTNERSHIP UNITS,
OPERATING PARTNERSHIP UNITS AND TRUST COMMON SHARES..................................................... 200
Issuance of Additional Securities...................................................................... 201
Term of Existence...................................................................................... 202
Management Control..................................................................................... 203
Economic Interest...................................................................................... 203
Property Investments and Anticipated Holding Period.................................................... 206
Restrictions on Transfers of Securities................................................................ 206
Tax Status............................................................................................. 207
Pre-emptive Rights..................................................................................... 207
Managing Entity Removal and Resignation Rights......................................................... 208
Reporting Rights....................................................................................... 209
Assessments............................................................................................ 210
Amendments of Governing Agreements..................................................................... 210
Liability and Indemnification.......................................................................... 212
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Compensation of Managing Persons and Affiliates........................................................ 213
Meetings and Voting Rights............................................................................. 214
Accounting Method and Period........................................................................... 215
CAPITAL STOCK OF THE TRUST.................................................................................. 215
General................................................................................................ 215
Transfer Agent......................................................................................... 216
Restrictions on Ownership and Transfer................................................................. 216
CAPITALIZATION.............................................................................................. 217
TERMS OF THE CASH OFFERING.................................................................................. 219
AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS........................................... 221
OTHER INFORMATION........................................................................................... 228
General................................................................................................ 228
Authorized Sales Material.............................................................................. 229
Financial Statements.................................................................................. 229
LITIGATION.................................................................................................. 230
EXPERTS..................................................................................................... 230
LEGAL MATTERS............................................................................................... 230
EXPENSES OF THE EXCHANGE OFFERING........................................................................... 231
ADDITIONAL INFORMATION...................................................................................... 232
GLOSSARY.................................................................................................... 233
TABLES
Organizational Table.............................................................................. 13
Use of Proceeds of Trust's Cash Offering.......................................................... 19
Fees and Reimbursable Expenses Table ............................................................. 20
Appraisal Table................................................................................... 29
Compensation of Managing Shareholder and Affiliates............................................... 38
Property Information - Equity Property Interests.................................................. 124
Property Information - Debt Property Interests.................................................... 127
Mortgage Information - Equity Property Interests.................................................. 130
Mortgage Information - Mortgage Property Interests................................................ 132
Selected Financial Data .......................................................................... 161
Combined Statement of Estimated Taxable Operating Results of Acquired Properties and
Exchange Partnerships and Funds Available from Operations..................................... 162
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/Exchange Partnerships
E ... Financial Statements of the Acquired Properties
F ... Exchange Property Appraisal Values
</TABLE>
<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.
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 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.
9
<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.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL AND ELECTION FORM
CONTAIN IMPORTANT INFORMATION. HOLDERS OF EXCHANGE PARTNERSHIP UNITS ARE URGED
TO READ THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL AND ELECTION FORM
CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR EXCHANGE PARTNERSHIP UNITS
PURSUANT TO THE EXCHANGE OFFERING.
Offerees may tender their Exchange Partnership Units for exchange on or
prior to 5:00 p.m., New York City time, on the Expiration Date set forth in the
Election Form, unless the Exchange Offering is extended by the Operating
Partnership (in which case the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offering is extended). 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.
An Offeree must exchange all of his Exchange Partnership Units in order to
participate in the Exchange Offering. Partial exchanges will not be accepted.
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.
Neither the Operating Partnership nor the Trust will receive any cash
proceeds from the issuance of the Operating Partnership Units offered hereby. No
dealer-manager is being used in connection with this Exchange Offering. See "-
Use of Proceeds" and "THE EXCHANGE OFFERING."
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 owned by
individual limited partners in limited partnerships which own direct or indirect
interests in residential apartment properties. Holders of Operating Partnership
Units, including recipients of Units in the Exchange Offering, 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% 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. See "THE EXCHANGE OFFERING."
This Prospectus and the accompanying Transmittal Letter and Election Form
are first being sent to Offerees in connection with the Exchange Offering on or
about the date indicated on the Election Form. Offerees who elect to accept the
Exchange Offering are required to indicate their acceptance of the offering in
the space
10
<PAGE>
provided on the Election Form and sign and return it, together with the
certificates representing their Exchange Partnership Units in a particular
Exchange Partnership, to American Stock Transfer & Trust Company (the "Exchange
Agent") by the Expiration Date. Assuming the satisfaction or waiver of the
closing conditions of the Exchange Offering, as soon as practicable after the
Expiration Date, the Exchange Agent will send certificates representing
Operating Partnership Units to each Offeree who accepts the Exchange Offering
and delivers to the Exchange Agent a completed and signed copy of the Election
Form and the certificate representing their Exchange Partnership Units. See "THE
EXCHANGE OFFERING - Exchange Offering Procedures."
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and/or to provide
or acquire mortgage loans secured by such types of property. The Trust,
indirectly through the Operating Partnership, intends to acquire, own, operate,
manage and improve residential apartment property interests 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 in respect of
the first quarter of 1999. The Trust intends to operate as a REIT for federal
income tax purposes, provided, however, that if its Managing Shareholder (wholly
owned and controlled, along with the Corporate General Partners of the Exchange
Partnerships, by Gregory K. McGrath, a founder of the Trust and the Operating
Partnership) 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 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 limited partnership
interests in limited partnerships which directly or indirectly own such property
interests, and thereby provide the opportunity for deferral until a later date
of any tax liabilities that sellers of partnership 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 Trust's Managing Shareholder (wholly owned and controlled, along with
the Corporate General Partner of each Exchange Partnership, by Mr. McGrath) is
Baron Advisors, Inc. ("Baron Advisors"), a Delaware corporation which will
manage the day-to-day 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, 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.
11
<PAGE>
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 have significant influence over the operation of the
Trust, the Operating Partnership and the Exchange Partnerships, 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, Unitholders in the Operating Partnership and limited
partners in the Exchange Partnerships. See "CONFLICTS OF INTEREST," "MANAGEMENT"
and "SUMMARY OF DECLARATION OF TRUST - Control of Operations."
All of the Units being offered by the Operating Partnership pursuant to
this Prospectus are being offered in connection with the Exchange Offering. In
the Exchange Offering, the Operating Partnership is offering to issue Units to
individual limited partners in the Exchange Partnerships, which directly or
indirectly own interests in residential apartment properties, in exchange for
their limited partnership interests.
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 qualified and licensed independent appraisal firms for each
underlying residential apartment property involved in the Exchange Offering and
other considerations described herein. For purposes of the Exchange Offering,
each Unit has been arbitrarily assigned an initial value of $10, which
corresponds to the offering price of each Trust Common Share being offered in
the Cash Offering. The value of each Unit and Common Share outstanding will be
substantially identical since Unitholders, including recipients of Units in the
Exchange Offering, will be entitled to exchange all or a portion of their 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% 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.
In the Exchange Offering, each limited partner in an Exchange Partnership
will be given the option to acquire the number of Units per $1,000 of original
investment in the partnership listed on the table set forth on page ____ of this
Prospectus (and on the inside cover of the Prospectus Supplement accompanying
this Prospectus) in exchange for all Exchange Partnership Units held by the
limited partner.
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 and
unissued Units and Shares, together with available cash flow from operations
and/or other available financing sources (i) to acquire interests in residential
apartment properties or equity interests in partnerships or entities
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 among
the Trust, the Operating Partnership, the Managing Shareholder (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath), the Exchange Partnerships, and other real estate
limited partnerships managed by corporate general partners affiliated with the
Managing Shareholder which will not participate in the Exchange 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 Units are exchangeable into an identical number of Common
Shares at any time
12
<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 Operating
Partnership $
Units
- ---------------------------------- ----------------------------------- -----------------------------
Exchange Baron Capital Capital
Participating Partnership Properties, L.P. contribution
Exchange Partnerships* Units (Operating Partnership) _________ Original Investors
___________
(managed by affiliates of (GP is REIT; LPs are Original _________ (Gregory K. McGrath
Managing Shareholder) ___________ Investors, the REIT and and Robert S. Geiger)
Operating Exchange Limited Partners Operating
Partnership who elect to accept Exchange Partnership
Units Offering) Units
- ---------------------------------- ----------------------------------- -----------------------------
/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\
\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/\/
-----------------------------------
Non-participating
Real Estate Limited
Partnerships
(managed by affiliates of
Managing Shareholder)
-----------------------------------
</TABLE>
- ------------------
* Each Exchange Partnership is a real estate investment program which directly
or indirectly owns all or a portion of either (i) the fee simple title to,
and/or a subordinated mortgage interest in, residential apartment property or
(ii) the limited partnership interest or beneficial interest in a limited
partnership or other entity which owns such an equity or mortgage interest.
13
<PAGE>
(subject to certain restrictions) and the economic interests represented by
Units and 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 (wholly owned and controlled,
along with the Corporate General Partner of each Exchange Partnership, by Mr.
McGrath) 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 on
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) 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 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 equity and/or subordinated mortgage interests
in 26 properties (the "Exchange Properties") directly or indirectly owned by 23
Exchange Partnerships managed by Corporate General Partners affiliated with the
Managing Shareholder. The Operating Partnership will acquire interests in a
particular property by acquiring from limited partners ("Exchange Limited
Partners") their units of limited partnership interest in the respective
partnership ("Exchange Partnership Units"). Each of the Exchange Partnerships
directly or indirectly owns equity and/or mortgage interests in one or more
properties. Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 813
existing residential units (studio and one and two bedroom units) and 164 units
(two and three bedroom units) under development. Of the Exchange Properties, 21
properties are located in Florida, three properties in Ohio and one property
each in Georgia and Indiana. The Exchange Properties are described in further
detail at "THE EXCHANGE PARTNERSHIPS" "INITIAL REAL ESTATE INVESTMENTS" and
Exhibit B hereto.
14
<PAGE>
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a residential apartment property or the entire
limited partnership or other equity interests in a limited partnership or other
entity which owns record title to a property. The sole assets of each of six of
the Exchange Partnerships (individually, an "Exchange Mortgage Partnership" and
collectively, the "Exchange Mortgage Partnerships") are the entire or an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests). Each of the remaining four Exchange
Partnerships (individually, an "Exchange Hybrid Partnership" and collectively,
the "Exchange Hybrid Partnerships") own a combination of (i) all or a portion of
the direct or indirect equity interest in one or more properties and (ii) an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests).
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
The current book value of the 23 Exchange Partnerships is approximately
$8,113,659. If exchanges are consummated in respect of all Exchange Partnership
Units in the Exchange Offering, the partnership interests acquired will have a
purchase price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with the
balance of the Operating Partnership Units being offered in the Exchange
Offering 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. In September 1998,
the Operating Partnership acquired beneficial ownership of a 50-unit residential
apartment property located in New Smyrna Beach, Florida. In October 1998, the
Operating Partnership acquired an approximately 12.3% limited partnership
interest in a limited partnership which is the owner and developer of a 168-unit
residential apartment property under construction in Alexandria, Kentucky.
Thirty eight of the 168 residential units (approximately 22.6%) have been
completed and are in the rent-up stage. The acquisitions described above, which
had a total cash purchase price of $2,641,293, were paid out of the net proceeds
of the Trust's ongoing Cash Offering.
In July 1998, the Operating Partnership made capital contributions in the
range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20 real
estate partnerships managed by affiliates of the Managing Shareholder, including
certain of the Exchange Partnerships, in exchange for a 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 Cash 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
any 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.e., each Exchange Partnership which
receives the requisite limited partner acceptance of the offering to allow the
partnership to participate in the offering, assuming it closes), (i) Mr.
McGrath, the sole stockholder, director and executive officer of the Corporate
General Partner of each of the Exchange Partnerships, 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 Participating 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
15
<PAGE>
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 (up to
$21,500,000, 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 81.2% 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 $100,000 initial
capitalization of the Operating Partnership 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." If the Trust's Cash Offering and the Exchange Offering
are completed in full, each Original Investor would own 601,080 Units. In that
case, the value of the Units held by each Original Investor, calculated at the
$10 initial value assigned to each Unit to be issued in the Exchange Offering,
would then be $6,010,800 less a significant discount attributable to the
long-term escrow arrangement.
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 (other than those acquired
by the Trust) 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 issued or 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 2,500,000 Common Shares (39.5%). 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."
To the extent Units remain available for issuance after completion of the
exchange transactions described herein, 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 (wholly owned and controlled,
along with the Corporate General Partner of each Exchange Partnership, by Mr.
McGrath). 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 mortgage loans or other debt
interests 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 property's estimated replacement
cost new as determined by the Managing Shareholder, unless substantial
justification exists.
16
<PAGE>
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 D. 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.
See "THE EXCHANGE OFFERING," "INITIAL REAL ESTATE INVESTMENTS," "SELECTED
FINANCIAL DATA," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" 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 integrated 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 Exchange Partnership Corporate General Partners (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 interests or assets held. In the case of each
Exchange Partnership, its 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 existing business plans 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 one or more residential apartment
properties. 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, its 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.
17
<PAGE>
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 all Exchange
Partnerships receive the requisite limited partner acceptance to allow them to
participate in the offering) 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.
o The Operating Partnership will not complete the offering in respect of any
Exchange Partnership if limited partners holding more than 10% of the
limited partnership interests therein 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.
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
23 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 (wholly owned and controlled, along with the
Managing Shareholder of the Trust, by Mr. McGrath) believe that a single
integrated 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 existing business plans of
the Exchange Partnerships 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.
18
<PAGE>
Summary of Use of Proceeds of Cash Offering
Set forth below is the estimated application of proceeds of the Trust's
Cash Offering, assuming the Trust sells all 2,500,000 Common Shares being
offered. 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 $__________) prior
to the date of this Prospectus. Therefore, the table below provides information
based 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%
Maximum Amount of 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%
=========== ===========
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 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 (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath) 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
19
<PAGE>
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.
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 and
Recipient Reimbursable Expenses
- --------- ---------------------
Broker-Dealers Participating in Selling commission in an amount equal
Cash Offering 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.
20
<PAGE>
Type and Amount of Fees and
Recipient Reimbursable Expenses (cont'd)
- --------- ------------------------------
Gregory K. McGrath, a founder of the Initial year's compensation payable
Trust and the Operating Partnership in the form of Common Shares or other
and Chief Executive Officer of the securities of the Trust or the
Trust, the Operating Partnership and Operating Partnership in an amount
the Managing Shareholder 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, Mr. McGrath
subscribed for Units which are
exchangeable (subject to certain
escrow restrictions) into 9.5% of the
Common Shares outstanding as of the
earlier to occur of completion of the
Cash Offering and the Exchange
Offering or May 14, 1999, calculated
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 Initial annual compensation of
Trust and the Operating Partnership $100,000, plus health benefits and
and Chief Executive Officer of the eligibility to participate in any
Trust, the Operating Partnership and option plan and bonus incentive plan
the Managing Shareholder which may be implemented by the
Executive Compensation Committee of
the Board of the Trust. In exchange
for an initial cash capital
contribution to the Operating
Partnership, Mr. Geiger subscribed
for Units which are exchangeable
(subject to certain escrow
restrictions) into 9.5% of the Common
Shares outstanding as of the earlier
to occur of the completion of the
Cash Offering and the Exchange
Offering or May 14, 1999, calculated
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 - Initial annual salary of $150,000,
Property of the Operating Partnership 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.
Mark L. Wilson, Interim Chief Initial annual salary of $110,000,
Financial Officer of the Operating plus health benefits and eligibility
Partnership 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 - Initial annual salary of $130,000,
Accounting and Strategic Planning plus health benefits and eligibility
of the Operating Partnership and to participate in any option plan and
Secretary of the Trust 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.
21
<PAGE>
Type and Amount of Fees and
Recipient Reimbursable Expenses (cont'd)
- --------- ------------------------------
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 Commission payable to broker-dealers
Exchange Offering 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.
22
<PAGE>
DESCRIPTION OF EXCHANGE PARTNERSHIPS
As its initial acquisition candidates in connection with the Exchange
Offering, the Operating Partnership will offer to acquire all limited
partnership interests owned by partners in the 23 Exchange Partnerships. To the
extent Units remain available for issuance after completion of the exchange
transactions described herein, 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 parties 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. Exchange Partnerships which directly or indirectly own
only equity interests in residential apartment properties are referred to herein
as "Exchange Equity Partnerships;" partnerships which own only subordinated
mortgage interests in properties and other debt interests are referred to herein
as "Exchange Mortgage Partnerships;" and partnerships which directly or
indirectly own a combination of equity and subordinated mortgage interests in
properties and other debt interests are referred to herein as "Exchange Hybrid
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 or receipt of interest income and, where applicable, to
provide the opportunity for capital appreciation from the future sale or
refinancing of the residential apartment property. The Corporate General
Partners of the Exchange Partnerships (wholly owned and controlled, along with
the Managing Shareholder of the Trust, by Mr. McGrath) 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, Ltd.
Baron Strategic Investment Fund, Ltd., an Exchange Mortgage Partnership,
was organized as a Florida limited partnership in April 1996. In June 1996,
Baron Capital XXXII, Inc., the general partner of the partnership and an
affiliate of the Managing Shareholder (wholly owned and controlled, along with
the general partner of the partnership and each general partner of the other
partnerships described below, by Mr. McGrath), sponsored a private offering of
2,400 units of limited partnership interest in the partnership at a purchase
price of $500 per unit (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 (i) three unrecorded second mortgage loans
secured by a 68-unit residential apartment property referred to as the Blossom
Corners Property-Phase II located in Orlando, Florida and (ii) an unrecorded
second mortgage loan secured by a 164-townhome property referred to as the Lake
Sycamore Property under development in Cincinnati, Ohio.
Baron Strategic Investment Fund II, Ltd.
Baron Strategic Investment Fund II, Ltd., an Exchange Equity Partnership,
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.
23
<PAGE>
Baron Strategic Investment Fund IV, Ltd.
Baron Strategic Investment Fund IV, Ltd., an Exchange Mortgage Partnership,
was organized as a Florida limited partnership in October 1996. In November
1996, Baron Capital XVII, Inc., the general partner of the partnership and an
affiliate of the Managing Shareholder, sponsored a private offering of 2,000
units of limited partnership 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 April 1997. The partnership invested the net proceeds of its
offering (and of a note payable to another Exchange Partnership, Baron Strategic
Investment Fund VI, Ltd.) to acquire two unrecorded second mortgage loans
secured by a 73-unit residential apartment property referred to as the Country
Square Property-Phase I located in Tampa, Florida.
Baron Strategic Investment Fund V, Ltd.
Baron Strategic Investment Fund V, Ltd., an Exchange Mortgage Partnership,
was organized as a Florida limited partnership in October 1996. In November
1996, Baron Capital XL, Inc., the general partner of the partnership and an
affiliate of the Managing Shareholder, sponsored a private offering of 2,400
units of limited partnership interest in the partnership at a purchase price of
$500 per unit (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 acquire (i) an unrecorded second mortgage loan secured by a 33-unit
residential apartment property referred to as the Candlewood Property-Phase II
located in Tampa, Florida, (ii) an undivided 26.3% interest in three unrecorded
second mortgage loans and a 100% interest in an unrecorded second mortgage loan
secured by an 81-unit residential apartment property referred to as the
Curiosity Creek Property located in Tampa, Florida, and (ii) five unrecorded
second mortgage loans secured by a 60-unit residential apartment property
referred to as the Sunrise Property-Phase I located in Titusville, Florida.
Baron Strategic Investment Fund VI, Ltd.
Baron Strategic Investment Fund VI, Ltd., an Exchange Hybrid Partnership,
was organized as a Florida limited partnership in October 1996. In November
1996, Baron Capital XXXI, Inc., the general partner of the partnership and an
affiliate of the Managing Shareholder, sponsored a private offering of 2,400
units of limited partnership interest in the partnership at a purchase price of
$500 per unit (gross proceeds of $1,200,000). The offering was fully subscribed
and closed in April 1997. The partnership invested the net proceeds of its
offering (i) to acquire a 57% limited partnership interest in a limited
partnership which holds fee simple title to a 91-unit residential apartment
property referred to as the Pineview Property located in Orlando, Florida, (ii)
to acquire an unrecorded second mortgage loan secured by a 33-unit residential
apartment property located in Tampa, Florida referred to as the Candlewood
Property-Phase II, (iii) to acquire an undivided 20% interest in an unrecorded
second mortgage loan secured by a 91-unit residential apartment property located
in Orlando, Florida referred to as the Garden Terrace Property-Phase III, and
(iv) to provide a loan (secured by a mortgage) to another Exchange Partnership,
Baron Strategic Investment Fund IV, Ltd., which in turn used such loan proceeds
and net proceeds from its own offering to acquire an unrecorded second mortgage
loan secured by a 73-unit residential apartment property referred to as the
Country Square Property-Phase I located in Tampa, Florida.
Baron Strategic Investment Fund VIII, Ltd.
Baron Strategic Investment Fund VIII, Ltd., an Exchange Mortgage
Partnership, was organized as a Florida limited partnership in February 1997. In
May 1997, Baron Capital XLIV, Inc., the general partner of the partnership and
an affiliate of the Managing Shareholder, sponsored a private offering of 2,400
units of limited partnership interest in the partnership at a purchase price of
$500 per unit (gross proceeds of $1,200,000). The offering was fully subscribed
and closed in February 1998. The partnership invested the net proceeds of its
offering to acquire (i) an undivided 58% interest in an unrecorded second
mortgage loan secured by a 41-unit residential apartment property referred to as
the Heatherwood Property located in Kissimmee, Florida and in three unsecured
loans associated with such property, (ii) three unrecorded second mortgage loans
secured by a 59-unit residential apartment property referred to as the Longwood
Property-Phase I located in Cocoa, Florida, and (iii) an unrecorded
24
<PAGE>
second mortgage loan secured by a 164-townhome property referred to as the Lake
Sycamore Property under development in Cincinnati, Ohio.
Baron Strategic Investment Fund IX, Ltd.
Baron Strategic Investment Fund IX, Ltd., an Exchange Hybrid Partnership,
was organized as a Florida limited partnership in June 1997. In June 1997, Baron
Capital XLII, Inc., the general partner of the partnership and an affiliate of
the Managing Shareholder, sponsored a private offering of 2,400 units of limited
partnership interest in the partnership at a purchase price of $500 per unit
(gross proceeds of $1,200,000). The offering was fully subscribed and closed in
May 1998. The partnership invested the net proceeds of its offering to acquire
(i) a 41.1% limited partnership interest in a limited partnership which holds
fee simple title to a 72-unit residential apartment property referred to as the
Crystal Court Property-Phase I located in Lakeland, Florida, (ii) an unrecorded
second mortgage loan secured by a 33-unit residential apartment property located
in Tampa, Florida referred to as the Candlewood Property-Phase II, (iii) an
undivided 25% interest in an unrecorded second mortgage loan secured by a
91-unit residential apartment property located in Orlando, Florida referred to
as the Garden Terrace Property-Phase III, and (iv) an unrecorded second mortgage
loan secured by a 164-townhome property referred to as the Lake Sycamore
Property under development in Cincinnati, Ohio.
Baron Strategic Investment Fund X, Ltd.
Baron Strategic Investment Fund X, Ltd., an Exchange Hybrid Partnership,
was organized as a Florida limited partnership in June 1997, Baron Capital XLIV,
Inc., the general partner of the partnership and an affiliate of the Managing
Shareholder, sponsored a private offering of 2,400 units of limited partnership
interest in the partnership at a purchase price of $500 per unit (gross proceeds
of $1,200,000). The offering was fully subscribed and closed in March 1998. The
partnership invested the net proceeds of its offering to acquire (i) a 43.5%
limited partnership interest in a limited partnership which holds a fee simple
interest in a 72-unit residential apartment property referred to as the Crystal
Court Property-Phase I located in Lakeland, Florida, (ii) a 43% limited
partnership interest in a limited partnership which holds a fee simple interest
in a 91-unit residential apartment property referred to as the Pineview Property
located in Orlando, Florida, (iii) an undivided 55% interest in an unrecorded
second mortgage loan secured by a 91-unit residential apartment property located
in Orlando, Florida referred to as the Garden Terrace Property-Phase III, and
(iv) an undivided 42% interest in an unrecorded second mortgage loan secured by
a 41-unit residential apartment property referred to as the Heatherwood
Property-Phase II located in Kissimmee, Florida and in three unsecured loans
associated with such property.
Baron Strategic Vulture Fund I, Ltd.
Baron Strategic Vulture Fund I, Ltd., an Exchange Mortgage Partnership, was
organized as a Florida limited partnership in April 1996. In May 1996, Baron
Capital XXVI, Inc., the general partner of the partnership and an affiliate of
the Managing Shareholder, sponsored a private offering of 1,800 units of limited
partnership interest in the partnership at a purchase price of $500 per unit
(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 an undivided 73.7% interest in three unrecorded second mortgage loans
and a 100% interest in an unrecorded second mortgage loan secured by an 81-unit
residential apartment property referred to as the Curiosity Creek Property
located in Tampa, Florida
Brevard Mortgage Program, Ltd.
Brevard Mortgage Program, Ltd., an Exchange Mortgage Partnership, was
organized as a Florida limited partnership in November 1995. In January 1996,
Baron Capital XII, Inc., the general partner of the partnership and an affiliate
of the Managing Shareholder, sponsored a private offering of 575 units of
limited partnership interest in the partnership at a purchase price of $1,000
per unit (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 three unrecorded second mortgage loans secured by a 64-unit
residential apartment property referred to as the Meadowdale Property located in
Melbourne, Florida.
25
<PAGE>
Central Florida Income Appreciation Fund, Ltd.
Central Florida Income Appreciation Fund, Ltd., an Exchange Equity
Partnership, was organized as a Florida limited partnership in April 1993. In
July 1994, Baron Capital of Florida, 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 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
Laurel Oaks (formerly Grove Hamlet) Apartment Property located in Deland,
Florida.
Florida Capital Income Fund, Ltd.
Florida Capital Income Fund, Ltd., an Exchange Equity Partnership, 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., an Exchange Equity 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 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 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., an Exchange Equity Partnership, 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., an Exchange Equity Partnership, 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.
26
<PAGE>
Florida Income Advantage Fund I, Ltd.
Florida Income Advantage Fund I, Ltd., an Exchange Equity 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 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., an Exchange Equity 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 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., an Exchange Equity Partnership, 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 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., an Exchange Equity Partnership,
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., an Exchange Equity Partnership, 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.
27
<PAGE>
Lamplight Court of Bellefontaine Apartments, Ltd.
Lamplight Court of Bellefontaine Apartments, Ltd., an Exchange Hybrid
Partnership, 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 (i) a 31.7% limited partnership interest in a limited
partnership which holds fee simple title to an 80-unit residential apartment
property referred to as the Lamplight Court Apartment Property located in
Bellefontaine, Ohio and (ii) two unrecorded second mortgage loans secured by
such property.
Midwest Income Growth Fund VI, Ltd.
Midwest Income Growth Fund VI, Ltd., an Exchange Equity 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 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., an Exchange Equity 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 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.
Appraisal Table
In the Exchange Offering, each Limited Partner in an Exchange Partnership
will be given the option to acquire Operating Partnership Units in exchange for
all limited partnership units held by the Limited Partner in the partnership.
Set forth in the table below is the following information in respect of each
Exchange Equity Partnership, Exchange Mortgage Partnership and Exchange Hybrid
Partnership: (i) the name of the partnership, its respective Corporate General
Partner (wholly owned and controlled, along with the Managing Shareholder, by
Mr. McGrath), and the residential apartment property or properties in which the
partnership owns a direct or indirect interest, (ii) the number of outstanding
limited partnership units in the partnership, (iii) the appraised value of the
partnership based on property appraisals prepared by an independent appraisal
firm and other considerations, (iv) the aggregate number of Operating
Partnership Units being offered to all Limited Partners in the partnership (and
their initial dollar value), (v) the number of Operating Partnership Units being
offered to each Limited Partner in the partnership per $1,000 of original
investment in the partnership (and their initial dollar value), and (vi) the
percentage of Units offered to limited partners in each Exchange Partnership in
relation to Units offered to limited partners in all Exchange Partnerships
participating in the initial transactions of the Exchange Offering.
28
<PAGE>
APPRAISAL TABLE
<TABLE>
<CAPTION>
Residential
Apartment Number Appraised
Property of Value of
Exchange Equity Partnerships General Partner Involved Investors Partnership
- ---------------------------- --------------- -------- --------- -----------
<S> <C> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd. Baron Capital XXXI, Inc. Steeplechase 16 $876,060
Central Florida Income Appreciation Baron Capital of Florida, Inc. Laurel Oaks (formerly 51 $1,252,750
Fund, Ltd. Grove Hamlet)
Florida Capital Income Fund, Ltd. Baron Capital II, Inc. Eagle Lake 31 $886,890
Florida Capital Income Fund II, Ltd. Baron Capital IV, Inc. Forest Glen I 38 $1,171,690
Florida Capital Income Fund III, Ltd. Baron Capital VII, Inc. Bridge Point 32 $885,030
Florida Capital Income Fund IV, Ltd. Baron Capital V, Inc. Glen Lake 60 $2,270,600
Florida Income Advantage Fund I, Ltd. Baron Capital IV, Inc. Forest Glen III 46 $1,094,340
Florida Income Appreciation Fund I, Ltd. Baron Capital IV, Inc. Forest Glen IV 13 $ 237,780
Florida Income Growth Fund V, Ltd. Baron Capital XI, Inc. Blossom Corners I 49 $1,254,750
Florida Opportunity Income Partners, Ltd. Baron Capital III, Inc. Camellia Court 29 $840,000
GSU Stadium Student Apartments, Ltd. Baron Capital X, Inc. Stadium Club 38 $1,050,000
Midwest Income Growth Fund VI, Ltd. Baron Capital of Ohio Brookwood Way 7 $305,130
III, Inc.
Realty Opportunity Income Fund VIII, Ltd. Baron Capital IV, Inc. Forest Glen II 45 $1,111,080
<CAPTION>
Percentage of Units
Offered to LP's in
No. of Units Offered Partnership in
Aggregate No. To Each LP relation to Units
of Units Offered to per $1,000 of Offered to
All Limited Partners Original Investment all LP's in all
Exchange Equity Partnerships (initial dollar value)* (initial dollar value)* Partnerships
- ---------------------------- ------------------------ ----------------------- ------------------
<S> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd. 87,606 ($876,060) 102 ($1,020) 3.65%
Central Florida Income Appreciation 125,275 ($1,252,750) 101 ($1,010) 5.21%
Fund, Ltd.
Florida Capital Income Fund, Ltd. 88,689 ($886,890) 102 ($1,020) 3.69%
Florida Capital Income Fund II, Ltd. 117,169 ($1,171,690) 102 ($1,020) 4.88%
Florida Capital Income Fund III, Ltd. 88,503 ($885,030) 105 ($1,050) 3.68%
Florida Capital Income Fund IV, Ltd. 227,060 ($2,270,600) 123 ($1,230) 9.45%
Florida Income Advantage Fund I, Ltd. 109,434 ($1,094,340) 101 ($1,010) 4.56%
Florida Income Appreciation Fund I, Ltd. 23,778 ($237,780) 101 ($1,010) .99%
Florida Income Growth Fund V, Ltd. 125,475 ($1,254,750) 105 ($1,050) 5.22%
Florida Opportunity Income Partners, Ltd. 84,000 ($840,000) 105 ($1,050) 3.50%
GSU Stadium Student Apartments, Ltd. 105,000 ($1,050,000) 117 ($1,170) 4.37%
Midwest Income Growth Fund VI, Ltd. 30,513 ($305,130) 102 ($1,020) 1.27%
Realty Opportunity Income Fund VIII, Ltd. 111,108 ($1,111,080) 102 ($1,020) 4.63%
</TABLE>
- ----------
* The number of Units being offered in the Exchange Offering in respect of each
Exchange Equity Partnership and each Exchange Hybrid Partnership (to the extent
of its direct or indirect equity interest in a property) takes into account,
among other considerations, the estimated appraised valuation and operating
history of the property and the current principal balance of first mortgage and
other indebtedness to which the property is subject. The number of Units being
offered in the Exchange Offering in respect of each Exchange Mortgage
Partnership and each Exchange Hybrid Partnership (to the extent of its mortgage
interest in a property and other debt interests) takes into account the current
principal balance of the respective debt interest held, the replacement cost new
of property securing such indebtedness and the debtor's repayment history and
current net equity interest in such property. For purposes of the Exchange
Offering, each Unit has been assigned an initial value of $10.00. See "THE
EXCHANGE OFFERING."
29
<PAGE>
APPRAISAL TABLE (cont'd)
<TABLE>
<CAPTION>
Residential
Apartment Number Appraised
Property of Value of
Exchange Equity Partnerships General Partner Involved Investors Partnership
- ---------------------------- --------------- -------- --------- -----------
<S> <C> <C> <C> <C>
Baron Strategic Investment Fund, Ltd. Baron Capital XXXII, Inc. Blossom Corners II 42 $959,000
Lake Sycamore
Baron Strategic Investment Fund IV, Ltd. Baron Capital XVII, Inc. Country Square I 43 $1,306,800
Baron Strategic Investment Fund V, Ltd. Baron Capital XL, Inc. Candlewood II 56 $1,246,000
Curiosity Creek
Sunrise I
Baron Strategic Investment Fund VIII, Baron Capital XLIV, Inc. Heatherwood II 43 $1,248,000
Ltd. Lake Sycamore
Longwood I
Baron Strategic Vulture Fund I, Ltd. Baron Capital XXVI, Inc. Curiosity Creek 42 $944,000
Brevard Mortgage Program, Ltd. Baron Capital XII, Inc. Meadowdale 23 $599,000
Exchange Hybrid Partnerships
Baron Strategic Investment Fund VI, Ltd. Baron Capital XXXI, Inc. Candlewood II 43 $1,237,000
Country Square I
Garden Terrace III
Pineview
Baron Strategic Investment Fund IX, Ltd. Baron Capital LXII, Inc. Candlewood II 51 $1,230,000
Crystal Court I
Garden Terrace III
Lake Sycamore
Baron Strategic Investment Fund, X, Ltd. Baron Capital LXIV, Inc. Crystal Court I 57 $1,236,000
Garden Terrace III
Heatherwood II
Pineview
Lamplight Court of Bellefontaine Baron Capital IX, Inc. Lamplight Court 27 $780,980
Apartments, Ltd.
--------------------------------
TOTAL: 882 $24,022,880
<CAPTION>
Percentage of Units
Offered to LP's in
No. of Units Offered Partnership in
Aggregate No. To Each LP relation to Units
of Units Offered to per $1,000 of Offered to
All Limited Partners Original Investment all LP's in all
Exchange Equity Partnerships (initial dollar value)* (initial dollar value)* Partnerships
- ---------------------------- ------------------------ ----------------------- ------------------
<S> <C> <C> <C>
Baron Strategic Investment Fund, Ltd. 95,900 (959,000) 104 ($1,040) 3.99%
Baron Strategic Investment Fund IV, Ltd. 130,680 ($1,306,800) 103 ($1,030) 5.44%
Baron Strategic Investment Fund V, Ltd. 124,600 ($1,246,000) 104 ($1,040) 5.19%
Baron Strategic Investment Fund VIII, 124,800 ($1,248,000) 104 ($1,040) 5.12%
Ltd.
Baron Strategic Vulture Fund I, Ltd. 94,400 ($944,000) 105 ($1,050) 3.93%
Brevard Mortgage Program, Ltd. 59,900 ($599,000) 104 ($1,040) 2.49%
Exchange Hybrid Partnerships
Baron Strategic Investment Fund VI, Ltd. 123,700 ($1,237,000) 103 ($1,030) 5.15%
Baron Strategic Investment Fund IX, Ltd. 123,000 ($1,230,000) 103 ($1,030) 5.12%
Baron Strategic Investment Fund, X, Ltd. 123,600 ($1,236,000) 103 ($1,030) 5.15%
Lamplight Court of Bellefontaine 78,098 ($780,980) 112 ($1,120) 3.25%
Apartments, Ltd.
------------------------ -------
2,402,288 ($24,022,880) 100.00%
</TABLE>
30
<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
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 exchanges in respect of all
Exchange Partnership Units initially targeted for investment in the
Exchange Offering, the partnership interests acquired will have a purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units being offered in the
Exchange Offering have not yet been finally determined. In addition, to
date, the Operating Partnership has acquired beneficial ownership of four
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) and collectively own
an amount of Operating Partnership Units (up to 1,202,160 Units) which are
exchangeable (subject to escrow restrictions described below) into 19% of
the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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, the Operating
Partnership and the Exchange Partnerships, 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, Unitholders
in the Operating Partnership and limited partners in the Exchange
Partnerships. 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 The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and mortgage and other debt interests in residential apartment
properties. The purchase price to be paid for equity interests in
properties will be based upon, among other considerations, appraisals
prepared by qualified and licensed independent appraisal firms employing
the three traditional property valuation methods:
31
<PAGE>
the income approach, direct sales comparison approach and cost approach.
The purchase price to be paid for mortgage or other debt interests in
properties will be based upon independent appraisals of the replacement
cost new of the respective property securing such indebtedness (without
taking into account the deficiencies of the existing improvements as
compared to a new building), which may significantly exceed the cost
approach valuation, the current principal balance of such interests, and
the debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath), 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 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.
32
<PAGE>
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; financing such
acquisitions and improvements, in turn, 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.
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 issuance in turn may result in the
dilution of Offerees who elect to accept this Exchange Offering and
Shareholders of the Trust and affect 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 ("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 interests held by the partnership would be sold in the near
future due to the REIT and other provisions of the Code which would
33
<PAGE>
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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for Exchange Partnership Units. This
discrepancy is due to depreciation taken against the original price paid by
Exchange Equity Partnerships and Exchange Hybrid Partnerships for direct or
indirect equity interests in properties and the appreciation of the
properties since such purchase. As a result, the return on investment of
the Exchange Partnerships based on the initial assigned value of the Units
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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.
34
<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
35
<PAGE>
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.
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
36
<PAGE>
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.
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, subject to certain limitations
described below. 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
generally 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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) 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 provided 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 (excluding 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.) It is likely that the total operating
expenses of the Trust and the Operating Partnership for their initial years of
operations will exceed the 2%/25% limitations described above. In August 1998,
the Independent Trustees made a finding that such expenses are justified in
respect of the
37
<PAGE>
first fiscal year of operations on the basis that (i) the Trust and the
Operating Partnership are start-up companies which will expand their property
interests through acquisitions paid for with net proceeds from the Cash Offering
and Units in exchange transactions, including the Exchange Offering, and (ii)
significant start-up expenses incurred to cover the acquisition or leasing of
equipment, rental obligations and leasehold improvements and salary expenses as
a percentage of assets or net income will decrease as operations expand.
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 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.
OFFERING AND ORGANIZATIONAL STAGE
<TABLE>
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Managing Shareholder (Baron Reimbursement for distribution, due diligence and Not to exceed $250,000
Advisors) 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 and filing, recording, printing, postage and Not to exceed $250,000
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. No compensation will be payable to the Corporate Reimbursable expenses are expected to
(the Corporate Trustee of the Trustee for performing services on behalf of the be limited to the expense of
Trust) Trust at the direction of the Managing Shareholder; operating an office in Delaware
however, reimbursement will be made for reasonable (approximately $1,500 per year
expenses incurred on behalf of the Trust which are initially) as required by the
approved in advance by the Managing Shareholder. Delaware Act - see "MANAGEMENT -
Corporate Trustee."
</TABLE>
38
<PAGE>
OFFERING AND ORGANIZATIONAL STAGE (cont'd)
<TABLE>
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Managing Shareholder and The Managing Shareholder and certain affiliates are Amount of reimbursable expenses
Affiliates entitled to be reimbursed by the Trust and the incurred on behalf of the Trust and
Operating Partnership for all reasonable direct the Operating Partnership.
expenses incurred 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.
ACQUISITION AND OPERATING STAGE
Managing Shareholder Reimbursement for expenses incurred prior to and Not to exceed $1,000,000;
during the Cash Offering for investigating and (reimbursable expenses paid in
evaluating investment opportunities for the Trust connection with investment activities
and the Operating Partnership (other than the plus other acquisition fees and
Exchange Properties) and for assisting them in expenses may not exceed 6% of the
consummating their investments, in an amount not to contract purchase price for
exceed 4% of gross proceeds from the Cash Offering; acquisitions unless the Independent
payable from available net proceeds of the Cash Trustees determine that the
Offering or as cash flow permits as determined by transaction is commercially
the Board of the Trust. reasonable).
Managing Shareholder Annual payment under the Trust Management Agreement Not to exceed $500,000 per year;
to reimburse it for its operating expenses relating payable on a monthly basis during the
to the business of the Trust and the Operating term of the agreement beginning June
Partnership, in an amount not to exceed 1% of gross 1, 1998; at its option the Managing
proceeds of the Cash Offering plus 1% of the Shareholder may elect to be paid in
initial assigned value of Units issued in Common Shares with an equivalent
connection with the Exchange Offering. value.
</TABLE>
39
<PAGE>
ACQUISITION AND OPERATING STAGE (cont'd)
<TABLE>
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Gregory K. McGrath, a founder of Initial year's 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 Partnership
Officer of the Trust, the in an amount not to exceed 25,000
Operating Partnership and the shares in the initial year of
Managing Shareholder 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 to the
Operating Partnership, Mr. McGrath
subscribed for Units which are
exchangeable (subject to certain
escrow restrictions) into 9.5% of
the Common Shares outstanding as of
the earlier to occur of the
completion of the Cash Offering and
the Exchange Offering or May 14,
1999, calculated 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 S. Geiger, a founder of Initial annual compensation $100,000, plus health benefits and
the Trust and the Operating eligibility to participate in any
Partnership and Chief Operating option plan and bonus incentive
Officer of the Trust, the plan which may be implemented by
Operating Partnership and the the Executive Compensation
Managing Shareholder Committee of the Board of the
Trust. In exchange for an initial
cash capital contribution to the
Operating Partnership, Mr. Geiger
has been issued Units which are
exchangeable (subject to certain
escrow restrictions) into 9.5% of
the Common Shares outstanding as of
the earlier to occur of the
completion of the Cash Offering and
the Exchange Offering or May 14,
1999, calculated 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."
</TABLE>
40
<PAGE>
ACQUISITION AND OPERATING STAGE (cont'd)
<TABLE>
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Robert L. Astorino, President - Initial annual salary $150,000, plus health benefits and
Properties of the Operating eligibility to participate in any
Partnership option plan and bonus incentive
plan which may be implemented by
the Executive Compensation
Committee of the Board of the
Trust.
Mark L. Wilson, Interim Chief Initial annual salary $110,000, plus health benefits and
Financial Officer of the eligibility to participate in any
Operating Partnership 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 and
Accounting and Strategic Planning eligibility to participate in any
of the Operating Partnership 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 $6,000
Baron Capital Properties, Inc. No compensation will be paid for performing Reimbursable expenses are expected
(the Corporate Trustee of the services on behalf of the Trust at the to be limited to the expense of
Trust) direction of the Managing Shareholder; operating an office in Delaware
however, reimbursement will be made for (approximately $1,500 per year
reasonable expenses incurred on behalf of initially) as required by the
the Trust which are approved in advance by Delaware Act - see "MANAGEMENT -
the Managing Shareholder. Corporate Trustee."
Managing Shareholder and Subject to operational limitations on REITs The compensation, price or fee
Affiliates for federal income tax purposes, the Trust payable must be comparable to and
is authorized to contract with the Managing competitive with that charged by a
Shareholder and affiliates to provide goods third party rendering comparable
and services other than those specified goods and services which could
herein, but no such contract is contemplated reasonably be made available to the
at this time. Any such contract would Trust.
require, among other things, that such
persons be previously engaged in the
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.
</TABLE>
41
<PAGE>
ACQUISITION AND OPERATING STAGE (cont'd)
<TABLE>
<CAPTION>
Recipient Type of Compensation Maximum Amount
- --------- -------------------- --------------
<S> <C> <C>
Managing Shareholder and The Managing Shareholder and certain affiliates Amount of reimbursable expenses
Affiliates are entitled to be reimbursed by the Trust and incurred on behalf of the Trust and
the Operating Partnership for all reasonable the Operating Partnership.
direct expenses incurred 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 for activities for which they already
receive a fee, compensation or reimbursement as
described herein.
</TABLE>
42
<PAGE>
CONFLICTS OF INTEREST
The Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) 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, including the 23 Exchange 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 or other equity interests in limited partnerships or other entities
which own a direct or indirect equity 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 (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath) 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 or other entities, including the Exchange 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. Mr.
McGrath is also the sole principal of the Managing Shareholder and 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. In addition, affiliates of Mr.
McGrath are also the corporate general partners of limited partnerships which
are debtors under second mortgage loans and other debt interests owned by
certain of the Exchange Partnerships, and in such capacity, Mr. McGrath holds an
indirect minority economic interest in such partnerships which is subordinate to
the preferred returns of their limited partners. Therefore, individually and
collectively the Original Investors have significant influence over the affairs
of the Trust, the Operating Partnership and the Exchange Partnerships which may
result in decisions that do not fully represent the interests of all
Shareholders, Unitholders and Exchange Limited Partners. 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
43
<PAGE>
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 interest 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
with the purposes for which they were organized, only upon fulfillment of the
following conditions. First, the requesting party or parties 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 or
parties, on the terms and conditions specified in the written proposal. In
addition, the requesting party or parties 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 or parties 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 certain 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 them.
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
44
<PAGE>
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 (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath). 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 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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) 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 have been retained to
prepare appraisals of each Exchange Property, and the exchange value to be
offered by the Operating Partnership for each limited partnership interest to be
acquired in the Exchange Offering will be based on such appraisals and other
considerations. 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."
45
<PAGE>
FIDUCIARY RESPONSIBILITY
The Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath), 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
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath), 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 provide
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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) 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.
46
<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 in the Cash Offering 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 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. As described herein at "THE
EXCHANGE
47
<PAGE>
OFFERING - Exchange Property Appraisals," appraisals of the fair market value
and replacement cost new 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 or replacement cost and cannot be relied
upon as measures of realizable value or replacement cost. 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
Property Interests to be Acquired by the Operating Partnership,
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 directly or indirectly own equity or
debt interests in residential apartment properties. If acquisitions are
consummated in respect of all Exchange Partnership Units initially targeted in
the Exchange Offering, the partnership interests acquired will have a purchase
price totaling approximately $24,022,880, comprised of Units to be issued with
an initial assigned value of such amount. The property interests to be acquired
with the balance of the Units to be offered in the Exchange Offering 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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath).
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, $2,982,293 of the net cash proceeds
of the Cash Offering (out of gross proceeds of approximately $___________) have
been used to acquire beneficial ownership of four properties and to make capital
contributions to 20 real estate limited partnerships, including certain of the
Exchange Partnerships, in exchange for limited partnership interests therein.
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 acquisitions of property interests by the Operating Partnership using
available net cash proceeds of the Cash Offering, available operating cash flow
or Units or other securities of the Trust or the Operating Partnership. In
addition, Offerees will not have any vote in the selection of investments in
property interests 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 and operating cash
flow the Operating Partnership has available to invest, the willingness of
Offerees in the Exchange Offering and other sellers to accept Operating
Partnership Units or other securities in exchange for their property interests,
and the amount of funds and number of securities required for each investment
opportunity. See "RISK FACTORS," "MANAGEMENT," "THE TRUST AND THE OPERATING
PARTNERSHIP," "INVESTMENT OBJECTIVES AND POLICIES" and "INITIAL REAL ESTATE
INVESTMENTS."
48
<PAGE>
Possible Adverse Influence of Original Investors
Mr. McGrath and Mr. Geiger, the Original Investors in the Operating
Partnership, 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 as of the earlier to occur of the completion of the offerings or May
14, 1999 (up to 601,080 Common Shares out of total maximum outstanding of
6,327,160 Common Shares), calculated 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% 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 the sole principal of the Corporate
General Partners of the Exchange Partnerships, 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. In addition, affiliates of Mr. McGrath are also the corporate
general partners of limited partnerships which are debtors under second mortgage
loans and other debt interests owned by certain of the Exchange Partnerships,
and in such capacity, Mr. McGrath holds an indirect minority economic interest
in such partnerships which is subordinate to the preferred returns of their
limited partners. Accordingly, the Original Investors have significant influence
over the affairs of the Trust, the Operating Partnership, the Managing
Shareholder and the Exchange Partnerships which may result in decisions that do
not fully represent the interests of all Shareholders, Unitholders and Exchange
Limited Partners. 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 and
the sole principal of the Managing Shareholder, 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,
affiliates of Mr. McGrath are also the corporate general partners of limited
partnerships which are debtors under second mortgage loans and other debt
interests owned by certain of the Exchange Partnerships, and in such capacity,
Mr. McGrath holds an indirect minority economic interest in such partnerships
which is subordinate to the preferred returns of their limited partners.
Moreover, 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 made an initial capital contribution to the Operating
Partnership in exchange for a significant number of Units. Therefore,
individually and collectively they will have significant influence over the
affairs of the Trust, the Operating Partnership, the Managing Shareholder and
the Exchange Partnerships which may result in decisions that do not fully
represent the interests of all Shareholders, Unitholders and Exchange Limited
49
<PAGE>
Partners. 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.
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 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, the Shareholders, the Operating Partnership and the Unitholders.
See "CONFLICTS OF INTEREST."
No Assurance of Successful Performance of
Partnership Interests to be Acquired in Exchange Offering
The annual rate of return on investment for 1997 and for the first nine
months of 1998 generated by the Exchange Partnerships, which are the initial
acquisition candidates involved in the Exchange Offering, ranged between zero
and ten percent. The annual rate of return on investment for those periods
generated by other real estate partnerships managed by affiliates of the
Managing Shareholder (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath) 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 Partnerships or any other
property investments 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
may 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, the investment
held by an Exchange Partnership in respect of an Exchange Property 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 in such partnership than
they would receive under the terms and conditions of the Exchange Offering.
50
<PAGE>
Investors in Successful Exchange Partnerships Could Lose
Advantage by Combining with Less Successful Exchange Partnerships
In connection with the Exchange Offering, Exchange Limited Partners are
being offered the opportunity 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
101% to 123% of the amount of an Offeree's original investment in his Exchange
Partnership. For purposes of the Exchange Offering, the 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, 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 by the Operating Partnership in the
Exchange Offering in respect of each Exchange Equity Partnership and each
Exchange Hybrid Partnership (to the extent of its direct or indirect equity
interest in a property) differs based upon a number of factors, including, among
others, the estimated appraised market value and operating history of the
property, the current principal balance of first mortgage and other indebtedness
to which the property is subject, 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. The number
of Units being offered in respect of each of the Exchange Mortgage Partnerships
and each of the Exchange Hybrid Partnerships (to the extent of their mortgage
interests in properties and other debt interests) differs based upon the current
principal balance of the respective debt interest held, the replacement cost new
of property securing such indebtedness and the debtor's repayment history and
current net equity interest in such property. By accepting the Exchange
Offering, Exchange Limited Partners in Participating Exchange Partnerships which
are performing relatively better than other partnerships could lose any such
advantage while Exchange Limited Partners in Participating Exchange Partnerships
which are performing relatively poorer than the average could 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 will acquire an interest 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
(wholly owned and controlled, along with the Corporate General Partner of each
Exchange Partnership, by Mr. McGrath), the Independent Trustees and other
members of the Board of the Trust and their respective affiliates and
developers, borrowers and property managers.
51
<PAGE>
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 it. 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 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
and/or other assets of the debtor for repayment. In most cases, mortgage
investments made by the Trust or the Operating Partnership are expected to be
Junior Mortgages which are subordinated to Senior Mortgages. 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
held by 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 provided or
acquired by the Trust or the Operating Partnership 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 residential apartment
properties in which they acquire a direct or indirect equity interest, certain
occupancy percentages and rental rates will need to be achieved and expense
levels maintained in respect of properties. 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
52
<PAGE>
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."
Similarly, in cases where the Trust or the Operating Partnership provides
or acquires a mortgage interest in a property, the borrower's ability to repay
the mortgage loan will depend on the same factors described above.
Adverse Effects 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 until recorded 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.
Subject to certain exceptions, the Trust and the Operating Partnership are
authorized to provide or acquire mortgage loans as long as, among other things,
the aggregate amount of all mortgage loans outstanding on any particular
underlying property, including the loan of the Trust or the Operating
Partnership, as applicable, would not exceed an amount equal to 80% of the
appraised replacement cost new of the property, without taking into account the
deficiencies of the existing improvements as compared to a new building. The
Trust and the Operating Partnership have relied upon appraisals performed by
independent appraisal firms in respect of the replacement cost new of properties
in which Exchange Partnerships involved in the Exchange Offering own a second
mortgage interest. In certain cases, the appraised replacement cost new of a
property significantly exceeds the appraised value of the property determined
under the income approach, the comparison approach and the cost approach (which
takes into account deficiencies of the existing improvements compared to a new
building).
Valuation of Mortgage Interests to be Acquired May Exceed Actual Value
Subject to certain exceptions, the Trust and the Operating Partnership are
authorized to provide or acquire mortgage loans as long as, among other things,
the aggregate amount of all mortgage loans outstanding on any particular
underlying property, including the loan of the Trust or the Operating
Partnership, as applicable, would not exceed an amount equal to 80% of the
appraised replacement cost new of the property. Replacement cost new refers to
the estimated cost new of the improvements on a property (estimated on the basis
of current prices for the component parts of a building) without taking into
account the deficiencies of the existing building compared to a new building,
plus the estimated current market value of the underlying land (generally
determined using the direct sales comparison approach).
The Trust and the Operating Partnership have relied upon appraisals
performed by independent appraisal firms in respect of the replacement cost new
of properties in which Exchange Partnerships involved in the Exchange Offering
own a second mortgage interest. In certain cases, the appraised replacement cost
new of a property in which an Exchange Partnership owns a mortgage interest
significantly exceeds the appraised value of the property determined under the
three traditional real property valuation approaches, the income approach, the
comparison approach and the cost approach (which takes into account deficiencies
of the existing improvements compared to a new building). Offerees should note
that appraisals are only opinions of value or replacement cost new and cannot be
relied upon as measures of realizable value or replacement cost new. The amount
that a beneficial owner of an Exchange Property might realize from a sale of a
mortgage interest in a particular property may be more or less than the value to
be paid for such interest.
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 property interests 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."
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 property interests 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
53
<PAGE>
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, respectively.
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).
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 depend upon the
number of Common Shares and Units outstanding as of the date of the particular
cash distribution, which in turn will depend upon (i) the
54
<PAGE>
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
(wholly owned and controlled, along with the Corporate General Partner of each
Exchange Partnership, by Mr. McGrath), 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."
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 (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath) 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
55
<PAGE>
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 and
replacement cost new of each 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 replacement cost and should
not be relied upon as precise measures of true worth or realizable value or
replacement cost. 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 is also 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 incurred by them, 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 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 or 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 depend 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
56
<PAGE>
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.
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) (primarily Gregory K.
McGrath, Robert S. Geiger, Robert L. Astorino, Mark L. Wilson 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 or other entities 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 (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath). 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."
57
<PAGE>
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 issuance of Operating Partnership Units which have been arbitrarily
assigned an initial value of at least $6,000,000. There can be no assurance that
a significant number of Offerees will accept the terms of the Exchange Offering
or that property interests 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
$496,000. 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 property
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
issued and 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 third or fourth
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.
58
<PAGE>
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 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 subscribed for by 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 Offerees who are
limited partners in limited partnerships which own direct or indirect interests
in residential apartment properties, in exchange for their limited 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
59
<PAGE>
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 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 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 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
60
<PAGE>
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 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.
Exchange Offering Procedures
Subject to conditions set forth under "THE EXCHANGE OFFERING - Conditions
to the Exchange Offering," issuance of Operating Partnership Units in exchange
for Exchange Partnership Units pursuant to the Exchange Offering will be made
only after a timely receipt by the Operating Partnership of certificates
representing such Exchange Partnership Units, a properly completed and duly
executed Consent Form, and any other required documents. See "THE EXCHANGE
OFFERING - Acceptance for Exchange and Issuance of Operating Partnership Units"
and "THE EXCHANGE OFFERING - Procedures for Tendering Exchange Partnership
Units." Therefore, holders of the Exchange Partnership Units desiring to tender
such Exchange Partnership Units in exchange for Operating Partnership Units
should allow sufficient time to ensure timely delivery. Neither the Operating
Partnership nor the Trust is under any duty to give notification of defects or
irregularities with respect to the tenders of Exchange Partnership Units for
exchange.
Consequences of a Failure to Tender Exchange Partnership Units
The Exchange Partnership Units have not been registered under the
Securities Act or any state securities laws and therefore may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws, or
pursuant to an exemption therefrom or in a transaction not subject thereto, and
in each case in compliance with certain other conditions and restrictions.
Exchange Partnership Units that remain outstanding after consummation of the
Exchange Offering will continue to bear a legend reflecting such restrictions on
transfer. In addition, upon consummation of the Exchange Offering,
61
<PAGE>
holders of Exchange Partnership Units that remain outstanding will not be
entitled to any rights to have such Exchange Partnership Units registered under
the Securities Act or qualified for any exemption therefrom. The Operating
Partnership and the Trust do not intend to register under the Securities Act or
qualify for a registration exemption any Exchange Partnership Units that remain
outstanding after consummation of the Exchange Offering.
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.
As described in further detail in this Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS," following the Exchange Offering, 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 Exchange Offering 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
62
<PAGE>
and Shareholders of the Trust will not have any 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 subscribed for 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 as of the earlier to occur of the completion of the Cash
Offering and the Exchange Offering or May 14, 1999, calculated 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. 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 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 property
interests owned by the Exchange Partnerships 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 property interests by the Operating Partnership at their
estimated value may result in the property interests 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
63
<PAGE>
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.
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 interest 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 (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath) 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
64
<PAGE>
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 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 using 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 by it.
Shareholders and Unitholders Could be Adversely Affected by
Limited Liability and Indemnification of the Managing Persons
65
<PAGE>
Although the Managing Shareholder (wholly owned and controlled, along with
the Corporate General Partner of each Exchange Partnership, by Mr. McGrath),
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 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
66
<PAGE>
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 then 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 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 Exchange Partnership Units Exceeds Current Book Value of Exchange
Partnerships
The $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for acquisition in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating Partnership
Units being offered for the Exchange Partnership Units. This discrepancy is due
to depreciation taken against the original price paid by the Exchange Equity
Partnerships and Exchange Hybrid Partnerships for direct or indirect equity
interests in the properties and the appreciation of the properties since such
purchase. As a result, the return on investment of the Exchange Partnerships
based on the initial value assigned to Units offered for Exchange Partnership
Units in such partnerships in connection with the Exchange Offering will be less
than the return on investment of the partnerships based on their 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 investments will be sufficient to permit
distributions to Shareholders and Unitholders.
67
<PAGE>
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, 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,
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 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.
68
<PAGE>
THE EXCHANGE OFFERING
All of the Units being offered by the Operating Partnership pursuant to
this Prospectus are being offered in connection with the Exchange Offering. In
the Exchange Offering, the Operating Partnership is offering to issue registered
Units to individual limited partners in limited partnerships which directly or
indirectly own equity and/or debt interests in residential apartment properties,
in exchange for the limited partners' limited partnership interests.
As its initial investment targets in the Exchange Offering, the Operating
Partnership is offering to acquire direct or indirect equity and/or subordinated
mortgage and other debt interests in 26 residential apartment properties (the
"Exchange Properties") directly or indirectly owned by 23 real estate limited
partnerships managed by Corporate General Partners affiliated with the Managing
Shareholder (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) (collectively, the
"Exchange Partnerships" and individually, an "Exchange Partnership"). Certain of
the Exchange Partnerships directly or indirectly own equity interests in 16
Exchange Properties which consist of an aggregate of 1,012 residential units
(comprised of studio and one, two, three and four-bedroom units). Certain of the
Exchange Partnerships directly or indirectly own mortgage interests in 10
Exchange Properties, which consist of an aggregate of 813 existing residential
units (studio and one and two bedroom units) and 164 units (two and three
bedroom units) under development. Of the Exchange Properties, 21 properties are
located in Florida, three properties in Ohio and one property each in Georgia
and Indiana.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a residential apartment property or the entire
limited partnership or other equity interests in a limited partnership or other
entity which owns record title to a property. The sole assets of each of six of
the Exchange Partnerships (individually, an "Exchange Mortgage Partnership" and
collectively, the "Exchange Mortgage Partnerships") are the entire or an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests). Each of the remaining four Exchange
Partnerships (individually, an "Exchange Hybrid Partnership" and collectively,
the "Exchange Hybrid Partnerships") own a combination of (i) all or a portion of
the direct or indirect equity interest in one or more properties and (ii) an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests). Such property interests are described in
further detail at "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "INITIAL REAL ESTATE
INVESTMENTS" and in Exhibit B hereto. See also "SELECTED FINANCIAL DATA,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" 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/or a
subordinated mortgage and other debt 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 such an interest. 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. Affiliates of Mr. McGrath are
also the corporate general partners of limited partnerships which are debtors
under second mortgage loans and other debt interests owned by certain of the
Exchange Partnerships, and in such capacity, Mr. McGrath holds an indirect
minority economic interest in such partnerships which is subordinate to the
preferred returns of their limited partners. 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
69
<PAGE>
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. An Offeree must exchange all of his units of limited partnership in
an Exchange Partnership in order to participate in the Exchange Offering.
Partial exchanges will not be accepted.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
The current book value of the 23 Exchange Partnerships is approximately
$8,113,659. If exchanges are consummated for all Exchange Partnership Units in
the partnerships in connection with the Exchange Offering, the partnership
interests acquired will have a purchase price totaling approximately
$24,220,880, comprised of Operating Partnership Units to be issued with an
initial assigned value in that amount. The property interests to be acquired
with the balance of the Operating Partnership Units to be offered in the
Exchange Offering 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. In September 1998,
the Operating Partnership acquired beneficial ownership of a 50-unit residential
apartment property located in New Smyrna Beach, Florida. In October 1998, the
Operating Partnership acquired an approximately 12.3% limited partnership
interest in a limited partnership which is the owner and developer of a 168-unit
residential apartment property under construction in Alexandria, Kentucky.
Thirty eight of the 168 residential units (approximately 22.6%) have been
completed and are in the rent-up stage. The acquisitions described above, which
had a total cash purchase price of $2,641,293, were paid out of the net proceeds
of the Trust's ongoing Cash Offering.
In July 1998, the Operating Partnership made capital contributions in the
range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20 real
estate partnerships managed by affiliates of the Managing Shareholder, including
certain of the Exchange Partnerships, in exchange for a 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 Cash 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
any 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 23 Exchange
Partnerships was approved by the Independent Trustees of the Trust, who together
with the Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath), 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. As described above, affiliates of Mr. McGrath are also the
corporate general partners of limited partnerships which are debtors under
second mortgage loans and other debt interests owned by certain of the Exchange
Partnerships.
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
70
<PAGE>
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
particular Exchange Partnership per $1,000 of his original investment is
indicated on the table set forth on page _________ of this Prospectus, on page 2
of the accompanying Prospectus Supplement 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 101% to 123% 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 assigned an initial value of $10 per Unit, which
corresponds to the offering price of each Trust Common Share offered in the Cash
Offering. The value of each outstanding Unit and Common Share will be
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 property in which an
Exchange Equity Partnership or an Exchange Hybrid Partnership directly or
indirectly owns an equity interest 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 current
principal balance of the first mortgage loan and other indebtedness to which the
property is subject, 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. The number of Units
being offered in respect of each of the Exchange Mortgage Partnerships and
Exchange Hybrid Partnerships (to the extent of their mortgage interests in
properties and other debt interests) differs based upon the current principal
balance of the respective debt interest held, the replacement cost new of
property securing such indebtedness and the debtor's repayment history and
current net equity interest in such property. 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) Mr. McGrath will either grant the
Board of the Trust a management proxy coupled with an interest to vote the
shares of its Corporate General Partner (wholly owned and controlled, along with
the Managing Shareholder of the Trust, by Mr. McGrath) 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.
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 below 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% 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 (at a price equal to the average of the daily market price
for the 10 consecutive trading days immediately preceding the date the Trust
receives the exchange notice, or, in the absence of a public trading market, at
a price determined in good faith by the Trust) 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
71
<PAGE>
Offering and the Common Shares into which Units issued in the Exchange Offering
will be exchangeable. There can be no 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
Subject to the completion of the Exchange Offering, the Trust and the
Operating Partnership will account for the acquisition of the limited
partnership interests in Participating Exchange Partnerships on the purchase
method and therefore record the assets acquired and the liabilities assumed at
their fair value at the date of acquisition.
Background of the Exchange Offering
In the first quarter of 1997, the Original Investors determined that a
single integrated 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 (wholly
owned and controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath), 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 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 the original private
placement offering of each Exchange Partnership 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, where applicable, to provide the opportunity for capital
appreciation from the future sale of the residential apartment property. The
Exchange Partnership Corporate General Partners (wholly owned and controlled,
along with the Managing Shareholder of the Trust, by Mr. McGrath) believe these
objectives have been substantially achieved.
72
<PAGE>
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, its 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 existing business plans of the Exchange Partnerships
has been determined by their Corporate General Partners (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath) 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 one or more
residential apartment properties. 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, its 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 (wholly owned and controlled,
along with the Managing Shareholder of the Trust, by Mr. McGrath) 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 all Exchange Partnerships receive the
requisite limited partner acceptance to allow them to participate in the
offering) 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.
o The Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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.
73
<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. The annual cost savings resulting from the
combined administration of the 23 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 (wholly owned and controlled, along
with the Managing Shareholder of the Trust, by Mr. McGrath) believe
that a single integrated 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 existing business
plans of the Exchange Partnerships 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.
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 property interests 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 (wholly owned and controlled, along with the
Managing Shareholder of the Trust, by Mr. McGrath) believe that a
single integrated 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 23 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.
74
<PAGE>
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 existing business plans of the Exchange Partnerships 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. 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 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 (wholly owned and controlled, along with the Managing Shareholder
of the Trust, by Mr. McGrath) retained Consortium Appraisal, Inc. ("CAI"), and
its affiliate, Consortium Appraisal and Consulting Services, Inc. ("CACSI"),
both of Winter Park, Florida, Richards Appraisal Service, Inc. ("RAS"),
Melbourne, Florida, Dennis J. Voyt ("Voyt"), Winter Park, Florida, and
Strickland & Wright ("S&W"), Cincinnati, Ohio, to prepare appraisal reports as
to the fair market value and/or replacement cost new of each of the Exchange
Properties in which the Operating Partnership proposes to acquire a direct or
indirect equity or debt interest in connection with the initial transactions of
the Exchange Offering. CAI or CACSI prepared appraisal reports in respect of 19
of the Exchange Properties, RAS prepared an appraisal report in respect of four
of the properties, S&W prepared an appraisal report in respect of two properties
and Voyt prepared an appraisal report in respect of one property. The number of
Operating Partnership Units which will be issued to each Offeree who elects to
accept the Exchange Offering will be based on the appraisal relating to the
respective property and other considerations. The appraisal firms 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. CAI and CACSI are familiar with certain of the Exchange Properties they
appraised, having completed appraisals for previous acquisitions and/or
financings of such properties.
The appraisal firms have delivered their written appraisals in respect of
each of the Exchange Properties to
75
<PAGE>
the effect that, as of the appraisal date and based on the matters described
therein, each Exchange Property has an estimated fair market value and
replacement cost new stated therein. The appraised value and replacement cost
new of each Exchange Property are set forth on 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 interest in the property.
The appraisal reports constitute only the opinion of the respective appraisal
firm as to the estimated fair market values and replacement cost new 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 the appraisal firm.
The table in Exhibit F to this Prospectus sets forth the appraised value
and replacement cost new 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
CAI or CACSI prepared appraisal reports as to the fair market value and the
replacement cost new of 19 of the Exchange Properties in which the Operating
Partnership will offer to acquire a direct or indirect equity or debt interest
in connection with the initial transactions of the Exchange Offering. The number
of Operating Partnership Units which will be issued to each Offeree who elects
to accept the Exchange Offering will be based on these appraisals and other
considerations described above. 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 appraised (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 recommended 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
76
<PAGE>
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 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 deficiencies of the existing building compared
to a new building.
Subject to certain exceptions, the Trust and the Operating Partnership are
authorized to provide or acquire mortgage loans as long as, among other things,
the aggregate amount of all mortgage loans outstanding on any particular
underlying property, including the loan of the Trust or the Operating
Partnership, as applicable, would not exceed an amount equal to 80% of the
appraised replacement cost new of the property. Replacement cost new refers to
the estimated cost new of the improvements on a property (estimated on the basis
of current prices for the component parts of a building) without taking into
account the deficiencies of the existing building compared to a new building,
plus the estimated current market value of the underlying land (generally
determined using the direct sales comparison approach).
The Trust and the Operating Partnership have relied upon appraisals
performed by independent appraisal firms in respect of the replacement cost new
of properties in which Exchange Partnerships involved in the Exchange Offering
own a second mortgage interest. In certain cases, the appraised replacement cost
new of a property in which an Exchange Partnership owns a mortgage interest
significantly exceeds the appraised value of the property determined under the
three traditional real property valuation approaches, the income approach, the
comparison approach and the cost approach (which takes into account deficiencies
of the existing improvements compared to a new building). Offerees should note
that appraisals are only opinions of value or replacement cost new and cannot be
relied upon as measures of realizable value or replacement cost new.
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 $6,000 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 not exceeding $95,000. 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.
77
<PAGE>
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.
S&W
S&W prepared an appraisal report as to (i) the estimated market value of a
72-unit residential apartment property located in Anderson, Indiana known as
Steeplechase Apartments and (ii) the estimated "as is" value and prospective
market value of a 164-townhome residential apartment property (appraised for use
as a condominium) under development in Cincinnati, Ohio. S&W inspected the
subject properties and made a study of the neighborhood data relating to the
properties and competing properties. In estimating each property's market value,
S&W relied upon the income approach and direct sales comparison approach as
described above under " - CAI and CACSI." S&W also assumed structural integrity
of the subject buildings and no existing environmental contamination. In
addition, as to the Indiana property, S&W assumed that the condition of units
that were not inspected is similar to that of the inspected units and that water
and sewer charges for the individual units is recouped by the property owner. In
estimating the prospective market value of the Cincinnati property as of January
1, 2000, the projected date of completion, S&W assumed the completion of
construction as proposed by the developer with satisfactory workmanship and
materials and full rent-up of the property as of such date. S&W has been paid a
fee of $____ for its appraisal services. It is not expected to provide appraisal
reports for any additional properties in connection with the Exchange Offering.
Voyt
Voyt prepared an appraisal report as to the fair market value of two
different configurations of a 56-unit residential apartment property (appraised
for use as a condominium) known as Laurel Oaks (formerly Grove Hamlet)
Apartments located in Deland, Florida. Voyt researched the subject market area
and selected three recent sales of properties which are similar and in close
proximity to the subject property. Voyt exclusively relied upon the direct sales
comparison approach as described above under " - CAI and CACSI." Voyt inspected
the interior and exterior areas of the subject property and public records in
respect of the three comparable properties. According to Voyt, the subject
property is in good condition and there appears to be no adverse environmental
conditions on the site or in the vicinity of the site. Voyt assumed structural
integrity of the subject buildings and no existing environmental contamination.
The appraisal is subject to completion of the planned renovation of certain
units with new carpeting, vinyl, wallpaper and painting. Voyt has been paid a
fee of $_______ for its appraisal services. Voyt is not expected to provide
appraisal reports for any additional properties in connection with the Exchange
Offering.
Historical Cash Distributions and Corporate General Partner Compensation
On an aggregate basis, the limited partners in the 23 Exchange Partnerships
have received the following approximate amount of cash distributions during the
periods indicated: 1995: $447,725, 1996: $1,011,505, 1997: $1,400,477, 1998
(through September 30th): $1,145,849, and all such periods combined: $4,005,556.
The Corporate General Partners of the Exchange Partnerships (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
and affiliates have received compensation during such periods in the aggregate
amount of approximately $2,806,104 (including commissions and fees relating to
the original private offering).
78
<PAGE>
During such period, the Corporate General Partner and affiliates have not
received any cash distributions from the partnerships. 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,
for serving as Chief Executive Officer of the Trust and the Operating
Partnership, Mr. McGrath would have received as compensation in the initial year
up to 25,000 Common Shares of the Trust (amount to be determined by the
Executive Compensation Committee of the Trust) and health benefits and
thereafter, compensation and benefits determined annually by the committee. Mr.
McGrath also would have received distributions from the Participating Exchange
Partnerships in the aggregate amount of approximately $380,528 (9.5% of all
distributions) on Units subscribed for by him in connection with the formation
of the Operating Partnership and the Trust.
Terms of the Exchange Offering
The Operating Partnership hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal and Election Form, to exchange up to 2,500,000 Operating Partnership
Units for all Exchange Partnership Units held by all Offerees properly tendered
on or prior to the Expiration Date. The Operating Partnership will issue,
promptly after the Expiration Date, up to 2,500,000 Operating Partnership Units
in exchange for Exchange Partnership Units tendered and accepted in connection
with the Exchange Offering. As of the date of this Prospectus, ________Operating
Partnership Units are outstanding; of such Units, ____________ are held by the
Trust and 1,212,260 are held by the Original Investors (subject to adjustment as
described at "THE TRUST AND THE OPERATING PARTNERSHIP - Formation Transactions."
This Prospectus and the accompanying Transmittal Letter and Election Form
are first being sent to Offerees in connection with the Exchange Offering on or
about the date indicated on the Election Form. Offerees who elect to accept the
Exchange Offering are required to indicate their acceptance of the offering in
the space provided on the accompanying green Election Form and sign and return
it, together with certificates representing their Exchange Partnership Units, to
the Exchange Agent by the Expiration Date. The Election Forms will be tabulated
effective the Expiration Date. An Offeree's Election Form bearing the latest
date that is either post-marked on or before the Expiration Date or physically
received by the Exchange Agent on the close of business on the Expiration Date
will constitute the Offeree's election.
Assuming satisfaction or waiver of the closing conditions of the Exchange
Offering (described below at " - Conditions to the Exchange Offering"), from and
after the Expiration Date, 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 _____ 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. As soon as
practicable after the Expiration Date, the Exchange Agent will mail to each
Offeree who delivers to the Exchange Agent a completed and signed copy of the
Election Form indicating his acceptance of the offering (together with the
certificate(s) representing his Exchange Partnership Units), certificates
representing the number of Operating Partnership Units to which the Offeree is
entitled.
Assuming satisfaction or waiver of the closing conditions of the Exchange
Offering, Offerees who accept the Exchange Offering will not be entitled to
receive any dividends or other distributions on his Exchange Partnership Units
from and after ____________. Each such Offeree will be entitled to receive
distributions on his Operating Partnership Units which are payable as of any
record date occurring after he has exchanged his Exchange Partnership Units.
Assuming satisfaction or waiver of the closing conditions of the Exchange
Offering (described below at " - Conditions to the Exchange Offering"), from and
after the Expiration Date, the Operating Partnership will be registered as the
owner of all Exchange Partnership Units in Participating Exchange Partnerships
owned prior to the completion of the Exchange Offering by Exchange Limited
Partners who accept the Exchange Offering. Similarly, Exchange Limited Partners
who accept the Exchange Offering will be registered as the owner of all
Operating Partnership Units received in connection with the offering.
79
<PAGE>
If any Operating Partnership Units are to be issued in a name other than
that in which the corresponding Exchange Partnership Units are 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.
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. An Offeree must exchange all of his Exchange Partnership Units
in order to participate in the Exchange Offering. Partial exchanges will not be
accepted.
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. Except as described
herein, Offerees who elect not to accept the offering ("Non-participating
Limited Partners") 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,
Non-participating Limited Partners 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," the original
partnership agreement of each Participating Exchange Partnership with one or
more Non-participating Limited Partners following the closing of the Exchange
Offering will be amended to require the prior approval (majority or unanimous,
as the case may be) of Non-participating Limited Partners voting as a class in
respect of substantially all 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.
Holders of Exchange Partnership Units do not have any appraisal or
dissenters' rights in connection with the Exchange Offering. Exchange
Partnership Units that are not tendered for or are tendered but not accepted in
connection with the Exchange Offering will remain outstanding and be entitled to
the benefits of the partnership agreement pertaining to the holder's respective
Exchange Partnership . See "RISK FACTORS - Consequences of a Failure to Exchange
Partnership Units." If any tendered Exchange Partnership Units are not accepted
for an exchange because of an invalid tender, the occurrence of certain other
events set forth herein or otherwise, certificates received by the Exchange
Agent for any such unaccepted Exchange Partnership Units will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Expiration Date, Extensions, and Amendments
The term "Expiration Date" means 5:00 p.m., New York City time, on the date
specified in the Election Form unless the Exchange Offering is extended by the
Operating Partnership (in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offering is extended).
The Operating Partnership expressly reserves the right in its sole and
absolute discretion, subject to applicable law, at any time and from time to
time, (i) to delay the acceptance of the Exchange Partnership Units for
exchange, (ii) to terminate the Exchange Offering (whether or not any Exchange
Partnership Units have theretofore been accepted for exchange) if the Operating
Partnership determines, in its sole and absolute discretion, that any of the
events or conditions referred to under " - Conditions to the Exchange Offering"
have occurred or exist or have not been satisfied, (iii) to extend the
Expiration Date of the Exchange Offering and retain all Exchange Partnership
Units tendered pursuant to the Exchange Offering, and (iv) to waive any
condition or otherwise amend the terms of the Exchange Offering in any respect.
If the Exchange Offering is amended in a manner determined by the Operating
Partnership to constitute a material change, or if the Operating Partnership
waives a material condition of the Exchange Offering, the Operating Partnership
will promptly disclose such amendment by means of a prospectus
80
<PAGE>
supplement that will be distributed to the holders of the Exchange Partnership
Units, and the Operating Partnership will extend the Exchange Offering to the
extent required by Rule 14e-1 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Any such delay in acceptance, extension, termination or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent and by
making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the next
Business Day following the previously scheduled Expiration Date. Without
limiting the manner in which the Operating Partnership may choose to make any
public announcement and subject to applicable laws, the Operating Partnership
shall have no obligation to publish, advertise or otherwise communicate any such
public announcement other than by issuing a release to an appropriate news
agency.
Acceptance for Exchange and Issuance of Operating Partnership Units
Upon the terms and subject to the conditions of the Exchange Offering,
promptly after the Expiration Date, the Operating Partnership will exchange, and
will issue to the Exchange Agent, Operating Partnership Units for Exchange
Partnerships Units validly tendered. In all cases, delivery of Operating
Partnership Units in exchange for Exchange Partnership Units tendered and
accepted for exchange pursuant to the Exchange Offering will be made only after
timely receipt by the Exchange Agent of certificates representing such Exchange
Partnership Units, the Election Form (or facsimile thereof), properly completed
and duly executed, and any other documents required by the Letter of
Transmittal.
Subject to the terms and conditions of the Exchange Offering, the Operating
Partnership will be deemed to have accepted for exchange, and thereby exchanged,
Exchange Partnership Units validly tendered as if and when the Operating
Partnership gives oral or written notice to the Exchange Agent (any such oral
notice to be promptly confirmed in writing) of the Operating Partnership's
acceptance of such Exchange Partnership Units for exchange pursuant to the
Exchange Offering. The Exchange Agent will act as agent for the Operating
Partnership for the purpose of receiving tenders of certificates representing
Exchange Partnership Units, Election Forms and related documents, and as agent
for tendering holders for the purpose of receiving certificates representing
Exchange Partnership Units, Election Forms and related documents and
transmitting Operating Partnership Units to validly tendered holders. Such
exchange will be made promptly after the Expiration Date. If for any reason
whatsoever, acceptance for exchange or the exchange of any Exchange Partnership
Units tendered pursuant to the Exchange Offering is delayed (whether before or
after the Operating Partnership's acceptance for exchange of Exchange
Partnership Units) or the Operating Partnership extends the Exchange Offering or
is unable to accept for exchange or exchange Exchange Partnership Units tendered
pursuant to the Exchange Offering, then, without prejudice to the Operating
Partnership's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Operating Partnership and subject to Rule 14e-1 under the Exchange
Act, retain tendered Exchange Partnership Units and such Exchange Partnership
Units may not be withdrawn.
Pursuant to the Election Form, a holder of Exchange Partnership Units will
warrant and agree that he has full power and authority to tender, exchange,
sell, assign and transfer Exchange Partnership Units, that the Operating
Partnership will acquire good, marketable and unencumbered title to the tendered
Exchange Partnership Units, free and clear of all liens, restrictions, charges
and encumbrances, and the Exchange Partnership Units tendered for exchange are
not subject to any adverse claims or proxies. The holder also will warrant and
agree that he will, upon request, execute and deliver any additional documents
deemed by the Operating Partnership or the Exchange Agent to be necessary or
desirable to complete the exchange, sale, assignment, and transfer of the
Exchange Partnership Units tendered pursuant to the Exchange Offering.
Procedures for Tendering Exchange Partnership Units
Valid Tender
Except as set forth herein, in order for Exchange Partnership Units to be
validly tendered pursuant to the Exchange Offering a properly completed and duly
executed Election Form (or facsimile thereof), with any other
81
<PAGE>
required documents, must be received by the Exchange Agent at its address set
forth under "- Exchange Agent," and tendered Exchange Partnership Units must be
received by the Exchange Agent.
THE METHOD OF DELIVERY OF THE CERTIFICATES, THE ELECTION FORM AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER, AND
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT REQUESTED, PROPERLY
INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Certificates
Certificates representing Exchange Partnership Units as well as the
Election Form (or facsimile thereof), properly completed and duly executed, with
any other required documents by the Letter of Transmittal must be received by
the Exchange Agent at its address set forth under " - Exchange Agent" on or
prior to the Expiration Date in order for such tender to be effective.
Delivery
The method of delivery of the certificates representing tendered Exchange
Partnership Units, the Election Form, and all other required documents is at the
option and sole risk of the tendering holder, and delivery will be deemed made
only when actually received by the Exchange Agent. If delivery is by mail,
registered mail, return receipt requested, properly insured, or an overnight
delivery service is recommended. In all cases, sufficient time should be allowed
to ensure timely delivery.
Notwithstanding any other provisions hereof, the delivery of Operating
Partnership Units in exchange for Exchange Partnership Units tendered and
accepted for exchange pursuant to the Exchange Offering will in all cases be
made only after timely receipt by the Exchange Agent of certificates
representing Exchange Partnership Units and a properly completed and duly
executed Election Form (or facsimile thereof), together with any other documents
required by the Letter of Transmittal. Accordingly, the delivery of Operating
Partnership Units might not be made to all tendering holders at the same time,
and will depend upon when certificates representing Exchange Partnership Units
and other required documents are received by the Exchange Agent.
Determination of Validity
All questions as to the form of documents, validity, eligibility (including
time of receipt) and acceptance for exchange of any tendered Exchange
Partnership Units will be determined by the Operating Partnership in its sole
discretion, whose determination shall be final and binding on all parties. The
Operating Partnership reserves the absolute right, in its sole and absolute
discretion, to reject any and all tenders determined by it not to be in proper
form or the acceptance of which, or exchange for, may, in the opinion of counsel
to the Operating Partnership, be unlawful. The Operating Partnership also
reserves the absolute right, subject to applicable law, to waive any of the
conditions of the Exchange Offering as set forth under " Conditions to the
Exchange Offering" or any condition or irregularity in any tender of Exchange
Partnership Units of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
The interpretation by the Operating Partnership of the terms and conditions
of the Exchange Offering (including the Letter of Transmittal and the Election
Form) will be final and binding. No tender of Exchange Partnership Units will be
deemed to have been validly made until all irregularities with respect to such
tender have been cured or waived. None of the Operating Partnership, the Trust,
any affiliates or assigns of the Operating Partnership or the Trust, the
Exchange Agent or any other person shall be under any duty to give any
notification of any irregularities in tenders or incur any liability for failure
to give any such notification.
If any Election Form, endorsement, bond power, power of attorney, or any
other document required by the Letter of Transmittal is signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a
82
<PAGE>
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Operating
Partnership, proper evidence satisfactory to the Operating Partnership, in its
sole discretion, of such person's authority to so act must be submitted.
Conditions to the Exchange Offering
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. Notwithstanding any other provisions of the Exchange Offering,
or any extension of the Exchange Offering, the Operating Partnership will not be
required to accept for exchange, or to exchange, any Exchange Partnership Units
for any Operating Partnership Units and, as described herein, may terminate the
Exchange Offering (whether or not any Exchange Partnership Units have
theretofore been accepted for exchange) or may waive any conditions to or amend
the Exchange Offering, if any of the following additional conditions have
occurred or exists or have not been satisfied:
(i) Any law, statute, rule or regulation shall have been adopted or enacted
which, in the judgment of Operating Partnership or the Trust, would reasonably
be expected to impair its ability to proceed with the Exchange Offering, or
(ii) A stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration Statement,
or proceedings shall have been initiated or, to the knowledge of the Operating
Partnership, threatened for that purpose, or any governmental approval has not
been obtained, which approval the Operating Partnership shall, in its sole
discretion, deem necessary for the consummation of the Exchange Offering as
contemplated hereby.
If the Operating Partnership determines in its sole and absolute discretion
that any of the foregoing events or conditions has occurred or exists or has not
been satisfied, it may, subject to applicable law, terminate the Exchange
Offering (whether or not any Exchange Partnership Units have theretofore been
accepted for exchange) or may waive any such condition or otherwise amend the
terms of the Exchange Offering in any respect. If such waiver or amendment
constitutes a material change to the Exchange Offering, the Operating
Partnership will promptly disclose such waiver or amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
Exchange Partnership Units and will extend the Exchange Offering to the extent
required by Rule 14e-1 under the Exchange Act.
Exchange Agent
American Stock Transfer & Trust Company has been appointed as Exchange
Agent for the Exchange Offering. Delivery of the Election Form, certificates
representing tendered Exchange Partnership Units and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus, Prospectus Supplement, or of the Letter of
Transmittal or Election Form should be directed to the Exchange Agent as
follows:
For Information Call:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(212) 936-5100
Fax: (718) 236-4588
Confirm: ________________________
83
<PAGE>
Delivery to other than the above address or facsimile number will not
constitute a valid delivery.
Fees and Expenses of the Exchange Offering
The Operating Partnership has agreed to pay the Exchange Agent reasonable
and customary fees for its services and will reimburse it for its reasonable
out-of-pocket expenses in connection therewith. The Operating Partnership will
also pay brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of this
Prospectus and related documents to the beneficial owners of Exchange
Partnership Units and in handling or tendering their customers.
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, of which this Prospectus is a part,
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 (wholly
owned and controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath), 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.
84
<PAGE>
PRIOR PERFORMANCE OF
AFFILIATES OF MANAGING SHAREHOLDER
This section provides certain historical information regarding 48 private
real estate limited partnerships sponsored and/or managed by affiliates of the
Trust's Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath).
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 sole director and sole stockholder of the Managing
Shareholder and the Chief Executive Officer of the Trust, the Operating
Partnership and the Managing Shareholder 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 _____________, the prior
partnerships had raised aggregate capital contributions of approximately
$___________ from approximately _________ investors (including investors who
have invested in two or more programs). The annual rate of return on investment
for 1997 and for the first three quarters of 1998 generated 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
$_____________. 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
85
<PAGE>
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.
In the initial transactions of the Exchange Offering, the Operating
Partnership will offer to acquire limited partnership interests held by
individual limited partners in 23 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 limited
partnerships and interests held by other limited partnerships managed by
affiliates of the Managing Shareholder, which may include certain of the
partnerships described below.
In August 1994, Baron Capital of Florida, 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 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 known as Laurel Oaks (formerly Grove
Hamlet) Apartments. 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
"DESCRIPTION OF EXCHANGE PARTNERSHIPS," "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 known as Eagle Lake
Apartments. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS,"
"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 known as Forest Glen Apartments-Phase IV. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and
"INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
86
<PAGE>
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 located in
Daytona Beach, Florida known as Forest Glen Apartments-Phase III. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "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 known as Forest Glen
Apartments-Phase II. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "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 known as Forest Glen Apartments-Phase I. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE
OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this
Prospectus.
In May 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 August 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 known
as Camellia Court Apartments. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In June 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
87
<PAGE>
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 known as Bridgepoint Apartments. 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
"DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL
REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In December 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 January 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 known as Glen Lake
Apartments. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS,"
"THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A
and B to this Prospectus.
In November 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 known as Stadium
Club Apartments. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In October 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 known as Blossom
Corners Apartments-Phase I. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In January 1996, 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 Program, 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 provide or acquire two second mortgage loans
secured by a 64-unit residential apartment community located in Melbourne,
Florida known as Meadowdale Apartments. As one of its initial acquisition
candidates in connection with the Exchange Offering, the
88
<PAGE>
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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and
"INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In January 1996, 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 February 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.
In April 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 November 1996. The
partnership invested the net proceeds of its offering (i) to acquire a 31.7%
limited partnership interest in a limited partnership that owns title to an
80-unit residential apartment community located in Bellefontaine, Ohio known as
Lamplight Apartments and (ii) to provide or acquire two unrecorded second
mortgage loans secured by such property. 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
"DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL
REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In May 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 provide or acquire an undivided
73.7% interest in four unrecorded second mortgage loans secured by an 81-unit
residential apartment community located in Tampa, Florida known as Curiosity
Creek Apartments. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
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 June 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
89
<PAGE>
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 July 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 known as Steeplechase Apartments. 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
"DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL
REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In June 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 provide or acquire (i)
three unrecorded second mortgage loans secured by a 68-unit residential
apartment community located in Orlando, Florida known as Blossom Corners
Apartments - Phase II and (ii) an unrecorded second mortgage loan secured by a
164 townhouse community under development in Cincinnati, Ohio known as Villas at
Lake Sycamore. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In August 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 April 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 known as Brookwood Way Apartments. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
90
<PAGE>
In September 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 November 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 April 1997. The
partnership has invested the net proceeds of its offering to provide or acquire
two unrecorded second mortgage loans secured by a 73-unit residential apartment
community located in Tampa, Florida known as Country Square Apartments-Phase I.
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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE
OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this
Prospectus.
In November 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 November 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 provide or acquire (i)
an unrecorded second mortgage loan secured by a 33-unit residential apartment
property located in Tampa, Florida known as Candlewood Apartments-Phase II, (ii)
an undivided 26.3% interest in four unrecorded second mortgage loans secured by
an 81-unit residential apartment community located in Tampa, Florida known as
Curiosity Creek Apartments and (iii) four unrecorded second mortgage loans
secured by a 60-unit residential apartment property located in Titusville,
Florida known as Sunrise Apartments-Phase I and an unsecured loan associated
with such property. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
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 fully subscribed and closed in April 1997. The
partnership has invested the net proceeds of its offering (i) to acquire a 57%
limited partnership interest in a limited partnership which owns record title to
a 91-unit residential apartment community in Orlando, Florida known as Pineview
Apartments, (ii) to provide or acquire an unrecorded second mortgage loan
secured by a 33-unit residential apartment property located in Tampa, Florida
known as
91
<PAGE>
Candlewood Apartments-Phase II, (iii) to provide or acquire an undivided 20%
interest in a second mortgage loan secured by a 91-unit residential property
located in Orlando, Florida known as Garden Terrace Apartments-Phase III and
(iv) to make a secured loan to an affiliated partnership, Baron Capital
Strategic Investment Fund IV, Ltd., which in turn used such loan proceeds to
make a second mortgage loan secured by a 73-unit residential apartment community
located in Tampa, Florida known as Country Square Apartments-Phase I. 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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE OFFERING" and
"INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this Prospectus.
In January 1997, 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 January 1997, 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 March 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 May 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 provide or acquire
(i) an undivided 58% interest in an unrecorded second mortgage loan secured by a
41-unit residential apartment community located in Kissimmee, Florida known as
Heatherwood Apartments-Phase II and three unsecured loans associated with such
property, (ii) three unrecorded second mortgage loans secured by a 59-unit
residential apartment property located in Cocoa, Florida known as Longwood
Apartments-Phase I, and (iii) an unrecorded second mortgage loan secured by a
164-townhome community under development in Cincinnati, Ohio known as Villas at
Lake Sycamore. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In May 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
92
<PAGE>
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 June 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 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 (i) to acquire a 41.1%
limited partnership interest in a limited partnership which owns record title to
a 72-unit residential apartment property in Lakeland, Florida known as Crystal
Court Apartments, (ii) to provide or acquire an unrecorded second mortgage loan
secured by a 33-unit residential apartment property located in Tampa, Florida
known as Candlewood Apartments-Phase II, (iii) to provide or acquire an
undivided 25% interest in a second mortgage loan secured by a 91-unit
residential apartment property located in Tampa, Florida known as Garden Terrace
Apartments-Phase III, and (iv) to provide or acquire an unrecorded second
mortgage loan secured by a 164-townhome community located in Cincinnati, Ohio
known as Villas at Lake Sycamore. 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 "DESCRIPTION OF EXCHANGE
PARTNERSHIPS," "THE EXCHANGE OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and
in Exhibits A and B to this Prospectus.
In July 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 (i) to acquire a 43.5%
limited partnership interest in a limited partnership which owns record title to
a 72-unit residential apartment property located in Lakeland, Florida known as
Crystal Court Apartments, (ii) to acquire a 43% limited partnership
93
<PAGE>
interest in a limited partnership which owns record title to a 91-unit
residential apartment property located in Orlando, Florida known as Pineview
Apartments, (iii) to provide or acquire an unrecorded second mortgage loan
secured by a 41-unit residential apartment property located in Kissimmee,
Florida known as Heatherwood Apartments-Phase II and three unsecured loans
associated with such property, and (iv) to provide or acquire an undivided 55%
interest in a second mortgage loan secured by a 91-unit residential apartment
property located in Tampa, Florida known as Garden Terrace Apartments-Phase III.
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 "DESCRIPTION OF EXCHANGE PARTNERSHIPS," "THE EXCHANGE
OFFERING" and "INITIAL REAL ESTATE INVESTMENTS" and in Exhibits A and B to this
Prospectus.
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.
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 (other than those
described below under "Management's Discussion and Analysis or Plan of
Operation") 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:
94
<PAGE>
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
95
<PAGE>
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 Managing Shareholder, the Corporate Trustee and the Corporate General
Partner of each Exchange Partnership are wholly owned and controlled by Mr.
McGrath, a founder of the Trust and the Operating Partnership. The audited
balance sheets of the Trust and the Operating Partnership as of February 3,
1998, the audited balance sheet of the Managing Shareholder as of February 28,
1998, the unaudited balance sheets as of September 30, 1998 and statements of
operations, statements of partners' capital and statements of cash flow for the
nine-month period ended September 30, 1998 for the Trust and the Operating
Partnership and the unaudited balance sheet of the Managing Shareholder as of
September 30, 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 (who also wholly owns and controls the
Corporate General Partner of each Exchange Partnership) 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
for such services. Such officers and employees generally will serve in the same
capacity for the Trust or the Operating Partnership and will be compensated by
the Trust or the Operating Partnership 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 one of the founders of the Trust and the
Operating Partnership and serves as the Chief Executive Officer of the Trust and
the Operating Partnership. He is also the Chief Executive Officer, sole director
and sole shareholder of Baron Advisors, the Managing Shareholder of the Trust.
Affiliates of Mr.
96
<PAGE>
McGrath are also the corporate general partners of limited partnerships which
are debtors under second mortgage loans and other debt interests owned by
certain of the Exchange Partnerships, and in such capacity, Mr. McGrath holds an
indirect minority economic interest in such partnerships which is subordinate to
the preferred returns of their limited partners.
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 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 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 48, 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 ______, 1998, Mr.
Geiger, an attorney, has operated his own law firm. Between August 1, 1998 and
_______, 1998, Mr. Geiger served as counsel with Atlas, Pearlman, Trop & Borkson
P.A., a Ft. 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.
97
<PAGE>
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 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 as of the earlier to occur of the completion of the Cash
Offering and the Exchange Offering or May 14, 1999, calculated 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 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 exchangeable).
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) 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 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 the reimbursable amount 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
98
<PAGE>
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 and the Operating Partnership who may act and sign
documents on their respective behalf 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 or Operating Partnership
business, as the case may be. 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
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, in addition to benefits,
including without limitation health, disability and life insurance, and
eligibility for participation in any option plan and bonus incentive
compensation plan which may be implemented by the Trust.
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
for such services. Such officers and employees generally will serve in the same
capacity for the Trust or the Operating Partnership and will be compensated by
the Trust or the Operating Partnership, as the case may be, 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
99
<PAGE>
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.
Mark L. Wilson, age 51, was elected Interim Chief Financial Officer of the
Operating Partnership in November 1998. Mr. Wilson replaced David E. Williams,
who served as Chief Financial Officer of the Operating Partnership from May 1998
until his resignation in November 1998 to devote his complete attention to other
business activities of The Baron Organization, an affiliate of Mr. McGrath.
Between 1989 and 1997, Mr. Wilson served as Vice President of Baron Real Estate
Services, Inc., an affiliate of Mr. McGrath. Mr. Wilson was responsible for
financial control, accounting and tax functions for that company in addition to
financial control and accounting for all of the properties which it managed. In
addition, Mr. Wilson served as President of The Baron Companies, a registered
securities broker-dealer which served as the dealer manager of numerous private
offerings of limited partnerships affiliated with Mr. McGrath. Prior to that
time, Mr. Wilson served in various financial and accounting capacities at five
other entities, including the position of Chief Financial Officer of two
publicly traded companies. Mr. Wilson, an attorney and Certified Public
Accountant, earned a Bachelor of Science degree from the University of Maryland;
an MBA, Cum Laude, from the University of California at Berkeley; and a Juris
Doctorate, Cum Laude, from Capital University.
Mr. Wilson's initial annual salary has been set at $110,000, 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."
100
<PAGE>
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 is comprised of the Managing
Shareholder and two individuals described below who serve as the initial
Independent Trustees. 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.
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 Shareholder 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 will 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, the
Operating Partnership and 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 Executive 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
101
<PAGE>
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 the initial Independent Trustees and any Independent Trustee
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 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 51, is a principal in Gamble Hartshorn Johnson 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 Lexford, Inc. ("Lexford") (formerly Cardinal
Realty Services, Inc. and prior to that Cardinal Industries, Inc.), a publicly
traded company headquartered in Reynoldsburg, Ohio which has sponsored numerous
real estate investment limited partnerships. At Lexford, 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, Lexford has
engaged in several arms-length transactions (none of which represented a
material portion of Lexford's assets, liabilities, revenues or expenditures)
with affiliates of the Managing Shareholder, including certain of the Exchange
Partnerships involved in the Exchange Offering, pursuant to which equity and
debt interests in multi-family real estate were 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.
Since 1991, Peter M. Dickson, age 48, 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
102
<PAGE>
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 or Operating
Partnership Property will be in the name of the Trust or the Operating
Partnership, 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 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."
103
<PAGE>
THE TRUST AND THE OPERATING PARTNERSHIP
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to indirectly acquire equity interests
in residential apartment properties located in the United States and to provide
or acquire mortgage loans secured by such types of property. The Trust intends
to acquire, own, operate, manage and improve residential apartment property
interests 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
their 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 (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath) 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 issuance of Units of limited partnership interest in
the Operating Partnership in exchange for limited partnership interests in
limited partnerships which own such property interests and thereby provide an
opportunity for the deferral until a later date of any tax liabilities that
sellers of partnership 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.
Net cash proceeds from the issuance of Common Shares of 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 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 or entities
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 units of limited partnership interest in limited
partnerships which directly or indirectly own equity and/or mortgage 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 23 real estate
limited partnerships (individually, an "Exchange Partnership" and collectively,
the "Exchange Partnerships") managed by Corporate General Partners affiliated
with the Managing Shareholder which directly or indirectly own equity and/or
mortgage interests in 26 residential apartment properties (the "Exchange
Properties"). The Exchange Properties are described in further detail at
"DESCRIPTION OF EXCHANGE PARTNERSHIPS," "INITIAL REAL ESTATE INVESTMENTS" and
Exhibit B hereto. If exchanges are consummated for all Exchange Partnership
Units in the partnerships in connection with the Exchange Offering, the
partnership interests acquired
104
<PAGE>
will have a purchase price totaling approximately $24,220,880, comprised of
Operating Partnership Units to be issued with an initial assigned value in that
amount. The property interests to be acquired with the balance of the Operating
Partnership Units to be offered in the Exchange Offering 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 the initial transactions of the Exchange Offering, the Operating
Partnership is offering 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 has been assigned an initial
value in the range of 101% to 123% 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 described below. Any Exchange
Limited Partner that does not desire to participate in the Exchange Offering
will 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 Units being offered by the Operating Partnership in respect
of each property in which an Exchange Equity Partnership or an Exchange Hybrid
Partnership directly or indirectly owns an equity interest 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 current principal balance of the first mortgage loan and other
indebtedness to which the property is subject, 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. The number of Units being offered in respect of each of the Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships (to the extent of their
mortgage interests in properties and other debt interests) differs based upon
the current principal balance of the respective debt interest held, the
replacement cost new of property securing such indebtedness and the debtor's
repayment history and current net equity interest in such property. 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."
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% of the then outstanding
Shares, subject to the Trust's right to cash out any holder of Units who
requests an exchange (at a price equal to the average of the daily market price
for the 10 consecutive trading days immediately preceding the date the Trust
receives the exchange notice, or, in the absence of a public trading market, at
a price determined in good faith by the Trust) and subject to certain other
exceptions. 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
105
<PAGE>
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
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 cash out their investment in
the Operating Partnership by exchanging their Units into Common Shares and then
selling 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 contribute to the Operating Partnership the net proceeds
from the sale of Common Shares of the Trust in the Cash Offering and of any
other issuance of Common Shares in exchange for an equivalent number of Units.
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.
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
Trust's Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath), has
complete discretion in the day to day 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 Baron Advisors, Inc., the Trust's 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, including the Exchange Partnerships, which since 1994 have
acquired interests in residential and commercial properties. See "MANAGEMENT"
and "PRIOR PERFORMANCE OF
106
<PAGE>
AFFILIATES OF MANAGING SHAREHOLDER." As described below at "DESCRIPTION OF
EXCHANGE PARTNERSHIPS," "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, the Original Investors, each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding Common Shares, calculated 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, each
Original Investor has agreed to return any excess Units to the Operating
Partnership for cancellation. As described further below, Mr. McGrath and Mr.
Geiger have deposited Units subscribed for by them into a security escrow
account for six to nine years, subject to earlier release under certain
conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of
107
<PAGE>
Common Shares. While Units (and/or Common Shares) owned by them are held in
escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
Assuming the Exchange Offering and the Cash Offering are completed in full
by May 14, 1999 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."
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 and
that no Unitholders have exercised their right to exchange Units into Common
Shares. 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 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 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, the Trust 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 in full of the Cash Offering by itself
without taking into account the Exchange Offering. The second table assumes the
consummation in full of the Cash Offering and the Exchange Offering.
108
<PAGE>
Cash Offering
-----------------------------------
Ownership:
Purchasers of
BARON CAPITAL TRUST Common 100.0%
Shares in Cash Offering
("TRUST")
-----------------------------------
-----------------------------------
General Partner
Baron Capital Trust 1.0%
BARON CAPITAL PROPERTIES, L.P. Limited Partners
Baron Capital Trust 80.2%
("OPERATING PARTNERSHIP") Original Investors 18.8%
100.0%
Total
-----------------------------------
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 net proceeds of the Cash Offering (up to
$21,500,000) (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).
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."
109
<PAGE>
Cash Offering and Exchange Offering
-----------------------------------
Ownership:
Purchasers of Common
BARON CAPITAL TRUST Shares in Cash Offering 95.2%
Broker-dealers earning
("TRUST") commissions in Exchange
Offering 4.8%
Total 100.0%
-----------------------------------
-----------------------------------
General Partner
Baron Capital Trust 1.0%
BARON CAPITAL PROPERTIES, L.P. Limited Partners
Baron Capital Trust 39.9%
("OPERATING PARTNERSHIP") Recipients of Units
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 issues all 2,500,000 registered Units to
complete the Exchange Offering, the following would result:
o The Trust would use net proceeds of the Cash Offering (up to
$21,500,000) (remaining after payment of commissions and reimbursable
offering expenses) to acquire 2,500,000 Units in the Operating
Partnership.
o The Operating Partnership would (i) issue all 2,500,000 registered
Units to individual limited partners of Exchange Partnerships which
directly or indirectly own property interests in exchange for their
limited partnership interests and (ii) 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 Unitholders of
the Operating Partnership would own limited partnership interests in
the Operating Partnership as follows:
110
<PAGE>
Number Percentage
Limited Partners of Units Interest
- ---------------- -------- --------
Baron Capital Trust (as limited partner) 2,500,000 39.9%
Recipients of Units 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%
Beneficial ownership of the Common Shares of the Trust would be held as
follows:
Number of Common Percentage
Beneficial Owners Shares Beneficially Owned Interest
- ----------------- ------------------------- --------
Purchasers of Common Shares in Cash
Offering 2,500,000 39.5%
Recipients of Units in Exchange Offering 2,500,000 39.5%
Original Investors 1,202,160 19.0%
Broker-dealers earning commissions in
Exchange Offering 125,000 2.0%
--------- -----
Total: 6,327,160 100.0%
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 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 beneficial 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.
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.
111
<PAGE>
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 ability of the Trust and
the Operating Partnership to make expected distributions to Shareholders and
Unitholders, respectively, 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 residential apartment properties located in the United
States and/or to provide or acquire mortgage loans secured by 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
(wholly owned and controlled, along with the Corporate General Partner of each
Exchange Partnership, by Mr. McGrath) expects that the proposed investments will
(1) generate current cash flow for distribution to Shareholders and Unitholders
from rental payments from the rental of
112
<PAGE>
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),
where applicable, provide the opportunity for capital appreciation of
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 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 property interests 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 their 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 property interests 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 Trust and the Operating Partnership intend to provide or acquire
subordinated mortgage loans which provide for the payment of a fixed or
adjustable rate of interest plus, in certain cases, participation interest that
is payable out of available cash flow remaining after the payment of operating
expenses and debt service requirements and/or out of net proceeds from the sale
or refinancing of such property remaining after the payment of transaction
expenses and indebtedness secured by such property. The repayment of such loans
would be secured by a subordinated mortgage on the underlying property. The
Trust will not provide or acquire mortgage loans in respect of any property
where the amount invested by the Trust or the Operating Partnership plus the
amount of any existing indebtedness in respect of such property exceeds 80% of
the property's estimated replacement cost new unless substantial justification
exists.
113
<PAGE>
The Exchange Partnerships which are the initial targets of the Exchange
Offering 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 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 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 Exchange 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 Trust's Managing Shareholder (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath) 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 property interests. The Trust intends to pursue these objectives by
directly or indirectly acquiring equity interests in residential apartment
properties located in the United States and/or providing or acquiring 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.
114
<PAGE>
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 provide or acquire 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 property's estimated replacement cost new 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 beyond the underlying property and/or other
assets of the borrower. It is expected that in most cases where it will provide
or acquire a loan, the Trust will provide or acquire a Second Mortgage Loan that
is subordinate to a large-scale 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, until the Junior Mortgage is recorded, 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 provided 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 interest 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 interest. 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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) 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.
115
<PAGE>
The Trust intends to make investments in such a manner 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 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. 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."
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
the 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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) will
have discretion in day to day 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.
116
<PAGE>
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, other than as described herein, the Trust does
not contemplate using any substantial portion of the net proceeds of the Cash
Offering to acquire property interests from 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 or parties 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 or parties, on the terms and
conditions specified in the written proposal.
In addition, the requesting party or parties 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 or parties that the Trust
or 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 conflicts 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 acquisition
between June and November 1998 of beneficial ownership of 67-unit, 80-unit,
50-unit and 168-unit residential apartment properties located in Orlando,
Lakeland and New Smyrna Beach, Florida, and Alexandria, Kentucky, respectively,
and a limited
117
<PAGE>
partnership interest in 20 real estate partnerships managed by affiliates of the
Managing Shareholder, including certain 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.
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 November 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 91% occupied as of November 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 an unaffiliated third party, Rylex Capital,
L.L.C., a Florida limited liability company, for a purchase price of $830,000.
The purchase price was determined by the parties in an arm's-length negotiation.
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 advance 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
118
<PAGE>
bedroom and two bedroom units is approximately 288, 576 and 864 square feet,
respectively. The average monthly rental rate as of November 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 98%
occupied as of November 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 an unaffiliated third party, Rylex
Capital, L.L.C., a Florida limited liability company, for a purchase price of
$756,293. The purchase price was determined by the parties in an arm's-length
negotiation. 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.
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.
Riverwalk Apartments
In September 1998, the Operating Partnership acquired the entire limited
partnership interest in Riverwalk Enterprises, Ltd., a Florida limited
partnership ("Riverwalk"), which owns fee simple title to a 50-unit residential
apartment property located at 47 Jacaranda Cay Court, New Smyrna Beach, Florida
32169 (the "Riverwalk Property"). Simultaneously, an affiliate of the Operating
Partnership, Riverwalk, LC, a Florida limited liability company, acquired the
general partnership interest in Riverwalk. Riverwalk, LC was organized for the
express purpose of acquiring such general partnership interest. Gregory K.
McGrath, the Chief Executive Officer of the Operating Partnership and the Trust,
is the manager of Riverwalk, LC. The Operating Partnership owns 99% of the
membership interests in Riverwalk, LC. The remaining 1% membership interest is
nominally held by the Managing Shareholder of the Trust, as agent for the
Operating Partnership.
The Riverwalk Property, completed in 1986, consists of 50 two bedroom
units. Forty-five units have two bathrooms and five have one bathroom. The
property is located directly on the intracoastal waterway and was originally
built for condominium sale. The Operating Partnership will operate the property
as a rental community for the indefinite future. As of November 1, 1998, the
property was 92% occupied. The average year to date occupancy has been _____%.
The average monthly occupancy for 1997 was 95%. The property has 51,024 square
feet of rentable space, or approximately 1,020 square feet per unit. The current
rent per square foot is approximately $.55. The average monthly rental rate is
approximately $565 per unit.
The Operating Partnership acquired the Riverwalk limited partnership
interests from 12 unaffiliated individuals. Riverwalk, LC acquired the Riverwalk
general partnership interest from Riverwalk Enterprises, Inc., whose principal
was Michael Green. Mr. Green is not affiliated with the Trust or the Operating
Partnership. The sale was subject to a first mortgage of approximately
$1,330,000, held by TMG Life Insurance Company. The mortgage matures in November
2004 and has a current interest rate of 8.75%. The holder of the first mortgage
has a right to adjust the rate in October 1999 for the remaining five years of
the loan, to a rate equal to 200 basis points above the then current rate for
five-year treasury notes. Assuming no prepayments of principal, the balance that
will be due at maturity is approximately $_____________. The monthly debt
service payments are $________, or an annual amount of $____________. Prepayment
is permitted at any time, subject however to a yield maintenance termination fee
calculated in accordance with the terms of the loan.
The total cost of the acquisition to the Operating Partnership was
approximately $655,000 above the then current principal balance of the
underlying first mortgage loan, which includes costs of the transaction,
including a
119
<PAGE>
$200,000 commission paid to Prime One Realty Inc. An affiliate of Mr. McGrath
received one-half of the commission from Prime One Realty Inc. The Operating
Partnership borrowed $575,000 from I. Stanley Levine, Trustee, of Miami,
Florida, in order to complete the acquisition. The Levine loan matures in
December 1998 (subject to the right of the Operating Partnership to extend the
maturity date up to 60 days as long as the Operating Partnership is not in
default), requires current interest payments only at the annual rate of 18%, and
is secured by a pledge of the general and limited partnership interests acquired
in the transaction. The Operating Partnership funded the acquisition and will
satisfy the Levine loan from the net proceeds of the Trust's sale of Common
Shares in the ongoing Cash Offering. The purchase price was determined by the
parties in an arms-length negotiation. The Operating Partnership relied upon an
appraisal of the Riverwalk Property updated as of July 17, 1998 prepared by
Rex-McGill, Inc, an independent appraisal firm, which valued the property at
$2,200,000. The transaction was unanimously approved by the Independent Trustees
of the Trust prior to closing of the acquisition.
Attached as Exhibit E hereto in respect of each of the Heatherwood
Property, the Crystal Court Property, and the Riverwalk 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
nine-month period ended September 30, 1998.
Alexandria Property
In October 1998, the Operating Partnership acquired an approximately 12.3%
limited partnership interest in Alexandria Development, L.P. (the "Alexandria
Partnership"), a Delaware limited partnership which is the owner and developer
of a 168-unit residential apartment property under construction in Alexandria,
Kentucky. Thirty eight of the 168 residential units (approximately 22.6%) have
been completed and are in the rent-up stage. As of November 1, 1998, 25 (or
approximately 66%) of the 38 units completed have been rented at an average
monthly rental rate of $_________. The Operating Partnership paid $400,000 for
the acquired partnership interest and retains an option to acquire the remaining
limited partnership interests at the same price per percentage interest (for a
total price of approximately $3,250,000 for the entire limited partnership
interest). The option is exercisable as additional apartment buildings are
completed and rented. An affiliate of Mr. McGrath sold the partnership interest
in the Alexandria Partnership to the Operating Partnership and also serves as
its managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Acquisition of Limited Partnership Interests
In July 1998, the Operating Partnership also was admitted as a limited partner
in 20 real estate limited partnerships managed by affiliates of the Managing
Partnership, including certain of the Exchange Partnerships. The Operating
Partnership acquired the interests in consideration of a capital contribution
ranging from approximately $2,000 to $59,000 in each such partnership. The
aggregate contribution made by the Operating Partnership was approximately
$341,000. The percentage interest acquired by the Operating Partnership (less
than 4% in each case) was calculated at fair market value. In each instance, the
Operating Partnership agreed that its right to receive distributions from cash
flow or from a capital event would be subordinate to the right of the existing
limited partners to receive any preferred return described in the partnership
agreement of the respective partnership. In addition, the Operating Partnership
agreed with the Exchange Partnerships that the acquisition would not affect the
valuation of the limited partnership interests for purposes of the Exchange
Offering. These various partnerships will be accounted for on the cost method
since their respective ownership interests represent less than 20% of the equity
ownership therein. In addition, the partnerships will periodically assess the
realizable value of these investments in order to ascertain that there has been
no impairment in their recorded value.
Contract to Purchase Two Additional Properties
In September 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
120
<PAGE>
Burlington, Ltd.) are controlled by Gregory K. McGrath. The properties are
scheduled to have a total of 652 units, comprised of studios and one, two and
three bedroom/one or two bathroom apartments. Construction of 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's raising the balance of the funds necessary
for the acquisition in its ongoing Cash Offering or otherwise having funds
available to make the acquisition.
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 (plus any extensions granted), 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 of 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 _______________ . 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 ___ days.
The Trust expects to receive significant benefits from the transaction in
addition to the acquisition of two large 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 one-half of one percent 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 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 directly or indirectly
own equity and/or debt interests in residential apartment properties. As its
initial investment targets in the Exchange Offering, the Operating Partnership
is offering to acquire limited partnership interests from individual limited
partners (collectively, the "Exchange Limited Partners" and individually an
"Exchange Limited Partner") in 23 limited partnerships (collectively referred to
herein as the "Exchange Partnerships" and individually as an "Exchange
Partnership") which directly or indirectly own equity and/or subordinated
mortgage interests in 26 residential apartment properties (collectively, the
"Exchange Properties" and individually an "Exchange Property"). The Operating
Partnership will acquire a beneficial ownership interest in all or a portion of
the Exchange Properties by acquiring from Exchange Limited Partners of
Participating Exchange Partnerships their limited partnership interests
("Exchange Partnership Units") in the respective partnership. The Exchange
Partnerships are managed by Corporate General Partners affiliated with the
Managing Shareholder (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath).
Certain of the Exchange Partnerships own direct or indirect equity
interests in 16 Exchange Properties which consist of an aggregate of 1,012
residential units (comprised of studio and one, two, three and four-bedroom
units). Certain of the Exchange Partnerships own direct or indirect mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 813
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, three properties in Ohio and one property each in
Georgia and Indiana.
121
<PAGE>
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a residential apartment property or the entire
limited partnership or other equity interest in a limited partnership or other
entity which owns record title to a property. The sole assets of each of six of
the Exchange Partnerships (individually, an "Exchange Mortgage Partnership" and
collectively, the "Exchange Mortgage Partnerships") are the entire or an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests). Each of the remaining four Exchange
Partnerships (individually, an "Exchange Hybrid Partnership" and collectively,
the "Exchange Hybrid Partnerships") own a combination of (i) all or a portion of
the direct or indirect equity interest in one or more properties and (ii) an
undivided subordinated mortgage interest in one or more properties (and in one
case, unsecured debt interests).
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
Certain information relating to the 26 Exchange Properties and mortgage
indebtedness secured thereby is summarized in the four tables set forth below.
Assuming the Exchange Offering is accepted by all Exchange Limited Partners in
all Exchange Partnerships, the aggregate purchase price for the Exchange
Partnership Units would be approximately $24,022,880, comprised of Operating
Partnership Units to be issued with an initial value in that amount. 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."
Upon 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 Partnerships, 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 table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
In the initial transactions of the Exchange Offering, the Operating
Partnership is offering to issue 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
122
<PAGE>
accept Units in exchange for his limited partnership interest in his respective
Exchange Partnership or (ii) to 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 in a given Participating Exchange Partnership would then
be owned by the Operating Partnership, if all Exchange Limited Partners in the
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 been
assigned an initial value in the range of 101% to 123% 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" and "THE EXCHANGE OFFERING."
The number of Units being offered in respect of each property in which an
Exchange Equity Partnership or an Exchange Hybrid Partnership directly or
indirectly owns an equity interest 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 current
principal balance of the first mortgage loan and other indebtedness to which the
property is subject, 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. The number of Units
being offered in respect of each of the Exchange Mortgage Partnerships and
Exchange Hybrid Partnerships (to the extent of their mortgage interests in
properties and other debt interests) differs based upon the face amount of the
respective debt interest held, the replacement cost new of property securing
such indebtedness and the debtor's repayment history and current net equity
interest in such property. 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."
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 (wholly owned and
controlled, along with the Corporate General Partner of each Exchange
Partnership, by Mr. McGrath), 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.
123
<PAGE>
Property Information
Equity Property Interests
The table set forth below summarizes certain information relating to each
of the 16 properties in which Exchange Equity Partnerships and Exchange Hybrid
Partnerships involved in the Exchange Offering directly or indirectly own an
equity interest, including (i) the name of the respective partnership and its
general partner, (ii) the name and location of each property, (iii) the year
each property was completed, (iv) the number of units, acreage, rentable area,
average unit size and average rental rate per unit and per square feet of
rentable area as of November 1, 1998, and (v) physical occupancy of each
property as of November 1, 1998. In the Exchange Offering, the Operating
Partnership will offer to issue its Units to limited partners in those
partnerships in exchange for their limited partnership interests in the
partnerships and thereby indirectly acquire such property interests.
<TABLE>
<CAPTION>
Name of Residential
Apartment Property
(and type Year Approx.
Partnership GP of interest) Location Completed No. of Units Acres
- ----------- -- ------------ -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange Equity
Partnerships:
Baron Strategic Baron Capital Steeplechase Anderson, 1977 Total 72 3.20
Investment Fund II, Ltd. XXXI, Inc. Apartments (1) Indiana 1 BR 12
2 BR 60
Central Florida Income Baron Capital Laurel Oaks Deland, Florida 1986 Total 56 6.21
Appreciation Fund, Ltd. of Ohio III, Apartments (1) 1 BR 11
Inc. 2 BR 45
Florida Capital Income Baron Capital Eagle Lake Port Orange, 1987 Total 77 4.68
Fund, Ltd. II, Inc. Apartments (1) Florida 1 BR 73
2 BR 4
Florida Capital Income Baron Capital Forest Glen Daytona Beach, 1985 Total 52 6.85
Fund II, Ltd. IV, Inc. Apartments Florida 2 BR 28
(Phase I) (2) 3 BR 24
Florida Capital Income Baron Capital Bridge Point Jacksonville, 1986 Total 48 3.39
Fund III, Ltd. VII, Inc. Apartments Florida Studio 6
(Phase II) (1) 1 BR 37
2 BR 5
Florida Capital Income Baron Capital Glen Lake St. Petersburg, 1986 Total 144 7.16
Fund IV, Ltd. V, Inc. Apartments (1) Florida 1 BR 144
Florida Income Baron Capital Forest Glen Daytona Beach, 1985 Total 26 6.85
Advantage Fund I, Ltd. IV, Inc. Apartments Florida 2 BR 19
(Phase III) (2) 3 BR 7
Florida Income Baron Capital Forest Glen Daytona Beach, 1985 Total 8 6.85
Appreciation Fund I, IV, Inc. Apartments Florida 2 BR 6
Ltd. (Phase IV) (2) 3 BR 2
<CAPTION>
Approx. Physical
Rentable 11/1/98 Occupancy
Area Avg. Unit Size Average Rental Rates/Month As Of
Partnership (Sq. Ft.)* (Sq. Ft.) (Per Unit) (Per Sq. Ft.) 11/1/98
- ----------- --------- --------- ------------------------ -------
<S> <C> <C> <C> <C> <C> <C>
Exchange Equity
Partnerships:
Baron Strategic 47,280 Avg. 657 $437 $.67 76%
Investment Fund II, Ltd. 1 BR 550
2 BR 678
Central Florida Income 45,216 Avg. 807 $513 $.64 96%
Appreciation Fund, Ltd. 1 BR 576
2 BR 864
Florida Capital Income 45,504 Avg. 591 $454 $.77 94%
Fund, Ltd. 1 BR 576
2 BR 864
Florida Capital Income 62,692 Avg. 1,205 $655 $.54 100%
Fund II, Ltd. 2 BR 1,075
3 BR 1,358
Florida Capital Income 27,360 Avg. 570 $455 $.80 96%
Fund III, Ltd. Studio 288
1 BR 576
2 BR 864
Florida Capital Income 79,200 Avg. 550 $674 $1.23 49%
Fund IV, Ltd. 1 BR 550
Florida Income 29,931 Avg. 1,151 $639 $.56 81%
Advantage Fund I, Ltd. 2 BR 1,075
3 BR 1,358
Florida Income 9,166 Avg. 1,146 $638 $.56 100%
Appreciation Fund I, 2 BR 1,075
Ltd. 3 BR 1,358
</TABLE>
124
<PAGE>
<TABLE>
<CAPTION>
Exchange Equity
Partnerships, cont.:
<S> <C> <C> <C> <C> <C> <C> <C>
Florida Income Growth Baron Capital Blossom Corners Orlando, 1980 Total 70 3.67
Fund V, Ltd. XI, Inc. Apartments Florida Studio 15
(Phase I) (1) 1 BR 49
2 BR 6
Florida Opportunity Baron Capital Camellia Court Daytona Beach, 1982 Total 60 5.15
Income Partners, Ltd. III, Inc. Apartments (1) Florida 1 BR 59
2 BR 1
GSU Stadium Student Baron Capital Stadium Club Statesboro, 1987 Total 60 3.50
Apartments, Ltd. X, Inc. Apartments (1) Georgia Studio 2
3 BR 3
4 BR 55
Midwest Income Growth [Baron Brookwood Way Mansfield, Ohio 1974 Total 66 3.92
Fund VI, Ltd. Capital of Apartments (1) Studio 3
Ohio III, 1 BR 60
Inc.] 2 BR 3
Realty Opportunity Baron Capital Forest Glen Daytona Beach, 1985 Total 30 6.85
Income Fund VIII, Ltd. IV, Inc. Apartments Florida 2 BR 23
(Phase II) (2) 3 BR 7
<CAPTION>
Exchange Hybrid
Partnerships:
<S> <C> <C> <C> <C> <C> <C> <C>
Baron Strategic Baron Capital Pineview Apartments Orlando, 1988 Total 91 4.38
Investment Fund VI, Ltd. XXXI, Inc. (3) Florida Studio 26
1 BR 59
2 BR 6
Baron Strategic Baron Capital Crystal Court Lakeland, 1982 Total 72 4.5
Investment Fund IX, Ltd. XLII, Inc. Phase I (4) Florida 1 BR 64
2 BR 8
Baron Strategic Baron Capital Crystal Court Lakeland, 1982 Total 72 4.5
Investment Fund X, Ltd. XLII, Inc. Phase I (5) Florida 1 BR 64
2 BR 8
Pineview Apartments Orlando, 1988 Total 91 4.38
(6) Florida Studio 26
1 BR 59
2 BR 6
Lamplight Court of Baron Capital Lamplight Bellefontaine, 1973 Total 80 6.00
Bellefontaine IX, Inc. Apartments (7) Ohio Studio 12
Apartments, Ltd. 1BR 53
2 BR 15
========== ===========
TOTAL PROPERTIES:
1,012** 83.16
========== ===========
<CAPTION>
Exchange Equity
Partnerships, cont.:
<S> <C> <C> <C> <C> <C> <C>
Florida Income Growth 39,300 Avg. 561 $473 $.84 97%
Fund V, Ltd. Studio 300
1 BR 600
2 BR 900
Florida Opportunity 34,848 Avg. 581 $432 $.74 98%
Income Partners, Ltd. 1 BR 576
2 BR 864
GSU Stadium Student 50,736 Avg. 860 $910 $1.06 86%
Apartments, Ltd. Studio 288
3 BR 880
4 BR 880
Midwest Income Growth 38,016 Avg. 576 $357 $.62 100%
Fund VI, Ltd. Studio 288
1 BR 576
2 BR 864
Realty Opportunity 34,231 Avg. 1,141 $636 $.56 90%
Income Fund VIII, Ltd. 2 BR 1,075
3 BR 1,358
<CAPTION>
Exchange Hybrid
Partnerships:
<S> <C> <C> <C> <C> <C> <C>
Baron Strategic 46,656 Avg. 513 $451 $.88 98%
Investment Fund VI, Ltd. Studio 288
1 BR 576
2 BR 864
Baron Strategic 43,776 Avg. 608 $390 $.64 94%
Investment Fund IX, Ltd. 1 BR 576
2 BR 864
Baron Strategic 43,776 Avg. 608 $390 $.64 94%
Investment Fund X, Ltd. 1 BR 576
2 BR 864
46,656 Avg. 513 $451 $.88 98%
1 BR 288
2 BR 576
864
Lamplight Court of 46,944 Avg. 587 $391 $.67 93%
Bellefontaine Studio 288
Apartments, Ltd. 1 BR 576
2 BR 864
============= ========== =============== =============== =============
680,856 673 $519 $.77 87%
============= ========== =============== =============== =============
</TABLE>
125
<PAGE>
- ----------
* Includes only residential apartment units and excludes common areas.
** Properties in which more than one partnership has an interest are counted
only once.
(1) Partnership owns the entire limited partnership interest in a limited
partnership which holds fee simple title to the property.
(2) Partnership owns beneficial interest in an unrecorded land trust which
holds fee simple title to the property.
(3) Partnership owns (i) a 57% limited partnership interest in a limited
partnership which holds fee simple title to the property and (ii) debt
interests in other property described below in "Mortgage Information -
Mortgage Properties" table.
(4) Partnership owns (i) a 41.1% limited partnership interest in a limited
partnership which holds fee simple title to the property and (ii) debt
interests in other property described below in "Mortgage Information -
Mortgage Properties" table.
(5) Partnership owns (i) a 43.5% limited partnership interest in a limited
partnership which holds fee simple title to the property and (ii) debt
interests in other property described below in "Mortgage Information -
Mortgage Properties" table.
(6) Partnership owns (i) a 43% limited partnership interest in a limited
partnership which holds fee simple title to the property and (ii) debt
interests in other property described below in "Mortgage Information -
Mortgage Properties" table.
(7) Partnership owns (i) a 31.7% limited partnership interest in a limited
partnership which holds fee simple title to the property and (ii) a debt
interest in the property described below in "Mortgage Information -
Mortgage Properties" table.
126
<PAGE>
Property Information
Debt Property Interests
The table set forth below summarizes certain information relating to each of the
11 properties in which Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships involved in the Exchange Offering own a mortgage interest,
including (i) the name of the respective partnership and its general partner,
(ii) the name and location of each property, (iii) the year each property was
completed, (iv) the number of units, acreage, rentable area, average unit size
and average rental rate per unit and per square feet of rentable area as of
November 1, 1998, and (v) physical occupancy of each property as of November 1,
1998. In the Exchange Offering, the Operating Partnership will offer to issue
its Units to limited partners in those partnerships in exchange for their
limited partnership interests in the partnerships and thereby indirectly acquire
such property interests.
<TABLE>
<CAPTION>
Name of Residential
Apartment Property
(and type Year Approx.
Partnership GP of interest) Location Completed No. of Units Acres
- ----------- -- ------------ -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange Mortgage
Partnerships:
Baron Strategic Baron Capital Blossom Corners Orlando, 1981 Total 68 3.51
Investment Fund, Ltd. XXXII, Inc. Apartments Florida Studio 16
(Phase II) (1) 1 BR 45
2 BR 7
Villas at Lake Cincinnati, Est. 4th Total 164 20.2
Sycamore (1) Ohio quarter 2003 2 BR
3 BR
Baron Strategic Baron Capital Country Square Tampa, Florida 1981 Total 73 4.56
Investment Fund IV, Ltd. XVII, Inc. Apartments Studio 14
(Phase I) (1) 1 BR 52
2 BR 7
Baron Strategic Baron Capital Candlewood Tampa, Florida 1984 Total 33 2.75
Investment Fund V, Ltd. XL, Inc. Apartments Studio 6
(Phase II) (1) 1 BR 26
2 BR 1
Curiosity Creek Tampa, Florida 1982 Total 81 4.51
Apartments (1) Studio 16
1 BR 59
2 BR 6
Sunrise Apartments Titusville, 1981 Total 60 4.08
(Phase I) (1) Florida 1 BR 54
2 BR 6
<CAPTION>
Approx. Physical
Rentable 11/1/98 Occupancy
Area Avg. Unit Size Average Rental Rates/Month As Of
Partnership (Sq. Ft.)* (Sq. Ft.) (Per Unit) (Per Sq. Ft.) 11/1/98
- ----------- --------- --------- ------------------------ -------
<S> <C> <C> <C> <C> <C> <C>
Exchange Mortgage
Partnerships:
Baron Strategic 38,100 Avg. 557 $485.87 $.87 97%
Investment Fund, Ltd. Studio 300
1 BR 600
2 BR 864
217,300 Avg. 1,325 - - -
2 BR
3 BR
Baron Strategic 40,032 Avg. 548 $429.41 $.78 95%
Investment Fund IV, Ltd. Studio 288
1 BR 576
2 BR 864
Baron Strategic 17,568 Avg. 532 $423.85 $.80 94%
Investment Fund V, Ltd. Studio 288
1 BR 576
2 BR 864
43,776 Avg. 540 $427.35 $.79 93%
Studio 288
1 BR 576
2 BR 864
36,288 Avg. 605 $391.00 $.65 88%
1 BR 576
2 BR 864
</TABLE>
127
<PAGE>
<TABLE>
<CAPTION>
Name of Residential
Apartment Property
(and type Year Approx.
Partnership GP of interest) Location Completed No. of Units Acres
- ----------- -- ------------ -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Baron Strategic Baron Capital Heatherwood Kissimmee, 1982 Total 41 2.26
Investment Fund VIII, XLIV, Inc. Apartments Florida Studio 10
Ltd. (Phase II) (2) 1 BR/1B 26
2 BR/1B 4
2 BR/2B 1
Longwood Apartments Cocoa, Florida 1981 Total 59 4.00
(Phase I) (1) 1 BR 51
2 BR 8
Villas at Lake Cincinnati, Est. 4th Total 164 20.2
Sycamore (1) Ohio quarter 2003 2 BR
3 BR
Baron Strategic Vulture Baron Capital Curiosity Creek Tampa, Florida 1982 Total 81 4.51
Fund I, Ltd. XXVI, Inc. Apartments (1) Studio 16
1 BR 59
2 BR 6
Brevard Mortgage Baron Capital Meadowdale Melbourne, 1984 Total 64 4.81
Program, Ltd. XII, Inc. Apartments (1) Florida 1 BR 56
2 BR 8
Exchange Hybrid
Partnerships
Baron Strategic Baron Capital Candlewood Tampa, Florida 1988 Total 33 2.75
Investment Fund VI, Ltd. XXXI, Inc. Apartments Studio 6
(Phase II) (3) 1 BR 26
2 BR 1
Country Square 1981 Total 73 4.56
Apartments Tampa, Florida Studio 14
(Phase I) (3) 1 BR 52
2 BR 7
Garden Terrace Orlando, 1983 Total 91 6.00
Apartments Florida Studio 8
(Phase III) (3) 1 BR 67
2 BR 16
<CAPTION>
Approx. Physical
Rentable 11/1/98 Occupancy
Area Avg. Unit Size Average Rental Rates/Month As Of
Partnership (Sq. Ft.)* (Sq. Ft.) (Per Unit) (Per Sq. Ft.) 11/1/98
- ----------- --------- --------- ------------------------ -------
<S> <C> <C> <C> <C> <C> <C>
Baron Strategic 22,176 Avg. 541 $498.51 $.92 98%
Investment Fund VIII, Studio 288
Ltd. 1 BR/1B 576
2 BR/1B 864
2 BR/2B 864
36,288 Avg. 615 $432.56 $.70 100%
1 BR 576
2 BR 864
217,300 Avg. 1,325 - - -
2 BR
3 BR
Baron Strategic Vulture 43,776 Avg. 540 $427.35 $.79 93%
Fund I, Ltd. Studio 288
1 BR 576
2 BR 864
Brevard Mortgage 39,168 Avg. 612 $411.50 $.67 70%
Program, Ltd. 1 BR 576
2 BR 864
Exchange Hybrid
Partnerships
Baron Strategic 17,568 Avg. 532 $423.85 $.80 94%
Investment Fund VI, Ltd. Studio 288
1 BR 576
2 BR 864
40,032 Avg. 548 $429.41 $.78 95%
Studio 288
1 BR 576
2 BR 864
54,720 Avg. 601 $417.20 $.69 90%
Studio 288
1 BR 576
2 BR 864
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
Name of Residential
Apartment Property
(and type Year Approx.
Partnership GP of interest) Location Completed No. of Units Acres
- ----------- -- ------------ -------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Baron Strategic Baron Capital Candlewood Tampa, Florida 1984 Total 33 2.75
Investment Fund IX, Ltd. XLII, Inc. Apartments Studio 6
(Phase II) (3) 1 BR 26
2 BR 1
Garden Terrace Tampa, Florida 1983 Total 91 6.00
Apartments Studio 8
(Phase III) (3) 1 BR 67
2 BR 16
Villas at Lake Cincinnati, est. 4th Total 164 20.2
Sycamore (3) Ohio quarter 2003
Baron Strategic Baron Capital Garden Terrace Tampa, Florida 1983 Total 91 6.00
Investment Fund X, Ltd. XLIV, Inc. Apartments Studio 8
(Phase III) (3) 1 BR 67
2 BR 16
Heatherwood Kissimmee, 1982 Total 41 2.26
Apartments Florida Studio 10
(Phase II) (2) 1 BR 26
2 BR/1B 4
2 BR/2B 1
Lamplight Court of Baron Capital Lamplight Bellefontaine, 1973 Total 80 6.00
Bellefontaine IX, Inc. Apartments (4) Ohio Studio 12
Apartments, Ltd. 1 BR 53
2 BR 15
======= ============
TOTAL PROPERTIES5:
650 42.48
======= ============
<CAPTION>
Approx. Physical
Rentable 11/1/98 Occupancy
Area Avg. Unit Size Average Rental Rates/Month As Of
Partnership (Sq. Ft.)* (Sq. Ft.) (Per Unit) (Per Sq. Ft.) 11/1/98
- ----------- --------- --------- ------------------------ -------
<S> <C> <C> <C> <C> <C> <C>
Baron Strategic 17,568 Avg. 532 $423.85 $.80 94%
Investment Fund IX, Ltd. Studio 288
1 BR 576
2 BR 864
54,720 Avg. 601 $417.20 $.69 90%
Studio 288
1 BR 576
2 BR 864
217,300 Avg. 1,325 - - -
Baron Strategic 54,720 Avg. 601 $417.20 $.69 90%
Investment Fund X, Ltd. Studio 288
1 BR 576
2 BR 864
22,176 Avg. 541 $498.51 $.92 98%
Studio 288
1 BR 576
2 BR/1B 864
2 BR/2B 864
Lamplight Court of 46,944 Avg. 587 $390.63 $.67 93%
Bellefontaine Studio 288
Apartments, Ltd. 1 BR 576
2 BR 864
============= ========== =============== =============== =============
375,060 569 $427.63 $.75 84%
============= ========== =============== =============== =============
</TABLE>
- ----------
* Includes only residential apartment units and excludes common areas.
1. The Partnership's sole real estate assets consist of an undivided second
mortgage interest in the property or properties described in this table.
The second mortgage interests are described below at "Mortgage
Information-Mortgage Properties" and in the table in Exhibit B pertaining
to the Partnership.
2. The Partnership owns an undivided second mortgage interest in the property
and unsecured indebtedness associated therewith. The indebtedness is
described below at "Mortgage Information-Mortgage Properties" and in the
table in Exhibit B pertaining to the Partnership.
3. The Partnership owns (i) an undivided second mortgage interest in the
property or properties described in this table and (ii) a direct or
indirect equity interest in one or more properties. The second mortgage
interests are described below at "Mortgage Information-Mortgage Properties"
and in the table in Exhibit B pertaining to the Partnership and the equity
interest is described above at "Property Information-Equity Property
Interests" and in such Exhibit B table.
4. The Partnership owns (i) an undivided second mortgage interest in the
property described in this table and (ii) an undivided limited partnership
interest in the limited partnership which owns fee simple title to the
property. The second mortgage interest is described below at "Mortgage
Information-Mortgage Properties" and in the table in Exhibit B pertaining
to the Partnership, and the equity interest is described above at "Property
Information-Equity Property Interests" and in such Exhibit B table.
5. Does not include information for Lake Sycamore, which is under development.
baronex.propmortg012699
129
<PAGE>
Mortgage Information
Equity Property Interests
The table below sets forth certain information relating to the first mortgage
(and in one case, second mortgage) indebtedness secured by or associated with
the 16 properties in which Exchange Equity Partnerships and Exchange Hybrid
Partnerships involved in the Exchange Offering directly or indirectly own an
equity interest, including (i) name of partnership and its general partner, (ii)
name and location of the properties, (iii) principal balances as of November 1,
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. In the Exchange Offering, the Operating
Partnership will offer to issue its Units to limited partners in those
partnerships in exchange for their limited partnership interests in the
partnerships and thereby indirectly acquire such property interests
<TABLE>
<CAPTION>
11/1/98 Annual
Principal Interest Debt Monthly
Partnership GP Property Location Balance Rate Payment Payment
- ----------- -- -------- -------- ------- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange Equity
Partnerships
Baron Strategic Baron Capital Steeplechase Anderson, $1,260,000 Yrs. 1-2: $91,344 $7,612
Investment Fund II, XXXI, Inc. Apartments Indiana 7.25%
Ltd. Yrs. 3-4:
7.75%
Yrs. 5-10:
8.25%
Central Florida Baron Capital of Laurel Oaks Deland, 1,306,124 9.50% 156,024 13,002
Income Appreciation Ohio III, Inc. Apartments Florida
Fund, Ltd.
Florida Capital Baron Capital Eagle Lake Port Orange, 1,443,015 8.56% 144,636 12,053
Income Fund, Ltd. II, Inc. Apartments Florida
Florida Capital Baron Capital Forest Glen Daytona 1,783,075 7.01% 145,920 12,160
Income Fund II, Ltd. IV, Inc. Apartments Beach, Florida
(Phase I)
Florida Capital Baron Capital Bridge Point Jacksonville, 716,243 9.52% 76,572 6,381
Income Fund III, VII, Inc. Apartments Florida
Ltd. (Phase II)
Florida Capital Baron Capital V, Glen Lake St. 2,709,330 9.55% 293,700 24,475
Income Fund IV, Ltd. Inc. Apartments Petersburg, 356,993 8.00% 34,728 2,894
Florida (second
mortgage)
Florida Income Baron Capital Forest Glen Daytona 891,537 7.01% 67,908 5,659
Advantage Fund I, IV, Inc. Apartments Beach, Florida
Ltd. (Phase III)
<CAPTION>
Balance
Amortization Maturity Due On
Partnership Term Date Maturity Lender
- ----------- ---- ---- -------- ------
<S> <C> <C> <C> <C>
Exchange Equity
Partnerships
Baron Strategic 30 years 10/1/06 $1,099,557 Crown Bank
Investment Fund II,
Ltd.
Central Florida 25 years 10/1/05 1,314,872 Midland Loan Services
Income Appreciation
Fund, Ltd.
Florida Capital 25 years 11/1/05 1,244,562 Column Financial, Inc.
Income Fund, Ltd.
Florida Capital 30 years 3/05 1,681,926 Prudential Mortgage Capital
Income Fund II, Ltd.
Florida Capital 25 years 7/1/06 625,327 Huntington Mortgage Co.
Income Fund III,
Ltd.
Florida Capital 25 years 5/18/00 2,652,341 Republic Bank
Income Fund IV, Ltd. 25 years 5/1/05 343,772 Glen Lake Arms
Joint Venture
Florida Income 30 years 3/05 782,744 Prudential Mortgage Capital
Advantage Fund I,
Ltd.
</TABLE>
130
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Florida Income Baron Capital Forest Glen Daytona 274,625 7.01% 18,792 1,566
Appreciation Fund IV, Inc. Apartments Beach, Florida
I, Ltd. (Phase IV)
Florida Income Baron Capital Blossom Corners Orlando, $1,026,732 9.04% $105,288 8,774
Growth Fund V, Ltd. XI, Inc. Apartments Florida
(Phase I)
Florida Opportunity Baron Capital Camellia Court Daytona 1,075,624 9.04% 111,132 9,261
Income Partners, III, Inc. Apartments Beach, Florida
Ltd.
GSU Stadium Student Baron Capital X, Stadium Club Statesboro, 1,728,653 7.87% 151,272 12,606
Apartments, Ltd. Inc. Apartments Georgia
Midwest Income Baron Capital of Brookwood Way Mansfield, 1,053,408 9.04% 108,612 9,051
Growth Fund VI, Ltd. Ohio III, Inc. Apartments Ohio
Realty Opportunity Baron Capital Forest Glen Daytona 1,030,840 7.01% 85,188 7,099
Income Fund VIII, IV, Inc. Apartments Beach, Florida
Ltd. (Phase II)
Exchange Hybrid
Partnerships
Baron Strategic Baron Capital Pineview Orlando, 1,605,781 7.75% 139,271 11,606
Investment Fund VI, XXXI, Inc. Apartments Florida
Ltd.
Baron Strategic Baron Capital Crystal Court Lakeland, 1,211,706 7.50% 102,533 8,544
Investment Fund IX, XLII, Inc. Apartments Florida
Ltd. (Phase I)
Baron Strategic Baron Capital Crystal Court Lakeland, 1,211,706 7.50% 102,533 8,544
Investment Fund X, XLIV, Inc. Apartments Florida
Ltd. (Phase I)
Pineview Orlando, 1,605,781 7.75% 139,271 11,606
Apartments Florida
Lamplight Court of Baron Capital Lamplight Court Bellefontaine 1,368,976 9.04% 141,445 11,787
Bellefontaine IX, Inc. Ohio
Apts., Ltd.
=============== ============= ============
TOTAL PROPERTIES: $20,842,662 $1,974,365 $164,530
=============== ============= ============
<CAPTION>
<S> <C> <C> <C> <C>
Florida Income 30 years 3/05 216,712 Prudential Mortgage Capital
Appreciation Fund
I, Ltd.
Florida Income 25 years 11/1/06 $882,430 Column Financial, Inc.
Growth Fund V, Ltd.
Florida Opportunity 30 years 11/1/06 984,430 Column Financial, Inc.
Income Partners,
Ltd.
GSU Stadium Student 30 years 10/1/05 1,615,458 GMAC
Apartments, Ltd.
Midwest Income 25 years 12/1/06 890,263 Mellon Bank
Growth Fund VI, Ltd.
Realty Opportunity 30 years 3/05 981,813 Prudential Mortgage Capital
Income Fund VIII,
Ltd.
Exchange Hybrid
Partnerships
Baron Strategic 30 years 11/04 1,493,008 GMAC
Investment Fund VI,
Ltd.
Baron Strategic 30 years 11/04 1,126,207 GMAC
Investment Fund IX,
Ltd.
Baron Strategic 30 years 11/04 1,126,207 GMAC
Investment Fund X,
Ltd.
30 years 11/04 1,493,008 GMAC
Lamplight Court of 25 years 11/1/06 1,158,349 Column Financial
Bellefontaine
Apts., Ltd.
===============
$19,093,771
===============
</TABLE>
131
<PAGE>
Mortgage Information
Mortgage Properties
The table below sets forth certain information relating to the second
mortgage loans (and in one case other debt interests) owned by each of the six
Exchange Mortgage Partnerships and the four Exchange Hybrid Partnerships whose
limited partnership interests the Operating Partnership will offer to acquire in
connection with the Exchange Offering, including (i) the name of the lending
Exchange Partnership, (ii) the name, location and number of units of the
underlying residential apartment property securing the first and second
mortgages, (iii) the name of the debtor, (iv) the original principal amount of
the second mortgage loan(s) held by the Exchange Partnership and the principal
balance as of November 1, 1998 and due at maturity, (v) the undivided interests
of other Exchange Partnerships in the second mortgage loans or the principal
balance as of November 1, 1998 of other second mortgage loans secured by the
property and owned by other Exchange Partnerships, (vi) the appraised
replacement cost new and the appraised value of the property determined under
the income method, (vii) the second mortgage loan interest rate, maturity date,
annual and monthly interest payable and participation features, if any, and
(viii) the principal balance of the institutional first mortgage loan secured by
the property as of November 1, 1998 and the terms thereof.
Additional information relating to the underlying residential apartment
property securing each second mortgage loan described and the first mortgage
loan with a senior position ahead of the second mortgage loan is set forth above
at "--Property Information Debt Property Interests." The debtors of
substantially all of the second mortgage loans and other loans provided or
acquired by the Exchange Mortgage Partnerships and the Exchange Hybrid
Partnerships are limited partnerships which own fee simple title to the property
which secures such mortgage loans. Affiliates of Mr. McGrath are the corporate
general partners of the debtor partnerships and in such capacity own a minority
economic interest (2%-20%) in such partnerships which is subordinate to the
preferred returns of the limited partners in such partnerships. Each second
mortgage note described is non-recourse beyond the property and/or other assets
owned by the debtors.
132
<PAGE>
EXCHANGE MORTGAGE PARTNERSHIPS
Baron Strategic Investment Fund, Ltd.
(GP: Baron Capital XXXII, Inc.)
This Exchange Partnership owns (i) three unrecorded second mortgage loans
secured by the Blossom Corners Property-Phase II and (ii) an unrecorded second
mortgage loan secured by the Lake Sycamore Property. The interest of the
Exchange Partnership and other Exchange Partnerships in the second mortgages,
terms of the first mortgage loans secured by the properties, and other
information are described below.
<TABLE>
<S> <C>
1. Blossom Corners Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Blossom Corners Apartments - Phase II (68 units) Orlando, Florida
Debtor: Blossom Corners Apartments II, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $977,645
12/31/98 principal balance
(accrued unpaid interest): $850,966 ($15,766)
Balance due at maturity: $850,966
Appraised replacement cost new
of property: $3,390,187
Appraised value of property -
income approach: $2,322,000
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $622,103 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal balance to the extent
of any available cash flow during the year and additional non-cumulative participation
interest equal to 30% of any remaining available cash flow during the year), (ii)
adjustable interest rate of 1% over the prime rate (current adjustable rate of 8.75%) as
to $68,861 of principal, and (iii) fixed interest rate of 12% as to $160,002 of
principal. The loans require payments of interest only until maturity.
Maturity date: 4/02
Annual interest payable: $62,552 (plus any participation interest payable)
Monthly interest payable: $5,213
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $1,106,894; the loan matures in 3/02, has a balance due at maturity of $1,050,024, bears
interest at a fixed annual rate of 8.24%, has annual and monthly debt service requirements
of $106,824 and $8,902, respectively, amortizes on a 25-year basis, and is prepayable
subject to a prepayment penalty equal to 1% of amount prepaid prior to third anniversary
of loan.
Other matters: Prior to 12/15/98, the second mortgage loans consisted of an unrecorded second mortgage
note with a principal balance of $622,103, an unsecured promissory note with a principal
balance of $68,861, an unsecured demand note with a principal balance of $130,270 and
advances of $29,732. On 12/15/98, the debtor restated and amended the $622,103 second
mortgage note and the $68,861 unsecured promissory note and made a new promissory note
in favor of the Exchange Partnership in the original principal amount of $160,002 (to
consolidate the $130,270 demand note and advances of $29,732). The debtor and the
Exchange Partnership also entered into a mortgage modification agreement. Pursuant to
the arrangement, the Exchange Partnership agreed to set the maturity date on the
unsecured notes at the same maturity date as the second mortgage note, in exchange for
the debtor's agreement to secure its repayment obligations on the unsecured notes with a
second mortgage on the property.
</TABLE>
133
<PAGE>
Baron Strategic Investment Fund, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Lake Sycamore Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Villas at Lake Sycamore (164 townhomes under development) Cincinnati, Ohio
Debtor: Sycamore Real Estate Development, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loan: $230,000
12/31/98 principal balance of
Exchange Partnership's 100%
interest in loan (accrued unpaid
interest): $230,000 ($20,700)
Balance due at maturity: $230,000
12/31/98 aggregate principal
balance of other second mortgage
loans secured by property and
owned by other Exchange
Partnerships (accrued unpaid
interest): $341,500 ($31,715)
Appraised replacement cost new
of property (under development): $9,376,039
Appraised value of property -
"As is" value: $1,080,000
Prospective market value: $14,312,000 (assuming completion of project as planned, full rent up and satisfactory
environmental-quality test)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires quarterly payments of interest only until maturity.
Maturity date: 12/03
Annual interest payable: $27,600
Monthly interest payable: $2,300
Prepayment provisions: Prepayable without penalty
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $800,000; approved maximum $2,000,000; the loan matures in 11/01, bears interest at an
annual adjustable rate equal to lender's prime rate plus 1% (currently 8.75%), has current
annual and monthly debt service requirements of $70,000 and $5,833, respectively, requires
payments of interest only until maturity and is prepayable without penalty.
Other matters: Two other Exchange Partnerships, Baron Strategic Investment Fund VIII, Ltd. and Baron
Strategic Investment Fund IX, Ltd., own separate second mortgage notes secured by the
property with the same terms except that they are in the principal amounts of $98,000
and $243,500 (with accrued unpaid interest in the amounts of $9,800 and $21,915),
respectively. The lending parties have agreed to share the benefits of the second
mortgage on a pari passu basis.
</TABLE>
134
<PAGE>
Baron Strategic Investment Fund IV, Ltd.
(GP: Baron Capital XVII, Inc.)
This Exchange Partnership owns two unrecorded second mortgage loans
secured by the Country Square Property-Phase I described below. The
Exchange Partnership's interest in the second mortgage loans, terms of
the first mortgage loan secured by the property, and other information
are described below.
<TABLE>
<S> <C>
Country Square Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Country Square Apartments - Phase I (73 units) Tampa, Florida
Debtor: Country Square Apartments, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $1,372,237
12/31/98 principal balance
(accrued unpaid interest): $1,364,549 ($141,226)
Balance due at maturity: $1,364,549
Second mortgage loan interests of
another Exchange Partnership: In 3/97, the Exchange Partnership received a loan with a current principal balance of
$254,267 (with accrued unpaid interest of $33,965) from Baron Strategic Investment Fund
VI, Ltd. ("Baron Fund VI"). The Exchange Partnership, in turn, lent the loan proceeds
to the debtor as part of the Country Square Second Mortgage Loans. The loan from Baron
Fund VI bears interest at the rate of 15%, payable monthly, matures in 9/02 and is
secured by the Exchange Partnership's interest in two second mortgage notes and a second
mortgage.
Appraised replacement cost new
of property: $3,554,776
Appraised value of property -
income approach: $2,281,000
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires payments of interest only until maturity.
Maturity date: 4/08
Annual interest payable: $163,746
Monthly interest payable: $13,645
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $1,592,633; the loan matures in 3/08, has a balance due at maturity of $1,385,953, bears
interest at a fixed annual rate of 7.41%, has annual and monthly debt service requirements
of $133,068 and $11,089, respectively, amortizes on a 30-year basis and is prepayable
after the fourth anniversary of the loan, subject to yield maintenance until the sixth
month prior to maturity, when it can be prepaid at par.
Other matters: Prior to 12/15/98, the second mortgage loans consisted of a second mortgage note with a
principal balance of $1,192,987 and an unsecured demand note with a principal balance of
$179,250. On 12/15/98, the debtor restated and amended the notes and the debtor and the
Exchange Partnership entered into a mortgage modification agreement. Pursuant to the
arrangement, the Exchange Partnership agreed to set the maturity date on the demand note
at the same maturity date as the second mortgage note, in exchange for the debtor's
agreement to secure its repayment obligation on the demand note with a second mortgage
on the Country Square Property.
</TABLE>
135
<PAGE>
Baron Strategic Investment Fund V, Ltd.
(GP: Baron Capital XL, Inc.)
The Exchange Partnership owns (I) an unrecorded second mortgage loan
secured by the Candlewood Property-Phase II, (ii) an undivided interest
in three unrecorded second mortgage loans and a 100% interest in an
unrecorded second mortgage loan secured by the Curiosity Creek Property
and (iii) five unrecorded second mortgage loans secured by the Sunrise
Property-Phase I. The interest of the Exchange Partnership and other
Exchange Partnerships in the second mortgage loans, terms of the first
mortgage loans secured by the properties, and other information are
described below.
<TABLE>
<S> <C>
1. Candlewood Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Candlewood Apartments - Phase II (33 units) Tampa, Florida
Debtor: Baron Strategic Investment Fund III, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loan: $21,000
12/31/98 principal balance
(accrued unpaid interest): $21,000 ($1,890)
Balance due at maturity: $21,000
12/31/98 aggregate principal
balance of other second mortgage
loans secured by property and
owned by other Exchange
Partnerships (accrued unpaid
interest): $143,500 ($10,045)
Second mortgage interests of other
Exchange Partnerships in
property: Baron Strategic Investment Fund VI, Ltd. ("Baron Fund VI") and Baron Strategic
Investment Fund IX, Ltd. ("Baron Fund IX") own separate second mortgage loans secured by
the Candlewood Property. The original principal balance, aggregate 12/31/98 principal
balance, and balance due at maturity in respect of Baron Fund VI's and Baron Fund IX's
second mortgage loans are $68,000 (accrued unpaid interest of $4,760) and $75,500
(accrued unpaid interest of $5,285), respectively; the annual (and monthly) payments due
them are $8,160 ($680) and $9,060 ($755), respectively. The other terms relating to
Baron Fund VI's and Baron Fund IX's second mortgage loans are the same as stated herein
in respect of the Exchange Partnership's loan.
Appraised replacement cost new
of property (12.8% of amount,
representing the percentage of the
current principal balance of the
Exchange Partnership's second
mortgage loan in relation to the
aggregate current principal
balance of all second mortgage
loans secured by the property):
$1,590,447 ($203,577);
Appraised value of property -
income approach (12.8% of
amount): $922,000 ($118,016)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires payments of interest only until maturity.
Maturity date: 3/03
Annual interest payable: $2,520
Monthly interest payable: $210
Prepayment provisions: Prepayable without penalty.
</TABLE>
136
<PAGE>
<TABLE>
<S> <C>
11/1/98 principal balance of first
mortgage loan secured by
property (12.8% of amount)
and other terms: $596,528 ($76,356); the loan matures in 2/03, has a balance due at maturity of $533,678,
bears interest at a fixed annual rate of 7.79%, payable quarterly, has annual and monthly
debt service requirements of $56,153 and $4,679, respectively, amortizes on a 25-year
basis and is prepayable without penalty.
Other matters: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted of an unsecured demand
note with a principal balance of $21,000. On 12/15/98, the debtor and the Exchange
Partnership entered into a second mortgage agreement under which the debtor agreed to
secure its repayment obligation on the note with a second mortgage on the Candlewood
Property. At the same time, the debtor agreed to secure the loans in favor of Baron
Fund VI and Baron Fund IX with separate second mortgages on the property. The lending
parties have agreed to share the benefits of the second mortgages on a pari passu basis.
</TABLE>
137
<PAGE>
Baron Strategic Investment Fund V, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Curiosity Creek Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Curiosity Creek Apartments (81 units) Tampa, Florida
Debtor: Curiosity Creek Apartments, Ltd.
Original principal amount of
Exchange Partnership's undivided
26.3% interest in three loans and
a 100% interest in one loan: $474,703
12/31/98 principal balance
(accrued unpaid interest): $474,703 ($ 22,998)
Balance due at maturity: $474,703
12/31/98 principal balance of other
Exchange Partnership's undivided
73.7% in three loans and a 100%
interest in one loan (accrued
unpaid interest): $1,243,847 ($ 103,664)
Interests of other Exchange
Partnerships in second mortgage
loans: Baron Strategic Vulture Fund I, Ltd. ("Baron Vulture Fund") owns the remaining undivided
73.7% interest in three second mortgage loans and a 100% interest in one second mortgage
loan secured by the Curiosity Creek Property ("Curiosity Creek Second Mortgage Loans").
The aggregate original principal balance, aggregate 12/31/98 principal balance, and
aggregate balance due at maturity in respect of Baron Vulture Fund's interest in the
loans is $1,243,847 (accrued unpaid interest of $103,664); the aggregate annual and
monthly payments due it are $105,149 and $8,762, respectively. The other terms relating
to Baron Vulture Fund's interest in the loans are the same as stated herein.
Appraised replacement cost new
of property (26.3% of amount): $3,941,164 ($1,036,526)
Appraised value of property -
income approach (26.3% of
amount): $2,552,000 ($ 671,176)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $212,227 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow, plus additional non-cumulative participation interest equal to 30%
of any remaining available cash flow), (ii) adjustable interest rate of prime plus 1%
(currently 8.75%) as to $108,899 of principal, (iii) fixed interest rate of 12.5% as to
$109,325 of principal and (iv) fixed interest rate of 12% as to $44,253 of principal.
The loans require payments of interest only until maturity.
Maturity date: 4/07
Annual interest payable: $41,238 (plus any participation interest payable)
Monthly interest payable: $3,437
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property (26.3% of amount)
and other terms: $1,294,866 ($340,550); the loan matures in 4/08, has a balance due at maturity of
$1,122,800, bears interest at the fixed annual rate of 7.28%, has annual and monthly debt
service requirements of $106,737 and $8,895, respectively, amortizes on a 30-year basis,
and is prepayable after the fourth anniversary of the loan, subject to yield maintenance
until the sixth month prior to maturity, when it may be prepaid at par.
</TABLE>
138
<PAGE>
<TABLE>
<S> <C>
Other matters: Prior to 12/15/98, the Curiosity Creek Second Mortgage Loans consisted of a second
mortgage note with a principal balance of $807,560, two unsecured demand notes with a an
aggregate principal balance of $830,360 and advances in the amount of $66,171. On
12/15/98, the debtor, the Exchange Partnership and Baron Vulture Fund entered into a
mortgage modification agreement pursuant to which the Exchange Partnership and Baron
Vulture Fund agreed to set the maturity date on the demand notes and the advances at the
same maturity date as the second mortgage note, in exchange for the debtor's agreement
to secure its repayment obligations on the unsecured notes and advances with a second
mortgage on the Curiosity Creek Property.
</TABLE>
139
<PAGE>
Baron Strategic Investment Fund V, Ltd. (cont'd)
<TABLE>
<S> <C>
3. Sunrise Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Sunrise Apartments - Phase I (60 units) Titusville, Florida
Debtor: Sunrise Apartments I, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $1,036,450
12/31/98 principal balance
(accrued unpaid interest): $1,031,801 ($29,678)
Balance due at maturity: $1,031,801
Appraised replacement cost new
of property: $2,700,611
Appraised value of property -
income approach: $1,424,000
Mortgage interest and (i) Fixed interest rate of 6% as to $335,000 of principal (plus non-cumulative
amortization provisions: participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 20% of
any remaining available cash flow), (ii) fixed interest rate of 4% as to $621,515 of
principal, and (iii) fixed interest rate of 12% as to $75,286 of principal. The loans
require payments of interest only until maturity.
Maturity date: 10/07
Annual interest payable: $53,995 (plus any participation interest payable)
Monthly interest payable: $4,500
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by $1,029,898; the loan matures in 1/05, has a balance due at maturity of $932,217, bears
property and other terms: interest at a fixed annual rate of 7.5%, has annual and monthly debt service requirements
of $174,020 and $14,502, respectively, amortizes on a 30-year basis, and is payable after
the fourth anniversary of the loan, subject to yield maintenance until the sixth month
prior to maturity, when it can be prepaid at par.
Other matters: Prior to 12/15/98, the second mortgage loans secured by the Sunrise Property (the
"Sunrise Second Mortgage Loans") consisted of a second mortgage note with a principal
balance of $335,000, two unsecured demand notes with an aggregate principal balance of
$622,982 and advances in the amount of $73,819. In 12/15/98, the debtor restated and
amended the second mortgage note and one of the demand notes and created two new
promissory notes in favor of the Exchange Partnership in the original principal amounts
of $48,468 and $25,350 (to cover prior advances). The debtor and the Partnership also
entered into a mortgage modification agreement. Pursuant to the arrangement, the
Exchange Partnership agreed to set the maturity date on the demand notes and the
advances at the same maturity date as the second mortgage note, in exchange for the
debtor's agreement to secure its repayment obligations on the unsecured notes and
advances with a second mortgage on the Sunrise Property. The other demand note in the
current principal amount of $1,467 remains unsecured.
</TABLE>
140
<PAGE>
Baron Strategic Investment Fund VIII, Ltd.
(Baron Capital XLIV, Inc.)
The Exchange Partnership owns (i) an undivided interest in an
unrecorded second mortgage loan secured by the Heatherwood
Property-Phase II, (ii) three unrecorded second mortgage loans secured
by the Longwood Property-Phase I and (iii) an unrecorded second
mortgage loan secured by the Lake Sycamore Property (under
development). The interest of the Exchange Partnership and other
Exchange Partnerships in the second mortgage loans, terms of the first
mortgage loans secured by each property, and other information are
described below.
<TABLE>
<S> <C>
1. Heatherwood Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Heatherwood Apartments - Phase II (41 units) Kissimmee, Florida
Debtor: Heatherwood Apartments II, Ltd.
Original principal amount of
Exchange Partnership's undivided
58% interest in loans: $206,260
12/31/98 principal balance
(accrued unpaid interest): $206,260 ($0)
Balance due at maturity: $206,260
12/31/98 principal balance of other
Exchange Partnership's undivided
42% in loans (accrued unpaid
interest): $149,361 ($17,338)
Interests of other Exchange
Partnership in second mortgage Baron Strategic Investment Fund X, Ltd. ("Baron Fund X") owns the remaining undivided 42%
loans: interest in the second mortgage loans secured by the Heatherwood Property and in the
unsecured loans associated with the property ("Heatherwood Loans"). The aggregate original
principal balance, aggregate 12/31/98 principal balance, and aggregate balance due at
maturity in respect of Baron Fund X's interest in the Heatherwood Loans is $149,361
(accrued unpaid interest of $17,338); the aggregate annual (and monthly) payments due it
are $9,710 ($809). The other terms relating to Baron Fund X's interest in the Heatherwood
Loans are the same as stated herein.
Appraised replacement cost new
of property (58% of amount): $1,862,475 ($1,080,236)
Appraised value of property -
income approach (58% of
amount): $1,259,000 ($730,220)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $188,500 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 30%
of any remaining available cash flow), (ii) adjustable interest rate of 1% over prime
rate (currently 8.75%) as to $1,010 of principal, and (iii) fixed interest rate of 12%
as to $16,749 of principal. The loans require payments of interest only until maturity.
Maturity date: 10/04
Annual interest payable: $13,408 (plus any participation interest payable)
Monthly interest payable: $1,117
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by $704,306 ($408,497); the loan matures in 11/04, has a balance due at maturity of $655,856,
property (58% of amount) bears interest at a fixed annual rate of 7.75%, has annual and monthly debt service
and other terms: requirements of $61,038 and $5,087, respectively, amortizes on a 30-year basis, and is
prepayable after the fourth anniversary of the loan, subject to yield maintenance until
the sixth month prior to maturity, when it can be prepaid at par.
Other matters: The Heatherwood Loans consist of a second mortgage note secured by the Heatherwood
Property with a principal balance $325,000 and unsecured loans in the aggregate principal
amount of $24,121.
</TABLE>
141
<PAGE>
Baron Strategic Investment Fund VIII, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Longwood Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Longwood Apartments - Phase I (59 units) Cocoa, Florida
Debtor: Longwood Apartments I, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $969,268
12/31/98 principal balance
(accrued unpaid interest ): $969,268 ($47,892)
Balance due at maturity: $969,268
Appraised replacement cost new
of property: $2,666,862
Appraised value of property -
income approach: $1,788,000
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $368,558 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 30%
of any remaining available cash flow), (ii) adjustable interest rate of 1% over prime
rate (currently 8.75%) as to $526,465 of principal, and (iii) fixed interest rate of 12%
as to $74,245 of principal. The loans require payments of interest only until maturity.
Maturity date: 10/07
Annual interest payable: $77,088 (plus any participation interest payable)
Monthly interest payable: $6,424
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $1,028,684; the loan matures in 11/04, has a balance due at maturity of $1,204,545, bears
interest at a fixed annual rate of 7.75%, has annual and monthly debt service requirements
of $89,150 and $7,429, respectively, amortizes on a 30-year basis, and is prepayable after
the fourth anniversary of the loan, subject to yield maintenance until the sixth month
prior to maturity, when it can be prepaid at par.
Other matters: Prior to 12/15/98, the Longwood Second Mortgage Loans consisted of a second mortgage
note with a principal balance of $368,558, an unsecured demand note with a principal
balance of $526,465, and advances of $74,245. On 12/15/98, the debtor restated and
amended the second mortgage note and the demand note and created a new promissory note
in the original principal amount of $74,245 (to cover prior advances). The debtor and
the Exchange Partnership also entered into a mortgage modification agreement. Pursuant
to the arrangement, the Exchange Partnership agreed to set the maturity date on the
demand note and the advances at the same maturity date as the second mortgage note, in
exchange for the debtor's agreement to secure its repayment obligations on the demand
note and advances with a second mortgage on the Longwood Property.
</TABLE>
142
<PAGE>
Baron Strategic Investment Fund VIII, Ltd. (cont'd)
<TABLE>
<S> <C>
3. Lake Sycamore Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Villas at Lake Sycamore (164 townhomes under development) Cincinnati, Ohio
Debtor: Sycamore Real Estate Development, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loan: $98,000
12/31/98 principal balance
(accrued unpaid interest): $98,000 ($9,800)
Balance due at maturity: $98,000
12/31/98 aggregate principal
balance of other second mortgage
loans secured by property and
owned by other Exchange
Partnerships (accrued unpaid
interest): $473,500 ($42,615)
Appraised replacement cost new
of property (under development): $9,376,039
Appraised value of property -
"As is" value: $1,080,000
Prospective market value: $14,312,000 (assuming completion of project as planned, full rent up and satisfactory
environmental-quality test)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires quarterly payments of interest only until maturity.
Maturity date: 12/03
Annual interest payable: $11,760
Monthly interest payable: $980
Prepayment provisions: Prepayable without penalty
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $800,000; approved maximum $2,000,000; the loan matures in 11/01, bears interest at an
annual adjustable rate equal to lender's prime rate plus 1% (currently 8.75%), has current
annual and monthly debt service requirements of $70,000 and $5,833, respectively, requires
payments of interest only until maturity and is prepayable without penalty.
Other matters: Two other Exchange Partnerships, Baron Strategic Investment Fund, Ltd. and Baron
Strategic Investment Fund IX, Ltd., own separate second mortgage notes secured by the
property with the same terms except that they have principal amounts of $230,000 and
$243,500 (and accrued unpaid interest of $20,700 and $21,915), respectively. The
lending parties have agreed to share the benefits of the second mortgage on a pari passu
basis.
</TABLE>
143
<PAGE>
Baron Strategic Vulture Fund I, Ltd.
(GP: Baron Capital XXVI, Inc.)
The Exchange Partnership owns an undivided interest in three unrecorded
second mortgage loans and a 100% interest in one loan secured by the
Curiosity Creek Property described below. The interest of the Exchange
Partnership and a separate Exchange Partnership in the second mortgage
loans, terms of the first mortgage loan secured by the property, and
other information are described below.
<TABLE>
<S> <C>
Curiosity Creek Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Curiosity Creek Apartments (81 units) Tampa, Florida
Debtor: Curiosity Creek Apartments, Ltd.
Original principal amount of
Exchange Partnership's undivided
73.7% interest in three loans and
100% interest in one loan: $1,243,847
12/31/98 principal balance
(accrued unpaid interest): $1,243,847 ($103,664)
Balance due at maturity: $1,243,847
12/31/98 principal balance of other
Exchange Partnership's undivided
26.3% in three loans and 100%
interest in one loan (accrued
unpaid interest): $474,703 ($22,998)
Interests of other Exchange
Partnership in second mortgage Baron Strategic Investment Fund V, Ltd. ( "Baron Fund V") owns the remaining undivided
loans: 26.3% interest in three second mortgage loans and a 100% interest in one second mortgage
loan secured by the Curiosity Creek Property ("Curiosity Creek Second Mortgage Loans").
The aggregate original principal balance, aggregate 12/31/98 principal balance, and
aggregate balance due at maturity in respect of Baron Fund V's interest in the Curiosity
Creek Second Mortgage Loans is $474,703 (accrued unpaid interest of $22,998); the
aggregate annual and monthly payments due it are $42,055 and $3,505, respectively. The
other terms relating to Baron Fund V's interest in the Curiosity Creek Second Mortgage
Loans are the same as stated herein.
Appraised replacement cost new
of property (73.7% of amount): $3,941,164 ($2,904,638)
Appraised value of property -
income approach (73.7% of
amount): $2,552,000 ($1,880,824)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $595,333 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 30%
of any remaining available cash flow), (ii) adjustable interest rate of prime plus 1%
(currently 8.75%) as to $305,407 of principal, (iv) fixed interest rate of 12.5% as to
$306,675 of principal, and (iii) fixed interest rate of 12% as to $36,431 of principal.
The loans require payments of interest only until maturity.
Maturity date: 4/07
Annual interest payable: $107,440 (plus any participation interest payable)
Monthly interest payable: $8,953
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by $1,294,866 ($954,316); the loan matures in 4/08, has a balance due at maturity of
property (73.7% of amount) $1,122,800, bears interest at the fixed annual rate of 7.28%, has annual and monthly
and other terms: debt service requirements of $106,737 and $8,895, respectively, amortizes on a 30-year
basis, and is prepayable after the
fourth anniversary of the loan,
subject to yield maintenance until the
sixth month prior to maturity, when it
may be prepaid at par.
</TABLE>
144
<PAGE>
<TABLE>
<S> <C>
Other matters: Prior to 12/15/98, the Curiosity Creek Second Mortgage Loans consisted of a second
mortgage note with a principal balance of $807,560, two unsecured demand notes with an
aggregate principal balance of $830,360 and advances in the amount of $66,171. On
12/15/98, the debtor, the Exchange Partnership and Baron Fund V entered into a mortgage
modification agreement pursuant to which the Exchange Partnership and Baron Fund V
agreed to set the maturity date on the demand notes and the advances at the same
maturity date as the second mortgage note, in exchange for the debtor's agreement to
secure its repayment obligations on the unsecured notes and advances with a second
mortgage on the Curiosity Creek Property.
</TABLE>
145
<PAGE>
Brevard Mortgage Program, Ltd.
(Baron Capital XII, Inc.)
The Exchange Partnership owns three unrecorded second mortgage loans
secured by the Meadowdale Property described below. The Exchange
Partnership's interest in the Second Mortgage Loans, terms of the first
mortgage loan secured by the property, and other information are
described below.
<TABLE>
<S> <C>
Meadowdale Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Meadowdale Apartments (64 units) Melbourne, Florida
Debtor: Florida Opportunity Income Fund III, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $1,048,861
12/31/98 principal balance
(accrued unpaid interest): $1,048,861 ($116,742)
Balance due at maturity: $1,048,861
Appraised replacement cost new
of property: $3,084,043
Appraised value of property -
income approach: $1,629,000
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $752,747 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 20%
of any remaining available cash flow), (ii) adjustable interest rate of 1% over prime
rate (currently 8.75%) as to $271,923 of principal and (iii) fixed rate of 12% as to
$24,191 of principal.
Maturity date: 10/07
Annual interest payable: $71,861 (plus any participation interest payable)
Monthly interest payable: $ 5,988
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $963,343; the loan matures in 7/01, has a balance due at maturity of $905,918, bears
interest at a fixed annual rate of 8.75%, has annual and monthly debt service requirements
of $93,935 and $7,828, respectively, amortizes on a 22-year basis, and is prepayable
without penalty.
Other matters: Prior to 12/15/98, the second mortgage loans consisted of a second mortgage note with a
principal balance of $752,747, an unsecured demand note with a principal balance of
$271,923 and advances of $24,191. On 12/15/98, the debtor restated and amended the
second mortgage note and the demand note and created a new promissory note in favor of
the Exchange Partnership in the original principal amount of $24,191 (to cover the prior
advances). The debtor and the Exchange Partnership also entered into a mortgage
modification agreement. Pursuant to the arrangement, the Exchange Partnership agreed to
set the maturity date on the demand note and the advances at the same maturity date as
the second mortgage note, in exchange for the debtor's agreement to secure its repayment
obligations on the demand note and the advances with a second mortgage on the Meadowdale
Property.
</TABLE>
146
<PAGE>
EXCHANGE HYBRID PARTNERSHIPS
Baron Strategic Investment Fund VI, Ltd.
(GP: Baron Capital XXXI, Inc.)
The Exchange Partnership owns (1) a 57% limited partnership interest in
a limited partnership which holds fee simple title to the Pineview
Property, (2) an unrecorded second mortgage loan secured by the
Candlewood Property-Phase II, (3) an undivided interest in two recorded
second mortgage loans secured by the Garden Terrace Property-Phase III,
and (4) a note receivable from another Exchange Partnership which is
secured by two unrecorded second mortgage notes and a second mortgage
on the Country Square Property-Phase I. Information concerning the
Pineview Property and the first mortgage indebtedness secured by it is
included above in the tables entitled "Property Information - Equity
Property Interests" and "Mortgage Information - Equity Property
Interests." The interest of the Exchange Partnership and other Exchange
Partnerships in the second mortgage loans, the note payable to the
Exchange Partnership from another Exchange Partnership, terms of the
respective first mortgage loan and the Exchange Partnership's second
mortgage loans secured by the three properties described below, and
other information are described below.
<TABLE>
<S> <C>
1. Candlewood Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Candlewood Apartments - Phase II (33 units) Tampa, Florida
Debtor: Baron Strategic Investment Fund III, Ltd.
Original principal amount of
Exchange Partnership's interest
in loan: $68,000
12/31/98 principal balance
(accrued unpaid interest): $68,000 ($4,760)
Balance due at maturity: $68,000
12/31/98 principal balance of other
second mortgage loans secured by
the property and owned by other
Exchange Partnerships
(accrued unpaid interest): $96,500 ($7,175)
Second mortgage interests of other
Exchange Partnerships in the
property: Baron Strategic Investment Fund V, Ltd. ("Baron Fund V") and Baron Strategic Investment
Fund IX, Ltd. ("Baron Fund IX") own separate second mortgage loans secured by the
Candlewood Property. The original principal balance, aggregate 12/31/98 principal
balance, and balance due at maturity in respect of Baron Fund V's and Baron Fund IX's
loans are $21,000 (accrued unpaid interest of $1,890) and $75,500 (accrued unpaid
interest of $5,285), respectively; the annual (and monthly) payments due them are $2,520
($210) and $9,060 ($755), respectively. The other terms relating to Baron Fund V's and
Baron Fund IX's loans are the same as stated herein in respect of the Exchange
Partnership's loan.
Appraised replacement cost new
of property (41.3% of amount,
representing the percentage of the
current principal balance of the
Exchange Partnership's second
mortgage loan in relation to the
aggregate current principal
balance of all second mortgage
loans secured by the property): $1,590,447 ($656,855)
Appraised value of property -
income approach (41.3% of
amount): $ 922,000 ($380,786)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires payments of interest only until maturity.
</TABLE>
147
<PAGE>
<TABLE>
<S> <C>
Maturity date: 3/03
Annual interest payable: $8,160
Monthly interest payable: $680
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property (41.3% of amount) and
other terms: $596,528 ($246,366); the loan matures in 2/03, has a balance due at maturity of $533,678,
bears interest at a fixed annual rate of 7.79%, payable quarterly, has annual and monthly
debt service requirements of $56,153 and $4,679, respectively, amortizes on a 25-year
basis and is prepayable without penalty.
Other matters: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted of an unsecured demand
note with a principal balance of $68,000. On 12/15/98, the debtor and the Exchange
Partnership entered into a second mortgage agreement under which the debtor agreed to
secure its repayment obligation on the note with a second mortgage on the Candlewood
Property. At the same time, the debtor agreed to secure the loans in favor of Baron
Fund V and Baron Fund IX with separate mortgages on the property. The lending parties
have agreed to share the benefits of the second mortgages on a pari passu basis.
</TABLE>
148
<PAGE>
Baron Strategic Investment Fund VI, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Garden Terrace Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Garden Terrace Apartments - Phase III (91 units) Orlando, Florida
Debtor: Garden Terrace Apartments III, Ltd.
Original principal amount of
Exchange Partnership's undivided
20% interest in loan: $248,353
12/31/98 principal balance
(accrued unpaid interest): $248,353 ($12,418)
Balance due at maturity: $248,353
12/31/98 principal balance of other
Exchange Partnerships' undivided
80% in loan (accrued unpaid
interest): $993,414 ($91,063)
Interests of other Exchange
Partnerships in second mortgage
loans: Baron Strategic Investment Fund IX, Ltd. ("Baron Fund IX") and Baron Strategic
Investment Fund X, Ltd. ("Baron Fund X") own the remaining undivided 80% interest in the
second mortgage loans secured by the Garden Terrace Property ("Garden Terrace Second
Mortgage Loans"). The original principal balance, 12/31/98 principal balance, and
balance due at maturity in respect of Baron Fund IX's and Baron Fund X's interest in the
Garden Terrace Second Mortgage Loans is $310,442 (accrued unpaid interest of $28,457)
and $682,972 (accrued unpaid interest of $62,606), respectively; the annual (and
monthly) payments due them are $27,940 ($2,328) and $61,467 ($5,122), respectively. The
other terms relating to Baron Fund IX's and Baron Fund X's interest in the Garden
Terrace Second Mortgage Loans are the same as stated herein.
Appraised replacement cost new
of property (20% of amount): $4,297,897 ($859,579)
Appraised value of property -
income approach (20% of
amount): $1,782,000 ($356,400)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 2% as to $147,000 of principal if cash flow available (plus
non-cumulative participation interest at the rate of 7% on the unpaid principal to the
extent of available cash flow, plus additional participation interest equal to 30% of
any remaining cash flow (payable only to holders of note referred to in (ii) below) and
(ii) fixed interest rate of 9% as to $101,353 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due on the
note referred to in (i) above. The loans require payments of interest only until
maturity.
Maturity date: 1/07
Annual interest payable: $22,352 (plus any additional participation interest)
Monthly interest payable: $1,863
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property (20% of amount) and
other terms: $970,167 ($194,033); the loan matures in 5/05, has a balance due at maturity of $822,063,
bears interest at the fixed annual rate of 8.31%, has annual and monthly debt service
requirements of $96,047 and $8,004, respectively, amortizes on a 25-year basis and may be
prepaid beginning 4/99 with a 5% prepayment fee, which decreases 1% per year until
maturity.
</TABLE>
149
<PAGE>
Baron Strategic Investment Fund VI, Ltd. (cont'd)
<TABLE>
<S> <C>
3. Note Payable by Baron Strategic Investment
Fund IV, Ltd. ("Baron Fund IV"):
12/31/98 principal balance owed to Exchange
Partnership (collateralized by security interest
in Baron Fund IV's second mortgage on
Country Square Property - Phase I- see above
under table for "Baron Strategic Investment
Fund IV, Ltd.") (accrued unpaid interest
payable to Exchange Partnership): $254,267 ($33,965))
12/31/98 principal balance of Baron Fund IV's
second mortgage loans secured by property
(accrued unpaid interest ): $1,364,549 ($141,226)
Appraised replacement cost new of property: $3,554,776
Appraised value of property - income approach: $2,281,000
11/1/98 principal balance of first mortgage loan
secured by property: $1,592,633; the loan matures in 3/08, has a
balance due at maturity of $1,385,953, bears
interest at a fixed annual rate of 7.41%,
has annual and monthly debt service
requirements of $133,068 and $11,089,
respectively, amortizes on a 30-year basis,
and is prepayable after the fourth
anniversary of the loan, subject to yield
maintenance until the sixth month prior to
maturity, when it can be prepaid at par.
Other matters: In 3/97, the Exchange Partnership provided a
loan with a current principal balance of
$254,267 to another Exchange Partnership,
Baron Strategic Investment Fund IV, Ltd.
("Baron Fund IV"). Baron Fund IV, in turn,
lent the loan proceeds to the borrower as
part of the Country Square Second Mortgage
Loans. The loan from Baron Fund VI to Baron
Fund IV bears interest at the annual rate of
15%, payable monthly, matures in 9/02 and is
secured by Baron Fund IV's interest in the
second mortgage note and second mortgage.
</TABLE>
150
<PAGE>
Baron Strategic Investment Fund IX, Ltd.
(Baron Capital LXII, Inc.)
The Partnership owns (i) a 41.1% limited partnership interest in a
limited partnership which holds fee simple title to the Crystal Court
Property-Phase I, (ii) an undivided interest in an unrecorded second
mortgage loan secured by the Candlewood Property, (iii) an undivided
interest in two recorded second mortgage loans secured by the Garden
Terrace Property-Phase III, and (iv) an unrecorded second mortgage loan
secured by the Lake Sycamore Property (under development). Information
concerning the Crystal Court Property and the first mortgage
indebtedness secured by it is included above in the tables entitled
"Property Information - Equity Property Interests" and "Mortgage
Information Equity Property Interests." The interest of the Exchange
Partnership and other Exchange Partnerships in the respective second
mortgage loans, terms of the respective first mortgage loan secured by
the Candlewood Property, the Garden Terrace Property and the Lake
Sycamore Property, and other information are described below.
<TABLE>
<S> <C>
1. Candlewood Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Candlewood Apartments - Phase II (33 units) Tampa, Florida
Debtor: Baron Strategic Investment Fund III, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loan: $75,500
12/31/98 principal balance
(accrued unpaid interest): $75,500 ($5,285)
Balance due at maturity: $75,500
12/31/98 aggregate principal
balance of other second mortgage
loans secured by property and
owned by other Exchange
Partnerships (accrued unpaid
interest): $89,000 ($6,650)
Second mortgage interests of other
Exchange Partnerships in
property: Baron Strategic Investment Fund V, Ltd. ("Baron Fund V") and Baron Strategic Investment
Fund VI, Ltd. ("Baron Fund VI") own separate second mortgage loans secured by the
Candlewood Property. The original principal balance, aggregate 12/31/98 principal
balance, and balance due at maturity in respect of Baron Fund V's and Baron Fund VI's
loans are $21,000 (accrued unpaid interest of $1,890) and $68,000 (accrued unpaid
interest of $4,760), respectively; the annual (and monthly) payments due them are
$2,520 ($210) and $8,160 ($680), respectively. The other terms relating to Baron Fund
V's and Baron Fund VI's loans are the same as stated herein in respect of the Exchange
Partnership's loan.
Appraised replacement cost new
of property (45.9% of amount,
representing the percentage of the
current principal balance of the
Exchange Partnership's second
mortgage loan in relation to the
aggregate current principal
balance of all second mortgage
loans secured by the property): $1,590,447 ($730,015)
Appraised value of property -
income approach (45.9% of
amount): $922,000 ($423,198)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires payments of interest only until maturity.
Maturity date: 3/03
Annual interest payable: $9,060
Monthly interest payable: $755
</TABLE>
151
<PAGE>
<TABLE>
<S> <C>
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property (45.9% of amount)
and other items: $596,528 ($273,806); the loan matures in 2/03, has a balance due at maturity of $533,678,
bears interest at a fixed annual rate of 7.79%, payable quarterly, has annual and monthly
debt service requirements of $56,153 and $4,679, respectively, amortizes on a 25-year
basis and is prepayable without penalty.
Other matters: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted of an unsecured demand
note with a principal balance of $75,500. On 12/15/98, the debtor and the Exchange
Partnership entered into a second mortgage agreement under which the debtor agreed to
secure its repayment obligation on the note with a second mortgage on the Candlewood
Property. At the same time, the debtor agreed to secure the loans in favor of Baron
Fund V and Baron Fund VI with separate second mortgages on the property. The lending
parties have agreed to share the benefits of the second mortgages on a pari passu basis.
</TABLE>
152
<PAGE>
Baron Strategic Investment Fund IX, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Garden Terrace Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Garden Terrace Apartments - Phase III (91 units) Orlando, Florida
Debtor: Garden Terrace Apartments III, Ltd.
Original principal amount of
Exchange Partnership's undivided
25% interest in loans: $310,442
12/31/98 principal balance
(accrued unpaid interest): $310,442 ($28,457)
Balance due at maturity: $310,442
12/31/98 principal balance of other
Exchange Partnerships' undivided
75% interest in loans (accrued
unpaid interest): $931,325 ($75,024)
Interests of other Exchange
Partnerships in second mortgage
loans: Baron Strategic Investment Fund VI, Ltd. ("Baron Fund VI") and Baron Strategic
Investment Fund X, Ltd. ("Baron Fund X") own the remaining undivided 75% interest in
the second mortgage loans secured by the Garden Terrace Property ("Garden Terrace
Second Mortgage Loans"). The original principal balance, 12/31/98 principal balance,
and balance due at maturity in respect of Baron Fund VI's and Baron Fund X's interest
in the Garden Terrace Second Mortgage Loans is $248,353 (accrued unpaid interest of
$12,418) and $682,972, (accrued unpaid interest of $82,606), respectively, the annual
(and monthly) payments due them are $22,352 ($1,863) and $61,467 ($5,122),
respectively. The other terms relating to Baron Fund VI's and Baron Fund X's interest
in the Garden Terrace Second Mortgage Loan are the same as stated herein.
Appraised replacement cost new
of property (25% of amount): $4,297,897 ($1,074,474)
Appraised value of property -
income approach (25% of
amount): $1,782,000 ($445,500)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 2% as to $183,750 of principal if cash flow available (plus
non-cumulative participation interest at the rate of 7% on the unpaid principal to the
extent of available cash flow plus additional participation interest equal to 30% of
any remaining cash flow (payable only to holders of note referred to in (ii) below) and
(ii) fixed interest rate of 9% as to $126,692 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due on the
note referred to in (i) above. The loan requires payments of interest only until
maturity.
Maturity date: 1/07
Annual interest payable: $27,940 (plus any additional participation interest)
Monthly interest payable: $2,328
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property (25% of amount) and
other terms: $970,167 ($242,542); the loan matures in 5/05, has a balance due at maturity of $822,063,
bears interest at the fixed annual rate of 8.31%, has annual and monthly debt service
requirements of $96,047 and $8,004, respectively, amortizes on a 25-year basis and may be
prepaid beginning 4/99 with a 5% prepayment fee, which decreases 1% per year until
maturity.
</TABLE>
153
<PAGE>
Baron Strategic Investment Fund IX, Ltd. (cont'd)
<TABLE>
<S> <C>
3. Lake Sycamore Second Mortgage Loan:
Residential apartment property
securing mortgages (number of
units and location): Villas at Lake Sycamore (164 townhomes under development) Cincinnati, Ohio
Debtor: Sycamore Real Estate Development, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loan: $243,500
12/31/98 principal balance
(accrued unpaid interest): $243,500 ($21,915)
Balance due at maturity: $243,500
11/1/98 aggregate principal balance
of other second mortgage loans
secured by property and owned
by other Exchange Partnerships
(accrued unpaid interest): $328,000 ($30,500)
Appraised replacement cost new
of property (under development): $9,376,039
Appraised value of property -
"As is" value: $1,080,000
Prospective market value: $14,312,000 (assuming completion of project as planned, full rent up and satisfactory
environmental-quality test)
Mortgage interest and
amortization provisions: Fixed interest rate of 12%; requires quarterly payments of interest only until maturity.
Maturity date: 12/03
Annual interest payable: $29,220
Monthly interest payable: $2,435
Prepayment provisions: Prepayable without penalty
11/1/98 principal balance of first
mortgage loan secured by
property and other items: $800,000; approved maximum $2,000,000; the loan matures in 11/01, bears interest at the
annual adjustable rate equal to lender's prime rate plus 1% (currently 8.75%), has current
annual and monthly debt service requirements of $70,000 and $5,833, respectively, requires
payments of interest only until maturity and is prepayable without penalty.
Other matters: Two other Exchange Partnerships, Baron Strategic Investment Fund, Ltd. and Baron Strategic
Investment Fund VIII, Ltd., own separate second mortgage notes secured by the property
with the same terms except that they have principal amounts of $230,000 and $98,000
(accrued unpaid interest of $20,700 and $9,800), respectively. The lending parties have
agreed to share the benefits of the second mortgage on a pari passu basis.
</TABLE>
154
<PAGE>
Baron Strategic Investment Fund X, Ltd.
(Baron Capital LXIV, Inc.)
The Partnership owns (1) a 43.5% limited partnership interest in a
limited partnership which holds fee simple title to the Crystal Court
Property-Phase I, (2) a 43% limited partnership interest in a limited
partnership which holds fee simple title to the Pineview Property, (3)
an undivided interest in two recorded second mortgage loans secured by
the Garden Terrace Property-Phase III, and (4) an undivided interest in
an unrecorded second mortgage loan secured by the Heatherwood
Property-Phase II and in three unsecured loans associated with such
property. Information concerning the Crystal Court Property and the
Pineview Property and the first mortgage indebtedness secured
respectively by them is included above in the tables entitled "Property
Information - Equity Property Interests" and "Mortgage Information
Equity Property Interests." The interest of the Exchange Partnership
and other Exchange Partnerships in the respective second mortgage
loans, terms of the respective first mortgage loans secured by the
Garden Terrace Property and the Heatherwood Property, and other
information are described below.
<TABLE>
<S> <C>
1. Heatherwood Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Heatherwood Apartments - Phase II (41 units) Kissimmee, Florida
Debtor: Heatherwood Apartments II, Ltd.
Original principal amount of
Exchange Partnership's undivided
42% interest in loans: $149,361
12/31/98 principal balance
(accrued unpaid interest): $149,361 ($17,338)
Balance due at maturity: $149,361
12/31/98 principal balance of other
Exchange Partnership's undivided
58% in loans (accrued unpaid
interest): $206,260 ($0)
Interests of other Exchange
Partnership in second mortgage
loans: Baron Strategic Investment Fund VIII, Ltd. ("Baron Fund VIII") owns the remaining
undivided 58% interest in the second mortgage loans secured by the Heatherwood Property
and in the unsecured loans associated with the property ("Heatherwood Loans"). The
aggregate original principal balance, aggregate 12/31/98 principal balance, and
aggregate balance due at maturity in respect of Baron Fund VIII's interest in the
Heatherwood Loans is $206,260 (no accrued unpaid interest); the aggregate annual (and
monthly) payments due it are $13,408 ($1,117). The other terms relating to Baron Fund
VIII's interest in the Heatherwood Loans are the same as stated herein.
Appraised replacement cost new
of property (42% of amount): $1,862,475 ($782,240)
Appraised value of property -
income approach (42% of
amount): $1,259,000 ($528,780)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 6% as to $136,500 of principal (plus non-cumulative
participation interest at the rate of 3% on the unpaid principal to the extent of
available cash flow plus additional non-cumulative participation interest equal to 30%
of any remaining available cash flow), (ii) adjustable interest rate of 1% over prime
rate (currently 8.75%) as to $732 of principal, and (iii) fixed interest rate of 12% as
to $12,130 of principal. The loans require payments of interest only until maturity.
Maturity date: 10/04
Annual interest payable: $9,710 (plus any participation interest payable)
Monthly interest payable: $809
Prepayment provisions: Prepayable without penalty.
</TABLE>
155
<PAGE>
<TABLE>
<S> <C>
11/1/98 principal balance of first
mortgage loan secured by
property (42% of amount) and
other terms: $704,306 ($295,809); the loan matures in 11/04, has a balance due at maturity of $655,856,
bears interest at a fixed annual rate of 7.75%, has annual and monthly debt service
requirements of $61,038 and $5,087, respectively, amortizes on a 30-year basis, and is
prepayable after the fourth anniversary of the loan, subject to yield maintenance until
the sixth month prior to maturity, when it can be prepaid at par.
Other matters: The Heatherwood Loans consist of a second mortgage note secured by the Heatherwood
Property with a principal balance $325,000 and unsecured loans in the aggregate principal
amount of $24,121.
</TABLE>
156
<PAGE>
Baron Strategic Investment Fund X, Ltd. (cont'd)
<TABLE>
<S> <C>
2. Garden Terrace Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Garden Terrace Apartments - Phase III (91 units) Orlando, Florida
Debtor: Garden Terrace Apartments III, Ltd.
Original principal amount of
Exchange Partnership's undivided
55% interest in loan: $682,972
12/31/98 principal balance
(accrued unpaid interest): $682,972 ($82,606)
Balance due at maturity: $682,972
12/31/98 principal balance of other
Exchange Partnerships' undivided
45% in loan (accrued unpaid
interest): $558,795 ($40,875)
Interests of other Exchange
Partnerships in second mortgage Baron Strategic Investment Fund VI, Ltd. ("Baron Fund VI") and Baron Strategic Investment
loans: Fund IX, Ltd. ("Baron Fund IX") own the remaining undivided 45% interest in the second
mortgage loans secured by the Garden Terrace Property ("Garden Terrace Second Mortgage
Loans"). The original principal balance, 12/31/98 principal balance, and balance due at
maturity in respect of Baron Fund VI's and Baron Fund IX's interest in the Garden Terrace
Second Mortgage Loans is $248,353 (accrued unpaid interest of $12,418) and $310,442,
(accrued unpaid interest of $28,457), respectively; the annual (and monthly) payments due
them are $22,352 ($1,863) and $27,940 ($2,328), respectively. The other terms relating to
Baron Fund VI's and Baron Fund IX's interest in the Garden Terrace Second Mortgage Loans
are the same as stated herein.
Appraised replacement cost new
of property (55% of amount): $4,297,897 ($2,363,843)
Appraised value of property -
income approach (55% of
amount): $1,782,000 ($980,100)
Mortgage interest and
amortization provisions: (i) Fixed interest rate of 2% as to $404,250 of principal if cash flow available (plus
non-cumulative participation interest at the rate of 7% on the unpaid principal to the
extent of available cash flow, (plus additional participation interest equal to 30% of
any remaining cash flow (payable only to holders of note referred to in (ii) below) and
(ii) fixed interest rate of 9% as to $278,222 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due on the
note referred to in (i) above. The loans require payments of interest only until
maturity.
Maturity date: 1/07
Annual interest payable: $61,467 (plus any additional participation interest)
Monthly interest payable: $5,122
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by $970,167 ($533,592); the loan matures in 5/05, has a balance due at maturity of $822,063,
property (55% of amount) bears interest at the fixed annual rate of 8.31%, has annual and monthly debt service
and other items: requirements of $96,047 and $8,004, respectively, amortizes on a 25-year basis and may be
prepaid beginning 4/99 with a 5% prepayment fee, which decreases 1% per year until
maturity.
Other matters: The Exchange Partnership paid a note (the "Note") with a current principal balance of
$400,000 to the seller in connection with its acquisition of an undivided 75% interest
in the Garden Terrace Second Mortgage Loans. The partnership in turn sold an undivided
20% interest (and retained a 55% interest) in the loans. The Note bears an annual
interest rate of 10%, has a maturity date of 6/30/98 and is secured by a collateral
assignment of the partnership's interest in the loans and a second mortgage on the
property.
</TABLE>
157
<PAGE>
Lamplight Court of Bellefontaine Apartments, Ltd.
(Baron Capital IX, Inc.)
The Exchange Partnership owns (1) a 31.7% limited partnership interest
in a limited partnership which holds fee simple title to the Lamplight
Property and (2) two unrecorded second mortgage loans secured by the
Lamplight Property. Additional information concerning the Lamplight
Property and the first mortgage indebtedness secured by it is included
above in the tables entitled "Property Information - Equity Property
Interests" and "Mortgage Information - Equity Property Interests." The
interest of the Exchange Partnership in the second mortgage loans and
other information are described below.
<TABLE>
<S> <C>
Lamplight Court Second Mortgage Loans:
Residential apartment property
securing mortgages (number of
units and location): Lamplight Court Apartments (80 units) Bellefontaine, Ohio
Debtor: Independence Village, Ltd.
Original principal amount of
Exchange Partnership's 100%
interest in loans: $678,302
12/31/98 principal balance
(accrued unpaid interest): $678,302 ($114,171)
Balance due at maturity: $678,302
Appraised replacement cost new
of property: $3,727,599
Appraised value of property -
income approach: $2,183,000
Mortgage interest and
amortization provisions: (i) Adjustable interest rate of 1% over prime rate (currently 8.75%) as to $585,000 of
principal, and (ii) fixed interest rate of 12% as to $93,302 of principal. The loans
require payments of interest only until maturity.
Maturity date: 12/06
Annual interest payable: $60,634
Monthly interest payable: $5,053
Prepayment provisions: Prepayable without penalty.
11/1/98 principal balance of first
mortgage loan secured by
property and other terms: $1,368,976; the loan matures in 11/06, has a balance due at maturity of $1,158,349,
bears interest at a fixed annual rate of 9.04%, has annual and monthly debt service
requirements of $141,445 and $11,787, respectively, amortizes on a 25-year basis, and
is prepayable after the fifth anniversary of the loan, provided that in the sixth and
seventh years prepayment requires a fee equal to the greater of 1% of the prepaid
amount or yield maintenance.
Other matters: Prior to 12/15/98, the Lamplight Court Second Mortgage Loans consisted of a second
mortgage note with a principal balance of $585,000 and an unsecured demand note with a
principal balance of $93,302. On 12/15/98, the debtor and the Exchange Partnership
entered into a mortgage modification agreement under which the Exchange Partnership
agreed to set the maturity date on the demand note at 12/06, the same maturity date as
the second mortgage note, in exchange for the agreement of the debtor to secure its
repayment obligations on the demand note with a second mortgage on the Lamplight Court
Property.
</TABLE>
158
<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 164
units. The Trust believes that the Exchange Properties generally occupy
strategic locations in growing sub-markets. The average unit size for properties
is ___ 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 Equity Partnerships and Exchange Hybrid Partnerships have improved the
attractiveness of the Exchange Properties in which they own an equity interest
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.
The Operating Partnership does not intend to acquire an interest in any
property which requires major maintenance unless (i) sufficient amounts have
been reserved to complete such maintenance and, in connection with the
acquisition, the Operating Partnership will receive the benefit of such reserves
or (ii) the acquisition price for the property interest reflects the cost of
required major maintenance items and the Operating Partnership has the ability
to fund such maintenance from its resources. Following the Exchange Offering,
the Operating Partnership intends to review each of the properties in which it
acquires an interest to determine the costs and benefits of undertaking any
capital improvements which may increase the property's profitability. The
Operating Partnership does not intend to undertake any capital improvement in
respect of a property unless the investment is projected to result in a rate of
return of 20% or more on the investment.
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 term
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. See "RISK FACTORS - Competition."
Insurance
The Managing Shareholder (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) 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
159
<PAGE>
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.
SELECTED FINANCIAL DATA
The following table sets forth selected financial information on a pro
forma basis for the Operating Partnership for the nine months ended September
30, 1998. The operating data has been derived from the unaudited financial
statements for the Operating Partnership, the three Acquired Properties acquired
by the Operating Partnership to date which have historical operating results,
and the 23 Exchange Partnerships whose limited partners are being offered the
opportunity to exchange their limited partnership interests therein for
Operating Partnership Units in the Exchange Offering. In the opinion of
management, the operating data for the nine months ended September 30, 1998
include all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the information set forth therein.
Industry analysts generally consider "funds from operations" to be an
appropriate measure of the performance of REITs. "Funds from operations" is
defined as net income (computed in accordance with generally accepted accounting
principles ("GAAP")), excluding gains (losses) from debt restructuring and sales
of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships, joint ventures, and other affiliates. Adjustments
for unconsolidated partnerships, joint ventures, and other affiliates are
calculated to reflect funds from operations on the same basis. Funds from
operations does not represent cash flows from operations as defined by GAAP, is
not indicative that cash flows are adequate to fund all cash needs and is not to
be considered an alternative to net income or any other GAAP measure as a
measurement of the results of the Operating Partnership's operations or the
Operating Partnership's cash flows or liquidity as defined by GAAP.
The pro forma operating data is presented as if the Operating Partnership
had owned the Acquired Properties and all of the limited partnership interests
in the Exchange Partnerships at January 1, 1998. The following selected
financial information should be read in conjunction with the discussion set
forth in "INITIAL REAL ESTATE INVESTMENTS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION," and all of the financial statements included
elsewhere in this Prospectus. The pro forma financial information is not
necessarily indicative of what the actual financial position and results of
operations of the Operating Partnership would have been as of and for the period
indicated, nor does it purport to represent the future financial position and
results of operations for future periods.
160
<PAGE>
Selected Financial Data
Baron Capital Properties, L.P.
Nine months ended September 30, 1998
(Pro Forma)
<TABLE>
<CAPTION>
Baron Capital
Baron Capital Pro Forma Properties,
Properties, Acquired L.P., as Exchange
L.P. Properties Adjusted Properties Adjusted Total
------------- ---------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental income: $ -- $ 673,660 $ 673,660 $ 3,079,381 $ 3,753,041
Interest income: 712 -- 712 601,100 601,812
Equity in net income of affiliate: 21,644 26,437 48,081 90,233 138,314
Other income: -- -- -- 3,762 3,762
------------ ------------ ------------ ------------ ------------
Total revenue: 22,356 700,097 722,453 3,774,476 4,496,929
Expenses:
Personnel: 237,815 83,057 320,872 465,659 786,531
Real estate taxes and insurance: -- 76,203 76,203 353,389 429,592
Property management fees: 259,042 29,335 288,377 163,712 452,089
Interest: -- 260,227 260,227 1,023,204 1,283,431
Depreciation and amortization: -- 116,234 116,234 677,068 793,302
Major maintenance: -- 46,740 46,740 33,458 80,198
Other operating expenses: 205,307 131,577 336,884 1,186,479 1,523,363
------------ ------------ ------------ ------------ ------------
Total expenses: 702,164 743,373 1,445,537 3,902,969 5,348,506
------------ ------------ ------------ ------------ ------------
Net income (loss): $ (679,808) $ (43,276) $ (723,084) $ (128,493) $ (851,577)
OTHER DATA:
Funds from operations: $ (679,808) $ 72,958 $ (606,850) $ 548,575 $ (58,275)
Total properties: -- 4 4 26 30
Total apartment units (at end
of period): -- 235 235 1,662 1,897
Weighted average physical
occupancy: [94%] [94%] [87%] [87%]
BALANCE SHEET DATA:
Residential real estate, before
accumulated depreciation: $ -- $ 4,868,717 $ 4,868,717 $ 19,616,582 $ 24,485,299
Investments in real estate
partnerships: 2,260,150 -- 2,260,150 2,100,994 4,361,144
Investments in limited partnership
interests: 341,280 -- 341,280 -- 341,280
Total assets: 3,070,695 4,321,453 7,392,148 30,152,968 37,545,116
Total debt: 677,263 4,775,038 5,452,301 22,039,309 27,491,610
Partners' capital: 2,393,432 (453,585) 1,939,847 8,113,659 10,053,506
</TABLE>
161
<PAGE>
Combined Statement of Estimated Taxable Operating Results
of Acquired Properties and Exchange Partnerships
and Funds Available from Operations
The following combined statement sets forth the estimated taxable operating
results and funds available from operations (unaudited) for the Operating
Partnership for the four Acquired Properties already beneficially owned by the
Operating Partnership and for the 23 Exchange Partnerships involved in the
Exchange Offering. The statement is based on the most recent 12-month period and
has been prepared on a pro forma basis, assuming that the Operating Partnership
has acquired all of the limited partnership interests in the Exchange
Partnerships owning interests in the Exchange Properties in connection with the
Exchange Offering. The statement also assumes the anticipated increase or
reduction of revenue, operating expenses and debt service requirements in
certain cases, where appropriate. The statement does not purport to forecast
actual operating results for any period in the future.
Acquired Exchange All Properties
Properties Properties Combined
---------- ---------- --------------
Revenue:
Rental Income: $1,112,380 $4,434,309 $5,546,689
Interest Income: -- 881,613 881,613
Equity in Net Income of Affiliate: -- 132,342 132,342
Other Income: 42,970 5,518 48,488
---------- ---------- ----------
Total Revenue: 1,155,350 5,453,782 6,609,132
Costs and Expenses:
Personnel: 107,410 620,879 728,289
Real Estate Taxes and Insurance: 108,832 471,185 580,017
Interest Expense: 413,812 1,421,117 1,834,929
Depreciation and Amortization: 187,067 890,879 1,077,946
Other Operating Expenses: 228,933 1,540,882 1,769,815
Major Maintenance: 51,500 66,916 118,416
---------- ---------- ----------
Total Costs and Expenses: 1,097,554 5,011,858 6,109,412
Estimated Taxable Income: 57,796 441,924 499,720
========== ========== ==========
Estimate of Funds Available from
Operations: $ 244,863 $1,332,803 $1,577,666
========== ========== ==========
162
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Plan of Operation
The Trust and the Operating Partnership (which conducts all of the Trust's
real estate operations and holds title to all of its real estate assets and of
which the Trust is the sole general partner and a limited partner) commenced
operations in February 1998. Since June 1998, the Operating Partnership has
applied net proceeds of the Trust's Cash Offering to acquire property interests.
In June 1998, the Operating Partnership acquired beneficial ownership of a
67-unit residential apartment property located in Kissimmee, Florida. In July
1998, the Operating Partnership acquired beneficial ownership of an 80-unit
residential apartment property located in Lakeland, Florida.
In July 1998, the Operating Partnership also acquired a limited partnership
interest (less than 4% in each case) in 20 real estate limited partnerships,
including certain of the Exchange Partnerships, managed by affiliates of Mr.
McGrath (a founder and Chief Executive Officer of the Trust and the Operating
Partnership) in consideration of a capital contribution ranging from $2,000 to
$59,000 in each such partnership (aggregate amount approximately $341,000).
These various partnerships will be accounted for on the cost method since their
respective ownership interests represent less than 20% of the equity ownership
therein. In addition, the partnerships will periodically assess the realizable
value of these investments in order to ascertain that there has been no
impairment in their recorded value.
In September 1998, the Operating Partnership acquired beneficial ownership
of a 50-unit residential apartment property located in New Smyrna Beach,
Florida. In September 1998, the Trust entered into an agreement to acquire two
luxury residential apartment properties (total 652 units) in Louisville and
Burlington, Kentucky upon the completion of construction for an aggregate
purchase price in the range of approximately $41,000,000 to $43,000,000. In
connection therewith, the Trust agreed to co-guarantee (along with Mr. McGrath),
for a period of 60 days (plus any extensions which may be granted), up to
$3,000,000 of the development portion of long-term construction loans to be made
by an institutional lender to three development companies controlled by Mr.
McGrath in connection with the development and construction of the two
residential apartment properties and a shopping center in Burlington, Kentucky.
In October 1998, the Operating Partnership acquired an approximately 12.3%
limited partnership interest in a limited partnership which is the owner and
developer of a 168-unit residential apartment property under construction in
Alexandria, Kentucky. An affiliate of Mr. McGrath sold the partnership interest
to the Operating Partnership and also serves as the limited partnership's
managing general partner. Thirty eight of the 168 residential units
(approximately 22.6%) have been completed and are in the rent-up stage.
The property interests acquired by Operating Partnership to date are
described in further detail above at "INITIAL REAL ESTATE INVESTMENTS."
The Trust and the Operating Partnership intend to continue to acquire
similar property interests using proceeds from the Trust's Cash Offering,
securities of the Trust and the Operating Partnership, including Units
registered in connection with the Exchange Offering, and available operating
cash flow and financing from other sources.
The operating results of the Trust and the Operating Partnership will
depend primarily upon income from the residential apartment properties in which
they directly or indirectly acquire an equity or mortgage interest. Operating
results in respect of equity interests will be substantially influenced by the
demand for and supply of residential apartment units in their primary market and
sub-markets, and operating expense levels. Operating results in respect of
mortgage and other debt interests will depend upon interest income, including,
in certain cases, participation interest, whose payment will depend upon the
operating performance, sale or refinancing of the underlying properties. The
operating results of the Trust and the Operating Partnership will also depend
upon the pace and price at which they can acquire and improve additional
property interests.
163
<PAGE>
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.
The Trust believes that known trends, events or uncertainties which will or
are reasonably likely to affect the short-term and long-term liquidity and
current and future prospects of the Trust and the Operating Partnership 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 property investments of the Trust and the Operating
Partnership 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 of the operations of the Trust or
the Operating Partnership which might have a material effect on their financial
condition or results of operation. However, for the last 36 months, one 60-unit
student housing property owned by one of the Exchange Partnerships involved in
the Exchange Offering has had an average occupancy rate of 93% for nine months
of the year and 40% for the remaining three months of the year.
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 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.
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 Partnership
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
164
<PAGE>
condition and results of operations of the Trust and the Operating Partnership.
See "Risk Factors - Possible "Year 2000" Problems."
165
<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 is urged to consult with his 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
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
166
<PAGE>
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
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,
167
<PAGE>
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.
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
168
<PAGE>
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 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)
169
<PAGE>
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 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
170
<PAGE>
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 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
171
<PAGE>
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
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
172
<PAGE>
(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.
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.
173
<PAGE>
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
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
174
<PAGE>
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
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
175
<PAGE>
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 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.
176
<PAGE>
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 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.
177
<PAGE>
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
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
178
<PAGE>
"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.
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
179
<PAGE>
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.
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
180
<PAGE>
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 factual
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.
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
181
<PAGE>
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 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
182
<PAGE>
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 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
183
<PAGE>
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 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
184
<PAGE>
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 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.
185
<PAGE>
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 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
186
<PAGE>
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 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
187
<PAGE>
(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 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.
188
<PAGE>
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
of Unitholders 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" below 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 Declaration also contains certain additional limitations on
the Trust's activities which will affect the operation of the Operating
Partnership. 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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) will
manage and control the day to day 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, except
the right to propose and vote on certain matters under the Declaration of Trust.
The Managing Shareholder and the other members of the Board, including the
Independent Trustees, are obligated to manage the Trust in the best interest of
its Partners. (See "FIDUCIARY RESPONSIBILITY" below 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.)
189
<PAGE>
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
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 (wholly
owned and controlled, along with the Corporate General Partner of each
Exchange Partnership, by Mr. McGrath) (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 agreement
is deemed to have been approved by Investors who acquire Common Shares in
the Cash 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
190
<PAGE>
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)
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 (wholly owned and controlled,
along with the Corporate General Partner of each Exchange Partnership, by
Mr. McGrath), 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 bullet point 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 (wholly owned and controlled, along with the Corporate
General Partner of each Exchange Partnership, by Mr. McGrath), 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.)
191
<PAGE>
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.)
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" above 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 (wholly owned and controlled, along
with the Corporate General Partner of each Exchange Partnership, by Mr.
McGrath) 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.)
192
<PAGE>
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
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 new 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 (wholly
owned and controlled, along with the Corporate General Partner of each
Exchange Partnership, by Mr. McGrath), 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 new
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 (wholly owned and controlled, along with
the Corporate General Partner of each Exchange Partnership, by Mr. McGrath), the
Trustees, any other members of the Board nor any of
193
<PAGE>
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 their respective affiliates,
officers, directors, shareholders, partners, agents and 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 in connection with the acquisition
of Common Shares in the Cash Offering. 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 below. 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
194
<PAGE>
beneficiaries of a business trust is uncertain. The Declaration has been signed
by the Corporate Trustee, and the Managing Shareholder was the formative
beneficial interest holder of the Trust.
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 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. (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 (wholly owned and controlled, along with the
Corporate General Partner of each Exchange Partnership, by Mr. McGrath) 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
195
<PAGE>
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."
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
Cash Offering by the Managing Shareholder (wholly owned and controlled, along
with the Corporate General Partner of each Exchange Partnership, by Mr. McGrath)
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 (wholly owned and controlled, along with the Corporate General
Partner of each Exchange Partnership, by Mr. McGrath) 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 and
with the conflicts of interest policies of the Trust and the Operating
Partnership (see "INVESTMENT OBJECTIVES AND POLICIES-Trust Policies with Respect
to Certain Activities-Conflict of Interest Policies." above), the Managing
Shareholder and
196
<PAGE>
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, cancellation 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.)
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
197
<PAGE>
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 interests in 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 or property interests.
(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 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.)
198
<PAGE>
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
(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 third or fourth
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.
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 1999 and for 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.
199
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by Mr.
McGrath) 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 described below are identical except as stated.
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. See also "THE TRUST AND THE OPERATING PARTNERSHIP-
The Operating Partnership." 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 the Trust's right to cash out any holder of Units who requests
an exchange (at a price equal to the average of the daily market price for the
10 consecutive trading days immediately preceding the date the Trust receives
the exchange notice, or, in the absence of a public trading market, at a price
determined in good faith by the Trust) and subject to certain other 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 if they exercise 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 Limited Partner
will retain his existing interest in his Exchange 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 the Exchange
Partnership Agreement. 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 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 Limited Partners remain limited partners of the Exchange
Partnership. See the Prospectus at "THE EXCHANGE OFFERING."
200
<PAGE>
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.
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. Except as described in the next paragraph, all of the Exchange
Partnerships may issue securities in addition to those issued in connection with
their respective private offering of limited partnership interests, as described
below in this paragraph. Additional partnership interests may be sold by each
such Exchange Partnership in the future if the Corporate General Partner thereof
(wholly owned and controlled, along with the Managing Shareholder of the Trust,
by Mr. McGrath) 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.
The partnership agreement provisions of three of the Exchange Partnerships
(Florida Income Advantage Fund I, Ltd., Florida Income Appreciation Fund I,
Ltd., and Realty Opportunity Income Fund VIII, Ltd.) permit the issuance of
additional securities only if such issuance is approved by the general partner
of, and the limited partners holding at least a majority of the limited
partnership interests in, the respective 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 authorized to admit any additional persons as
limited partners other than pursuant to provisions of the agreement, including
those described above, 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 of each Participating Exchange
Partnership (other than the three partnerships excepted above) 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 WITH
NON-PARTICIPATING LIMITED PARTNERS."
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, the Original Investors and the 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 of 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.
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
201
<PAGE>
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. 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.
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 twenty-ninth to thirty-second anniversary of its
formation, as the case may be, 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
has 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 WITH NON-PARTICIPATING LIMITED
PARTNERS."
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
202
<PAGE>
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.
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 WITH NON-PARTICIPATING LIMITED PARTNERS."
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 day to day 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 day to day 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. Except as described
in the next paragraph below, the partnership agreement provisions of all of the
Exchange Partnerships relating to the allocation of taxable income and loss
among the general partner and the limited partners are substantially the same.
Such provisions are described below in this paragraph. 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
203
<PAGE>
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.
Described below are the partnership agreement provisions of three of the
Exchange Partnerships (Florida Income Advantage Fund I, Ltd., Florida Income
Appreciation Fund I, Ltd., and Realty Opportunity Income Fund VIII, Ltd.)
relating to the allocation of taxable income and loss. Assuming that all
distributions (including distributions required under the special distribution
provisions of the Code) required to be made have been made, taxable income
attributable to operations is allocable first to those partners who have deficit
balances in their capital accounts, in proportion to such deficit balances,
until the capital accounts have been restored to zero; and then 90% to the
limited partners and 10% to the general partner. Taxable losses attributable to
operations are allocable 90% to the limited partners and 10% to the general
partner. Taxable gain attributable to the sale of the partnership property is
allocable first to those partners who have deficit balances in their capital
accounts, in proportion to those deficit balances, until the capital accounts
are restored to zero, and then in accordance with the partners' capital
accounts. Taxable losses attributable to the sale of partnership property are
allocable among the partners in proportion to the positive or negative balances
of their respective capital accounts; provided, however that, in the event that
some partners have positive capital account balances and other partners have
negative capital account balances, then such losses will be allocated first to
those partners who have positive capital account balances in proportion to such
positive balances until the capital account balances of such partners have been
reduced to zero, and then 90% to the limited partners and 10% to the general
partner.
Each Exchange 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 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 economic
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
204
<PAGE>
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 WITH NON-PARTICIPATING LIMITED PARTNERS."
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 upon,
among other considerations, the seller's proportionate share of the valuation
determined for the Participating Exchange Partnership.
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.
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
205
<PAGE>
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 one or more residential apartment properties
described at "DESCRIPTION OF EXCHANGE PARTNERSHIPS" and "PRIOR PERFORMANCE OF
AFFILIATES OF MANAGING SHAREHOLDER," 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 WITH NON-PARTICIPATING LIMITED PARTNERS."
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 and available cash flow and
other financing sources, to acquire property interests. The Operating
Partnership intends to issue up to $25,000,000 of registered Operating
Partnership Units in connection with the Exchange Offering. The first candidates
targeted for acquisition in the Exchange Offering are property interests in 26
Exchange Properties described in this Prospectus at "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
206
<PAGE>
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 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."
207
<PAGE>
Managing Entity Removal and Resignation Rights
Exchange Partnerships: Except as described in the next paragraph, the
partnership agreement provisions of all of the Exchange Partnerships relating to
the removal or resignation of the Corporate General Partner are substantially
the same. These provisions are described below in this paragraph. Limited
partners holding at least a majority of the outstanding Exchange Partnership
Units of such Exchange Partnerships 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.
Described below are the partnership agreement provisions of three of the
Exchange Partnerships (Florida Income Advantage Fund I, Ltd., Florida Income
Appreciation Fund I, Ltd., and Realty Opportunity Income Fund VIII, Ltd.)
relating to the removal of their respective general partner. The general partner
of each of these partnerships may be removed on the condition that (i) the
limited partners holding at least a majority of the limited partnership
interests in the respective partnership vote to remove the general partner and
provide notice thereof to the general partner and (ii) the removed general
partner receives a written release from the partnership and all of the limited
partners which releases the general partner from any claims by them in respect
of the partnership. In addition, following removal, a removed general partner is
entitled to retain its economic interest in the partnership unless the
partnership acquires such interest at a price determined by applying an 8%
capitalization rate to the projected net operating income of the partnership
during the year of removal minus major maintenance expenditures.
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 WITH NON-PARTICIPATING LIMITED PARTNERS."
208
<PAGE>
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
WITH NON-PARTICIPATING LIMITED PARTNERS."
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.
209
<PAGE>
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 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
210
<PAGE>
circumstances, 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 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 WITH NON-PARTICIPATING LIMITED PARTNERS."
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.
211
<PAGE>
Liability and Indemnification
Exchange Partnerships: Except as described in the paragraph following the next
paragraph, the partnership agreement provisions of all of the Exchange
Partnerships relating to liability and indemnification of the general partners
and limited partners are substantially the same. These provisions are described
below in this paragraph and the next paragraph. 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.
The liability and indemnification provisions relating to three of the
Exchange Partnerships (Florida Income Advantage Fund I, Ltd., Florida Income
Appreciation Fund I, Ltd., and Realty Opportunity Income Fund VIII, Ltd.) are
substantially similar to the provisions described in the two immediately
preceding paragraphs except that only the general partner (and not its
affiliates) are covered by such provisions.
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
212
<PAGE>
Trust 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 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, 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 of each of the Exchange Partnerships (except Baron Strategic
Investment Fund II, Ltd.) is also entitled to earn a real estate commission for
its efforts leading to a sale of any partnership property or any property
securing a second mortgage loan provided or acquired by the partnership. The
commission in respect of all such Exchange Partnerships (except Florida Income
Advantage Fund I, Ltd., Florida Income Appreciation Fund I, Ltd., and Realty
Opportunity Income Fund VIII, Ltd.) may be in an amount equal to 50% of any
commissions paid to an outside broker on the, but in no event greater than 3% of
the sales proceeds. The Corporate General Partners of such three Exchange
Partnerships and their affiliates may earn a real estate commission of up to 6%
of the sale price, if permitted under applicable law. The payment of any real
estate commission earned as described above is subordinated to the preferred
return of the limited partners of such partnerships.
Each of the Exchange Partnerships pays their general partner a monthly
administrative fee of $500, except Central Florida Income Appreciation Fund,
Ltd. and Brevard Mortgage Program, Ltd., which pay a monthly administrative fee
of $750, and Baron Strategic Investment Fund IV, Ltd., Baron Strategic
Investment Fund V, Ltd., Baron Strategic Investment Fund VI, Ltd., Baron
Strategic Investment Fund VIII, Ltd., Baron Strategic Investment Fund IX, Ltd.,
Baron Strategic Investment Fund X, Ltd., Florida Capital Income Fund IV, Ltd.,
and GSU Stadium Student Apartments, Ltd., which pay a monthly administrative fee
of $1,000.
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 economic 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
213
<PAGE>
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.
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 WITH NON-PARTICIPATING LIMITED
PARTNERS."
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
214
<PAGE>
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.
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 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, Offerees 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
215
<PAGE>
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
American Stock Transfer & Trust Company ("ASTTC"), New York, New York, will
serve as the escrow agent for the Cash Offering and the Exchange Offering, and
the transfer agent and registrar for the Common Shares and the Units. In the
Exchange Offering, ASTTC will act as the Exchange Agent, holding in escrow the
Operating Partnership Units being offered and Exchange Partnership Units
tendered by Offerees who elect to accept the offering. See "THE EXCHANGE
OFFERING - The Exchange Agent." ASTTC 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 Trust contains restrictions on the
acquisition of Shares intended to ensure compliance with these requirements.
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% (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 (wholly owned and controlled,
along with the Corporate General Partner of each Exchange Partnership, by Mr.
McGrath) 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
216
<PAGE>
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% (or such other percentage between 1/2 of 1% and 5%, as
provided in the rules and regulations promulgated under the 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 the
maximum number of 2,500,000 Common Shares being offered in the Cash Offering
(______ shares have been sold as of the date of this Prospectus). As described
above at "THE TRUST AND THE OPERATING PARTNERSHIP - The Operating Partnership,"
the Trust will contribute 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. See "THE TRUST AND THE
OPERATING PARTNERSHIP - Formation Transactions."
217
<PAGE>
Maximum Common Shares
Sold in Cash Offering (2,500,000)
---------------------------------
Capital Contribution by the Trust: $21,500,000
Capital Contribution by Original Investors: 100,000
Total Capitalization $21,600,000
218
<PAGE>
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 in the 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 Trust is required to contribute the remaining funds 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
219
<PAGE>
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 April 30, 1999 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
third or fourth 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
220
<PAGE>
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 1999 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 TO PARTNERSHIP AGREEMENTS
OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS
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
221
<PAGE>
required under the Exchange Partnership Agreement prior to the Exchange
Offering, or (ii) Non-participating 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% (or 99%, in one case) 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:
222
<PAGE>
"Except for admission of Limited Partners to the Partnership in the manner
provided in this Article XII 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 (which 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 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
223
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited 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 than 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
224
<PAGE>
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 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.
225
<PAGE>
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 has 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
226
<PAGE>
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 21.01, 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
227
<PAGE>
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 to be 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 the Corporate General Partner 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,
each 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.
228
<PAGE>
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 the 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,
the 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
Set forth in Exhibit C are (i) the audited balance sheets of the Trust and
the Operating Partnership as of February 3, 1998, the date they commenced
operations, and the audited balance sheet of the Managing Shareholder as of
February 28, 1998, (ii) the unaudited balance sheets of the Trust and the
Operating Partnership as of September 30, 1998 and their respective statement of
operations, statement of shareholders' equity (in the case of the Trust only),
statement of partners' capital (in the case of the Operating Partnership only)
and statements of cash flows for the period beginning with the commencement of
operations and ending on September 30, 1998 and (iii) the unaudited balance
sheet of the Managing Shareholder as of September 30, 1998..
As described below, Exhibits D and E to this Prospectus set forth financial
statements relating to the 23 Exchange Partnerships (and their interests in 26
Exchange Properties) involved in the Exchange Offering and the three Acquired
Properties acquired to date by the Operating Partnership which have historical
operating results. The financial statements are presented as of and for the
12-month periods ended December 31, 1996 (where applicable) and December 31,
1997, and for the nine-month period ended September 30, 1998.
Set forth in Exhibit D to this Prospectus are statements of revenues and
certain expenses for each of the 16 Exchange Properties in which Exchange Equity
Partnerships and Exchange Hybrid Partnerships directly or indirectly own an
equity interest, for the 12-month periods ended December 31, 1996 and December
31, 1997 (audited) and for the nine-month period ended September 30, 1998
(unaudited). 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.
Also set forth in Exhibit D for each of the Exchange Mortgage Partnerships
and the Exchange Hybrid Partnerships are their respective balance sheet,
statement of operations, statement of partners' capital and statement of cash
flow.
Set forth in Exhibit E are statements of revenues and certain expenses for
each of the three Acquired Properties acquired to date by the Operating
Partnership which have historical operating results, and the combined
229
<PAGE>
statement of revenues and certain expenses for such properties for the years
ended December 31, 1996 and December 31, 1997 (audited) and for the nine-month
period ended September 30, 1998 (unaudited).
Set forth at the end of Exhibit D are the pro forma balance sheet as of
September 30, 1998 and statement of operations for the nine-month period ended
September 30, 1998, for each of the Trust and the Operating Partnership, giving
effect to the acquisition by the Operating Partnership of 100% of the Exchange
Partnership Units of the Exchange Partnerships in connection with the Exchange
Offering and the already completed acquisition of three Acquired Properties
which have historical operating results. Pro forma financial statements for the
two entities have also been included in Exhibit D which were prepared assuming
only the minimum participation of Offerees (i.e., acceptance by Offerees of
Units with an assigned value of $6,000,000).
The foregoing statements should be reviewed by the Offerees prior to making
a decision whether or not to accept the Exchange Offering. See above at "INITIAL
REAL ESTATE INVESTMENTS - The Exchange Properties" and " - Acquired Properties"
and "SELECTED FINANCIAL DATA."
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 reports of Rachlin Cohen & Holtz, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in auditing and accounting.
The statements of revenues and certain expenses for each of the 16 Exchange
Properties in which Exchange Equity Partnerships and Exchange Hybrid
Partnerships directly or indirectly own an equity interest for the 12-month
periods ended December 31, 1996 and December 31, 1997 (set forth in Exhibit D
hereto) and the statements of revenues and certain expenses for the three
Acquired Properties acquired to date by the Operating Partnership which have
historical operating results 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.
The balance sheets, statements of operations, statements of partners'
capital and statements of cash flow for each of the six Exchange Mortgage
Partnerships and four Exchange Hybrid Partnerships for the 12-month periods
ended December 31, 1996 (where applicable) and December 31, 1997 (set forth in
Exhibit D hereto) have been included herein and in the Registration Statement in
reliance upon the reports of Rachlin, Cohen & Holtz, independent certified
public accountants, appearing herein, and upon the authority of said firm as
experts 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
230
<PAGE>
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 Sharon Studt
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 (i) the Trust and the Managing Shareholder as
to facts regarding the Operating Partnership, the Trust and the Managing
Shareholder and their respective affiliates and their proposed activities and
(ii) the Corporate General Partners as to facts regarding the Exchange
Partnerships and their respective affiliates. Counsel to the Trust 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 have been
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.
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>
231
<PAGE>
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 Securities and Exchange Commission (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.
At the Commission's Public Reference Room, the public may also read and
copy any materials filed with the Commission by the Trust and the Operating
Partnership. The public may obtain information on the operation of the Public
Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also
maintains an Internet site (address: hhtp://www.sec.gov.) that contains reports,
proxy and information statements, and other information regarding issuers, such
as the Trust and the Operating Partnership, which file electronically with the
Commission.
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.
232
<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 four residential apartment properties
referred to as Alexandria Apartments, Crystal Court Apartments - Phase II,
Heatherwood Apartments - Phase I and Riverwalk Apartments which are located in
Cincinnati, Ohio and Lakeland, Kissimmee and New Smyrna, Florida, respectively.
Between June and November 1998, 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.
"Business Day" means a day other than a Saturday, Sunday or other day in
which commercial banks in New York City are authorized or required by law to
close.
"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, and 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.
233
<PAGE>
"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.
"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 23 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.
"Election Form" represents the election form accompanying this Prospectus
which Offerees are required to complete, sign and date and then return to the
Exchange Agent to indicate whether they elect to accept or decline the Exchange
Offering.
"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 Agent" refers to American Stock Transfer & Trust Company, New
York, New York, which will act as agent for the Operating Partnership for the
purpose of receiving tenders of certificates representing Exchange Partnership
Units, Election Forms and related documents, and as agent for tendering Exchange
Limited Partners for the purpose of receiving certificates representing Exchange
Partnership Units, Election Forms and related documents and transmitting
Operating Partnership Units to validly tendered Exchange Limited Partners.
"Exchange Equity Partnership" refers to each of the 13 Exchange
Partnerships involved in the Exchange Offering whose sole real estate asset is
record title to a residential apartment property or the entire limited
partnership or other equity interest in a limited partnership or other entity
which owns record title to a property. Such partnerships are collectively
referred to as the "Exchange Equity Partnerships." See "THE EXCHANGE OFFERING."
"Exchange Hybrid Partnership" refers to each of the four Exchange
Partnerships involved in the Exchange Offering which own a combination of (i)
all or a portion of the direct or indirect equity interest in one or more
residential apartment properties and (ii) an undivided subordinated mortgage
interest in one or more properties (and in one case, unsecured debt interests).
Such partnerships are collectively referred to as the "Exchange Hybrid
Partnerships." See "THE EXCHANGE OFFERING."
234
<PAGE>
"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 23
Exchange Partnerships described herein. See "THE EXCHANGE OFFERING."
"Exchange Mortgage Partnerships" refers to each of the six Exchange
Partnerships involved in the Exchange Offering whose only real estate assets are
the entire or an undivided subordinated mortgage interest in one or more
residential apartment properties (and in one case, unsecured debt interests).
Such partnerships are collectively referred to as the "Exchange Mortgage
Partnerships." See "THE EXCHANGE OFFERING."
"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 directly or indirectly own equity and/or debt
interests in residential apartment properties. See "SUMMARY OF THE TRUST AND THE
OPERATING PARTNERSHIP" and "THE EXCHANGE OFFERING."
"Exchange Partnerships" refers to the 23 real estate limited partnerships
(referred to herein as either an Exchange Equity Partnership, Exchange Hybrid
Partnership or Exchange Mortgage Partnership - see definitions of such terms)
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 directly or
indirectly owns an equity and/or debt interest in one or more residential
apartment properties and is managed by a Corporate General Partner which is an
Affiliate of the Managing Shareholder. 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 26 residential apartment properties in
which Exchange Partnerships directly or indirectly own an equity and/or debt
interest. In the Exchange Offering, the Operating Partnership will offer to
acquire a direct or indirect equity or debt interest in the Exchange Properties
by acquiring limited partnership interests in each Participating Exchange
Partnership which currently owns such interests. See "THE EXCHANGE OFFERING" and
"INITIAL REAL ESTATE INVESTMENTS."
"Expiration Date" means 5:00 p.m., New York City time, on the date
specified in the Election Form by which Offerees are required to tender their
Exchange Partnership Units if they elect to accept the Exchange Offering, unless
the Exchange Offering is extended by the Operating Partnership (in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offering is extended).
"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.
"General Partner" refers to the Trust and any successor in its capacity as
general partner of the Operating Partnership.
"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
235
<PAGE>
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.
"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.
"Offerees" refers to limited partners of Exchange Partnerships who are
being offered the opportunity to exchange their Exchange Limited Units for
Operating Partnership Units in the Exchange Offering. See "THE EXCHANGE
OFFERING."
"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.
236
<PAGE>
"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 is
offering 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
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. 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 "Participating Exchange
Partnerships."
"Partners" refers collectively to the General Partner and Limited Partners
of the Operating Partnership.
"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
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
____________, 1999, 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.
"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.
237
<PAGE>
"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.
"Subordinated 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.
"Subordinated Mortgage Loan" refers to a Mortgage Loan secured or
collateralized by a Subordinated Mortgage.
"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.
"Transmittal Letter" refers to the transmittal letter accompanying this
Prospectus containing certain information relating to the Exchange Offering
which the Corporate General Partner of each Exchange Partnership delivered to
its Exchange Limited Partners.
"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.
206
<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
Florida Income Advantage Realty Opportunity Income Appreciation Fund I, Ltd.
Fund I, Ltd. (Baron Fund VIII, Ltd. (Baron (Baron Capital IV, Inc.,
Capital IV, Inc., general Capital IV, Inc., general general partner)
partner) partner)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 940,000 $ 1,020,000 $ 840,000
Dollar amount raised: 940,000 1,020,000 205,000
(percent relative to (100%) (100%) (24%)
amount offered):
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 partnership
interests of existing limited
partners: 846,000(1) 925,600(1) 184,500(1)
(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 original 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 TRUST COMMON SHARES, EXCEPT AS OTHERWISE INDICATED IN THE PROSPECTUS.
[010499]
A-1
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Home Baron First Time Home Buyer Clearwater First Time
Buyer Fund V, Ltd. (Baron Mortgage Fund IV, Ltd. (Baron Homebuyer Program, Ltd.
Capital XXIX, Inc., Capital XXVIII, Inc., general (Baron Capital XVI, Inc.,
general partner) partner) general partner)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 500,000 $ 500,000 $ 750,000
Dollar amount raised: 500,000 500,000 750,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 425,000(2) 430,000(3) 672,500(2)
(85%) (86%) (90%)
Investment fee: 0 25,000 0
(5%)
Percent leverage (mortgage
financing divided by total N/A N/A N/A
acquisition cost):
Date offering began: 5/96 6/96 2/96
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."
A-2
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Income Growth Fund Lamplight Court of Baron Strategic Vulture
V, Ltd. (Baron Capital Bellefontaine Apartments, Fund I, Inc. (Baron
XI, Inc., general partner) Ltd. (Baron Capital IX, Inc., Capital XXVI, Inc.,
general partner) general partner)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,150,000 $ 700,000 $ 900,000
Dollar amount raised: 1,150,000 700,000 900,000
(percent relative to (100%) (100%) (100%)
amount offered):
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%)
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 partnership
interests of existing limited
partners: 825,500(4) 580,000(5) 601,000(6)
(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
provide or acquire subordinated mortgage loans secured by a residential
apartment property and a limited partnership interest in the limited
partnership which owns record title to the property.
(6) Net proceeds from the private offering of the partnership were invested to
provide or acquire subordinated mortgage loans secured by a residential
apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-3
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Strategic Investment
Fund, Ltd. (Baron Capital Fund II, Ltd. (Baron Capital Fund VI, Inc. (Baron
XXXII, Inc., general XXXI, Inc., general partner) Capital XXXI, Inc.,
partner) general partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 800,000 $ 1,200,000
Dollar amount raised: 1,200,000 800,000 1,200,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 796,000(6) 524,000(4) 806,000(13)
(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
provide or acquire subordinated mortgage loans secured by two residential
apartment property.
(13) Net proceeds from the private offering of the partnership were invested to
acquire a limited partnership interest in a limited partnership which owns
a residential apartment property and to provide or acquire subordinated
mortgage loans secured by three residential apartment properties.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-4
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Income Tampa Capital Income Fund, Florida Capital Income
Fund, Ltd. (Baron Capital Ltd. (Baron Capital I, Inc., Fund II, Ltd. (Baron
II, Inc., general partner) general partner) Capital IV, Inc., general
partner)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 807,000 $ 1,050,000 $ 920,000
Dollar amount raised: 807,000 1,050,000 920,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 656,300(4) 589,500(7) 548,000(1)
(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 2/95
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 residential apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-5
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Opportunity Income Florida Capital Income Fund Florida Tax Credit Fund,
Partners, Ltd. (Baron III, Ltd. (Baron Capital VII, Ltd. (Baron Capital VI,
Capital III, Inc., general Inc., general partner) Inc., general partner)
partner)
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 800,000 $ 626,000
Dollar amount raised: 800,000 800,000 626,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 543,000(7) 549,000(7) 546,000(4)
(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 5/95
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."
A-6
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
GSU Stadium Student Florida Capital Income Fund Brevard Mortgage Program,
Apartments, Ltd. (Baron IV, Ltd. (Baron Capital V, Ltd. (Baron Capital XII,
Capital X, Inc., general Inc., general partner) Inc., general partner)
partner)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,000,000 $ 1,820,000 $ 575,000
Dollar amount raised: 1,000,000 1,820,000 575,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 690,000(4) 1,212,800(7) 450,000(8)
(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 subordinated mortgage loan secured by a residential
apartment property.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-7
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Home Baron First Time Home Buyer Baron First Time Home
Buyer Mortgage Fund II, Mortgage Fund III, Ltd. Buyer Mortgage Fund, Ltd.
Ltd. (Baron Capital XV, (Baron Capital XXVII, Inc., (Baron Capital VIII, Inc.,
Inc., general partner) general partner) general partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 500,000 $ 500,000 $ 500,000
Dollar amount raised: 500,000 500,000 500,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 455,000(3) 450,000(2) 450,000(3)
(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: 1/96 4/96 12/95
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."
A-8
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Development Fund IX, Baron Income Property Baron Mortgage Development
Ltd. (Baron Capital XLII, Mortgage Fund VI, Ltd. (Baron Fund VII Ltd. (Baron
Inc., general partner) Capital XXIX, Inc., general Capital XXXVII, Inc.,
partner) general partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 750,000 $ 700,000
Dollar amount raised: 800,000 750,000 700,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 678,000(3) 645,000(8) 585,000(8)
(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."
A-9
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Baron Mortgage Development Baron Mortgage Development
Fund X, Ltd. (Baron Fund XI, Ltd. (Baron Capital Fund XVIII LP (Baron
Capital XLIII, Inc., XXXIII, Inc., general partner) Capital LXV, Inc., general
general partner) partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 800,000 $ 800,000 $ 800,000
Dollar amount raised: 800,000 800,000 800,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 678,000(2) 678,000(2) 668,000(8)
(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."
A-10
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Mortgage Development
Fund V, Ltd. (Baron Fund VII, Ltd. (Baron Capital Fund XV, Ltd. (Baron
Capital XL, Inc., general XLI, Inc., general partner) Capital XLVIII, Inc.,
partner) general partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 1,900,000 $ 700,000
Dollar amount raised: 1,200,000 1,900,000 700,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 818,000(10) 1,253,000(10) 575,000(8)
(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 subordinated mortgage loan secured by a residential
apartment property.
(10) Net proceeds from the private offering of the partnership were invested to
provide or acquire subordinated mortgage loans secured by three residential
apartment properties.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-11
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Mortgage Development
Fund X, Ltd. (Baron Fund VIII, Ltd. (Baron Fund XIV, Ltd. (Baron
Capital LXIV, Inc., Capital XLIV, Inc., general Capital XLVII, Inc.,
general partner) partner) general partner)
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 1,200,000 $ 1,200,000 $ 1,000,000
Dollar amount raised: 1,200,000 1,200,000 1,000,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 916,000(11) 784,000(10) 840,000(8)
(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
provide or acquire subordinated mortgage loans secured by 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
record title to separate residential apartment properties and to provide or
acquire subordinated mortgage financing secured by two residential
apartment properties.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-12
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Tax Credit Fund Baron Strategic Investment Baron Strategic Investment
II, Ltd. (Baron Capital Fund IV, Ltd. (Baron Capital Fund IX, Ltd. (Baron
XXXIV, Inc., general XVII, Inc., general partner) Capital LXII, Inc.,
partner) general partner)
---------------------------- ------------------------------- --------------------------
<S> <C> <C> <C>
Dollar amount offered: $ 310,000 $ 1,000,000 $ 1,200,000
Dollar amount raised: 310,000 1,000,000 1,200,000
(percent relative to (100%) (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 259,000(7) 690,000(8) 674,000(12)
(84%) (69%) (56%)
Investment fee: 10,000 0 20,000
(3%) (2%)
Percent leverage (mortgage
financing divided by total
acquisition cost):
Date offering began: 70% N/A
Length of offering (in months):
9/96 11/96 6/97
Months required to invest 90% of the 20 16 11
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 subordinated mortgage loans 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 provide or acquire
subordinated mortgage loans secured by three residential apartment
properties.
See Prospectus at "PRIOR PERFORMANCE OF AFFILIATES OF MANAGING SHAREHOLDER."
A-13
<PAGE>
TABLE I:
BARON ADVISORS' AND AFFILIATES' EXPERIENCE
IN RAISING AND INVESTING FUNDS (cont'd)
<TABLE>
<CAPTION>
Central Florida Income Midwest Income Growth Fund
Appreciation Fund, Ltd. VI, Ltd. (Baron Capital of
(Baron Capital of Florida, Ohio III, Inc., general
Inc., general partner) partner)
---------------------------- ---------------------------
<S> <C> <C>
Dollar amount offered: $ 1,050,000 $ 300,000
Dollar amount raised: 1,050,000 300,000
(percent relative to (100%) (100%)
amount offered):
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 partnership
interests of existing limited
partners: 725,000(7) 219,000(7)
(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."
A-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 September 30, 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 Advantage Realty Opportunity Income Florida Income
Fund I, Ltd. Fund VIII, Ltd Appreciation 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
expenses: $ 94,000 $ 94,400 $ 20,500
Dollar amount of cash generated
(deficiency) by program from
operations from its inception
through September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $140,612 $111,670 $ 37,222
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $ 28,085 $ 34,209 $ 15,223
Reimbursements: 0 0 0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancing by the programs.
A-15
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Capital Income Tampa Capital Income Fund, Florida Capital Income
Fund, 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 to Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 56,288 $ 147,696 $ 99,972
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: $ 44,773 $ 47,729 $ 36,059
Reimbursements: 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
A-16
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Opportunity Income Florida Capital Income Fund Florida Tax Credit Fund,
Partners, Ltd. III, 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 to Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $100,987 $141,015 $ 7,510
Dollar amount paid Baron
Advisors Affiliates from
Operations:
Property Management
And Administrative Fees: $ 36,510 $ 19,276 $ 30,107
Reimbursements: 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
A-17
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Florida Capital Income Fund GSU Student Stadium
Mortgage Fund, Ltd. IV, Ltd. Apartments, 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 160,757 $ (327,695) $ 60,851
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative Fees: 0 $ 63,115 $ 41,980
Reimbursements: 0 0 0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
A-18
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Brevard Mortgage Program, Baron First Time Homebuyer Clearwater First Time Home
Ltd. Mortgage Fund II, Ltd. Buyer Program, 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 to Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $179,646 $153,563 $202,480
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative 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.
A-19
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron First Time Homebuyer Baron First Time Homebuyer Baron First Time Homebuyer
Mortgage Fund III, Ltd. Mortgage Fund V, Ltd. Mortgage Fund IV, 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 to Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $143,427 $145,568 $132,914
Dollar amount paid Baron
Advisors Affiliates from
operations:
Property Management
and Administrative 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.
A-20
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Florida Income Growth Fund Lamplight Court of Baron Strategic Vulture
V, Ltd. Bellefontaine 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 to Baron Advisors
Affiliates from proceeds of
offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 49,509 $ 47,986 $108,290
Dollar amount paid Baron
Advisors Affiliates from
Operations:
Property Management
and Administrative Fees: $ 24,687 $ 15,172 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.
A-21
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Strategic Investment
Fund, Ltd. Fund 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 83,220 $(40,383) $112,331
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-22
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Development Fund IX, Baron Income Property Baron Mortgage Development
Ltd. Mortgage 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $130,439 $145,683 $128,432
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-23
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Mortgage Development Baron Mortgage Development Baron Mortgage Development
Fund X, Ltd. Fund 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $139,235 $132,932 $ 83,497
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-24
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Mortgage Development
Fund V, Ltd. Fund 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $101,274 $ 63,389 $ 70,973
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-25
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Baron Mortgage Development
Fund X, Ltd. Fund 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 65,134 $ 65,794 $117,571
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-26
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Baron Strategic Investment Baron Strategic Investment Florida Tax Credit Fund
Fund IV, Ltd. Fund IX, Ltd. II, 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 to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
expenses: $ 90,000 $120,000 $ 31,000
Acquisition fees: 0 0 0
Dollar amount of cash generated
(deficiency) by program from
operations from its inception
through September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $ 81,620 $ 22,380 $ 41,639
Dollar amount paid Baron
Advisors Affiliates from
Operations: 0 0 0
Property Management
and Administrative 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.
A-27
<PAGE>
TABLE II:
COMPENSATION TO BARON ADVISORS AFFILIATES
FROM PRIOR FUNDS (cont'd)
<TABLE>
<CAPTION>
Central Florida Income Midwest Income Growth Fund
Appreciation Fund, Ltd. VI, Ltd.
---------------------------------------------------------------------------------------
<S> <C> <C>
Date offering began: 8/94 4/96
Dollar amount raised: $1,050,000 $ 300,000
Amount paid to Baron Advisors
Affiliates from proceeds of
Offering:
Selling commissions and
due diligence and legal
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 September 30, 1998
before deducting payments to
Baron Advisors Affiliates: $(121,793) $ 110,483
Dollar amount paid Baron
Advisors Affiliates from
operations: 0 0
Property Management
and Administrative Fees: $ 40,616 $ 26,799
Reimbursements: 0 0
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Baron Advisors Affiliates have received no fees or other payments related to
property sales or refinancings by the programs.
A-28
<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).
Florida Capital Income Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $302,920 $346,154 $348,348 $377,296
Other: 3,585 21,065 32,140 3,670
Less:
Operating Expenses: (150,917) (182,429) (169,938) (201,404)
Interest Expenses: (106,580) (158,727) (159,163) (128,897)
Depreciation and Amortization: (48,301) (64,402) (63,327) (69,441)
Other: Major Maintenance: 0 (19,712) 0 (40,663)
Net Income (Loss) - Tax Basis: 707 (58,051) (11,940) (59,439)
Cash generated from operations: 45,423 (14,714) 19,247 6,332
Less: Cash distributions: 15,000 80,700 80,700 56,059
Cash generated after cash distributions: 30,423 (95,414) (61,453) (49,727)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 1 (72) (15) (73)
Cash distributions to investors: 19 100 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $16,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-29
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Income Advantage Fund I, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $142,199 $170,175 $180,549 $165,493
Other: 0 7,031 5,721 47,756
Less:
Operating Expenses: (59,035) (79,292) (73,049) (89,479)
Interest Expenses: (42,192) (49,070) (49,964) (29,185)
Depreciation and Amortization: (42,135) (70,922) (50,446) (49,641)
Other: Major Maintenance: 0 (18,353) 0 (28,185)
Net Income (Loss) - Tax Basis: (1,163) (40,431) 12,811 16,759
Cash generated from operations: 40,972 23,460 57,536 18,644
Less: Cash distributions: 28,959 0 82,500 94,000
Cash generated after cash distributions: 12,013 23,460 (24,964) (73,356)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 44 (43) 14 18
Cash distributions to investors: 31 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $40,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-30
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Realty Opportunity Income Fund VIII, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $157,829 $159,093 $181,587 $216,535
Other: 0 6,252 3,616 37,068
Less:
Operating Expenses: (70,356) (93,216) (89,343) (98,705)
Interest Expenses: (47,988) (60,222) (59,048) (38,897)
Depreciation and Amortization: (42,135) (56,180) (55,941) (55,265)
Other: Major Maintenance: 0 (21,967) 0 (23,632)
Net Income (Loss) - Tax Basis: (2,650) (66,240) (19,129) 37,104
Cash generated from operations: 39,485 (16,312) 33,196 55,301
Less: Cash distributions: 17,000 0 80,800 94,400
Cash generated after cash distributions: 22,485 (16,312) (47,604) (39,099)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 42 (65) (19) 37
Cash distributions to investors: 18 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $24,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-31
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Income Appreciation Fund I, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $38,648 $56,139 $57,348 $69,986
Other: 0 2,437 2,565 8,944
Less:
Operating Expenses: (19,381) (26,488) (26,417) (36,080)
Interest Expenses: (13,029) (17,843) (15,898) (13,692)
Depreciation and Amortization: (12,198) (16,264) (16,172) (10,878)
Other: Major Maintenance: 0 (6,317) 0 (9,754)
Net Income (Loss) - Tax Basis: (5,960) (8,336) 1,426 8,526
Cash generated from operations: 6,238 5,491 15,033 10,460
Less: Cash distributions: 3,600 0 19,375 20,500
Cash generated after cash distributions: 2,638 5,491 (4,342) (10,040)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 29 (41) 7 41
Cash distributions to investors: 18 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $4,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-32
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Tampa Capital Income Fund, Ltd.
1996 1995
--------------------------
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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $60,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements 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.
A-33
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Capital Income Fund II, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $277,130 $379,763 $319,640 $355,612
Other: 0 7,968 16,405 3,084
Less:
Operating Expenses: (138,935) (158,953) (154,720) (195,088)
Interest Expenses: (107,071) (149,908) (130,820) (66,611)
Depreciation and Amortization: (59,308) (79,077) (78,505) (76,341)
Other: Major Maintenance: 0 (86,899) 0 (43,168)
Net Income (Loss) - Tax Basis: (28,184) (87,106) (28,000) (22,512)
Cash generated from operations: 31,124 (15,997) 34,100 50,745
Less: Cash distributions: 20,900 0 92,000 52,468
Cash generated after cash distributions: 10,224 (15,997) (57,900) (1,723)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (31) (95) (30) (24)
Cash distributions to investors: 23 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $6,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-34
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Opportunity Income Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $213,762 $218,018 $311,719 $207,207
Other: 0 0 0 9,634
Less:
Operating Expenses: (108,697) (153,765) (149,572) (100,163)
Interest Expenses: (81,678) (98,851) (78,273) (47,679)
Depreciation and Amortization: (33,051) (44,069) (47,371) (24,532)
Other: Major Maintenance: 0 (22,392) 0 (8,649)
Net Income (Loss) - Tax Basis: (9,664) (101,059) 36,503 35,818
Cash generated from operations: 23,387 (56,990) 83,874 50,716
Less: Cash distributions: 60,000 80,000 77,441 3,390
Cash generated after cash distributions: (36,613) (136,990) 6,433 47,326
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 12 (126) 46 45
Cash distributions to investors: 75 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $13,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-35
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Capital Income Fund III, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $185,158 $212,608 $228,451 $106,625
Other: 0 6,605 7,884 0
Less:
Operating Expenses: (93,898) (116,044) (112,640) (54,323)
Interest Expenses: (47,103) (69,345) (68,759) (12,597)
Depreciation and Amortization: (27,668) (36,890) (37,979) (18,548)
Other: Major Maintenance: 0 (13,630) 0 (3,488)
Net Income (Loss) - Tax Basis: 16,489 (16,696) 16,957 17,669
Cash generated from operations: 44,157 13,589 47,052 36,217
Less: Cash distributions: 17,000 80,000 79,867 22,482
Cash generated after cash distributions: 27,157 (66,411) (32,815) 13,735
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 21 (21) 10 22
Cash distributions to investors: 21 100 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $10,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-36
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Tax Credit Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $222,017 $282,587 $266,240 $274,862
Other: 0 0 0 0
Less:
Operating Expenses: (130,467) (191,445) (172,489) (194,953)
Interest Expenses: (51,041) (67,422) (69,122) (99,684)
Depreciation and Amortization: (38,556) (51,408) (47,236) (25,740)
Other: Major Maintenance: 0 (28,357) (20,067) (13,149)
Net Income (Loss) - Tax Basis: 1,953 (56,045) (42,674) (58,664)
Cash generated from operations: 40,509 (4,637) 4,562 (32,924)
Less: Cash distributions: 6,260 0 25,194 0
Cash generated after cash distributions: 34,249 (4,637) (20,632) (32,924)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 3 (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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $ (4,000).
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-37
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron First Time Homebuyer Mortgage Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $45,050 $70,341 $46,970
Other: 0 0 0
Less:
Operating Expenses: (156) (774) (674)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 44,894 69,567 46,296
Cash generated from operations: 44,894 69,567 46,296
Less: Cash distributions: 45,000 60,000 45,536
Cash generated after cash distributions: (106) 9,567 760
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 139 93
Cash distributions to investors: 90 120 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-38
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Capital Income Fund IV, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $571,980 $745,649 $695,308 $422,209
Other: 0 22,536 60,265 9,640
Less:
Operating Expenses: (518,063) (469,088) (435,005) (301,870)
Interest Expenses: (192,536) (310,603) (312,704) (173,711)
Depreciation and Amortization: (99,045) (132,061) (137,316) (120,000)
Other: Major Maintenance: 0 (36,903) 0 (1,750)
Net Income (Loss) - Tax Basis: (237,664) (180,470) (129,452) (165,482)
Cash generated from operations: (138,619) (70,945) (52,401) (55,122)
Less: Cash distributions: 137,000 180,233 149,240 676
Cash generated after cash distributions: (275,619) (251,178) (201,641) (55,798)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (131) (99) (71) (91)
Cash distributions to investors: 75 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $17,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-39
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
GSU Stadium Student Apartments, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $311,584 $458,687 $427,919 $200,668
Other: 0 27,710 21,809 0
Less:
Operating Expenses: (219,334) (242,603) (212,984) (106,361)
Interest Expenses: (102,025) (146,120) (122,433) (50,645)
Depreciation and Amortization: (48,852) (65,135) (66,830) (66,999)
Other: Major Maintenance: 0 (35,113) (54,112) (46,277)
Net Income (Loss) - Tax Basis: (58,627) (2,574) (6,631) (69,614)
Cash generated from operations: (9,775) 34,851 38,390 (2,615)
Less: Cash distributions: 71,904 203,1051 84,961 25,000
Cash generated after cash distributions: (81,679) (168,254) (46,571) (27,615)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (58) (3) (7) (70)
Cash distributions to investors: 72 203 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $20,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
1 $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.
A-40
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Brevard Mortgage Program, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $48,285 $64,380 $73,267
Other: 35 0 0
Less:
Operating Expenses: 3,293 (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: 45,027 62,261 72,393
Cash generated from operations: 44,992 62,261 72,393
Less: Cash distributions: 43,125 57,500 34,572
Cash generated after cash distributions: 1,867 4,761 37,821
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 78 108 126
Cash distributions to investors: 75 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-41
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron First Time Homebuyer Mortgage Fund II, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $44,628 $69,051 $41,748
Other: 0 45 0
Less:
Operating Expenses: 315 (938) (611)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 44,313 68,158 41,137
Cash generated from operations: 44,313 68,113 41,137
Less: Cash distributions: 45,000 60,300 42,619
Cash generated after cash distributions: (687) 7,813 (1,482)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 89 136 82
Cash distributions to investors: 90 121 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-42
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Clearwater First Time Homebuyer Program, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $67,650 $88,149 $46,999
Other: 0 0 0
Less:
Operating Expenses: (93) (132) (93)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 67,557 88,017 46,906
Cash generated from operations: 67,557 88,017 46,906
Less: Cash distributions: 75,000 90,000 43,377
Cash generated after cash distributions: (7,443) (1,983) 3,529
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 40 62
Cash distributions to investors: 100 120 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-43
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron First Time Homebuyer Mortgage Fund III, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $45,014 $70,425 $29,006
Other: 0 0 0
Less:
Operating Expenses: 295 (315) (408)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 44,719 70,110 28,598
Cash generated from operations: 44,719 70,110 28,598
Less: Cash distributions: 45,000 60,000 27,846
Cash generated after cash distributions: (281) 10,110 752
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 89 140 57
Cash distributions to investors: 90 120 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-44
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron First Time Homebuyer Mortgage Fund V, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $45,000 $75,400 $26,198
Other: 0 0 0
Less:
Operating Expenses: (72) (713) (245)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 44,928 74,687 25,953
Cash generated from operations: 44,928 74,687 25,953
Less: Cash distributions: 45,000 60,000 25,140
Cash generated after cash distributions: (72) 14,687 813
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 149 52
Cash distributions to investors: 90 120 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-45
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron First Time Homebuyer Mortgage Fund IV, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $45,055 $74,020 $14,529
Other: 0 0 0
Less:
Operating Expenses: (149) (164) (377)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 44,906 73,856 14,152
Cash generated from operations: 44,906 73,856 14,152
Less: Cash distributions: 45,000 60,000 13,900
Cash generated after cash distributions: (94) 13,856 252
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 147 28
Cash distributions to investors: 90 120 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-46
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Income Growth Fund V, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $268,778 $273,596 $278,590
Other: 0 20,987 26,698
Less:
Operating Expenses: 120,092 (163,172) (172,943)
Interest Expenses: 77,965 (94,358) (98,805)
Depreciation and Amortization: 39,378 (52,504) (56,381)
Other: Major Maintenance: 0 (16,416) (27,704)
Net Income (Loss) - Tax Basis: 31,343 (31,867) (45,963)
Cash generated from operations: 70,721 (350) (20,862)
Less: Cash distributions: 39,000 114,988 77,039
Cash generated after cash distributions: 31,721 (115,338) (97,901)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 27 (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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $19,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-47
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Lamplight Court of Bellefontaine Apartments, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $50,085 $(12,535) $(37,785)
Other: 157 9,973 733
Less:
Operating Expenses: 11,312 (1,262) (231)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 38,930 (3,824) (37,283)
Cash generated from operations: 38,773 8,711 502
Less: Cash distributions: 42,600 69,525 16,593
Cash generated after cash distributions: (3,827) (60,814) (16,091)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 56 (5) (53)
Cash distributions to investors: 61 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-48
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Vulture Fund I, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $59,602 $78,996 $3,731
Other: 0 0 0
Less:
Operating Expenses: (16,870) (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: 42,732 62,291 3,267
Cash generated from operations: 42,732 62,291 3,267
Less: Cash distributions: 67,500 89,894 14,044
Cash generated after cash distributions: (24,768) (27,603) (10,777)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 47 69 4
Cash distributions to investors: 75 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-49
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $63,687 $61,000 $2,479
Other: 315 1,906 0
Less:
Operating Expenses: (17,858) (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: 46,144 37,221 2,076
Cash generated from operations: 45,829 35,315 2,076
Less: Cash distributions: 57,000 112,664 8,884
Cash generated after cash distributions: (11,171) (77,349) (6,808)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 38 31 2
Cash distributions to investors: 48 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-50
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund II, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $232,453 $261,513 $79,630
Other: 53,534 1,666
Less:
Operating Expenses: (173,075) (205,243) (60,041)
Interest Expenses: (68,203) (92,514) 0
Depreciation and Amortization: (28,848) (38,465) (7,552)
Other: Major Maintenance: 0 (70,103) 0
Net Income (Loss) - Tax Basis: (37,673) (91,278) 13,703
Cash generated from operations: (8,825) (52,813) 21,255
Less: Cash distributions: 19,600 79,601 2,942
Cash generated after cash distributions: (28,425) (132,414) 18,313
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (47) (114) 17
Cash distributions to investors: 25 100 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-51
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund VI, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $70,941 $67,699 $400
Other: 636 4,500 0
Less:
Operating Expenses: (8,517) (17,974) (218)
Interest Expenses: 0 0 0
Depreciation and Amortization: 0 0 0
Other: Major Maintenance: 0 0 0
Net Income (Loss) - Tax Basis: 63,060 49,725 182
Cash generated from operations: 62,424 49,725 182
Less: Cash distributions: 90,000 85,003 0
Cash generated after cash distributions: (27,576) (39,778) 182
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 53 41 0
Cash distributions to investors: 75 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-52
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Development Fund IX, Ltd.
1/1/98-
9/30/98 1997
--------------------------
Gross Revenues: $72,030 $69,804
Other: 0 749
Less:
Operating Expenses: (161) (11,234)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 71,869 59,319
Cash generated from operations: 71,869 58,570
Less: Cash distributions: 72,129 58,397
Cash generated after cash distributions: (260) 173
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 56
Cash distributions to investors: 90 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-53
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Income Property Mortgage Fund VI, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $75,031 $66,807 $5,740
Other: 0 389 85
Less:
Operating Expenses: (156) (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: 74,875 65,717 5,565
Cash generated from operations: 74,875 65,328 5,480
Less: Cash distributions: 68,210 65,250 6,334
Cash generated after cash distributions: 6,665 78 (854)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 100 80 7
Cash distributions to investors: 91 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-54
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund VII, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $63,200 $66,692 $10,012
Other: 0 542 2
Less:
Operating Expenses: (232) (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: 62,968 65,531 (65)
Cash generated from operations: 62,968 65,531 (67)
Less: Cash distributions: 63,000 65,075 27
Cash generated after cash distributions: (32) 456 (94)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 90 93 (2)
Cash distributions to investors: 90 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-55
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund X, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $62,500 $77,526 $9,998
Other: 0 1,789 23
Less:
Operating Expenses: (172) (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: 62,328 78,731 (12)
Cash generated from operations: 62,328 76,942 (35)
Less: Cash distributions: 71,826 76,878 200
Cash generated after cash distributions: (9,498) 64 (235)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 78 79 (13)
Cash distributions to investors: 90 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-56
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund XI, Ltd.
1/1/98-
9/30/98 1997
--------------------------
Gross Revenues: $71,874 $61,200
Other: 0 0
Less:
Operating Expenses: (142) 0
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 71,732 61,200
Cash generated from operations: 71,732 61,200
Less: Cash distributions: 72,000 61,109
Cash generated after cash distributions: (268) 91
Tax and distribution data per $1,000 90
invested: 90
Federal taxable income (loss): 0
Cash distributions to investors: 12% 76
Annualized cash on cash
yield to investors: 12%
Amount (in percentage terms) remaining
invested in program property at the
end of last year reported in table: 100% 100%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-57
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund XVIII, L.P.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $57,489 $46,473
Other: 0 759
Less:
Operating Expenses: (186) (20,279)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 57,303 26,953
Cash generated from operations: 57,303 26,194
Less: Cash distributions: 72,000 26,135
Cash generated after cash distributions: (14,697) 59
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 72 17
Cash distributions to investors: 90 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-58
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund V, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Revenues: $48,906 $69,423 $10,145
Other: 474 0 109
Less:
Operating Expenses: (11,958) (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: 37,422 64,306 129
Cash generated from operations: 36,948 64,306 20
Less: Cash distributions: 90,000 62,868 0
Cash generated after cash distributions: (53,052) 1,438 20
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 31 1 8
Cash distributions to investors: 75 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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-59
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund VII, Ltd.
1/1/98-
930/98 1997
--------------------------
Gross Revenues: $106,254 $3,050
Other: 0 0
Less:
Operating Expenses: (32,309) (13,606)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 73,945 (10,556)
Cash generated from operations: 73,945 (10,556)
Less: Cash distributions: 64,576 77,208
Cash generated after cash distributions: 9,369 (87,764)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 39 (6)
Cash distributions to investors: 34 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-60
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund IV, Ltd.
1/1/98-
9/30/98 1997
--------------------------
Gross Revenues: $124,110 $22,431
Other: 340
Less:
Operating Expenses: (47,740) (17,181)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 76,710 5,250
Cash generated from operations: 76,370 5,250
Less: Cash distributions: 67,013 27,130
Cash generated after cash distributions: 9,357 (21,880)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 77 5
Cash distributions to investors: 67 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-61
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund XIV, Ltd.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $73,583 $44,419
Other: 0 631
Less:
Operating Expenses: (157) (274)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 73,426 44,776
Cash generated from operations: 73,426 44,145
Less: Cash distributions: 89,281 44,070
Cash generated after cash distributions: (15,855) 75
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 73 21
Cash distributions to investors: 89 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-62
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund X, Ltd.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $96,391 $7,264
Other: 0
Less:
Operating Expenses: (28,284) (10,237)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 68,107 (2,973)
Cash generated from operations: 68,107 (2,973)
Less: Cash distributions: 82,615 13,428
Cash generated after cash distributions: (14,508) (16,401)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 57 (2)
Cash distributions to investors: 69 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-63
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Mortgage Development Fund XV, Ltd.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $58,878 $12,669
Other: 0 190
Less:
Operating Expenses: 274 (300)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 58,604 12,559
Cash generated from operations: 58,604 12,369
Less: Cash distributions: 60,643 12,362
Cash generated after cash distributions: (2,039) 7
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 84 13
Cash distributions to investors: 87 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-64
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund VIII, Ltd.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $63,425 $38,892
Other: 0 1,708
Less:
Operating Expenses: (22,069) (14,453)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0
Net Income (Loss) - Tax Basis: 41,355 26,147
Cash generated from operations: 41,355 24,439
Less: Cash distributions: 101,424 30,450
Cash generated after cash distributions: (60,069) (6,011)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 34 22
Cash distributions to investors: 85 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-65
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Florida Tax Credit Fund II, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $133,634 $151,372 $193,970 $116,455
Other: 0 0 0 0
Less:
Operating Expenses: (94,136) (114,363) (121,850) (65,664)
Interest Expenses: (31,464) (41,317) (38,995) (21,949)
Depreciation and Amortization: (19,335) (25,780) (25,565) (21,669)
Other: Major Maintenance: 0 (6,265) (8,135) (9,654)
Net Income (Loss) - Tax Basis: (11,301) (36,353) (575) (2,481)
Cash generated from operations: 8,034 (10,573) 24,990 19,188
Less: Cash distributions: 2,940 2,780 34 0
Cash generated after cash distributions: 5,094 (13,353) 24,956 19,188
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): (36) (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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $54,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-66
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Baron Strategic Investment Fund IX, Ltd.
1/1/98-
9/30/98 1997
-------------------------
Gross Revenues: $40,600 $ 676
Other: 0 0
Less:
Operating Expenses: (14,453) (4,443)
Interest Expenses: 0 0
Depreciation and Amortization: 0 0
Other: Major Maintenance: 0 0
Net Income (Loss) - Tax Basis: 26,147 (3,767)
Cash generated from operations: 26,147 (3,767)
Less: Cash distributions: 57,309 3,589
Cash generated after cash distributions: (31,162) (7,356)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 22 (3)
Cash distributions to investors: 48 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%
- --------------------------------------------------------------------------------
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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. Third, for tax purposes, the
depreciable basis in a residential apartment property is stepped up to reflect
the purchase price at the time of acquisition of fee simple title to the
property or of the equity interest in the partnership which owns such title.
Under GAAP accounting, stepped up basis is not recognized. In respect of the
partnership, there is no difference between net income (loss) determined on a
tax basis as reflected in the table above and net income (loss) determined on a
GAAP basis since the partnership does not own a direct or indirect interest in a
residential apartment property.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-67
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Central Florida Income Appreciation Fund, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996 1995
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Revenues: $217,728 $228,623 $244,496 $275,805
Other: 0 0 0 0
Less:
Operating Expenses: (99,671) (112,911) (127,984) (236,408)
Interest Expenses: (90,261) (134,746) (124,291) (128,965)
Depreciation and Amortization: (56,207) (76,023) (74,942) (75,915)
Other: Major Maintenance: 0 (19,500) (1,346) (12,362)
Net Income (Loss) - Tax Basis: (28,411) (114,557) (84,067) (177,845)
Cash generated from operations: 27,796 (38,534) (9,125) (101,930)
Less: Cash distributions: 2,300 0 105,000 78,750
Cash generated after cash distributions: 25,496 (38,534) (114,125) (180,680)
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 27 (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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $3,000.
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-68
<PAGE>
TABLE III:
OPERATING RESULTS OF PRIOR PROGRAMS (cont'd)
Midwest Income Growth Fund VI, Ltd.
<TABLE>
<CAPTION>
1/1/98-
9/30/98 1997 1996
----------------------------------
<S> <C> <C> <C>
Gross Revenues: $206,024 $257,567 $98,226
Other: 0 0 0
Less:
Operating Expenses: (83,907) (84,233) (28,556)
Interest Expenses: (57,338) (106,684) (28,631)
Depreciation and Amortization: (41,118) (54,823) (17,563)
Other: Major Maintenance: 0 (61,985) 0
Net Income (Loss) - Tax Basis: 23,661 (50,158) 23,476
Cash generated from operations: 64,779 4,665 41,039
Less: Cash distributions: 15,000 29,799 5,547
Cash generated after cash distributions: 49,779 (25,134) 35,492
Tax and distribution data per $1,000 invested:
Federal taxable income (loss): 79 (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>
Net income (loss) - tax basis reflected in the table above differs from the
amount reported as taxable income (loss) due primarily to (a) in certain cases,
the inclusion of certain advances as taxable income and (b) major maintenance
expenses being reported as capital expenditures, rather than deductible expenses
for purposes of taxable income (loss).
The significant differences between tax basis net income (loss) determined on a
tax basis 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 $(22,000).
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 forfeited security deposits, laundry and vending income, pet
fees, distribution supplements and interest income.
A-69
<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.
A-70
<PAGE>
TABLE V:
RESULTS OF COMPLETED PROGRAMS
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.
<TABLE>
<CAPTION>
Property: Lakewood Apartments
<S> <C>
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(4)
- -----------------------------------------------------------------------------------
</TABLE>
(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.
(4) Estimated.
A-71
<PAGE>
OTHER PROGRAMS SPONSORED BY
AFFILIATES OF MANAGING SHAREHOLDER
<TABLE>
<CAPTION>
MAXIMUM
DATE CAPITAL
FORMED RAISE PARTNERSHIP NAME GENERAL PARTNER
- ------ ----- ---------------- ---------------
<S> <C> <C> <C>
10/2/96 650,000 Baron Mortgage Development Fund VIII, Ltd. Baron Capital XXXVIII, Inc.
04/02/97 1,000,000 Baron Mortgage Development Fund XII, Ltd. Baron Capital XLVI, 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, Ltd. Baron Capital LXI, 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>
A-72
<PAGE>
EXHIBIT B
In the Exchange Offering, the Operating Partnership will offer to issue its
Units to limited partners in the Exchange Partnerships in exchange for their
limited partnership interests therein. The tables comprising Exhibit B set forth
information relating to each Exchange Partnership.
Exchange Equity Partnerships
The table relating to each of the 13 Exchange Equity Partnerships sets forth the
following information: (i) the name of the partnership and its general partner,
(ii) the name and location of the residential apartment property in which it
directly or indirectly owns equity, (iii) the year the property was completed,
(iv) the number of units, acreage, rentable area, average unit size and average
rental rate per unit and per square feet of rentable area as of November 1,
1998, (v) physical occupancy of each property as of November 1, 1998 and for
each of the five prior years, (vi) the property's estimated appraised value, and
(vii) certain property tax information.
The table also sets forth for each partnership certain information relating to
the first mortgage (and in one case, second mortgage) indebtedness secured by or
associated with the property, including: (i) initial principal balance and
balance as of November 1, 1998 and due at maturity, (ii) interest rate, (iii)
annual and monthly debt service requirements, (iv) amortization term, (v)
maturity date, and (vi) name of lending institution.
In addition, the table for each Exchange Equity Partnership sets forth (i)
certain information relating to the partnership's original private offering,
including, the offering commencement and termination dates, number of investors,
paid in capital, number of units sold, price per unit and the allocations
between the limited partners and the general partner of distributable cash and
net proceeds from a sale or refinancing of property, (ii) the number of
Operating Partnership Units (and their initial assigned value) being offered to
each limited partner in the particular partnership per $1,000 of original
investment, and (iii) the estimated deferred taxable gain from the Exchange
Offering for limited partners electing to accept the offering, per $1,000 of
original investment.
Exchange Mortgage Partnerships
The table relating to each of the six Exchange Mortgage Partnerships sets forth
the same information as described above relating to the underlying property
which secures second mortgage loans held by the partnership, the first mortgage
loan which is senior to the partnership's loan interests, the partnership's
original offering and the estimated deferred taxable gain resulting from
participation in the offering. The table also sets forth the replacement cost
new of property securing second mortgage interests of the partnership and
information relating to the second mortgage loan and other debt interests held
by the partnership, including: (i) initial principal balances and balances as of
December 31, 1998 and due at maturity, (ii) interest rates, (iii) annual and
monthly debt service requirements, (iv) amortization term, (v) maturity dates,
(vi) annual monthly debt service requirements, and (vii) similar information
regarding other Exchange Partnerships which hold second mortgage interests
secured by the same property in which the partnership holds a second mortgage
interest.
Exchange Hybrid Partnerships
The table relating to each of the four Exchange Hybrid Partnerships sets forth
the same information as described above relating to: (i) properties in which the
partnership directly or indirectly owns an equity interest and properties which
secure second mortgage loans held by the partnership, first mortgage loans which
are senior to the partnership's equity interests and second mortgage interests,
the partnership's original private offering and the estimated deferred taxable
gain resulting from participation in the Exchange Offering and (ii) the second
mortgage loan and other debt interests held by the partnership.
B-1
<PAGE>
EXCHANGE EQUITY PARTNERSHIPS
B-2
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME GROWTH FUND V, LTD.
(GP: Baron Capital XI, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1980
BLOSSOM CORNERS APARTMENTS-PHASE I APPROX. ACREAGE: 3.67
2143 Raper Dairy Road
Orlando, Florida 32822
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 15 300 $399
-------------------------------------------------------------------------------------------------------------------
1 BR 49 600 $480
-------------------------------------------------------------------------------------------------------------------
2 BR 6 900 $600
-------------------------------------------------------------------------------------------------------------------
Total 70 39,300
--------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 97% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,195,000
1997 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 1/98
1996 AVG. MONTHLY OCCUPANCY %: 89% 11/1/98 FEDERAL INCOME TAX BASIS: $1,629,182
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% 1997 PROPERTY TAX VALUE: $1,194,445
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/06
Column Financial, Inc.
3414 Peachtree Road N.E., Suite 1140
Atlanta, Georgia 30326-1113
INITIAL PRINCIPAL BALANCE: $1,050,000 ANNUAL DEBT SERVICE: $105,288
11/1/98 BALANCE: $1,026,732 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: 10/95 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
ALLOCATIONOF 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 OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 105 Units Short Term Capital Gain (assuming 39% rate): $143
valued at $10 per Unit (or $1,050) Long Term Capital Gain (assuming 20% rate): $ 73
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-3
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND III, LTD.
(GP: Baron Capital VII, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1986
Bridge point Apartments - Phase II APPROX. ACREAGE: 3.39
1500 Monument Road
Jacksonville, Florida 32225
<CAPTION>
UNIT MIX AND RENTAL RATES:
---------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 6 288 $369-389
---------------------------------------------------------------------------------------------------------------
1 BR 37 576 $449
---------------------------------------------------------------------------------------------------------------
2 BR 5 864 $589-599
---------------------------------------------------------------------------------------------------------------
Total 48 27,360
--------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 96% ESTIMATED APPRAISED PARTNERSHIP VALUE: $1,610,000
1997 AVG. MONTHLY OCCUPANCY %: 93% APPRAISAL DATE: 2/98
1996 AVG. MONTHLY OCCUPANCY %: 95% 11/1/98 FEDERAL INCOME TAX BASIS: $1,152,374
1995 AVG. MONTHLY OCCUPANCY %: 94% DEPRECIATION LIFE CLAIMED: 25.5 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 21.4228
1993 AVG. MONTHLY OCCUPANCY %: 93% 1997 PROPERTY TAX VALUE: $904,775
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 7/1/06
Huntington Mortgage Co.
41 South High Street, Suite 900
Columbus, Ohio 43215
INITIAL PRINCIPAL BALANCE: $735,000 ANNUAL DEBT SERVICE: $76,572
11/1/98 BALANCE: $716,243 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 OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 105 Units Short Term Capital Gain (assuming 39% rate): $ 85
valued at $10 per Unit (or $1,050) Long Term Capital Gain (assuming 20% rate): $ 44
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-4
<PAGE>
<TABLE>
<CAPTION>
MIDWEST INCOME GROWTH FUND VI, LTD.
(GP: Baron Capital of Ohio III, Inc.,
formerly named Sigma Financial Capital VI, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1974
BROOKWOOD WAY APARTMENTS APPROX. ACREAGE: 3.92
327 N. Brookwood Way
Mansfield, Ohio 44906
<CAPTION>
UNIT MIX AND RENTAL RATES:
---------------------------------------------------------------------------------------------------------------------
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 $399
---------------------------------------------------------------------------------------------------------------------
Total 66 38,016
------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 100% ESTIMATED APPRAISED PARTNERSHIP VALUE: $1,780,000
1997 AVG. MONTHLY OCCUPANCY %: 94% APPRAISAL DATE: 9/98
1996 AVG. MONTHLY OCCUPANCY %: 97% 11/1/98 FEDERAL INCOME TAX BASIS: $1,737,619
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% 1997 PROPERTY TAX VALUE: $349,520
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 12/1/06
Mellon Bank
1422 Euclid #900
Cleveland, Ohio 44115
INITIAL PRINCIPAL BALANCE: $1,075,000 ANNUAL DEBT SERVICE: $108,612
11/1/98 BALANCE: $1,053,408 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: 4/96 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; any remaining distributable cash during the fiscal year is to be
deposited in a cash reserve acount.
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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 102 Units Short Term Capital Gain (assuming 39% rate): $130
valued at $10 per Unit (or $1,020) Long Term Capital Gain (assuming 20% rate): $ 67
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-5
<PAGE>
<TABLE>
<CAPTION>
FLORIDA OPPORTUNITY INCOME PARTNERS, LTD.
(GP: Baron Capital III, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1982
CAMELLIA COURT APARTMENTS APPROX. ACREAGE: 5.15
1401 S. Clyde Morris Boulevard
Daytona Beach, Florida 32114
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 59 576 $429
-------------------------------------------------------------------------------------------------------------------
2 BR 1 864 $599
-------------------------------------------------------------------------------------------------------------------
Total 60 34,848
-------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 98% ESTIMATED APPRAISED PARTNERSHIP VALUE: $1,833,000
1997 AVG. MONTHLY OCCUPANCY %: 75% APPRAISAL DATE: 8/98:
1996 AVG. MONTHLY OCCUPANCY %: 91% 11/1/98 FEDERAL INCOME TAX BASIS: $1,384,565
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% 1997 PROPERTY TAX VALUE: $1,100,618
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/06
Column Financial
6400 Congress Avenue #200
Boca Raton, Florida 33487
INITIAL PRINCIPAL BALANCE: $1,100,000 ANNUAL DEBT SERVICE: $111,132
11/1/98 BALANCE: $1,075,624 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> <C>
DATE OFFERING BEGAN: 8/95 NUMBER OF UNITS SOLD: 800
NUMBER OF INVESTORS: 29 PRICE PER UNIT: $1,000
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 OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 105 Units Short Term Capital Gain (assuming 39% rate): $138
valued at $10 per Unit (or $1,050) Long Term Capital Gain (assuming 20% rate): $ 71
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-6
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND, LTD.
(GP: Baron Capital II, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1987
Eagle Lake Apartments APPROXIMATE ACREAGE: 4.68
1025 Eagle Lake Trail
Port Orange, Florida 32119
<CAPTION>
UNIT MIX AND RENTAL RATES:
---------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 73 576 $449
---------------------------------------------------------------------------------------------------------------------
2 BR 4 864 $550-555
---------------------------------------------------------------------------------------------------------------------
Total 77 45,504
------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 95% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,530,000
1997 AVG. MONTHLY OCCUPANCY %: 94% APPRAISAL DATE: 1/98
1996 AVG. MONTHLY OCCUPANCY %: 96% 11/1/98 FEDERAL INCOME TAX BASIS: $2,066,071
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% 1997 PROPERTY TAX VALUE: $1,755,464
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 11/1/05
Column Financial, Inc.
3414 Peachtree Road N.E., Suite 1140
Atlanta, Georgia 30325-1113
INITIAL PRINCIPAL BALANCE: $1,500,000 ANNUAL DEBT SERVICE: $144,636
11/1/98 BALANCE: $1,443,015 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.
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<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: 4/95
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 DEFERRED TAXABLE GAIN FROM EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 102 Units Short Term Capital Gain (assuming 39% rate): $204
valued at $10 per Unit (or $1,020) Long Term Capital Gain (assuming 20% rate): $105
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-7
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND II, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase I APPROXIMATE ACREAGE: 6.85 (all 4 phases)
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
<CAPTION>
UNIT MIX AND RENTAL RATES:
---------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 BR 28 1,075 $599-635
---------------------------------------------------------------------------------------------------------------------
3 BR 24 1,358 $699
---------------------------------------------------------------------------------------------------------------------
Total 52 62,692
-------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 100% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,990,820
1997 AVG. MONTHLY OCCUPANCY %: 82% APPRAISAL DATE: 10/97
1996 AVG. MONTHLY OCCUPANCY %: 85% 11/1/98 FEDERAL INCOME TAX BASIS: $1,512,371
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% 1997 PROPERTY TAX VALUE: $1,594,041
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
INITIAL PRINCIPAL BALANCE: $1,836,576 ANNUAL DEBT SERVICE: $145,920
11/1/98 BALANCE: $1,783,075 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: 2/95 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; 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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 102 Units Short Term Capital Gain (assuming 39% rate): $173
valued at $10 per Unit (or $1,020) Long Term Capital Gain (assuming 20% rate): $ 89
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
- ----------------
* 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.
B-8
<PAGE>
<TABLE>
<CAPTION>
REALTY OPPORTUNITY INCOME FUND VIII, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase II APPROXIMATE ACREAGE: 6.85 (all 4 phases)
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 BR 23 1,075 $599-635
-------------------------------------------------------------------------------------------------------------------
3 BR 7 1,358 $699
-------------------------------------------------------------------------------------------------------------------
Total 30 34,231
------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 90% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,173,162
1997 AVG. MONTHLY OCCUPANCY %: 73% APPRAISAL DATE: 10/97
1996 AVG. MONTHLY OCCUPANCY %: 82% 11/1/98 FEDERAL INCOME TAX BASIS: $1,460,396
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% 1997 PROPERTY TAX VALUE: $930,725
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
INITIAL PRINCIPAL BALANCE: $ 1,072,132 ANNUAL DEBT SERVICE: $85,188
11/1/98 BALANCE: $ 1,030,840 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; 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 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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 102 Units Short Term Capital Gain (assuming 39% rate): $304
valued at $10 per Unit (or $1,020) Long Term Capital Gain (assuming 20% rate): $156
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
- ----------------
* The GP became a manager of this program in July 1995, replacing Realty Capital
I, Inc., the initial sponsor.
B-9
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME ADVANTAGE FUND I, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase III APPROXIMATE ACREAGE: 6.85 (all 4 phases)
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
<CAPTION>
UNIT MIX AND RENTAL RATES:
-----------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 BR 19 1,075 $599-635
-----------------------------------------------------------------------------------------------------------------
3 BR 7 1,358 $699
-----------------------------------------------------------------------------------------------------------------
Total 26 29,931
------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 81% ESTIMATED APPRAISED PARTNERSHIP VALUE: $1,940,339
1997 AVG. MONTHLY OCCUPANCY %: 88% APPRAISAL DATE: 10/97
1996 AVG. MONTHLY OCCUPANCY %: 94% 11/1/98 FEDERAL INCOME TAX BASIS: $1,282,871
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% 1997 PROPERTY TAX VALUE: $743,191
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
INITIAL PRINCIPAL BALANCE: $ 854,708 ANNUAL DEBT SERVICE: $67,908
11/1/98 BALANCE: $ 891,537 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
<S> <C> <C> <C>
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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 101 Units Short Term Capital Gain (assuming 39% rate): $73
valued at $10 per Unit (or $1,010) Long Term Capital Gain (assuming 20% rate): $37
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
- ----------------
The GP became a manager of this program in July 1995, replacing Realty Capital
IV, Inc., the initial sponsor.
B-10
<PAGE>
<TABLE>
<CAPTION>
FLORIDA INCOME APPRECIATION FUND I, LTD.
(GP: Baron Capital IV, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1985
Forest Glen Apartments - Phase IV APPROXIMATE ACREAGE: 6.85 (all 4 phases)
300 Forest Glen Boulevard
Daytona Beach, Florida 32114
<CAPTION>
UNIT MIX AND RENTAL RATES:
------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2 BR 6 1,075 $599-635
------------------------------------------------------------------------------------------------------------------
3 BR 2 1,358 $699
------------------------------------------------------------------------------------------------------------------
Total 8 9,166
-----------------------------------------------------------------
<S> <C> <C>
11/1/98 OCCUPANCY %: 100% ESTIMATED APPRAISED PARTNERSHIP VALUE: $471,679
1997 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 10/97
1996 AVG. MONTHLY OCCUPANCY %: 91% 11/1/98 FEDERAL INCOME TAX BASIS: $216,381
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% 1997 PROPERTY TAX VALUE: $204,899
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 3/2005
Prudential Mortgage Capital
One Ravinia Drive, Suite 1400
Atlanta, Georgia 30346
INITIAL PRINCIPAL BALANCE: $ 236,584 ANNUAL DEBT SERVICE: $18,792
11/1/98 BALANCE: $ 274,625 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.
====================================================================================================================================
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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 101 Units Short Term Capital Gain (assuming 39% rate): $ 95
valued at $10 per Unit (or $1,010) Long Term Capital Gain (assuming 20% rate): $ 49
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
- ----------------
The GP became a manager of this program in July 1995, replacing Realty Capital
II, Inc., the initial sponsor.
B-11
<PAGE>
<TABLE>
<CAPTION>
FLORIDA CAPITAL INCOME FUND IV, LTD.
(GP: Baron Capital V, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1986
GLEN LAKE ARMS APARTMENTS APPROXIMATE ACREAGE: 7.16
2000 Gandy Boulevard North
St. Petersburg, Florida 33702
<CAPTION>
UNIT MIX AND RENTAL RATES:
-----------------------------------------------------------------------------------------------------------------
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>
11/1/98 OCCUPANCY %: 62% ESTIMATED APPRAISED PARTNERSHIP VALUE: $6,483,079
1997 AVG. MONTHLY OCCUPANCY %: 78% APPRAISAL DATE: 3/98
1996 AVG. MONTHLY OCCUPANCY %: 81% 11/1/98 FEDERAL INCOME TAX BASIS: $4,110,622
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% 1997 PROPERTY TAX VALUE: $3,789,000
====================================================================================================================================
<CAPTION>
MORTGAGE INFORMATION
<S> <C> <C> <C>
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
INITIAL PRINCIPAL BALANCE: $2,812,500 INITIAL PRINCIPAL BALANCE: $375,000
11/1/98 BALANCE: $2,709,330 11/1/98 BALANCE: $356,993
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 PROVISIONS: The loan bears a fixed MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: The loan
interest rate of 9.55% and amortizes on a 25-year bears a fixed interest rate of 8.0% and amortizes on a
basis. 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty PREPAYMENT PROVISIONS: Prepayable without penalty
====================================================================================================================================
<CAPTION>
INVESTMENT PROGRAM INFORMATION
<S> <C> <C> <C>
DATE OFFERING BEGAN: 1/95 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 EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 123 Units Short Term Capital Gain (assuming 39% rate): $189
valued at $10 per Unit (or $1,230) Long Term Capital Gain (assuming 20% rate): $ 97
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-12
<PAGE>
<TABLE>
<CAPTION>
CENTRAL FLORIDA INCOME APPRECIATION FUND, LTD.
(GP: Baron Capital of Ohio III, Inc.,
formerly named Sigma Financial Capital VI, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1986
LAUREL OAKS APARTMENTS APPROXIMATE ACREAGE: 6.21
(FORMERLY GROVE HAMLET APARTMENTS
915B Grove Hamlet Way
Deland, Florida 32720
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 11 576 $425
-------------------------------------------------------------------------------------------------------------------
2 BR 45 864 $519-549
-------------------------------------------------------------------------------------------------------------------
Total 56 45,216
-------------------------------------------------------------------
<CAPTION>
<S> <C> <C>
11/1/98 OCCUPANCY %: 96% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,881,000
1997 AVG. MONTHLY OCCUPANCY %: 71% APPRAISAL DATE: 9/98
1996 AVG. MONTHLY OCCUPANCY %: 75% 11/1/98 FEDERAL INCOME TAX BASIS: $1,908,139
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% 1997 PROPERTY TAX VALUE: $1,240,948
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/05
Midland Loan Services
210 West 10th Street
Kansas City, Missouri 64105
INITIAL PRINCIPAL BALANCE: $1,400,000 ANNUAL DEBT SERVICE: $ 156,024
11/1/98 BALANCE: $1,306,124 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: 8/94 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%.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 101 Units Short Term Capital Gain (assuming 39% rate): $223
valued at $10 per Unit (or $1,010) Long Term Capital Gain (assuming 20% rate): $114
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-13
<PAGE>
<TABLE>
<CAPTION>
GSU STADIUM STUDENT APARTMENTS, LTD.
(GP: Baron Capital X, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1987
STADIUM CLUB APARTMENTS APPROXIMATE ACREAGE: 3.50
210 Lanier Drive
Statesboro, Georgia 30458
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROXIMATE
APPROXIMATE RENTABLE AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 2 288 $385
-------------------------------------------------------------------------------------------------------------------
3 BR 3 880 $705
-------------------------------------------------------------------------------------------------------------------
4 BR 55 880 $940
-------------------------------------------------------------------------------------------------------------------
Total 60 51,616
-------------------------------------------------------------------
<CAPTION>
<C> <C> <C>
11/1/98 OCCUPANCY %: 64% ESTIMATED APPRAISED PARTNERSHIP VALUE: $2,800,000
1997 AVG. MONTHLY OCCUPANCY %: 86% APPRAISAL DATE: 12/97
1996 AVG. MONTHLY OCCUPANCY %: 90% 11/1/98 FEDERAL INCOME TAX BASIS: $2,014,060
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% 1997 PROPERTY TAX VALUE: $1,802,200
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/05
GMAC
650 Dresher Road
Horsham, Pennsylvania 19044
INITIAL PRINCIPAL BALANCE: $1,750,000 ANNUAL DEBT SERVICE: $151,272
11/1/98 BALANCE: $1,728,653 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; thereafter, the GP receives all remaining distributable cash during
the fiscal year.
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 OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 117 Units Short Term Capital Gain (assuming 39% rate): $152
valued at $10 per Unit (or $1,170) Long Term Capital Gain (assuming 20% rate): $ 78
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-14
<PAGE>
<TABLE>
<CAPTION>
BARON STRATEGIC INVESTMENT FUND II, LTD.
(GP: Baron Capital XXXI, Inc.)
====================================================================================================================================
PARTNERSHIP PROPERTY INTEREST
The Partnership owns 100% of the limited partnership interest in a limited
partnership which holds fee simple title to the property described below.
<S> <C>
PROPERTY NAME AND ADDRESS: YEAR COMPLETED: 1977
STEEPLECHASE APARTMENTS APPROXIMATE ACREAGE: 3.2
841 W. 53rd Street
Anderson, Indiana 46013
<CAPTION>
UNIT MIX AND RENTAL RATES:
---------------------------------------------------------------------------------------------------------------------
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 $445
---------------------------------------------------------------------------------------------------------------------
Total 72 47,280
-------------------------------------------------------------------
<CAPTION>
<C> <C> <C>
11/1/98 OCCUPANCY %: 76% ESTIMATED APPRAISED PARTNERSHIP VALUE: $1,690,000
1997 AVG. MONTHLY OCCUPANCY %: 73% APPRAISAL DATE: 8/98
1996 AVG. MONTHLY OCCUPANCY %: 70% 11/1/98 FEDERAL INCOME TAX BASIS: $1,273,899
1995 AVG. MONTHLY OCCUPANCY %: 82% DEPRECIATION LIFE CLAIMED: 25 yrs.
1994 AVG. MONTHLY OCCUPANCY %: 78% REALTY TAX RATE (MILLAGE): 12.3716
1993 AVG. MONTHLY OCCUPANCY %: 81% 1997 PROPERTY TAX VALUE: $285,170
====================================================================================================================================
<CAPTION>
FIRST MORTGAGE INFORMATION
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS: MATURITY DATE: 10/1/06
Crown Bank
105 Live Oaks Garden #129
Castleberry, Florida 32707
INITIAL PRINCIPAL BALANCE: $1,260,000 ANNUAL DEBT SERVICE: $ 91,344
11/1/98 BALANCE: $1,260,000 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: 7/96 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%.
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
NUMBER OF OPERATING PARTNERSHIP UNITS ESTIMATED DEFERRED TAXABLE GAIN FROM EXCHANGE OFFERING
OFFERED IN EXCHANGE OFFERING (per $1,000 of Investors' original investment):
(per $1,000 of Investors' original investment): 102 Units Short Term Capital Gain (assuming 39% rate): $ 46
valued at $10 per Unit (or $1,020) Long Term Capital Gain (assuming 20% rate): $ 23
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(See Endnotes to Exchange Equity Partnerships)
B-15
<PAGE>
Endnotes to Exchange Equity Partnerships:
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 lease agreements with terms of one
year or less which are common in the industry.
6. For purposes of determining the appraised value of the Partnership, the
estimated appraised value of the property interest owned by the Partnership
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 to the Operating Partnership 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.
B-16
<PAGE>
EXCHANGE MORTGAGE PARTNERSHIPS
B-17
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
(GP: Baron Capital XXXII, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
This Exchange Partnership owns (i) three unrecorded second mortgage
loans secured by the Blossom Corners Property-Phase II and (ii) an
unrecorded second mortgage loan secured by the Lake Sycamore Property
under development. The properties, interest of the partnership and
other Exchange Partnerships in the second mortgages, terms of the
first mortgage loans secured by the properties, and other information
are described below.
1. BLOSSOM CORNERS SECOND MORTGAGE LOANS:
NAME AND ADDRESS OF PROPERTY SECURING MORTGAGE LOANS:
BLOSSOM CORNERS APARTMENTS - PHASE II YEAR COMPLETED: 1981
("Blossom Corners Property") APPROX. ACREAGE: 3.51
2143 Raper Dairy Road
Orlando, Florida 32822
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 16 300 $399
- -------------------------------------------------------------------------------------------------------------------
1 BR 45 600 $499
- -------------------------------------------------------------------------------------------------------------------
2 BR 7 864 $600
- -------------------------------------------------------------------------------------------------------------------
Total 68 38,100
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 97% APPRAISED VALUE: $2,250,000
1997 AVG. MONTHLY OCCUPANCY %: 91% Cost Approach: $2,239,000
1996 AVG. MONTHLY OCCUPANCY %: 81% Income Approach: $2,322,000
1995 AVG. MONTHLY OCCUPANCY %: 88% Market Approach: $2,160,000
1994 AVG. MONTHLY OCCUPANCY %: 91% REPLACEMENT COST NEW: $3,390,187
1993 AVG. MONTHLY OCCUPANCY %: 90% APPRAISAL DATE: 1/98
PARTNERSHIP'S BLOSSOM CORNERS SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Blossom Corners Apartments II, Ltd. PARTNERSHIP'S UNDIVIDED INTEREST IN
(affiliate of Managing Shareholder) SECOND MORTGAGE NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $977,645 AGGREG. ANNUAL DEBT SERVICE: $62,552
AGGREG. 12/31/98 BALANCE: $850,966 (plus participation interest)
AGGREG. BALANCE DUE AT MATURITY: $850,966 AGGREG. MONTHLY PAYMENT: $ 5,213
AGGREG. ACCRUED UNPAID INTEREST: $ 15,766 MATURITY DATE: 4/02
</TABLE>
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$622,103 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal balance to the extent of any available cash flow
during the year and additional non-cumulative participation interest equal to
30% of any remaining available cash flow during the year), (ii) adjustable
interest rate of 1% over the prime rate (current adjustable rate of 8.75%) as to
$68,861 of principal, and (iii) fixed interest rate of 12% as to $160,002 of
principal. The loans require payments of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: None
OTHER MATTERS: Prior to 12/15/98, the second mortgage loans consisted of an
unrecorded second mortgage note with a principal balance of $622,103, an
unsecured promissory note with a principal balance of $68,861, an unsecured
demand note with a principal balance of $130,270 and advances of $29,732. On
12/15/98, the debtor restated and amended the $622,103 second mortgage note and
the $68,861 unsecured promissory note and made a new promissory note in favor of
the Exchange Partnership in the original principal amount of $160,002 (to
consolidate the $130,270 demand note and advances of $29,732). The debtor and
the Exchange Partnership also entered into a mortgage modification agreement.
Pursuant to the arrangement, the Exchange Partnership agreed to set the maturity
date on the unsecured notes at the same maturity date as the second mortgage
note, in exchange for the debtor's agreement to secure its repayment obligations
on the unsecured notes with a second mortgage on the property.
B-18
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD. (cont'd)
BLOSSOM CORNERS FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Blossom
Horsham, Pennsylvania 19044-0809 Corners Property
ORIGINAL PRINCIPAL BALANCE: $1,130,000 ANNUAL DEBT SERVICE: $106,824
11/1/98 BALANCE: $1,106,894 MONTHLY PAYMENT: $ 8,902
BALANCE DUE AT MATURITY: $1,050,024 MATURITY DATE: 3/02
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Fixed interest rate of 8.24% and
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayment penalty equal to 1% of prepayment amount if
prepaid prior to third anniversary of loan; no prepayment penalty thereafter.
2. LAKE SYCAMORE SECOND MORTGAGE LOAN
NAME AND ADDRESS OF PROPERTY
SECURING MORTGAGE LOAN:
VILLAS AT LAKE SYCAMORE
("Lake Sycamore Property")
1911 Chaucer Drive
Cincinnati, Ohio 45237
PARTNERSHIP'S SECOND MORTGAGE INTEREST:
The Partnership owns an unrecorded second mortgage note with a current principal
balance of $230,000. Accrued unpaid interest on the note as of 12/31/98 is
$20,700. The debtor is Sycamore Real Estate Development, L.P., an affiliate of
the Managing Shareholder. The note bears interest at the fixed rate of 12% and
matures on 12/03. The note is secured by a second mortgage on the Villas at Lake
Sycamore, a 164 townhome property under construction on 22.44 acres in
Cincinnati, Ohio. Each townhome has a rentable area per unit of approximately
1,325 square feet (or a total area of 217,300 square feet). Construction
commenced in December 1997 and is expected to be completed in the last quarter
of 2003. Each unit is expected to have an initial monthly rental rate in the
range of $889 to $990. In July 1998, an independent Cincinnati appraisal firm
estimated the "as is" value of the property at $1,080,000 and the value of the
completed property to be $14,312,000 (assuming completion of the project as
designed, full rent up and satisfactory environment-quality test).
Two other Exchange Partnerships, Baron Strategic Investment Fund VIII, Ltd. and
Baron Strategic Investment Fund IX, Ltd., own separate second mortgage notes
secured by the property with the same terms except that they are in the
principal amounts of $98,000 and $243,500 (with accrued unpaid interest in the
amounts of $9,800 and $21,915), respectively. The lending parties have agreed to
share the benefits of the second mortgage on a pari passu basis.
LAKE SYCAMORE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Metropolitan Savings REPAYMENT SECURED BY:
8050 Hosbrook Road, Suite 408 First Mortgage on Lake
Cincinnati, Ohio 45236 Sycamore Property
ORIGINAL PRINCIPAL
BALANCE: $2,000,000 ANNUAL DEBT SERVICE: Interest only
maximum approved MONTHLY PAYMENT: Interest only
11/1/98 BALANCE: $ 800,000 MATURITY DATE: 11/01
EXPECTED BALANCE
DUE AT MATURITY: $2,000,000
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Adjustable interest rate equal to
lender's prime rate plus 1% (currently 8.75%); requires payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
B-19
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD. (cont'd)
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 6/96 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 42 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 12/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to investors until they have received a 12.5% non-cumulative
return on their capital contributions; thereafter, investors and the GP share
any remaining distributable cash during the fiscal year 50%/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 an 12.5% yearly cash-on-cash return, the GP
is entitled to receive a similar return on its capital contribution;
thereafter, investors and the GP share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 104 Units
valued at $10 per Unit (or $1,040)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $82
Long Term Capital Gain (assuming 20% rate): $42
- --------------------------------------------------------------------------------
(See Endnotes to Exchange Mortgage Partnerships)
B-20
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
(GP: Baron Capital XVII, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
This Exchange Partnership owns two unrecorded second mortgage
loans secured by the Country Square Property-Phase I described
below. The Exchange Partnership's interest in the second mortgage
loans, terms of the first mortgage loan secured by the property,
and other information are described below.
COUNTRY SQUARE SECOND MORTGAGE LOANS
NAME AND ADDRESS OF PROPERTY
SECURING MORTGAGE LOANS:
COUNTRY SQUARE APARTMENTS - PHASE I YEAR COMPLETED: 1981
("Country Square Property") APPROX. ACREAGE: 4.56
8401 Aiken Court
Tampa, Florida 33615
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 14 288 $339
- -------------------------------------------------------------------------------------------------------------------
1 BR 52 576 $439
- -------------------------------------------------------------------------------------------------------------------
2 BR 7 864 $539
- -------------------------------------------------------------------------------------------------------------------
Total 73 40,032
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 95% APPRAISED VALUE: $2,185,000
1997 AVG. MONTHLY OCCUPANCY %: 83% Cost Approach: $2,185,000
1996 AVG. MONTHLY OCCUPANCY %: 84% Income Approach: $2,281,000
1995 AVG. MONTHLY OCCUPANCY %: 86% Market Approach: $2,090,000
1994 AVG. MONTHLY OCCUPANCY %: 84% REPLACEMENT COST NEW: $3,554,776
1993 AVG. MONTHLY OCCUPANCY %: 79% APPRAISAL DATE: 1/98
PARTNERSHIP'S COUNTRY SQUARE SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: PARTNERSHIP'S UNDIVIDED %
Country Square Apartments, Ltd. INTEREST IN SECOND
(affiliate of Managing Shareholder) MORTGAGE NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $1,372,237 AGGREG. ANNUAL DEBT SERVICE: $163,746
AGGREG. 12/31/98 BALANCE: $1,364,549 AGGREG. MONTHLY PAYMENT: $ 13,645
AGGREG. BALANCE DUE AT MATURITY: $1,364,549 MATURITY DATE: 4/08
AGGREG. ACCRUED UNPAID INTEREST: $141,226
</TABLE>
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Fixed rate of 12%; requires payments
of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: None.
OTHER MATTERS: In 3/97, the Exchange Partnership received a loan with a current
principal balance of $254,267 (with accrued unpaid interest of $33,965) from
Baron Strategic Investment Fund VI, Ltd. ("Baron Fund VI"). The Exchange
Partnership, in turn, lent the loan proceeds to the debtor as part of the
Country Square Second Mortgage Loans. The loan from Baron Fund VI bears interest
at the rate of 15%, payable monthly, matures in 9/02 and is secured by the
Exchange Partnership's interest in two second mortgage notes and a second
mortgage.
Prior to 12/15/98, the second mortgage loans consisted of a second mortgage note
with a principal balance of $1,192,987 and an unsecured demand note with a
principal balance of $179,250. On 12/15/98, the debtor restated and amended the
notes and the debtor and the Exchange Partnership entered into a mortgage
modification agreement. Pursuant to the arrangement, the Exchange Partnership
agreed to set the maturity date on the demand note at the same maturity date as
the second mortgage note, in exchange for the debtor's agreement to secure its
repayment obligation on the demand note with a second mortgage on the Country
Square Property.
B-21
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD. (cont'd)
COUNTRY SQUARE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Prudential Mortgage Capital Company, LLC REPAYMENT SECURED BY:
100 Mulberry Street - 9th Floor First Mortgage on Country
Newark, NJ 07102-4069______________ Square Property
ORIGINAL PRINCIPAL BALANCE: $1,600,000 ANNUAL DEBT SERVICE: $133,068
11/1/98 BALANCE: $1,592,633 MONTHLY PAYMENT: $ 11,089
BALANCE DUE AT MATURITY: $1,385,953 MATURITY DATE: 3/08
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: The loan bears a fixed interest rate
of 7.41% and amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 11/96 NUMBER OF UNITS SOLD: 2,000
NUMBER OF INVESTORS: 43 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,000,000 DATE OFFERING TERMINATED: 4/97
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to the investors until they have received a 12% non-cumulative
return on their capital contributions; thereafter, any remaining
distributable cash during the fiscal year is to be distributed to 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 an 18% yearly cash-on-cash return, the GP is
entitled to receive any remaining net proceeds.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 103 Units
valued at $10 per Unit (or $1,030)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $81
Long Term Capital Gain (assuming 20% rate): $42
- --------------------------------------------------------------------------------
(See Endnotes of Exchange Mortgage Partnerships)
B-22
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
(GP: Baron Capital XL, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns (i) an unrecorded second mortgage loan
secured by the Candlewood Property-Phase II, (ii) an undivided interest in
three unrecorded second mortgage loans and a 100% interest in an
unrecorded second mortgage loan secured by the Curiosity Creek Property
and (iii) five unrecorded second mortgage loans secured by the Sunrise
Property-Phase I. The interest of the Exchange Partnership and other
Exchange Partnerships in the second mortgage loans, terms of the first
mortgage loans secured by the properties, and other information are
described below.
1. CANDLEWOOD SECOND MORTGAGE LOAN
NAME AND ADDRESS OF PROPERTY
SECURING MORTGAGE LOAN:
CANDLEWOOD APARTMENTS - PHASE II YEAR COMPLETED: 1984
("Candlewood Property") APPROX. ACREAGE: 2.75
5901 Bryce Lane
Tampa, Florida 33615
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 6 288 $339
- -------------------------------------------------------------------------------------------------------------------
1 BR 26 576 $439
- -------------------------------------------------------------------------------------------------------------------
2 BR 1 864 $539
- -------------------------------------------------------------------------------------------------------------------
Total 33 17,568
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 94% APPRAISED VALUE: $925,000
1997 AVG. MONTHLY OCCUPANCY %: 94% Cost Approach: $926,000
1996 AVG. MONTHLY OCCUPANCY %: 95% Income Approach: $922,000
1995 AVG. MONTHLY OCCUPANCY %: 93% Market Approach: $932,000
1994 AVG. MONTHLY OCCUPANCY %: 94% REPLACEMENT COST NEW: $1,590,447
1993 AVG. MONTHLY OCCUPANCY %: 92% APPRAISAL DATE: 1/98
PARTNERSHIP'S CANDLEWOOD SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Baron Strategic Investment Fund III, Ltd. PARTNERSHIP'S UNDIVIDED INTEREST
(affiliate of Managing Shareholder) IN SECOND MORTGAGE NOTE: 100%
ORIGINAL PRINCIPAL BALANCE: $21,000 ANNUAL DEBT SERVICE: $2,520
11/1/98 BALANCE: $21,000 MONTHLY PAYMENT: $ 210
BALANCE DUE AT MATURITY: $21,000 MATURITY DATE: 3/03
ACCRUED UNPAID INTEREST: $ 1,890
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed rate of 12%; requires payments
of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund VI,
Ltd. ("Baron Fund VI") and Baron Strategic Investment Fund IX, Ltd. ("Baron Fund
IX") own separate second mortgage loans secured by the Candlewood Property. The
original principal balance, aggregate 12/31/98 principal balance, and balance
due at maturity in respect of Baron Fund VI's and Baron Fund IX's second
mortgage loans are $68,000 (accrued unpaid interest of $4,760) and $75,500
(accrued unpaid interest of $5,285), respectively; the annual (and monthly)
payments due them are $8,160 ($680) and $9,060 ($755), respectively. The other
terms relating to Baron Fund VI's and Baron Fund IX's second mortgage loans are
the same as stated herein in respect of the Exchange Partnership's loan.
OTHER MATTERS: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted
of an unsecured demand note with a principal balance of $21,000. On 12/15/98,
the debtor and the Exchange Partnership entered into a second mortgage agreement
under which the debtor agreed to secure its repayment obligation on the note
with a second mortgage on the Candlewood Property. At the same time, the debtor
agreed to secure the loans in favor of Baron Fund VI and Baron Fund IX with
separate second mortgages on the property. The lending parties have agreed to
share the benefits of the second mortgages on a pari passu basis.
B-23
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD. (cont'd)
CANDLEWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Republic Bank REPAYMENT SECURED BY:
P.O. Box 33009 First Mortgage on Candlewood
St. Petersburg, Florida 33733-8009 Property
ORIGINAL PRINCIPAL BALANCE: $605,000 ANNUAL DEBT SERVICE: $56,153
11/1/98 BALANCE: $596,528 MONTHLY PAYMENT: $ 4,679
BALANCE DUE AT MATURITY: $533,678 MATURITY DATE: 2/03
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of
7.79%;amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
2. CURIOSITY CREEK SECOND MORTGAGE LOANS
NAME AND ADDRESS OF PROPERTY
SECURING MORTGAGE LOANS:
CURIOSITY CREEK APARTMENTS YEAR COMPLETED: 1982
("Curiosity Creek Property") APPROX. ACREAGE: 4.51
102 Curiosity Creek Lane
Tampa, Florida 33612
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 16 288 $355
- -------------------------------------------------------------------------------------------------------------------
1 BR/ 1 Bath 59 576 $435
- -------------------------------------------------------------------------------------------------------------------
2 BR/ 1 Bath 6 864 $545
- -------------------------------------------------------------------------------------------------------------------
Total 81 43,776
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 93% APPRAISED VALUE: $2,425,000
1997 AVG. MONTHLY OCCUPANCY %: 88% Cost Approach: $2,426,000
1996 AVG. MONTHLY OCCUPANCY %: 86% Income Approach: $2,552,000
1995 AVG. MONTHLY OCCUPANCY %: 92% Market Approach: $2,297,000
1994 AVG. MONTHLY OCCUPANCY %: 89% REPLACEMENT COST NEW: $3,941,164
1993 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 3/98
PARTNERSHIP'S CURIOSITY CREEK SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Curiosity Creek Apartments, Ltd. PARTNERSHIP'S UNDIVIDED 26.3% on three
(affiliate of Managing Shareholder) % INTEREST IN SECOND loans and 100% on
MORTGAGE NOTES: one
AGGREG. ORIGINAL PRINCIPAL BALANCE: $474,703 AGGREG. ANNUAL DEBT SERVICE: $41,238
AGGREG. 11/1/98 BALANCE: $474,703 (plus any participation interest)
AGGREG. BALANCE DUE AT MATURITY: $474,703 AGGREG. MONTHLY PAYMENT: $ 3,437
AGGREG. ACCRUED UNPAID INTEREST: $ 22,998 MATURITY DATE: 4/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$212,227 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow, plus additional
non-cumulative participation interest equal to 30% of any remaining available
cash flow), (ii) adjustable interest rate of prime plus 1% (currently 8.75%) as
to $108,899 of principal, (iii) fixed interest rate of 12.5% as to $109,325 of
principal and (iv) fixed interest rate of 12% as to $44,253 of principal. The
loans require payments of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
B-24
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD. (cont'd)
PARTNERSHIP'S CURIOSITY CREEK SECOND MORTGAGE LOAN INTERESTS (cont'd)
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Vulture Fund I, Ltd.
("Baron Vulture Fund") owns the remaining undivided 73.7% interest in three
second mortgage loans and a 100% interest in one second mortgage loan secured by
the Curiosity Creek Property ("Curiosity Creek Second Mortgage Loans"). The
aggregate original principal balance, aggregate 12/31/98 principal balance, and
aggregate balance due at maturity in respect of Baron Vulture Fund's interest in
the loans is $1,243,847 (accrued unpaid interest of $103,664); the aggregate
annual and monthly payments due it are $105,149 and $8,762, respectively. The
other terms relating to Baron Vulture Fund's interest in the loans are the same
as stated herein.
OTHER MATTERS: Prior to 12/15/98, the Curiosity Creek Second Mortgage Loans
consisted of a second mortgage note with a principal balance of $807,560, two
unsecured demand notes with a an aggregate principal balance of $830,360 and
advances in the amount of $66,171. On 12/15/98, the debtor, the Exchange
Partnership and Baron Vulture Fund entered into a mortgage modification
agreement pursuant to which the Exchange Partnership and Baron Vulture Fund
agreed to set the maturity date on the demand notes and the advances at the same
maturity date as the second mortgage note, in exchange for the debtor's
agreement to secure its repayment obligations on the unsecured notes and
advances with a second mortgage on the Curiosity Creek Property.
CURIOSITY CREEK FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Prudential Mortgage Capital Company, LLC REPAYMENT SECURED BY:
100 Mulberry Street - 9th Floor First Mortgage on Curiosity
Newark, NJ 07102-4069 Creek Property
ORIGINAL PRINCIPAL BALANCE: $1,300,000 ANNUAL DEBT SERVICE: $106,737
11/1/98 BALANCE: $1,294,866 MONTHLY PAYMENT: $ 8,895
BALANCE DUE AT MATURITY: $1,122,800 MATURITY DATE: 4/08
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.28%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
3. SUNRISE SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
SUNRISE APARTMENTS - PHASE I YEAR COMPLETED: 1981
("Sunrise Property") APPROX. ACREAGE: 4.08
3805 Hopkins Avenue
Titusville, Florida 32780
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
-------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR/ 1 Bath 54 576 $380
-------------------------------------------------------------------------------------------------------------------
2 BR/ 1Bath 6 864 $490
-------------------------------------------------------------------------------------------------------------------
Total 60 36,288
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 88% APPRAISED VALUE: $1,510,000
1997 AVG. MONTHLY OCCUPANCY %: 90% Cost Approach: $1,361,500
1996 AVG. MONTHLY OCCUPANCY %: 85% Income Method: $1,424,000
1995 AVG. MONTHLY OCCUPANCY %: 83% Market Approach: $1,591,000
1994 AVG. MONTHLY OCCUPANCY %: 89% REPLACEMENT COST NEW: $2,700,611
1993 AVG. MONTHLY OCCUPANCY %: 83% APPRAISAL DATE: 4/98
B-25
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD. (cont'd)
PARTNERSHIP'S SUNRISE SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Sunrise Apartments I, Ltd. PARTNERSHIP'S UNDIVIDED INTEREST
(affiliate of Managing Shareholder) IN SECOND MORTGAGE NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $1,036,450 AGGREG. ANNUAL DEBT SERVICE: $53,995
(plus any participation interest)
AGGREG. 12/31/98 BALANCE: $1,031,801 AGGREG. MONTHLY PAYMENT: $ 4,500
AGGREG. BALANCE DUE AT MATURITY: $1,031,801 MATURITY DATE: 10/07
AGGREG. ACCRUED UNPAID INTEREST: $ 29,678
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$335,000 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow plus additional
non-cumulative participation interest equal to 20% of any remaining available
cash flow), (ii) fixed interest rate of 4% as to $621,515 of principal, and
(iii) fixed interest rate of 12% as to $75,286 of principal. The loans require
payments of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: None
OTHER MATTERS: Prior to 12/15/98, the second mortgage loans secured by the
Sunrise Property (the "Sunrise Second Mortgage Loans") consisted of a second
mortgage note with a principal balance of $335,000, two unsecured demand notes
with an aggregate principal balance of $622,982 and advances in the amount of
$73,819. In 12/15/98, the debtor restated and amended the second mortgage note
and one of the demand notes and created two new promissory notes in favor of the
Exchange Partnership in the original principal amounts of $48,468 and $25,350
(to cover prior advances). The debtor and the Partnership also entered into a
mortgage modification agreement. Pursuant to the arrangement, the Exchange
Partnership agreed to set the maturity date on the demand notes and the advances
at the same maturity date as the second mortgage note, in exchange for the
debtor's agreement to secure its repayment obligations on the unsecured notes
and advances with a second mortgage on the Sunrise Property. The other demand
note in the current principal amount of $1,467 remains unsecured.
SUNRISE FIRST MORTGAGE INFORMATION:
<TABLE>
<S> <C> <C> <C>
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC Commercial Mortgage Company REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Sunrise Property
Horsham, Pennsylvania 19044-0809
ORIGINAL PRINCIPAL BALANCE: $1,307,000 ANNUAL DEBT SERVICE: $174,020
11/1/98 BALANCE: $1,029,898 MONTHLY PAYMENT: $ 14,502
BALANCE DUE AT MATURITY: $ 932,217 MATURITY DATE: 1/05
</TABLE>
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: Fixed interest rate of 7.5%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 11/96 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 56 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 6/97
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to the investors until they have received a 15% non-cumulative
return on their capital contributions; thereafter, any remaining
distributable cash during the fiscal year is to be distributed to 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 15% yearly cash-on-cash return, the
investors and the GP will share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 104 Units
valued at $10 per Unit (or $1,040)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $36
Long Term Capital Gain (assuming 20% rate): $19
- --------------------------------------------------------------------------------
(See Endnotes of Exchange Mortgage Partnerships)
B-26
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
(GP: Baron Capital XLIV, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns (i) an undivided interest in an unrecorded
second mortgage loan secured by the Heatherwood Property-Phase II, (ii)
three unrecorded second mortgage loans secured by the Longwood
Property-Phase I and (iii) an unrecorded second mortgage loan secured by
the Lake Sycamore Property (under development). The interest of the
Exchange Partnership and other Exchange Partnerships in the second
mortgage loans, terms of the first mortgage loans secured by each
property, and other information are described below.
1. HEATHERWOOD SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
HEATHERWOOD APARTMENTS - PHASE II YEAR COMPLETED: 1982
("Heatherwood Property") APPROX. ACREAGE: 2.26
1105 North Hoagland Blvd.
Kissimmee, Florida 34741
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 10 288 $519
- -------------------------------------------------------------------------------------------------------------------
1 BR/1 Bath 26 576 $599
- -------------------------------------------------------------------------------------------------------------------
2 BR/1 Bath 4 864 $599
- -------------------------------------------------------------------------------------------------------------------
2BR/2 Bath 1 864 $599
- -------------------------------------------------------------------------------------------------------------------
Total 41 22,176
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 98% APPRAISED VALUE: $1,285,000
1997 AVG. MONTHLY OCCUPANCY %: 97% Cost Approach: $1,188,000
1996 AVG. MONTHLY OCCUPANCY %: 93% Income Approach: $1,259,000
1995 AVG. MONTHLY OCCUPANCY %: 88% Market Approach: $1,312,000
1994 AVG. MONTHLY OCCUPANCY %: 91% REPLACEMENT COST NEW: $1,862,475
1993 AVG. MONTHLY OCCUPANCY %: 89% APPRAISAL DATE: 3/98
PARTNERSHIP'S HEATHERWOOD SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Heatherwood Apartments II, Ltd. PARTNERSHIP'S UNDIVIDED
(an affiliate of Managing Shareholder) % INTEREST IN LOANS: 58%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $206,260 AGGREG. ANNUAL DEBT SERVICE: $13,408
AGGREG. 12/31/98 BALANCE: $206,260 (plus any participation interest)
AGGREG. BALANCE DUE AT MATURITY: $206,260 AGGREG. MONTHLY PAYMENT: $ 1,117
AGGREG. ACCRUED UNPAID INTEREST: $0 AGGREG. MATURITY DATE: 10/04
</TABLE>
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as
to $188,500 of principal (plus non-cumulative participation interest at the rate
of 3% on the unpaid principal to the extent of available cash flow plus
additional non-cumulative participation interest equal to 30% of any remaining
available cash flow), (ii) adjustable interest rate of 1% over prime rate
(currently 8.75%) as to $1,010 of principal, and (iii) fixed interest rate of
12% as to $16,749 of principal. The loans require payments of interest only
until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund X,
Ltd. ("Baron Fund X") owns the remaining undivided 42% interest in the second
mortgage loans secured by the Heatherwood Property and in the unsecured loans
associated with the property ("Heatherwood Loans"). The aggregate original
principal balance, aggregate 12/31/98 principal balance, and aggregate balance
due at maturity in respect of Baron Fund X's interest in the Heatherwood Loans
is $149,361 (accrued unpaid interest of $17,338); the aggregate annual (and
monthly) payments due it are $9,710 ($809). The other terms relating to Baron
Fund X's interest in the Heatherwood Loans are the same as stated herein.
OTHER MATTERS: The Heatherwood Loans consist of a second mortgage note secured
by the Heatherwood Property with a principal balance $325,000 and unsecured
loans in the aggregate principal amount of $24,121.
B-27
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD. (cont'd)
HEATHERWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Heatherwood
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $710,000 ANNUAL DEBT SERVICE: $61,038
11/1/98 BALANCE: $704,306 MONTHLY PAYMENT: $ 5,087
BALANCE DUE AT MATURITY: $655,856 MATURITY DATE: 11/04
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.75%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
3. LONGWOOD SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
LONGWOOD APARTMENTS - PHASE I YEAR COMPLETED: 1981
("Longwood Property") APPROX. ACREAGE: 4.00
1524 Clearlake Road
Cocoa, Florida 32922
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR/1 Bath 51 576 $419
- -------------------------------------------------------------------------------------------------------------------
2 BR/1 Bath 8 864 $519
- -------------------------------------------------------------------------------------------------------------------
Total 59 36,288
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 100% APPRAISED VALUE: $1,820,000
1997 AVG. MONTHLY OCCUPANCY %: 86% Cost Approach: $1,664,000
1996 AVG. MONTHLY OCCUPANCY %: 93% Income Approach: $1,788,000
1995 AVG. MONTHLY OCCUPANCY %: 93% Market Approach: $1,844,000
1994 AVG. MONTHLY OCCUPANCY %: 95% REPLACEMENT COST NEW: $ 266,862
1993 AVG. MONTHLY OCCUPANCY %: 98% APPRAISAL DATE: 3/98
PARTNERSHIP'S LONGWOOD SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Longwood Apartments I, Ltd. PARTNERSHIP'S UNDIVIDED %
(an affiliate of Managing Shareholder) INTEREST IN SECOND
MORTGAGE NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $969,268 AGGREG. ANNUAL DEBT SERVICE: $77,088
AGGREG. 11/1/98 BALANCE: $969,268 (plus any participation interest)
AGGREG. BALANCE DUE AT MATURITY: $969,268 AGGREG. MONTHLY PAYMENT: $6,424
AGGREG. ACCRUED UNPAID INTEREST: $ 47,892 MATURITY DATE: 10/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$368,558 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow plus additional
non-cumulative participation interest equal to 30% of any remaining available
cash flow), (ii) adjustable interest rate of 1% over prime rate (currently
8.75%) as to $526,465 of principal, and (iii) fixed interest rate of 12% as to
$74,245 of principal. The loans require payments of interest only until
maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: None
B-28
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD. (cont'd)
PARTNERSHIP'S LONGWOOD SECOND MORTGAGE LOAN INTERESTS (cont'd):
OTHER MATTERS: Prior to 12/15/98, the Longwood Second Mortgage Loans consisted
of a second mortgage note with a principal balance of $368,558, an unsecured
demand note with a principal balance of $526,465, and advances of $74,245. On
12/15/98, the debtor restated and amended the second mortgage note and the
demand note and created a new promissory note in the original principal amount
of $74,245 (to cover prior advances). The debtor and the Exchange Partnership
also entered into a mortgage modification agreement. Pursuant to the
arrangement, the Exchange Partnership agreed to set the maturity date on the
demand note and the advances at the same maturity date as the second mortgage
note, in exchange for the debtor's agreement to secure its repayment obligations
on the demand note and advances with a second mortgage on the Longwood Property.
LONGWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Longwood
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $1,307,000 ANNUAL DEBT SERVICE: $89,150
11/1/98 BALANCE: $1,028,684 MONTHLY PAYMENT: $ 7,429
BALANCE DUE AT MATURITY: $1,204,545 MATURITY DATE: 11/04
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.75%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
3. LAKE SYCAMORE SECOND MORTGAGE LOAN:
NAME AND ADDRESS
OF PROPERTY SECURING MORTGAGE:
VILLAS AT LAKE SYCAMORE
("Lake Sycamore Property")
1911 Chaucer Drive
Cincinnati, Ohio 45237
PARTNERSHIP'S SECOND MORTGAGE INTEREST:
The Partnership owns an unrecorded second mortgage note with a current principal
balance of $98,000. Accrued unpaid interest on the note as of 12/31/98 is
$9,800. The debtor is Sycamore Real Estate Development, L.P., an affiliate of
the Managing Shareholder. The note bears interest at the fixed rate of 12% and
matures on 12/03. The note is secured by a second mortgage on the Villas at Lake
Sycamore, a 164 townhome property under construction on 22.44 acres in
Cincinnati, Ohio. Each townhome has a rentable area per unit of approximately
1,325 square feet (or a total area of 217,300 square feet). Construction
commenced in December 1997 and is expected to be completed in the last quarter
of 2003. Each unit is expected to have an initial monthly rental rate in the
range of $889 to $990. In July 1998, an independent Cincinnati appraisal firm
estimated the "as is" value of the property at $1,080,000 and the value of the
completed property to be $14,312,000 (assuming completion of the project as
designed, full rent up and satisfactory environment-quality test).
Two other Exchange Partnerships, Baron Strategic Investment Fund, Ltd. and Baron
Strategic Investment Fund IX, Ltd., own separate second mortgage notes secured
by the property with the same terms except that they are in the principal
amounts of $230,000 and $243,500 (with accrued unpaid interest in the amounts of
$20,700 and $21,915), respectively. The lending parties have agreed to share the
benefits of the second mortgage on a pari passu basis.
B-29
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD. (cont'd)
LAKE SYCAMORE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Metropolitan Savings REPAYMENT SECURED BY:
8050 Hosbrook Road, Suite 408 First Mortgage on Lake Sycamore
Cincinnati, Ohio 45236 Property
ORIGINAL PRINCIPAL BALANCE: $2,000,000 ANNUAL DEBT SERVICE: Interest only
maximum approved MONTHLY PAYMENT: Interest only
11/1/98 BALANCE: $ 800,000 MATURITY DATE: 11/01
EXPECTED BALANCE
DUE AT MATURITY: $2,000,000
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Adjustable interest rate equal to
lender's prime rate plus 1% (currently 8.75%); requires payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 5/97 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 43 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 2/98
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to the investors until they have received a 12.5%
non-cumulative return on their capital contributions; thereafter, investors
and the GP share any remaining distributable cash during the fiscal year
50%/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 an 12.5% yearly cash-on-cash return,
investors and the GP share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 104 Units
valued at $10 per Unit (or $1,040)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $43
Long Term Capital Gain (assuming 20% rate): $22
- --------------------------------------------------------------------------------
(See Endnotes to Exchange Mortgage Partnerships)
B-30
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
(GP: Baron Capital XXVI, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns an undivided interest in three unrecorded
second mortgage loans and a 100% interest in one loan secured by the
Curiosity Creek Property described below. The interest of the Exchange
Partnership and a separate Exchange Partnership in the second mortgage
loans, terms of the first mortgage loan secured by the property, and other
information are described below..
CURIOSITY CREEK SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
CURIOSITY CREEK APARTMENTS
("Curiosity Creek Property") YEAR COMPLETED: 1982
102 Curiosity Creek Lane APPROX. ACREAGE: 4.51
Tampa, Florida 33612
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 16 288 $355
- -------------------------------------------------------------------------------------------------------------------
1 BR/ 1 Bath 59 576 $435
- -------------------------------------------------------------------------------------------------------------------
2 BR/ 1 Bath 6 864 $545
- -------------------------------------------------------------------------------------------------------------------
Total 81 43,776
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 93% APPRAISED VALUE: $2,425,000
1997 AVG. MONTHLY OCCUPANCY %: 88% Cost Approach: $2,426,000
1996 AVG. MONTHLY OCCUPANCY %: 86% Income Approach: $2,552,000
1995 AVG. MONTHLY OCCUPANCY %: 92% Market Approach: $2,297,000
1994 AVG. MONTHLY OCCUPANCY %: 89% REPLACEMENT COST NEW: $3,941,164
1993 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 3/98
PARTNERSHIP'S CURIOSITY CREEK SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Curiosity Creek Apartments, Ltd. PARTNERSHIP'S UNDIVIDED 73.7% on three
(an affiliate of Managing Shareholder) % INTEREST IN SECOND loans and 100%
MORTGAGE NOTES: of one
AGGREG. ORIGINAL PRINCIPAL BALANCE: $1,243,847 AGGREG. ANNUAL DEBT SERVICE: $107,440
AGGREG. 11/1/98 BALANCE: $1,243,847 (plus participation interest)
AGGREG. BALANCE DUE AT MATURITY: $1,243,847 AGGREG. MONTHLY PAYMENT: $ 8,953
AGGREG. ACCRUED UNPAID INTEREST: $ 103,664 MATURITY DATE: 4/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$595,333 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow plus additional
non-cumulative participation interest equal to 30% of any remaining available
cash flow), (ii) adjustable interest rate of prime plus 1% (currently 8.75%) as
to $305,407 of principal, (iv) fixed interest rate of 12.5% as to $306,675 of
principal, and (iii) fixed interest rate of 12% as to $36,431 of principal. The
loans require payments of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund V,
Ltd. ( "Baron Fund V") owns the remaining undivided 26.3% interest in three
second mortgage loans and a 100% interest in one second mortgage loan secured by
the Curiosity Creek Property ("Curiosity Creek Second Mortgage Loans"). The
aggregate original principal balance, aggregate 12/31/98 principal balance, and
aggregate balance due at maturity in respect of Baron Fund V's interest in the
Curiosity Creek Second Mortgage Loans is $474,703 (accrued unpaid interest of
$22,998); the aggregate annual and monthly payments due it are $42,055 and
$3,505, respectively. The other terms relating to Baron Fund V's interest in the
Curiosity Creek Second Mortgage Loans are the same as stated herein.
OTHER MATTERS: Prior to 12/15/98, the Curiosity Creek Second Mortgage Loans
consisted of a second mortgage note with a principal balance of $807,560, two
unsecured demand notes with an aggregate principal balance of $830,360 and
advances in the amount of $66,171. On 12/15/98, the debtor, the Exchange
Partnership and Baron Fund V entered into a mortgage modification agreement
pursuant to which the Exchange Partnership and Baron Fund V agreed to set the
maturity date on the demand notes and the advances at the same maturity date as
the second mortgage note, in exchange for the debtor's agreement to secure its
repayment obligations on the unsecured notes and advances with a second mortgage
on the Curiosity Creek Property.
B-31
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD. (cont'd)
CURIOSITY CREEK FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Prudential Mortgage Capital Company, LLC REPAYMENT SECURED BY:
100 Mulberry Street - 9th Floor First Mortgage on Curiosity
Newark, NJ 07102-4069 Creek Property
ORIGINAL PRINCIPAL BALANCE: $1,300,000 ANNUAL DEBT SERVICE: $106,737
11/1/98 BALANCE: $1,294,866 MONTHLY PAYMENT: $ 8,895
BALANCE DUE AT MATURITY: $1,122,800 MATURITY DATE: 4/08
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.28%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 5/96 NUMBER OF UNITS SOLD: 1,800
NUMBER OF INVESTORS: 42 PRICE PER UNIT: $500
PAID IN CAPITAL: $900,000 DATE OFFERING TERMINATED: 10/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to the investors until they have received a 15% non-cumulative
return on their capital contributions; thereafter, any remaining
distributable cash during the fiscal year is to be distributed to the GP.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: After investors
have first received an aggregate amount (including prior distributions) equal
to the amount of their capital contributions plus a 10% yearly cash-on-cash
return and the GP has then received a similar return on the amount of its
capital contribution, investors and the GP share any remaining net proceeds
50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 105 Units
valued at $10 per Unit (or $1,050)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $134
Long Term Capital Gain (assuming 20% rate): $ 69
- --------------------------------------------------------------------------------
(See Endnotes to Exchange Mortgage Partnerships)
B-32
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
(GP: Baron Capital XII, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns three unrecorded second mortgage loans
secured by the Meadowdale Property described below. The Exchange
Partnership's interest in the Second Mortgage Loans, terms of the
first mortgage loan secured by the property, and other information
are described below.
MEADOWDALE SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
MEADOWDALE APARTMENTS
("Meadowdale Property") YEAR COMPLETED: 1984
248 E. University Boulevard APPROX. ACREAGE: 4.81
Melbourne, Florida 32901
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 56 576 $399
- -------------------------------------------------------------------------------------------------------------------
2 BR 8 864 $499
- -------------------------------------------------------------------------------------------------------------------
Total 64 39,168
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 70% APPRAISED VALUE: $1,717,000
1997 AVG. MONTHLY OCCUPANCY %: 89% Cost Approach: $1,636,000
1996 AVG. MONTHLY OCCUPANCY %: 90% Income Approach: $1,629,000
1995 AVG. MONTHLY OCCUPANCY %: 92% Market Approach: $1,643,000
1994 AVG. MONTHLY OCCUPANCY %: 91% REPLACEMENT COST NEW: $3,084,043
1993 AVG. MONTHLY OCCUPANCY %: 91% APPRAISAL DATE: 8/98
PARTNERSHIP'S MEADOWDALE SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Florida Opportunity Income Fund III, Ltd. PARTNERSHIP'S UNDIVIDED %
(affiliate of Managing Shareholder) INTEREST IN SECOND MORTGAGE
NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $1,048,861 AGGREG. ANNUAL DEBT SERVICE: $72,861
AGGREG. 12/31/98 BALANCE: $1,048,861 (plus any participation interest)
AGGREG. BALANCE DUE AT MATURITY: $1,048,861 AGGREG. MONTHLY PAYMENT: $ 5,988
AGGREG. ACCRUED UNPAID INTEREST: $ 116,742 MATURITY DATE: 10/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$752,747 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow plus additional
non-cumulative participation interest equal to 20% of any remaining available
cash flow), (ii) adjustable interest rate of 1% over prime rate (currently
8.75%) as to $271,923 of principal and (iii) fixed rate of 12% as to $24,191 of
principal.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: None
OTHER MATTERS: Prior to 12/15/98, the second mortgage loans consisted of a
second mortgage note with a principal balance of $752,747, an unsecured demand
note with a principal balance of $271,923 and advances of $24,191. On 12/15/98,
the debtor restated and amended the second mortgage note and the demand note and
created a new promissory note in favor of the Exchange Partnership in the
original principal amount of $24,191 (to cover the prior advances). The debtor
and the Exchange Partnership also entered into a mortgage modification
agreement. Pursuant to the arrangement, the Exchange Partnership agreed to set
the maturity date on the demand note and the advances at the same maturity date
as the second mortgage note, in exchange for the debtor's agreement to secure
its repayment obligations on the demand note and the advances with a second
mortgage on the Meadowdale Property.
B-33
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD. (cont'd)
MEADOWDALE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Republic Bank REPAYMENT SECURED BY:
P.O. Box 33009 First Mortgage on Meadowdale
St. Petersburg, Florida 33733-8009 Property
ORIGINAL PRINCIPAL BALANCE: $1,000,000 ANNUAL DEBT SERVICE: $93,935
11/1/98 BALANCE: $ 963,343 MONTHLY PAYMENT: $ 7,828
BALANCE DUE AT MATURITY: $ 905,918 MATURITY DATE: 7/01
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: Fixed interest rate of 8.75%;
amortizes on a 22-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 1/96 NUMBER OF UNITS SOLD: 575
NUMBER OF INVESTORS: 23 PRICE PER UNIT: $1,000
PAID IN CAPITAL: $575,000 DATE OFFERING TERMINATED: 4/96
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, investors and the GP share
distributable cash 99%/1%.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: Investors are
entitled to 100% of net proceeds until the entire amount of the Partnership's
Second Mortgage Loans have been repaid and the GP is entitled to receive any
remaining net proceeds.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 104 Units
valued at $10 per Unit (or $1,040)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $43
Long Term Capital Gain (assuming 20% rate): $22
- --------------------------------------------------------------------------------
(See Endnotes on Exchange Mortgage Partnerships)
B-34
<PAGE>
Endnotes to Exchange Mortgage Partnerships:
1. For purposes of the Exchange Offering, the value of each Exchange Mortgage
Partnership has been based upon the current principal balance of mortgage
interests in properties held by the partnership, independent appraisals of
the replacement cost new of property securing such indebtedness (without
taking into account the deficiencies of the existing improvements as
compared to a new building) and the debtor's repayment history and current
net equity interest in such property.
2. The second mortgage interests held by the Exchange Partnership and the
first mortgage loans identified are not insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise
insured or guaranteed. Repayment of each of the loans indicated is
non-recourse beyond the underlying property and /or other assets of the
particular debtor.
3. In the opinion of the Managing Shareholder, each residential apartment
property identified is in good overall condition and is suitable and
adequate for the purpose for which it was built.
4. Each property is subject to significant competition from other residential
apartment properties in its general vicinity.
5. In the opinion of the Managing Shareholder, each property is covered by
insurance of the types and amounts which are comparable for similar
properties located in its general vicinity.
6. 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 lease agreements with terms of one
year or less which are common in the industry.
7. For purposes of determining the appraised value of the Exchange
Partnership, the estimated appraised value of the property interest owned
by the Partnership and replacement cost new of each property was determined
by a qualified and licensed independent appraisal firm. See the Prospectus
at "THE EXCHANGE OFFERING - Exchange Property Appraisals."
8. The overall depreciable life of each property is 27.5 years; depreciation
is determined using the straight-line method.
9. 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 to the Operating Partnership 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.
B-35
<PAGE>
EXCHANGE HYBRID PARTNERSHIPS
B-36
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
(GP: Baron Capital XXXI, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns (1) a 57% limited partnership interest in
a limited partnership which holds fee simple title to the Pineview
Property, (2) an unrecorded second mortgage loan secured by the
Candlewood Property-Phase II, (3) an undivided interest in two recorded
second mortgage loans secured by the Garden Terrace Property-Phase III,
and (4) a note receivable from another Exchange Partnership which is
secured by two unrecorded second mortgage notes and a second mortgage on
the Country Square Property-Phase I. The interest of the Exchange
Partnership and other Exchange Partnerships in the Pineview Property and
the second mortgage loans, the note payable to the Exchange Partnership
from another Exchange Partnership, terms of the respective first
mortgage loan and the Exchange Partnership's second mortgage loans
secured by the three properties described below, and other information
are described below.
1. EQUITY INTEREST IN PINEVIEW PROPERTY
NAME AND ADDRESS OF PROPERTY:
PINEVIEW APARTMENTS
("Pineview Property") YEAR COMPLETED: 1988
4731 Pine Hills Road APPROX. ACREAGE: 4.38
Orlando, Florida 32808
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 26 288 $399
- -------------------------------------------------------------------------------------------------------------------
1 BR 59 576 $459
- -------------------------------------------------------------------------------------------------------------------
2 BR 6 864 $589-600
- -------------------------------------------------------------------------------------------------------------------
Total 91 46,656
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
11/1/98 OCCUPANCY %: 95% ESTIMATED APPRAISED VALUE: $2,848,000
1997 AVG. MONTHLY OCCUPANCY %: 92% APPRAISAL DATE: 3/98
1996 AVG. MONTHLY OCCUPANCY %: 93% 11/1/98 FEDERAL INCOME TAX BASIS: $1,747,499
1995 AVG. MONTHLY OCCUPANCY %: 90% DEPRECIATION LIFE CLAIMED: 30 years
1994 AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 21.4657
1993 AVG. MONTHLY OCCUPANCY %: 91% 1997 PROPERTY TAX VALUE: $1,384,273
</TABLE>
PINEVIEW FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Pineview
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $1,620,000 ANNUAL DEBT SERVICE: $139,271
11/1/98 BALANCE: $1,605,781 MONTHLY PAYMENT: $ 11,606
BALANCE DUE AT MATURITY: $1,493,008 MATURITY DATE: 11/04
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.75%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted prior to May 1, 2004; thereafter,
may be prepaid subject to a yield maintenance fee payable until 6 months prior
to maturity.
SECOND MORTGAGE ON PROPERTY: The Partnership also owns an interest in a second
mortgage loan on the Pineview Property which is described below.
B-37
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD. (cont'd)
2. CANDLEWOOD SECOND MORTGAGE LOAN
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
CANDLEWOOD APARTMENTS - PHASE II YEAR COMPLETED: 1984
("Candlewood Property") APPROX. ACREAGE: 2.75
5901 Bryce Lane
Tampa, Florida 33615
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 6 288 $339
- -------------------------------------------------------------------------------------------------------------------
1 BR 26 576 $439
- -------------------------------------------------------------------------------------------------------------------
2 BR 1 864 $539
- -------------------------------------------------------------------------------------------------------------------
Total 33 17,568
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 94% APPRAISED VALUE: $ 925,000
1997 AVG. MONTHLY OCCUPANCY %: 94% Cost Approach: $ 926,000
1996 AVG. MONTHLY OCCUPANCY %: 95% Income Approach: $ 922,000
1995 AVG. MONTHLY OCCUPANCY %: 93% Market Approach: $ 932,000
1994 AVG. MONTHLY OCCUPANCY %: 94% REPLACEMENT COST NEW: $1,590,447
1993 AVG. MONTHLY OCCUPANCY %: 92% APPRAISAL DATE: 1/98
PARTNERSHIP'S CANDLEWOOD SECOND MORTGAGE LOAN INTEREST:
DEBTOR: Baron Strategic Investment PARTNERSHIP'S UNDIVIDED
Fund III, Ltd. % INTEREST IN SECOND
(affiliate of Managing Shareholder) MORTGAGE NOTE: 100%
ORIGINAL PRINCIPAL BALANCE: $68,000 ANNUAL DEBT SERVICE: $8,160
12/31/98 BALANCE: $68,000 MONTHLY PAYMENT: $ 680
BALANCE DUE AT MATURITY: $68,000 MATURITY DATE: 3/03
ACCRUED UNPAID INTEREST: $ 4,760
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed rate of 12%; requires payments
of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund V,
Ltd. ("Baron Fund V") and Baron Strategic Investment Fund IX, Ltd. ("Baron Fund
IX") own separate second mortgage loans secured by the Candlewood Property. The
original principal balance, aggregate 12/31/98 principal balance, and balance
due at maturity in respect of Baron Fund V's and Baron Fund IX's loans are
$21,000 (accrued unpaid interest of $1,890) and $75,500 (accrued unpaid interest
of $5,285), respectively; the annual (and monthly) payments due them are $2,520
($210) and $9,060 ($755), respectively. The other terms relating to Baron Fund
V's and Baron Fund IX's loans are the same as stated herein in respect of the
Exchange Partnership's loan.
OTHER MATTERS: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted
of an unsecured demand note with a principal balance of $68,000. On 12/15/98,
the debtor and the Exchange Partnership entered into a second mortgage agreement
under which the debtor agreed to secure its repayment obligation on the note
with a second mortgage on the Candlewood Property. At the same time, the debtor
agreed to secure the loans in favor of Baron Fund V and Baron Fund IX with
separate mortgages on the property. The lending parties have agreed to share the
benefits of the second mortgages on a pari passu basis.
B-38
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD. (cont'd)
CANDLEWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Republic Bank REPAYMENT SECURED BY:
P.O. Box 33009 First Mortgage on Candlewood
St. Petersburg, Florida 33733-8009 Property
ORIGINAL PRINCIPAL BALANCE: $605,000 ANNUAL DEBT SERVICE: $56,153
11/1/98 BALANCE: $596,528 MONTHLY PAYMENT: $ 4,679
BALANCE DUE AT MATURITY: $533,678 MATURITY DATE: 2/03
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.79%;
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
3. GARDEN TERRACE SECOND MORTGAGE LOAN
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
GARDEN TERRACE APARTMENTS - PHASE III
("Garden Terrace Property") YEAR COMPLETED: 1983
8725 Del Ray Court APPROX. ACREAGE: 5.16
Tampa, Florida 33617
Orlando, Florida 32822
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 8 288 $344
- -------------------------------------------------------------------------------------------------------------------
1 BR 67 576 $399
- -------------------------------------------------------------------------------------------------------------------
2 BR 16 864 $530
- -------------------------------------------------------------------------------------------------------------------
Total 91 54,720
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 90% APPRAISED VALUE: $1,850,000
1997 AVG. MONTHLY OCCUPANCY %: 78% Cost Approach: $1,835,000
1996 AVG. MONTHLY OCCUPANCY %: 81% Income Approach: $1,782,000
1995 AVG. MONTHLY OCCUPANCY %: 86% Market Approach: $1,901,000
1994 AVG. MONTHLY OCCUPANCY %: 90% REPLACEMENT COST NEW: $4,297,897
1993 AVG. MONTHLY OCCUPANCY %: 89% APPRAISAL DATE: 6/98
PARTNERSHIP'S GARDEN TERRACE SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Garden Terrace Apartments III, Ltd. PARTNERSHIP'S UNDIVIDED INTEREST
IN SECOND MORTGAGE LOANS: 20%
ORIGINAL PRINCIPAL BALANCE: $248,353 ANNUAL DEBT SERVICE: $22,353
12/31/98 BALANCE: $248,353 MONTHLY PAYMENT: $ 1,863
BALANCE DUE AT MATURITY: $248,353 MATURITY DATE: 1/07
ACCRUED UNPAID INTEREST: $ 12,418
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 2% as to
$147,000 of principal if cash flow available (plus non-cumulative participation
interest at the rate of 7% on the unpaid principal to the extent of available
cash flow, plus additional participation interest equal to 30% of any remaining
cash flow (payable only to holders of note referred to in (ii) below) and (ii)
fixed interest rate of 9% as to $101,353 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due
on the note referred to in (i) above. The loans require payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund IX,
Ltd. ("Baron Fund IX") and Baron Strategic Investment Fund X, Ltd. ("Baron Fund
X") own the remaining undivided 80% interest in the second mortgage loans
secured by the Garden Terrace Property ("Garden Terrace Second Mortgage Loans").
The original principal balance, 12/31/98 principal balance, and balance due at
maturity in respect of Baron Fund IX's and Baron Fund X's interest in the Garden
Terrace Second Mortgage Loans is $310,442 (accrued unpaid interest of $28,457)
and $682,972 (accrued unpaid interest of $62,606), respectively; the annual (and
monthly) payments due them are $27,940 ($2,328) and $61,467 ($5,122),
respectively. The other terms relating to Baron Fund IX's and Baron Fund X's
interest in the Garden Terrace Second Mortgage Loans are the same as stated
herein.
B-39
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD. (cont'd)
GARDEN TERRACE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Mellon Mortgage Company REPAYMENT SECURED BY:
1422 Euclid Ave., Suite 900 First Mortgage Garden Terrace
Cleveland, Ohio 44115-2092 Property
ORIGINAL PRINCIPAL BALANCE: $1,010,000 ANNUAL DEBT SERVICE: $96,047
11/1/98 BALANCE: $ 970,167 MONTHLY PAYMENT: $ 8,004
BALANCE DUE AT MATURITY: $ 822,063 MATURITY DATE: __5/05
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 8.31%;
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: May be prepaid beginning 4/99 with a 5% prepayment fee;
the fee decreases 1% per year until maturity.
4. NOTE PAYABLE BY BARON STRATEGIC INVESTMENT FUND IV, LTD.:
In 3/97, the Exchange Partnership provided a loan with a current principal
balance of $254,267 to another Exchange Partnership, Baron Strategic Investment
Fund IV, Ltd. ("Baron Fund IV"). Baron Fund IV, in turn, lent the loan proceeds
to the borrower as part of the Country Square Second Mortgage Loans. (See the
table for Baron Fund IV above.) The loan from Baron Fund VI to Baron Fund IV
bears interest at the annual rate of 15%, payable monthly, matures in 9/02 and
is secured by Baron Fund IV's interest in the second mortgage note and second
mortgage. Set forth below is information relating to the Country Square Property
and the Country Second Mortgage Loans.
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
COUNTRY SQUARE APARTMENTS - PHASE I
("Country Square Property") YEAR COMPLETED: 1981
8401 Aiken Court APPROX. ACREAGE: 4.56
Tampa, Florida 33615
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 14 288 $339
- -------------------------------------------------------------------------------------------------------------------
1 BR 52 576 $439
- -------------------------------------------------------------------------------------------------------------------
2 BR 7 864 $539
- -------------------------------------------------------------------------------------------------------------------
Total 73 40,032
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 95% APPRAISED VALUE: $2,185,000
1997 AVG. MONTHLY OCCUPANCY %: 83% Cost Approach: $2,185,000
1996 AVG. MONTHLY OCCUPANCY %: 84% Income Approach: $2,281,000
1995 AVG. MONTHLY OCCUPANCY %: 86% Market Approach: $2,090,000
1994 AVG. MONTHLY OCCUPANCY %: 84% REPLACEMENT COST NEW: $3,554,776
1993 AVG. MONTHLY OCCUPANCY %: 79% APPRAISAL DATE: 1/98
BARON FUND IV'S SECOND MORTGAGE LOAN INTEREST IN COUNTRY SQUARE PROPERTY:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Country Square Apartments, Ltd. BARON FUND IV'S UNDIVIDED %
(affiliate of Managing Shareholder) INTEREST IN SECOND MORTGAGE LOANS: 100%
ORIGINAL PRINCIPAL BALANCE: $1,372,237 ANNUAL DEBT SERVICE: $163,746
12/31/98 BALANCE: $1,364,549 MONTHLY PAYMENT: $ 13,645
BALANCE DUE AT MATURITY: $1,364,549 MATURITY DATE: 4/08
ACCRUED UNPAID INTEREST: $ 141,226
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed rate of 12%; requires payments
of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER MATTERS: Prior to 12/15/98, the second mortgage loans consisted of a
second mortgage note with a principal balance of $1,192,987 and an unsecured
demand note with a principal balance of $179,250. On 12/15/98, the debtor
restated and amended the notes and the debtor and the Exchange Partnership
entered into a mortgage modification agreement. Pursuant to the arrangement, the
Exchange Partnership agreed to set the maturity date on the demand note at the
same maturity date as the second mortgage note, in exchange for the debtor's
agreement to secure its repayment obligation on the demand note with a second
mortgage on the Country Square Property.
B-40
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD. (cont'd)
COUNTRY SQUARE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Prudential Mortgage Capital Company, LLC REPAYMENT SECURED BY:
100 Mulberry Street - 9th Floor First Mortgage on Country
Newark, NJ 07102-4069______________ Square Property
ORIGINAL PRINCIPAL BALANCE: $1,600,000 ANNUAL DEBT SERVICE: $133,068
11/1/98 BALANCE: $1,592,633 MONTHLY PAYMENT: $ 11,089
BALANCE DUE AT MATURITY: $1,385,953 MATURITY DATE: 3/08
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.41%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 11/96 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 43 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 4/97
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to the investors until they have received a 12.5%
non-cumulative return on their capital contributions; thereafter, investors
and the GP share any remaining distributable cash during the fiscal year
50%/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 an 12.5% yearly cash-on-cash return,
investors and the GP share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 103 Units
valued at $10 per Unit (or $1,030)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $36
Long Term Capital Gain (assuming 20% rate): $19
- --------------------------------------------------------------------------------
(See Endnotes on Exchange Hybrid Partnerships)
B-41
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
(GP: Baron Capital LXII, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Partnership owns (i) a 41.1% limited partnership interest in a
limited partnership which holds fee simple title to the Crystal Court
Property-Phase I, (ii) an undivided interest in an unrecorded second
mortgage loan secured by the Candlewood Property Phase II, (iii) an
undivided interest in two recorded second mortgage loans secured by the
Garden Terrace Property-Phase III, and (iv) an unrecorded second
mortgage loan secured by the Lake Sycamore Property (under development).
The interest of the Exchange Partnership and other Exchange Partnerships
in the Crystal Court Property and the respective second mortgage loans,
terms of the respective first mortgage loan secured by the Candlewood
Property, the Garden Terrace Property and the Lake Sycamore Property,
and other information are described below.
1. EQUITY INTEREST IN CRYSTAL COURT PROPERTY
NAME AND ADDRESS OF PROPERTY:
CRYSTAL COURT APARTMENTS - PHASE I YEAR COMPLETED: 1982
("Crystal Court Property") APPROX. ACREAGE: 4.5
1969 Crystal Court Drive
Lakeland, Florida 33801
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 64 576 $379
- -------------------------------------------------------------------------------------------------------------------
2 BR 8 864 $479
- -------------------------------------------------------------------------------------------------------------------
Total 72 43,776
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
11/1/98 OCCUPANCY %: 94% APPRAISED VALUE: $2,040,000
1997 AVG. MONTHLY OCCUPANCY %: 95% APPRAISAL DATE: 6/98
1996 AVG. MONTHLY OCCUPANCY %: 90% 11/1/98 FEDERAL INCOME TAX BASIS: $1,673,788
1995 AVG. MONTHLY OCCUPANCY %: 91% DEPRECIATION LIFE CLAIMED: ___ yrs.
1994 AVG. MONTHLY OCCUPANCY %: 91% REALTY TAX RATE (MILLAGE 21.508
1993 AVG. MONTHLY OCCUPANCY %: 95% 1997 PROPERTY TAX VALUE: $1,240,680
</TABLE>
================================================================================
CRYSTAL COURT FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Crystal Court
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $1,222,000 ANNUAL DEBT SERVICE: $102,533
11/1/98 BALANCE: $1,211,706 MONTHLY PAYMENT: $ 8,544
BALANCE DUE AT MATURITY: $1,126,207 MATURITY DATE: 11/04
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Fixed interest rate of 7.50%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted prior to 5/04; thereafter, may be
prepaid subject to a yield maintenance fee payable until 6 months prior to
maturity.
B-42
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD. (cont'd)
2. CANDLEWOOD SECOND MORTGAGE LOAN
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
CANDLEWOOD APARTMENTS - PHASE II YEAR COMPLETED: 1984
("Candlewood Property") APPROX. ACREAGE: 2.75
5901 Bryce Lane
Tampa, Florida 33615
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 6 288 $339
- -------------------------------------------------------------------------------------------------------------------
1 BR 26 576 $439
- -------------------------------------------------------------------------------------------------------------------
2 BR 1 864 $539
- -------------------------------------------------------------------------------------------------------------------
Total 33 17,568
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 94% APPRAISED VALUE: $ 925,000
1997 AVG. MONTHLY OCCUPANCY %: 94% Cost Approach: $ 926,000
1996 AVG. MONTHLY OCCUPANCY %: 95% Income Approach: $ 922,000
1995 AVG. MONTHLY OCCUPANCY %: 93% Market Approach: $ 932,000
1994 AVG. MONTHLY OCCUPANCY %: 94% REPLACEMENT COST NEW: $1,590,447
1993 AVG. MONTHLY OCCUPANCY %: 92% APPRAISAL DATE: 1/98
PARTNERSHIP'S CANDLEWOOD SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Baron Strategic Investment Fund III, Ltd. PARTNERSHIP'S UNDIVIDED
(affiliate of Managing Shareholder) % INTEREST IN SECOND MORTGAGE
NOTE: 100%
ORIGINAL PRINCIPAL BALANCE: $75,500 ANNUAL DEBT SERVICE: $9,060
12/31/98 BALANCE: $75,500 MONTHLY PAYMENT: $ 755
BALANCE DUE AT MATURITY: $75,500 MATURITY DATE: 3/03
ACCRUED UNPAID INTEREST: $ 5,285
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed rate of 12%; requires payments
of interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund V,
Ltd. ("Baron Fund V") and Baron Strategic Investment Fund VI, Ltd. ("Baron Fund
VI") own separate second mortgage loans secured by the Candlewood Property. The
original principal balance, aggregate 12/31/98 principal balance, and balance
due at maturity in respect of Baron Fund V's and Baron Fund VI's loans are
$21,000 (accrued unpaid interest of $1,890) and $68,000 (accrued unpaid interest
of $4,760), respectively; the annual (and monthly) payments due them are $2,520
($210) and $8,160 ($680), respectively. The other terms relating to Baron Fund
V's and Baron Fund VI's loans are the same as stated herein in respect of the
Exchange Partnership's loan.
OTHER MATTERS: Prior to 12/15/98, the Candlewood Second Mortgage Loan consisted
of an unsecured demand note with a principal balance of $75,500. On 12/15/98,
the debtor and the Exchange Partnership entered into a second mortgage agreement
under which the debtor agreed to secure its repayment obligation on the note
with a second mortgage on the Candlewood Property. At the same time, the debtor
agreed to secure the loans in favor of Baron Fund V and Baron Fund VI with
separate mortgages on the property. The lending parties have agreed to share the
benefits of the second mortgages on a pari passu basis.
CANDLEWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Republic Bank REPAYMENT SECURED BY:
P.O. Box 33009 First Mortgage on Candlewood Property
St. Petersburg, Florida 33733-8009
ORIGINAL PRINCIPAL BALANCE: $605,000 ANNUAL DEBT SERVICE: $56,153
11/1/98 BALANCE: $596,528 MONTHLY PAYMENT: $ 4,679
BALANCE DUE AT MATURITY: $533,678 MATURITY DATE: 2/03
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: Fixed interest rate of 7.79%;
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: Prepayable without penalty.
B-43
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD. (cont'd)
3. GARDEN TERRACE SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
GARDEN TERRACE APARTMENTS - PHASE III
("Garden Terrace Property") YEAR COMPLETED: 1983
8725 Del Ray Court APPROX. ACREAGE: 5.16
Tampa, Florida 33617
Orlando, Florida 32822
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 8 288 $344
- -------------------------------------------------------------------------------------------------------------------
1 BR 67 576 $399
- -------------------------------------------------------------------------------------------------------------------
2 BR 16 864 $530
- -------------------------------------------------------------------------------------------------------------------
Total 91 54,720
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 90% APPRAISED VALUE: $1,850,000
1997 AVG. MONTHLY OCCUPANCY %: 78% Cost Approach: $1,835,000
1996 AVG. MONTHLY OCCUPANCY %: 81% Income Approach: $1,782,000
1995 AVG. MONTHLY OCCUPANCY %: 86% Market Approach: $1,901,000
1994 AVG. MONTHLY OCCUPANCY %: 90% REPLACEMENT COST NEW: $4,297,897
1993 AVG. MONTHLY OCCUPANCY %: 89% APPRAISAL DATE: 6/98
PARTNERSHIP'S GARDEN TERRACE SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Garden Terrace Apartments III, Ltd. PARTNERSHIP'S UNDIVIDED %
INTEREST IN SECOND MORTGAGE
LOANS: 25%
ORIGINAL PRINCIPAL BALANCE: $310,442 ANNUAL DEBT SERVICE: $27,940
12/31/98 BALANCE: $310,442 (plus any participation interest)
BALANCE DUE AT MATURITY: $310,442 MONTHLY PAYMENT: $ 2,328
ACCRUED UNPAID INTEREST: $ 28,457 MATURITY DATE: 1/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 2% as to
$183,500 of principal if cash flow available (plus non-cumulative participation
interest at the rate of 7% on the unpaid principal to the extent of available
cash flow, plus additional participation interest equal to 30% of any remaining
cash flow (payable only to holders of note referred to in (ii) below) and (ii)
fixed interest rate of 9% as to $126,692 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due
on the note referred to in (i) above. The loans require payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund VI,
Ltd. ("Baron Fund VI") and Baron Strategic Investment Fund X, Ltd. ("Baron Fund
X") own the remaining undivided 75% interest in the second mortgage loans
secured by the Garden Terrace Property ("Garden Terrace Second Mortgage Loans").
The original principal balance, 12/31/98 principal balance, and balance due at
maturity in respect of Baron Fund VI's and Baron Fund X's interest in the Garden
Terrace Second Mortgage Loans is $248,353 (accrued unpaid interest of $12,418)
and $682,972 (accrued unpaid interest of $62,606), respectively; the annual (and
monthly) payments due them are $22,352 ($1,863) and $61,467 ($5,122),
respectively. The other terms relating to Baron Fund VI's and Baron Fund X's
interest in the Garden Terrace Second Mortgage Loans are the same as stated
herein.
GARDEN TERRACE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Mellon Mortgage Company REPAYMENT SECURED BY:
1422 Euclid Ave., Suite 900 First Mortgage Garden Terrace
Cleveland, Ohio 44115-2092 Property
ORIGINAL PRINCIPAL BALANCE: $1,010,000 ANNUAL DEBT SERVICE: $96,047
11/1/98 BALANCE: $ 970,167 MONTHLY PAYMENT: $ 8,004
BALANCE DUE AT MATURITY: $ 822,063 MATURITY DATE: __5/05
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 8.31%;
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: May be prepaid beginning 4/99 with a 5% prepayment fee;
the fee decreases 1% per year until maturity.
B-44
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD. (cont'd)
4. LAKE SYCAMORE SECOND MORTGAGE LOAN
NAME AND ADDRESS OF PROPERTY
SECURING MORTGAGE LOAN:
VILLAS AT LAKE SYCAMORE
("Lake Sycamore Property")
1911 Chaucer Drive
Cincinnati, Ohio 45237
PARTNERSHIP'S SECOND MORTGAGE INTEREST:
The Partnership owns an unrecorded second mortgage note with a current principal
balance of $243,500. Accrued unpaid interest on the note as of 12/31/98 is
$21,915. The debtor is Sycamore Real Estate Development, L.P., an affiliate of
the Managing Shareholder. The note bears interest at the fixed rate of 12% and
matures on 12/03. The note is secured by a second mortgage on the Villas at Lake
Sycamore, a 164 townhome property under construction on 22.44 acres in
Cincinnati, Ohio. Each townhome has a rentable area per unit of approximately
1,325 square feet (or a total area of 217,300 square feet). Construction
commenced in December 1997 and is expected to be completed in the last quarter
of 2003. Each unit is expected to have an initial monthly rental rate in the
range of $889 to $990. In July 1998, an independent Cincinnati appraisal firm
estimated the "as is" value of the property at $1,080,000 and the value of the
completed property to be $14,312,000 (assuming completion of the project as
designed, full rent up and satisfactory environment-quality test).
Two other Exchange Partnerships, Baron Strategic Investment Fund, Ltd. and Baron
Strategic Investment Fund VIII, Ltd., own separate second mortgage notes secured
by the property with the same terms except that they are in the principal
amounts of $230,000 and $98,000 (with accrued unpaid interest in the amounts of
$20,700 and $9,800), respectively. The lending parties have agreed to share the
benefits of the second mortgage on a pari passu basis.
LAKE SYCAMORE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Metropolitan Savings REPAYMENT SECURED BY:
8050 Hosbrook Road, Suite 408 First Mortgage on Lake
Cincinnati, Ohio 45236 Sycamore Property
ORIGINAL PRINCIPAL BALANCE: $2,000,000 ANNUAL DEBT SERVICE: Interest only
maximum approved MONTHLY PAYMENT: Interest only
11/1/98 BALANCE: $ 800,000 MATURITY DATE: 11/01
EXPECTED BALANCE
DUE AT MATURITY: $2,000,000
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Adjustable interest rate equal to
lender's prime rate plus 1% (currently 8.75%); requires payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
B-45
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD. (cont'd)
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 6/97 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 51 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 5/98
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to investors until they have received a 15% non-cumulative
return on their capital contributions; the GP is then entitled to receive any
remaining distributable cash during the fiscal year.
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 an 15% yearly cash-on-cash return, investors
and the GP share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 103 Units
valued at $10 per Unit (or $1,030)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $35
Long Term Capital Gain (assuming 20% rate): $18
- --------------------------------------------------------------------------------
(See Endnotes on the Exchange Hybrid Partnerships)
B-46
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
(GP: Baron Capital LXIV, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Partnership owns (1) a 43.5% limited partnership interest in a
limited partnership which holds fee simple title to the Crystal Court
Property-Phase I, (2) a 43% limited partnership interest in a limited
partnership which holds fee simple title to the Pineview Property, (3)
an undivided interest in two recorded second mortgage loans secured by
the Garden Terrace Property-Phase III, and (4) an undivided interest in
an unrecorded second mortgage loan secured by the Heatherwood
Property-Phase II and in three unsecured loans associated with such
property. The interest of the Exchange Partnership and other Exchange
Partnerships in the the Crystal Court Property and the Pineview Property
and the respective second mortgage loans, terms of the respective first
mortgage loans secured by the Garden Terrace Property and the
Heatherwood Property, and other information are described below.
1. EQUITY INTEREST IN CRYSTAL COURT PROPERTY
NAME AND ADDRESS OF PROPERTY:
CRYSTAL COURT APARTMENTS - PHASE I YEAR COMPLETED: 1982
("Crystal Court Property") APPROX. ACREAGE: 4.5
1969 Crystal Court Drive
Lakeland, Florida 33801
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 BR 64 576 $379
- -------------------------------------------------------------------------------------------------------------------
2 BR 8 864 $479
- -------------------------------------------------------------------------------------------------------------------
Total 72 43,776
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
11/1/98 OCCUPANCY %: 94% ESTIMATED APPRAISED VALUE: $2,040,000
1997 AVG. MONTHLY OCCUPANCY %: 95% APPRAISAL DATE: 6/98
1996 AVG. MONTHLY OCCUPANCY %: 90% 11/1/98 FEDERAL INCOME TAX BASIS: $1,673,788
1995 AVG. MONTHLY OCCUPANCY %: 91% DEPRECIATION LIFE CLAIMED: ___ yrs.
1994 AVG. MONTHLY OCCUPANCY %: 91% REALTY TAX RATE (MILLAGE): 21.508
1993 AVG. MONTHLY OCCUPANCY %: 95% 1997 PROPERTY TAX VALUE: $1,240,680
</TABLE>
CRYSTAL COURT FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Crystal Court
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $1,222,000 ANNUAL DEBT SERVICE: $102,533
11/1/98 BALANCE: $1,211,706 MONTHLY PAYMENT: $ 8,544
BALANCE DUE AT MATURITY: $1,126,207 MATURITY DATE: 11/04
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.50%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted prior to 5/04; thereafter, may be
prepaid subject to a yield maintenance fee payable until 6 months prior to
maturity.
B-47
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD. (cont'd)
2. EQUITY INTEREST IN PINEVIEW PROPERTY
NAME AND ADDRESS OF PROPERTY:
PINEVIEW APARTMENTS
("Pineview Property") YEAR COMPLETED: 1988
4731 Pine Hills Road APPROX. ACREAGE: 4.38
Orlando, Florida 32808
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 26 288 $399
- -------------------------------------------------------------------------------------------------------------------
1 BR 59 576 $459
- -------------------------------------------------------------------------------------------------------------------
2 BR 6 864 $589-600
- -------------------------------------------------------------------------------------------------------------------
Total 91 46,656
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
11/1/98 OCCUPANCY %: 95% ESTIMATED APPRAISED VALUE: $2,848,000
1997 AVG. MONTHLY OCCUPANCY %: 92% APPRAISAL DATE: 3/98
1996 AVG. MONTHLY OCCUPANCY %: 93% 11/1/98 FEDERAL INCOME TAX BASIS: $1,747,499
1995 AVG. MONTHLY OCCUPANCY %: 90% DEPRECIATION LIFE CLAIMED: 30 years
1994 AVG. MONTHLY OCCUPANCY %: 92% REALTY TAX RATE (MILLAGE): 21.4657
1993 AVG. MONTHLY OCCUPANCY %: 91% 1997 PROPERTY TAX VALUE: $1,384,273
</TABLE>
PINEVIEW FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Pineview Property
Horsham, Pennsylvania 19044-0809
ORIGINAL PRINCIPAL BALANCE: $1,620,000 ANNUAL DEBT SERVICE: $139,271
11/1/98 BALANCE: $1,605,781 MONTHLY PAYMENT: $ 11,606
BALANCE DUE AT MATURITY: $1,493,008 MATURITY DATE: 11/04
MORTGAGE INTEREST/AMORTIZATION PROVISIONS: Fixed interest rate of 7.75%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted prior to May 1, 2004; thereafter,
may be prepaid subject to a yield maintenance fee payable until 6 months prior
to maturity.
3. HEATHERWOOD SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
HEATHERWOOD APARTMENTS - PHASE II
("Heatherwood Property") YEAR COMPLETED: 1982
1105 North Hoagland Blvd. APPROX. ACREAGE: 2.26
Kissimmee, Florida 34741
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 10 288 $519
- -------------------------------------------------------------------------------------------------------------------
1 BR/1 Bath 26 576 $599
- -------------------------------------------------------------------------------------------------------------------
2 BR/1 Bath 4 864 $599
- -------------------------------------------------------------------------------------------------------------------
2BR/2 Bath 1 864 $599
- -------------------------------------------------------------------------------------------------------------------
Total 41 22,176
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 98% APPRAISED VALUE: $1,285,000
1997 AVG. MONTHLY OCCUPANCY %: 97% Cost Approach: $1,188,000
1996 AVG. MONTHLY OCCUPANCY %: 93% Income Approach: $1,259,000
1995 AVG. MONTHLY OCCUPANCY %: 88% Market Approach: $1,312,000
1994 AVG. MONTHLY OCCUPANCY %: 91% REPLACEMENT COST NEW: $1,862,475
1993 AVG. MONTHLY OCCUPANCY %: 89% APPRAISAL DATE: 3/98
B-48
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD. (cont'd)
PARTNERSHIP'S HEATHERWOOD SECOND MORTGAGE LOAN INTERESTS:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Heatherwood Apartments II, Ltd. PARTNERSHIP'S UNDIVIDED
(an affiliate of Managing Shareholder) % INTEREST IN LOANS: 42%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $149,361 AGGREG. ANNUAL DEBT SERVICE: $9,710
AGGREG. 11/1/98 BALANCE: $149,361 (plus any participation interest)
AGGREG. BALANCE DUE AT MATURITY: $149,361 AGGREG. MONTHLY PAYMENT: $ 809
AGGREG. ACCRUED UNPAID INTEREST: $ 17,338 AGGREG. MATURITY DATE: 10/04
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 6% as to
$136,500 of principal (plus non-cumulative participation interest at the rate of
3% on the unpaid principal to the extent of available cash flow plus additional
non-cumulative participation interest equal to 30% of any remaining available
cash flow), (ii) adjustable interest rate of 1% over prime rate (currently
8.75%) as to $732 of principal, and (iii) fixed interest rate of 12% as to
$12,310 of principal. The loans require payments of interest only until
maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund
VIII, Ltd. ("Baron Fund VIII") owns the remaining undivided 58% interest in the
second mortgage loans secured by the Heatherwood Property and in the unsecured
loans associated with the property ("Heatherwood Loans"). The aggregate original
principal balance, aggregate 12/31/98 principal balance, and aggregate balance
due at maturity in respect of Baron Fund VIII's interest in the Heatherwood
Loans is $206,260 (no accrued unpaid interest); the aggregate annual (and
monthly) payments due it are $13,408 ($1,117). The other terms relating to Baron
Fund VIII's interest in the Heatherwood Loans are the same as stated herein.
OTHER MATTERS: The Heatherwood Loans consist of a second mortgage note secured
by the Heatherwood Property with a principal balance $325,000 and unsecured
loans in the aggregate principal amount of $24,121.
HEATHERWOOD FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
GMAC REPAYMENT SECURED BY:
650 Dresher Road, P.O. Box 809 First Mortgage on Heatherwood
Horsham, Pennsylvania 19044-0809 Property
ORIGINAL PRINCIPAL BALANCE: $710,000 ANNUAL DEBT SERVICE: $61,038
11/1/98 BALANCE: $704,306 MONTHLY PAYMENT: $ 5,087
BALANCE DUE AT MATURITY: $655,856 MATURITY DATE: 11/04
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 7.75%;
amortizes on a 30-year basis.
PREPAYMENT PROVISIONS: No prepayment permitted during the first four years of
the loan term; thereafter, loan may be prepaid in whole subject to a prepayment
premium in accordance with the following schedule: yield maintenance for the
term of the loan, subject to a minimum of 1%, except that for the last six
months of the loan term, it may be prepaid at par.
B-49
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD. (cont'd)
4. GARDEN TERRACE SECOND MORTGAGE LOANS
NAME AND ADDRESS OF
PROPERTY SECURING MORTGAGES:
GARDEN TERRACE APARTMENTS - PHASE III
("Garden Terrace Property") YEAR COMPLETED: 1983
8725 Del Ray Court APPROX. ACREAGE: 5.16
Tampa, Florida 33617
Orlando, Florida 32822
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. AVERAGE MONTHLY
UNIT TYPE NUMBER AREA PER UNIT (Sq. Ft.) RENTAL RATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Studio 8 288 $344
- -------------------------------------------------------------------------------------------------------------------
1 BR 67 576 $399
- -------------------------------------------------------------------------------------------------------------------
2 BR 16 864 $530
- -------------------------------------------------------------------------------------------------------------------
Total 91 54,720
- -------------------------------------------------------------------
</TABLE>
11/1/98 OCCUPANCY %: 90% APPRAISED VALUE: $1,850,000
1997 AVG. MONTHLY OCCUPANCY %: 78% Cost Approach: $1,835,000
1996 AVG. MONTHLY OCCUPANCY %: 81% Income Approach: $1,782,000
1995 AVG. MONTHLY OCCUPANCY %: 86% Market Approach: $1,901,000
1994 AVG. MONTHLY OCCUPANCY %: 90% REPLACEMENT COST NEW: $4,297,897
1993 AVG. MONTHLY OCCUPANCY %: 89% APPRAISAL DATE: 6/98
PARTNERSHIP'S GARDEN TERRACE SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Garden Terrace Apartments III, Ltd. PARTNERSHIP'S UNDIVIDED %
INTEREST IN SECOND MORTGAGE
LOANS: 55%
ORIGINAL PRINCIPAL BALANCE: $682,972 ANNUAL DEBT SERVICE:
12/31/98 BALANCE: $682,972 (plus any participation interest) $61,467
BALANCE DUE AT MATURITY: $682,972 MONTHLY PAYMENT: $ 5,122
ACCRUED UNPAID INTEREST: $ 82,606 MATURITY DATE: 1/07
</TABLE>
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: (i) Fixed interest rate of 2% as to
$404,250 of principal if cash flow available (plus non-cumulative participation
interest at the rate of 7% on the unpaid principal to the extent of available
cash flow, plus additional participation interest equal to 30% of any remaining
cash flow (payable only to holders of note referred to in (ii) below) and (ii)
fixed interest rate of 9% as to $278,222 of principal, payable only from excess
cash flow after payment of 2% minimum interest and 7% participation interest due
on the note referred to in (i) above. The loans require payments of interest
only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER SECOND MORTGAGES SECURED BY PROPERTY: Baron Strategic Investment Fund VI,
Ltd. ("Baron Fund VI") and Baron Strategic Investment Fund IX, Ltd. ("Baron Fund
IX") own the remaining undivided 45% interest in the second mortgage loans
secured by the Garden Terrace Property ("Garden Terrace Second Mortgage Loans").
The original principal balance, 12/31/98 principal balance, and balance due at
maturity in respect of Baron Fund VI's and Baron Fund IX's interest in the
Garden Terrace Second Mortgage Loans is $248,353 (accrued unpaid interest of
$12,418) and $310,442 (accrued unpaid interest of $28,457), respectively; the
annual (and monthly) payments due them are $22,352 ($1,863) and $27,940
($2,328), respectively. The other terms relating to Baron Fund VI's and Baron
Fund IX's interest in the Garden Terrace Second Mortgage Loans are the same as
stated herein.
GARDEN TERRACE FIRST MORTGAGE INFORMATION:
FIRST MORTGAGE HOLDER AND ADDRESS:
Mellon Mortgage Company REPAYMENT SECURED BY:
1422 Euclid Ave., Suite 900 First Mortgage Garden Terrace
Cleveland, Ohio 44115-2092 Property
ORIGINAL PRINCIPAL BALANCE: $1,010,000 ANNUAL DEBT SERVICE: $96,047
11/1/98 BALANCE: $ 970,167 MONTHLY PAYMENT: $ 8,004
BALANCE DUE AT MATURITY: $ 822,063 MATURITY DATE: __5/05
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 8.31%;
amortizes on a 25-year basis.
PREPAYMENT PROVISIONS: May be prepaid beginning 4/99 with a 5% prepayment fee;
the fee decreases 1% per year until maturity.
B-50
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD. (cont'd)
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 7/97 NUMBER OF UNITS SOLD: 2,400
NUMBER OF INVESTORS: 57 PRICE PER UNIT: $500
PAID IN CAPITAL: $1,200,000 DATE OFFERING TERMINATED: 3/98
ALLOCATION OF DISTRIBUTABLE CASH: Each fiscal year, all distributable cash is to
be distributed to investors until they have received a 12.5% non-cumulative
return on their capital contributions; thereafter investors and the GP will
share any remaining distributable cash during the fiscal year 50%/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 an 12.5% yearly cash-on-cash return,
investors and the GP share any remaining net proceeds 50%/50%.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 103 Units
valued at $10 per Unit (or $1,030)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $39
Long Term Capital Gain (assuming 20% rate): $20
- --------------------------------------------------------------------------------
(See Endnotes on Exchange Hybrid Partnerships)
B-51
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD.
(GP: Baron Capital IX, Inc.)
I. PARTNERSHIP PROPERTY INTERESTS
The Exchange Partnership owns (1) a 31.7% limited partnership interest
in a limited partnership which holds fee simple title to the Lamplight
Property and (2) two unrecorded second mortgage loans secured by the
Lamplight Property. The Lamplight Property, the partnership's equity
and second mortgage interest in the property and other information are
described below.
1. EQUITY INTEREST IN LAMPLIGHT COURT PROPERTY
NAME AND ADDRESS OF PROPERTY:
LAMPLIGHT COURT APARTMENTS YEAR COMPLETED: 1973
("Lamplight Property") APPROXIMATE ACREAGE: 6.00
1600 S. Detroit
Bellefontaine, OH 43311
<TABLE>
<CAPTION>
UNIT MIX AND RENTAL RATES:
- -------------------------------------------------------------------------------------------------------------------
APPROX. RENTABLE APPROX. 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
- -------------------------------------------------------------------------------------------------------------------
1 BR/1 Bath 53 576 $369
- -------------------------------------------------------------------------------------------------------------------
2 BR/1 Bath 15 864 $499
- -------------------------------------------------------------------------------------------------------------------
Total 80 46,944
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
11/1/98 OCCUPANCY %: 91% ESTIMATED APPRAISED VALUE: $2,183,000
1997 AVG. MONTHLY OCCUPANCY %: 87% Cost Approach: $2,295,000
1996 AVG. MONTHLY OCCUPANCY %: 93% Income Approach: $2,214,000
1995 AVG. MONTHLY OCCUPANCY %: 88% Market Approach: $2,111,000
1994 AVG. MONTHLY OCCUPANCY %: 90% APPRAISAL DATE: 9/98
1993 AVG. MONTHLY OCCUPANCY %: 89% 11/1/98 FEDERAL INCOME TAX BASIS: $1,704,052
REALTY TAX RATE (MILLAGE): 46.67 DEPRECIATION LIFE CLAIMED: 15.25 yrs.
1997 PROPERTY TAX VALUE: $518,000
</TABLE>
LAMPLIGHT COURT FIRST MORTGAGE INFORMATION
FIRST MORTGAGE HOLDER AND ADDRESS:
Column Financial
3414 Peachtree Road N.E.
Suite 1140
Atlanta, Georgia 30326
ORIGINAL PRINCIPAL BALANCE: $1,400,000 ANNUAL DEBT SERVICE: $141,445
11/1/98 BALANCE: $1,368,976 MONTHLY PAYMENT: $ 11,787
BALANCE DUE AT MATURITY: $1,158,349 MATURITY DATE: 11/06
MORTGAGE INTEREST/ AMORTIZATION PROVISIONS: Fixed interest rate of 9.04%;
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.
B-52
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD. (cont'd)
2. PARTNERSHIP'S LAMPLIGHT COURT SECOND MORTGAGE LOAN INTEREST:
<TABLE>
<S> <C> <C> <C>
DEBTOR: Independence Village, Ltd. PARTNERSHIP'S UNDIVIDED %
(affiliate of Managing Shareholder) INTEREST IN SECOND MORTGAGE
NOTES: 100%
AGGREG. ORIGINAL PRINCIPAL BALANCE: $678,302 AGGREG. ANNUAL DEBT SERVICE: $60,634
AGGREG. 12/31/98 BALANCE: $678,302 AGGREG. MONTHLY PAYMENT: $ 5,053
AGGREG. BALANCE DUE AT MATURITY: $678,302 MATURITY DATE: 12/06
AGGREG. ACCRUED UNPAID INTEREST $114,171
</TABLE>
MORTGAGE INTEREST AND AMORTIZATION PROVISIONS: (i) Adjustable interest rate of
1% over prime rate (currently 8.75%) as to $585,000 of principal, and (ii) fixed
interest rate of 12% as to $93,302 of principal. The loans require payments of
interest only until maturity.
PREPAYMENT PROVISIONS: Prepayable without penalty.
OTHER MATTERS: Prior to 12/15/98, the Lamplight Court Second Mortgage Loans
consisted of a second mortgage note with a principal balance of $585,000 and an
unsecured demand note with a principal balance of $93,302. On 12/15/98, the
debtor and the Exchange Partnership entered into a mortgage modification
agreement under which the Exchange Partnership agreed to set the maturity date
on the demand note at 12/06, the same maturity date as the second mortgage note,
in exchange for the agreement of the debtor to secure its repayment obligations
on the demand note with a second mortgage on the Lamplight Court Property.
II. PARTNERSHIP INVESTMENT PROGRAM INFORMATION
DATE OFFERING BEGAN: 4/96 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; thereafter, the GP is entitled to
receive any remaining distributable cash during the fiscal year.
ALLOCATION OF NET PROCEEDS FROM PROPERTY SALE OR REFINANCING: All net proceeds
are allocated to investors until the entire principal amount of the Lamplight
Court Second Mortgage Loans has been repaid; then 31.7% of up to $350,000 of
any remaining net proceeds to the investors; and any balance to the GP.
- --------------------------------------------------------------------------------
NUMBER OF OPERATING PARTNERSHIP UNITS
OFFERED IN EXCHANGE OFFERING
(per $1,000 of Investors' original investment): 112 Units
valued at $10 per Unit (or $1,120)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ESTIMATED DEFERRED TAXABLE GAIN FROM
EXCHANGE OFFERING (per $1,000 of Investors' original
investment):
Short Term Capital Gain (assuming 39% rate): $124
Long Term Capital Gain (assuming 20% rate): $ 64
- --------------------------------------------------------------------------------
(See Endnotes on Exchange Hybrid Partnerships)
B-53
<PAGE>
Endnotes to Exchange Hybrid Partnerships:
1. For purposes of the Exchange Offering, the value of each Exchange Hybrid
Partnership (to the extent of its mortgage interest in properties and other
debt interests) has been based upon the current principal balance of such
debt interests, independent appraisals of the replacement cost new of
property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building)
and the debtor's repayment history and current net equity interest in such
property. The value of each Exchange Hybrid Partnership (to the extent of
its direct or indirect equity interest in properties) is 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 current principal balance of first mortgage and other
indebtedness to which the property is subject, 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.
2. The second mortgage interests held by the Exchange Partnership and the
first mortgage loans identified are not insured by the Federal Housing
Administration or guaranteed by the Veterans Administration or otherwise
insured or guaranteed. Repayment of each of the loans indicated is
non-recourse beyond the underlying property and/or other assets of the
particular debtor.
3. In the opinion of the Managing Shareholder, each residential apartment
property identified is in good overall condition and is suitable and
adequate for the purpose for which it was built.
4. Each property is subject to significant competition from other residential
apartment properties in its general vicinity.
5. In the opinion of the Managing Shareholder, each property is covered by
insurance of the types and amounts which are comparable for similar
properties located in its general vicinity.
6. 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 lease agreements with terms of one
year or less which are common in the industry.
7. For purposes of determining the appraised value of the Exchange
Partnership, the estimated appraised value of the property interest owned
by the Partnership and replacement cost new of each property was determined
by a qualified and licensed independent appraisal firm. See the Prospectus
at "THE EXCHANGE OFFERING - Exchange Property Appraisals."
8. The overall depreciable life of each property is 27.5 years; depreciation
is determined using the straight-line method.
9. 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 to the Operating Partnership 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.
B-54
<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 .................... C-2
FINANCIAL STATEMENTS
February 3, 1998 Balance Sheet (audited) .......................... C-3
Notes ............................................................. C-4
September 30, 1998 and from Commencement of Operations
(February 3, 1998) through September 30, 1998 (unaudited)
Condensed Balance Sheet ....................................... C-5
Condensed Statement of Operations ............................ C-6
Condensed Statement of Shareholders' Equity ................... C-7
Condensed Statement of Cash Flows ............................. C-8
Notes ......................................................... C-9
Pro forma Balance Sheet (minimum/maximum Exchange Offering) ... C-13
Pro forma Statement of Operations (maximum Exchange Offering) . C-14
BARON CAPITAL PROPERTIES, L.P.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .................... C-15
FINANCIAL STATEMENTS
February 3, 1998 Balance Sheet (audited) .......................... C-16
Notes ............................................................. C-17
September 30, 1998 and from Commencement of Operations
(February 3, 1998) through September 30, 1998 (unaudited)
Condensed Balance Sheet ....................................... C-18
Condensed Statement of Operations ............................. C-19
Condensed Statement of Partners' Capital ...................... C-20
Condensed Statement of Cash Flows ............................. C-21
Notes ......................................................... C-21
Pro forma Balance Sheet (maximum Exchange Offering) ........... C-22
Pro forma Balance Sheet (minimum Exchange Offering) ........... C-24
Pro forma Statement of Operations (maximum Exchange Offering) . C-23
Pro forma Statement of Operations (minimum Exchange Offering) . C-25
BARON ADVISORS, INC
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .................... C-26
FINANCIAL STATEMENTS
February 28, 1998 Balance Sheet (audited) ......................... C-27
Notes ............................................................. C-28
September 30, 1998 Balance Sheet (unaudited) ...................... C-29
Notes ............................................................. C-30
C-1
<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
C-2
<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.
C-3
<PAGE>
BARON CAPITAL TRUST
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 3, 1998
NOTE 1. ORGANIZATION
Baron Capital Trust (the "Trust") was organized as a business trust in
Delaware on July 31, 1997. The Trust and its affiliate, Baron Capital
Properties, L.P. (the "Operating Partnership"), a Delaware limited
partnership, constitute an integrated real estate company which has been
organized to indirectly acquire equity interests in residential apartment
properties located in the United States and to provide or acquire mortgage
loans secured by 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 Managing Shareholder of the Trust is Baron Advisors, Inc., a Delaware
corporation which will manage the operations of the Trust and the Operating
Partnership subject to the supervisory authority of the Board of the Trust
over the activities of the Trust and the Operating Partnership and the
Board's prior approval authority in respect of certain actions of the Trust
and the Operating Partnership specified in the Declaration of Trust of the
Trust.
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.
The Trust commenced operations on February 3, 1998, at which time it
received its initial capital contribution.
NOTE 3. 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.
C-4
<PAGE>
BARON CAPITAL TRUST
CONDENSED BALANCE SHEET
September 30, 1998
(UNAUDITED)
ASSETS
Investment in Baron Capital Properties, L.P. $ 2,293,432
Cash 291,387
Cash held in escrow 16,300
Other Receivables 400
-----------
Total assets $ 2,601,519
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities:
Managing shareholder --
Commissions --
-----------
--
-----------
Shareholders' Equity:
Common shares, no par value; 25,000,000 shares 3,476,228
authorized; 379,496 shares issued and outstanding,
a change of 186,373 shares
Deficit (874,709)
-----------
2,601,519
-----------
Total liabilities and shareholders' equity $ 2,601,519
===========
See notes to financial statements
C-5
<PAGE>
BARON CAPITAL TRUST
CONDENSED STATEMENT OF OPERATIONS
FROM COMMENCEMENT OF OPERATIONS
(FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
From Commencement
of Operations
(February 3, 1998) To
September 30, 1998
------------------
<S> <C>
Revenue:
Interest Income $ 1,064
Costs and Expenses:
Advisory and investment fees - managing shareholder 182,110
General and administrative expenses 13,855
---------
Total costs and expenses 195,965
---------
Net Loss from Investment in Baron Capital Properties, LP (679,808)
---------
Net Loss $(874,709)
=========
Net Loss per Common Share $ (2.25)
=========
</TABLE>
See notes to financial statements
C-6
<PAGE>
BARON CAPITAL TRUST
CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY
FROM COMMENCEMENT OF OPERATIONS (FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
-------------------------
Shares Amount Deficit Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Initial Capital Contribution -- $ 100 $ -- $ 100
Issuance of Common Shares 379,496 3,491,362 -- 3,491,362
Return of Capital -- (15,234) -- (15,234)
Net Loss -- -- (874,709) $ (874,709)
----------- ----------- ----------- -----------
Balance, September 30, 1998 379,496 $ 3,476,228 $ (874,709) $ 2,601,519
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
C-7
<PAGE>
BARON CAPITAL TRUST
CONDENSED STATEMENT OF CASH FLOWS
FROM COMMENCEMENT OF OPERATIONS (FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net loss $ (874,709)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Increase in accounts payable and accrued liabilities, --
managing shareholder
Increase in accounts receivable (400)
-----------
Net cash used in operating activities (875,109)
-----------
Cash Flows from Investing Activities:
Investment in Baron Capital Properties, L.P. (2,293,432)
-----------
Cash Flows from Financing Activities:
Proceeds from issuance of common shares 3,476,228
Accrued comm in connection with issuance of common shares --
Cash held in escrow (16,300)
-----------
Net cash provided by financing activities 3,459,928
-----------
Net Increase in Cash 291,387
Cash, Beginning --
-----------
Cash, Ending $ 291,387
===========
See notes to financial statements
C-8
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 1. ORGANIZATION
Baron Capital Trust (the "Trust") was organized as a business trust in
Delaware on July 31, 1997. The Trust and its affiliate, Baron Capital
Properties, L.P. (the "Operating Partnership"), a Delaware limited
partnership, constitute an integrated real estate company which has been
organized to indirectly acquire equity interests in residential apartment
properties located in the United States and to provide or acquire mortgage
loans secured by 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 Managing Shareholder of the Trust is Baron Advisors, Inc., a Delaware
corporation which will manage the operations of the Trust and the Operating
Partnership subject to the supervisory authority of the Board of the Trust
over the activities of the Trust and the Operating Partnership and the
Board's prior approval authority in respect of certain actions of the Trust
and the Operating Partnership specified in the Declaration of Trust of the
Trust.
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.
The Trust commenced operations on February 3, 1998, at which time it
received its initial capital contribution. As a result, the statements of
operations and cash flows have been presented for the period from
commencement of operations (February 3, 1998) to September 30, 1998.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited financial statements as of September 30, 1998
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these condensed financial statements reflect all adjustments,
which, in the opinion of management, are necessary for a fair presentation
of financial position as of September 30, 1998 and results of operations
and cash flows for the period from commencement of operations (February 3,
1998) to September 30, 1998. All such adjustments are of a normal recurring
nature. The results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year.
C-9
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
NOTE 3. PUBLIC OFFERING
In May 1998, the Trust commenced an initial public offering of 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 total maximum
gross proceeds of $25,000,000. Funds were held in escrow until the minimum
of 50,000 common shares were sold. All of the common shares issued or sold
by the Trust in the offering are tradable without restriction under the
Securities Act, but are 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.
In connection with this public offering, the Trust issued and had
outstanding 379,496 shares through September 30, 1998 for proceeds of
$3,476,228, net of related costs (primarily commissions). Of the net
proceeds received, the Trust invested $2,973,240 in Baron Capital
Properties, L.P. of which the Trust is the sole general partner and a
limited partner (the "Operating Partnership").
NOTE 4. RELATED PARTY TRANSACTIONS
Trust Management Agreement
The Trust has entered into a Trust Management Agreement with Baron
Advisors, Inc., the Managing Shareholder of the Trust (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 (see Note 3). 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
aggregate 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 Operating
Partnership's 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.
C-10
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
NOTE 4. RELATED PARTY TRANSACTIONS (Continued)
Trust Management Agreement (Continued)
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.
Fees incurred under the Trust Management Agreement amounted to
approximately $37,950 from commencement of operations (February 3, 1998) to
September 30, 1998, of which approximately $1,528 were unpaid and accrued
at September 30, 1998.
NOTE 5. MATERIAL SUBSEQUENT EVENTS AND CONTINGENCIES
In October 1998, the Operating Partnership acquired an approximately 12.3%
limited partnership interest in Alexandria Development, L.P. (the
"Alexandria Partnership"), a Delaware limited partnership which is the
owner and developer of a 168-unit residential apartment property under
construction in Alexandria, Kentucky. Thirty eight of the 168 residential
units (approximately 22.6%) have been completed and are in the rent-up
stage. The Operating Partnership paid $400,000 for the acquired partnership
interest and retains an option to acquire the remaining limited partnership
interests at the same price per percentage interest (for a total price of
approximately $3,250,000 for the entire limited partnership interest). The
option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath, the founder and Chief Executive
Officer of the Trust and the Operating Partnership, sold the partnership
interest in the Alexandria Partnership to the Operating Partnership and
also serves as the managing general partner of the Alexandria Partnership.
During the construction stage of the apartment property, the Operating
Partnership's limited partnership interest in the Alexandria Partnership is
entitled to an annual 12% preferential return which is senior to the other
limited partnership interests and the general partner's nominal 1%
interest.
In September 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 are controlled by Mr. McGrath. The properties
will have a total of 652 units, comprised of 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
C-11
<PAGE>
BARON CAPITAL TRUST
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
(UNAUDITED)
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.
In connection with the transaction, the Trust agreed to co-guarantee (along
with Mr. McGrath), for a period of 60 days (plus any extensions which may
be granted), up to $3,000,000 of the development portion of long-term bank
construction loans with an aggregate principal amount of up to $36,000,000
to 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 in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will
either buy out the bank'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.
C-12
<PAGE>
BARON CAPITAL TRUST
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Pro forma Pro forma
Maximum Minimum
Exchange Offering Exchange Offering
----------------------------------------
<S> <C> <C>
ASSETS
Investment in Baron Capital Properties, $ 2,875,309 $ 2,764,436
L.P
Cash 291,384 291,384
Cash held in escrow 16,300 16,300
Other receivables 400 400
------------------------------------
Total assets $ 3,183,393 $ 3,072,520
====================================
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities: $ -- $ --
Managing shareholder -- --
Commissions -- --
------------------------------------
Total liabilities -- --
------------------------------------
Shareholders' Equity
Common shares, no par value; 25,000,000
shares authorized, 379,496 shares issued
and outstanding, a change of 186,373 shares 3,476,228 3,476,228
Deficit (292,835) (403,708)
------------------------------------
$ 3,183,393 $ 3,072,520
------------------------------------
Total liabilities and shareholders' equity $ 3,183,393 $ 3,072,520
====================================
</TABLE>
- ----------
The table above sets forth a pro forma balance sheet (based on a maximum and
minimum Exchange Offering) for the Trust as of September 30, 1998 based on the
Trust's assumed percentage ownership interest in the Operating Partnership. The
pro forma data is presented as if at September 30,1998: (i) the Operating
Partnership had owned the Acquired Properties and had issued all 2,500,000 Units
being offered, in the case of the maximum Exchange Offering, and had issued only
600,000 Units, in the case of the minimum Exchange Offering, and (ii) the Trust
had owned approximately 11.5% of the assumed outstanding Units, in the case of
the maximum Exchange Offering, and approximately 31.9%, in the case of the
minimum Exchange Offering (calculated taking into account the number of Units
(379,496) the Trust had acquired from the Operating Partnership with the net
proceeds of the Trust's Cash Offering as of September 30, 1998 in relation to
the number of assumed outstanding Units that would have been held by recipients
of Units in the Exchange Offering and the Original Investors.
The financial information shown should be read in conjunction with the
discussion set forth in "INITIAL REAL ESTATE INVESTMENTS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," and all of the financial
statements included elsewhere in this Prospectus. The pro forma financial
information is not necessarily indicative of what the actual financial position
of the Trust would have been as of the date indicated, nor does it purport to
represent the future financial position for future periods.
C-13
<PAGE>
BARON CAPITAL TRUST
PRO FORMA STATEMENT OF OPERATIONS
FROM COMMENCEMENT OF OPERATIONS
(FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Pro forma Pro forma
Maximum Minimum
Exchange Offering Exchange Offering
----------------------------------------
<S> <C> <C>
Revenue
Interest income $ 1,064 $ 1,064
Costs and Expenses
Advisory and investment fees - managing shareholder 182,110 182,110
General and administrative expenses 13,855 13,855
--------------------------------
Total costs and expenses 195,965 195,965
--------------------------------
Net loss from investment in Baron Capital Properties, L.P. (97,934) (208,807)
--------------------------------
Net Loss $(292,835) $(403,708)
================================
</TABLE>
- ----------
The table above sets forth a pro forma statement of operations (based on a
maximum and minimum Exchange Offering) for the Trust from February 3. 1998 (the
commencement of operations) through September 30, 1998 based on the Trust's
assumed percentage ownership interest in the Operating Partnership. The pro
forma data is presented as if at the beginning of the indicated period: (i) the
Operating Partnership had owned the Acquired Properties and had issued all
2,500,000 Units being offered, in the case of the maximum Exchange Offering, and
had issued only 600,000 Units, in the case of the minimum Exchange Offering, and
(ii) the Trust had owned approximately 11.5% of the assumed outstanding Units,
in the case of the maximum Exchange Offering, and approximately 31.9%, in the
case of the minimum Exchange Offering (calculated taking into account the number
of Units (379,496) the Trust had acquired from the Operating Partnership with
the net proceeds of the Trust's Cash Offering as of September 30, 1998 in
relation to the number of assumed outstanding Units that would have been held by
recipients of Units in the Exchange Offering and the Original Investors.
The financial information shown should be read in conjunction with the
discussion set forth in "INITIAL REAL ESTATE INVESTMENTS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," and all of the financial
statements included elsewhere in this Prospectus. The pro forma financial
information is not necessarily indicative of what the results of operations of
the Trust would have been for the period indicated, nor does it purport to
represent the results of operations for future periods.
C-14
<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
C-15
<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.
C-16
<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 an
integrated real estate company which has been organized to indirectly
acquire equity interests in residential apartment properties located in the
United States and to provide or acquire mortgage loans secured by 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. As of the date of this report, only two units of limited
partnership interest in the Operating Partnership had been issued. One unit
was issued to each of Gregory K. McGrath and Robert S. Geiger, its
formative limited partners and founders of the Trust and the Operating
Partnership.
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
("Unitholders") will have the right, exercisable at any time, to exchange
all or a portion of their Units into an equivalent number of Common Shares
of beneficial interest in the Trust. Generally, this exchange right may be
exercised by a Unitholder by delivering notice to the Trust at least 10
days prior to such exchange. Upon the exchange, the Operating Partnership
will immediately cancel the Units and issue to the Trust an equivalent
number of new Units. The Trust, at its option, may satisfy a Unitholder's
exchange right by acquiring on the specified exchange date the Units at a
price equal to the average of the daily market price for the 10 consecutive
trading days immediately preceding the date the Trust receives the exchange
notice.
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.
In exchange for a cash capital contribution paid to the Operating
Partnership, in May 1988, 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 (up to 1,202,160 Common Shares) outstanding as of the earlier to
occur of the completion of the exchange offering and the cash public
offering to be made by the Trust or May 14, 1999, calculated 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.
Mr. McGrath and Mr. Geiger have deposited their Units into an escrow
account with American Stock Transfer & Trust Company. 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 Trust's public offering of Common Shares (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 Trust and the Operating Partnership will consider these escrowed shares
as being outstanding for purposes of calculating basic earnings per share
in the financial statements. To the extent that these shares are considered
compensatory, the implicit compensation will be recognized over the
six-year period represented by the minimum release provisions of the escrow
agreement. Because the release of the shares from escrow is not dependent
upon the achievement of any specified level of profits, no accounting
measurement is anticipated to be given the release of the shares from
escrow. As indicated above, the compensation will be amortized over the
shortest period of the release.
C-17
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Investment in real estate limited partnerships $2,260,150
Investment in limited partnership interests 341,280
Cash 183,459
Prepaid expenses and other assets 52,500
Other receivables 126,948
Property and equipment 106,358
----------
Total assets $3,070,695
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Note payable 575,000
Other accrued liabilities 102,263
----------
677,263
----------
Partners' Capital
General partner $ --
Limited partners, 25,000,000 units authorized:
472,309 units issued and outstanding 2,393,432
----------
2,393,432
----------
Total liabilities and shareholders' equity $3,070,695
==========
See notes to financial statements
C-18
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
CONDENSED STATEMENT OF OPERATIONS
FROM COMMENCEMENT OF OPERATIONS (FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
From Commencement
of Operations
(February 3, 1998) To
September 30, 1998
------------------
<S> <C>
Revenue:
Interest Income $ 712
Income from real estate 21,644
---------
22,356
---------
Costs and Expenses:
Personnel $ 237,815
Professional services 119,900
Managed properties expenses 259,042
Other general and administrative expenses 85,407
---------
Total costs and expenses 702,164
---------
Net Loss $(679,808)
=========
</TABLE>
See notes to financial statements
C-19
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
CONDENSED STATEMENT OF PARTNERS' CAPITAL
FROM COMMENCEMENT OF OPERATIONS (FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
Initial Capital Contribution (89,018 units) $ -- $ 100,000 $ 100,000
Issuance of limited partnership interests (379,496 units) -- 2,973,240 2,973,240
Net Loss -- (679,808) (679,808)
----------- ----------- -----------
Balance, September 30, 1998 $ -- $ 2,393,432 $ 2,393,432
=========== =========== ===========
</TABLE>
See notes to financial statements
C-20
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
CONDENSED STATEMENT OF CASH FLOWS
FROM COMMENCEMENT OF OPERATIONS (FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net loss $ (679,808)
Adjustments to reconcile net loss to net cash
used in operating activities:
Changes in operating assets and liabilities:
Increase in prepaid expenses and other assets (52,500)
Increase in other receivables (126,948)
Increase in accrued liabilities 102,263
-----------
Net cash used in operating activities (756,993)
-----------
Cash Flows from Investing Activities:
Investment in real estate limited partnerships (2,260,150)
Investment in limited partnership interests (341,280)
Purchase of property and equipment (106,358)
Due on purchase of limited partnership interests --
-----------
Net cash used in investing activities (2,707,788)
-----------
Cash Flows from Financing Activities:
Issuance of limited partnership interests 2,973,240
Initial capital contribution 100,000
Increase in notes payable 575,000
Loan from related party --
-----------
Net cash provided by financing activities 3,648,240
-----------
Net Increase in Cash 183,459
Cash, Beginning --
-----------
Cash, Ending $ 183,459
===========
See notes to financial statements
C-21
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
Pro forma Baron Capital
Baron Capital Acquired Properties, L.P. Exchange Adjusted
Properties, L.P. Properties As Adjusted Properties Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate $ -- $ 4,868,717 $ 4,868,717 $ 19,616,582 $ 24,485,299
Less accumulated depreciation -- (973,369) (973,369) (2,285,807) (3,259,176)
Investments in real estate limited partnership 2,260,150 -- 2,260,150 2,100,994 4,361,144
Investments in limited partnership interests 341,280 -- 341,280 -- 341,280
Cash and cash equivalents 183,459 242,553 426,012 499,277 925,289
Accounts receivable -- 2,777 2,777 18,571 21,348
Deferred expenses, net -- 22,267 22,267 622,337 644,604
Notes receivable from affiliates -- -- -- 4,903,879 4,903,879
Accrued interest receivable from affiliates -- -- -- 538,174 538,174
Other assets 285,806 158,508 444,314 4,138,961 4,583,275
---------------------------------------------------------------------------
$ 3,070,695 $ 4,321,453 $ 7,392,148 $ 30,152,968 $ 37,545,116
===========================================================================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Mortgages payable $ -- $ 4,549,346 $ 4,549,346 $ 17,744,845 $ 22,294,191
Notes payable to affiliates 575,000 -- 575,000 675,687 1,250,687
Loans payable -- 14,087 14,087 2,479,270 2,493,357
Accrued interest and payable -- -- -- 39,419 39,419
Accrued real estate taxes payable -- 61,615 61,615 58,180 119,795
Security deposits and prepaid rent -- 37,263 37,263 167,433 204,696
Other liabilities 102,263 112,727 214,990 874,475 1,089,465
---------------------------------------------------------------------------
Total liabilities 677,263 4,775,038 5,452,301 22,039,309 27,491,610
PARTNERS' CAPITAL: 2,393,432 (453,585) 1,939,847 8,113,659 10,053,506
---------------------------------------------------------------------------
$ 3,070,695 $ 4,321,453 $ 7,392,148 $ 30,152,968 $ 37,545,116
===========================================================================
</TABLE>
- ----------
The table above sets forth a pro forma balance sheet for the Operating
Partnership as of September 30, 1998. The data has been derived from the
unaudited financial statements for the Operating Partnership, the three
Acquired Properties acquired by the Operating Partnership to date which
have historical operating results, and the 23 Exchange Partnerships whose
limited partners are being offered the opportunity to exchange their
limited partnership interests therein for Operating Partnership Units in
the Exchange Offering.
The pro forma data is presented as if the Operating Partnership had owned
the Acquired Properties and all of the limited partnership interests in the
Exchange Partnerships at September 30,1998. The financial information shown
should be read in conjunction with the discussion set forth in "INITIAL
REAL ESTATE INVESTMENTS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION," and all of the financial statements included elsewhere in
this Prospectus. The pro forma financial information is not necessarily
indicative of what the actual financial position of the Operating
Partnership would have been as of the date indicated, nor does it purport
to represent the future financial position for future periods.
C-22
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
PRO FORMA STATEMENTS OF OPERATIONS
FROM COMMENCEMENT OF OPERATIONS
(FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
UNAUDITED
<TABLE>
<CAPTION>
Pro forma Baron Capital
Baron Capital Acquired Properties, L.P. Exchange Adjusted
Properties, L.P. Properties As Adjusted Properties Total
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental income $ -- $ 673,660 $ 673,660 $ 3,079,381 $ 3,753,041
Interest income 712 -- 712 601,100 601,812
Equity in net income of affiliate 21,644 26,437 48,081 90,233 138,314
Other income -- -- -- 3,762 3,762
-------------------------------------------------------------------------------
Total Revenue 22,356 700,097 722,453 3,774,476 4,496,929
COSTS AND EXPENSES:
Personnel 237,815 83,057 320,872 465,659 786,531
Real estate taxes and insurance -- 76,203 76,203 353,389 429,592
Property management fees 259,042 29,335 288,377 163,712 452,089
Interest -- 260,227 260,227 1,023,204 1,283,431
Depreciation and amortization -- 116,234 116,234 677,068 793,302
Major maintenance -- 46,740 46,740 33,458 80,198
Other operating expenses 205,307 131,577 336,884 1,186,479 1,523,363
-------------------------------------------------------------------------------
Total costs and expenses 702,164 743,373 1,445,537 3,902,969 5,348,506
-------------------------------------------------------------------------------
NET INCOME (LOSS) $ (679,808) $ (43,276) $ (723,084) $ (128,493) $ (851,577)
===============================================================================
</TABLE>
- ----------
The table above sets forth the pro forma statement of operations for the
Operating Partnership from February 3. 1998 (the commencement of
operations) through September 30, 1998. The operating data has been derived
from the unaudited financial statements for the Operating Partnership, the
three Acquired Properties acquired by the Operating Partnership to date
which have historical operating results, and the 23 Exchange Partnerships
whose limited partners are being offered the opportunity to exchange their
limited partnership interests therein for Operating Partnership Units in
the Exchange Offering. In the opinion of management, the operating data for
the indicated period include all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the information set
forth therein.
The pro forma operating data is presented as if the Operating Partnership
had owned the Acquired Properties and all of the limited partnership
interests in the Exchange Partnerships at the beginning of the indicated
period. The financial information shown should be read in conjunction with
the discussion set forth in "INITIAL REAL ESTATE INVESTMENTS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," and all of the
financial statements included elsewhere in this Prospectus. The pro forma
financial information is not necessarily indicative of what the results of
operations of the Operating Partnership would have been for the period
indicated, nor does it purport to represent the results of operations for
future periods.
C-23
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
BASED ON MINIMUM EXCHANGE PROPERTIES
UNAUDITED
<TABLE>
<CAPTION>
Pro forma Baron Capital
Baron Capital Acquired Properties, L.P. Exchange Adjusted
Properties, L.P. Properties As Adjusted Properties Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Real estate $ -- $ 4,868,717 $ 4,868,717 $ 4,638,021 $ 9,506,738
Less accumulated depreciation -- (973,369) (973,369) (628,732) (1,602,101)
Investments in real estate limited partnership 2,260,150 -- 2,260,150 1,518,508 3,778,658
Investments in limited partnership interests 341,280 -- 341,280 -- 341,280
Cash and cash equivalents 183,459 242,553 426,012 145,052 571,064
Accounts receivable -- 2,777 2,777 -- 2,777
Deferred expenses, net -- 22,267 22,267 115,901 138,168
Notes receivable from affiliates -- -- -- 719,508 719,508
Accrued interest receivable from affiliates -- -- -- 162,152 162,152
Other assets 285,806 158,508 444,314 1,381,189 1,825,503
-------------------------------------------------------------------------------
$ 3,070,695 $ 4,321,453 $ 7,392,148 $ 8,051,599 $ 15,443,747
===============================================================================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Mortgages payable $ -- $ 4,549,346 $ 4,549,346 $ 4,538,843 $ 9,088,189
Loans payable -- 14,087 14,087 730,083 744,170
Notes payable affiliates 575,000 -- 575,000 400,000 975,000
Accrued interest and payable -- -- -- -- --
Accrued real estate taxes payable -- 61,615 61,615 -- 61,615
Security deposits and prepaid rent -- 37,263 37,263 38,066 75,329
Other liabilities 102,263 112,727 214,990 184,266 399,256
-------------------------------------------------------------------------------
Total liabilities 677,263 4,775,038 5,452,301 5,891,258 11,343,559
PARTNERS' CAPITAL: 2,393,432 (453,585) 1,939,847 2,160,341 4,100,188
-------------------------------------------------------------------------------
$ 3,070,695 $ 4,321,453 $ 7,392,148 $ 8,051,599 $ 15,443,747
===============================================================================
</TABLE>
- ----------
The table above sets forth a pro forma balance sheet (based on a minimum
Exchange Offering) for the Operating Partnership as of September 30, 1998.
The pro forma data is presented as if the Operating Partnership had owned
at September 30,1998 the Acquired Properties and only the minimum number of
limited partnership interests in Exchange Partnerships to satisfy the
closing conditions of the Exchange Offering. The Operating Partnership will
not complete the offering in respect of any Exchange Partnership if limited
partners holding more than 10% of the limited partnership interests therein
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.
C-24
<PAGE>
BARON CAPITAL PROPERTIES, L.P.
PRO FORMA STATEMENTS OF OPERATIONS
FROM COMMENCEMENT OF OPERATIONS
(FEBRUARY 3, 1998) TO SEPTEMBER 30, 1998
BASED ON MINIMUM EXCHANGE PROPERTIES
UNAUDITED
<TABLE>
<CAPTION>
Pro forma Baron Capital
Baron Capital Acquired Properties, L.P. Exchange Adjusted
Properties, L.P. Properties As Adjusted Properties Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental income $ -- $ 673,660 $ 673,660 $ 854,679 $ 1,528,339
Interest income 712 -- 712 166,117 166,829
Equity in net income of affiliate 21,644 26,437 48,081 41,647 89,728
Other income -- -- -- 950 950
------------------------------------------------------------------------------
Total Revenue 22,356 700,097 722,453 1,063,393 1,785,846
COSTS AND EXPENSES:
Personnel 237,815 83,057 320,872 110,756 431,628
Real estate taxes and insurance -- 76,203 76,203 96,267 172,470
Property management fees 259,042 29,335 288,377 52,345 340,722
Interest -- 260,227 260,227 256,557 516,784
Depreciation and amortization -- 116,234 116,234 219,303 335,537
Major maintenance -- 46,740 46,740 15,133 61,873
Other operating expenses 205,307 131,577 336,884 244,515 581,399
------------------------------------------------------------------------------
Total costs and expenses 702,164 743,373 1,445,537 994,876 2,440,413
------------------------------------------------------------------------------
NET INCOME (LOSS) $ (679,808) $ (43,276) $ (723,084) $ 68,517 $ (654,567)
==============================================================================
</TABLE>
- ----------
The table above sets forth the pro forma statement of operations (based on
a minimum Exchange Offering) for the Operating Partnership from February 3.
1998 (the commencement of operations) through September 30, 1998. The pro
forma operating data is presented as if the Operating Partnership had owned
at the beginning of the indicated period the Acquired Properties and only
the minimum number of limited partnership interests in Exchange
Partnerships to satisfy the closing conditions of the Exchange Offering.
The Operating Partnership will not complete the offering in respect of any
Exchange Partnership if limited partners holding more than 10% of the
limited partnership interests therein 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.
C-25
<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
C-26
<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
====
C-27
<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.
C-28
<PAGE>
BARON ADVISORS, INC.
BALANCE SHEET
SEPTEMBER 30, 1998
ASSETS
Current Assets
Checking/ Savings Key Bank $ 16,318.19
-------------
Total Checking/ Savings 16,318.19
-------------
Total Current Assets 16,318.19
-------------
Total Assets $ 16,318.19
=============
LIABILITIES AND EQUITY
Equity
Common Stock 100.00
Net Income 16,218.19
-------------
Total Equity $ 16,318.19
-------------
TOTAL LIABILITIES AND EQUITY $ 16,318.19
=============
C-29
<PAGE>
BARON ADVISORS, INC.
NOTES TO BALANCE SHEET
(unaudited)
NOTE 1. RELATED PARTY TRANSACTIONS
Trust Management Agreement
Baron Advisors, Inc., the Managing Shareholder of Baron Capital Trust (the
"Trust"), and the Trust have entered into a Trust Management Agreement with
under which the Managing Shareholder is obligated to provide management,
administrative and investment advisory services to the Trust from the
commencement of the Trust's initial public offering (the "Cash Offering")
of up to 2,500,000 common shares of beneficial interest in the Trust at $10
per common share, for total maximum gross proceeds of $25,000,000. 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
aggregate 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 Operating
Partnership's 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.
Fees earned under the Trust Management Agreement amounted to approximately
$37,950 from commencement of operations (February 3, 1998) to September 30,
1998, of which approximately $1,528 were unpaid and accrued at September
30, 1998.
C-30
<PAGE>
EXHIBIT D
FINANCIAL STATEMENTS OF THE EXCHANGE PROPERTIES
<PAGE>
EXHIBIT D
BARON CAPITAL PROPERTIES, L.P.
INDEX TO FINANCIAL STATEMENTS
OF EXCHANGE PROPERTIES PURSUANT TO REGULATION SB 310
Page
----
EQUITY PROPERTIES
EXCHANGE EQUITY PARTNERSHIPS ............................................ D-7
BLOSSOM CORNERS APARTMENTS PHASE I:
Independent Auditors Report ........................................ D-8
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-9
Notes to Statement of Revenues and Certain Expenses ................ D-10
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-11
BRIDGEPOINT APARTMENTS PHASE II:
Independent Auditors Report ........................................ D-13
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-14
Notes to Statement of Revenues and Certain Expenses ................ D-15
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-16
BROOKWOOD WAY APARTMENTS:
Independent Auditors Report ........................................ D-18
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-19
Notes to Statement of Revenues and Certain Expenses ................ D-20
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-21
CAMELLIA COURT APARTMENTS:
Independent Auditors Report ........................................ D-23
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-24
Notes to Statement of Revenues and Certain Expenses ................ D-25
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-26
EAGLE LAKE APARTMENTS:
Independent Auditors Report ........................................ D-28
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-29
Notes to Statement of Revenues and Certain Expenses ................ D-30
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-31
FOREST GLEN APARTMENTS PHASE I:
Independent Auditors Report ........................................ D-33
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-34
Notes to Statement of Revenues and Certain Expenses ................ D-35
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-36
FOREST GLEN APARTMENTS PHASE II:
Independent Auditors Report ........................................ D-38
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-39
Notes to Statement of Revenues and Certain Expenses ................ D-40
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-41
FOREST GLEN APARTMENTS PHASE III:
Independent Auditors Report ........................................ D-43
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-44
Notes to Statement of Revenues and Certain Expenses ................ D-45
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-46
D-1
<PAGE>
Page
----
FOREST GLEN APARTMENTS PHASE IV:
Independent Auditors Report ........................................ D-48
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-49
Notes to Statement of Revenues and Certain Expenses ................ D-50
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-51
GLEN LAKE ARMS APARTMENTS:
Independent Auditors Report ........................................ D-53
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-54
Notes to Statement of Revenues and Certain Expenses ................ D-55
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-56
LAUREL OAKS (FORMERLY GROVE HAMLET) APARTMENTS:
Independent Auditors Report ........................................ D-58
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-59
Notes to Statement of Revenues and Certain Expenses ................ D-60
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-61
STADIUM CLUB APARTMENTS:
Independent Auditors Report ........................................ D-63
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-64
Notes to Statement of Revenues and Certain Expenses ................ D-65
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-66
STEEPLECHASE APARTMENTS:
Independent Auditors Report ........................................ D-68
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-69
Notes to Statement of Revenues and Certain Expenses ................ D-70
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-71
EXCHANGE HYBRID PARTNERSHIPS
CRYSTAL COURT APARTMENTS PHASE I:
Independent Auditors Report ........................................ D-74
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-75
Notes to Statement of Revenues and Certain Expenses ................ D-76
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-77
LAMPLIGHT COURT APARTMENTS:
Independent Auditors Report ........................................ D-79
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-80
Notes to Statement of Revenues and Certain Expenses ................ D-81
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-82
PINEVIEW APARTMENTS:
Independent Auditors Report ........................................ D-84
Statement of Revenues and Certain Expenses for the
Years Ended December 31, 1996 and 1997 .......................... D-85
Notes to Statement of Revenues and Certain Expenses ................ D-86
Statement of Revenues and Certain Expenses
for the Nine-Month Period Ended September 30, 1998 (unaudited) .. D-87
D-2
<PAGE>
DEBT PROPERTIES
Page
----
BARON STRATEGIC INVESTMENT FUND, LTD. ................................... D-89
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-91
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-92
Statement of Operations ..................................... D-93
Statement of Partners' Capital .............................. D-94
Statement of Cash Flows ..................................... D-95
Notes ....................................................... D-96
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-222
Statement of Operations ..................................... D-223
Statement of Partners' Capital .............................. D-224
Statement of Cash Flows ..................................... D-225
Notes ....................................................... D-226
BARON STRATEGIC INVESTMENT FUND IV, LTD. ................................ D-102
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-104
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-105
Statement of Operations ..................................... D-106
Statement of Partners' Capital .............................. D-107
Statement of Cash Flows ..................................... D-108
Notes ....................................................... D-109
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-233
Statement of Operations ..................................... D-234
Statement of Partners' Capital .............................. D-235
Statement of Cash Flows ..................................... D-236
Notes ....................................................... D-237
BARON STRATEGIC INVESTMENT FUND V, LTD. ................................. D-115
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-117
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-118
Statement of Operations ..................................... D-119
Statement of Partners' Capital .............................. D-120
Statement of Cash Flows ..................................... D-121
Notes ....................................................... D-122
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-243
Statement of Operations ..................................... D-244
Statement of Partners' Capital .............................. D-245
Statement of Cash Flows ..................................... D-246
Notes ....................................................... D-247
D-3
<PAGE>
Page
----
BARON STRATEGIC INVESTMENT FUND VI, LTD. ................................ D-130
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-132
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-133
Statement of Operations ..................................... D-134
Statement of Partners' Capital .............................. D-135
Statement of Cash Flows ..................................... D-136
Notes ....................................................... D-137
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-254
Statement of Operations ..................................... D-255
Statement of Partners' Capital .............................. D-256
Statement of Cash Flows ..................................... D-257
Notes ....................................................... D-258
BARON STRATEGIC INVESTMENT FUND VIII, LTD. .............................. D-143
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-145
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-146
Statement of Operations ..................................... D-147
Statement of Partners' Capital .............................. D-148
Statement of Cash Flows ..................................... D-149
Notes ....................................................... D-150
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-265
Statement of Operations ..................................... D-266
Statement of Partners' Capital .............................. D-267
Statement of Cash Flows ..................................... D-268
Notes ....................................................... D-269
BARON STRATEGIC INVESTMENT FUND IX, LTD. ................................ D-157
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-159
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-160
Statement of Operations ..................................... D-161
Statement of Partners' Capital .............................. D-162
Statement of Cash Flows ..................................... D-163
Notes ....................................................... D-164
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-276
Statement of Operations ..................................... D-277
Statement of Partners' Capital .............................. D-278
Statement of Cash Flows ..................................... D-279
Notes ....................................................... D-280
BARON STRATEGIC INVESTMENT FUND X, LTD. ................................. D-170
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .................. D-172
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-173
Statement of Operations ..................................... D-174
Statement of Partners' Capital .............................. D-175
Statement of Cash Flows ..................................... D-176
Notes ....................................................... D-177
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-287
Statement of Operations ..................................... D-288
Statement of Partners' Capital .............................. D-289
Statement of Cash Flows ..................................... D-290
Notes ....................................................... D-291
D-4
<PAGE>
Page
----
BARON STRATEGIC VULTURE FUND I, LTD. .................................... D-184
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-186
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-187
Statement of Operations ..................................... D-188
Statement of Partners' Capital .............................. D-189
Statement of Cash Flows ..................................... D-190
Notes ....................................................... D-191
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-299
Statement of Operations ..................................... D-300
Statement of Partners' Capital .............................. D-301
Statement of Cash Flows ..................................... D-302
Notes ....................................................... D-303
BREVARD MORTGAGE PROGRAM, LTD. .......................................... D-196
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS .................. D-198
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-199
Statement of Operations ..................................... D-200
Statement of Partners' Capital .............................. D-201
Statement of Cash Flows ..................................... D-202
Notes ....................................................... D-203
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-309
Statement of Operations ..................................... D-310
Statement of Partners' Capital .............................. D-311
Statement of Cash Flows ..................................... D-312
Notes ....................................................... D-313
D-5
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD. ....................... D-209
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ................. D-211
FINANCIAL STATEMENTS
As of December 31, 1997 and for the year then ended (audited)
Balance Sheet ............................................... D-212
Statement of Operations ..................................... D-213
Statement of Partners' Capital .............................. D-214
Statement of Cash Flows ..................................... D-215
Notes ....................................................... D-216
As of September 30, 1998 and for the nine-month period then ended
(unaudited)
Balance Sheet ............................................... D-319
Statement of Operations ..................................... D-320
Statement of Partners' Capital .............................. D-321
Statement of Cash Flows ..................................... D-322
Notes ....................................................... D-323
D-6
<PAGE>
EXCHANGE EQUITY PARTNERSHIPS
D-7
<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
D-8
<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
D-9
<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.
D-10
<PAGE>
Blossom Corners I Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 268,778
Other Income _______
Total Revenue 268,778
Certain Expenses
Personnel 34,486
Advertising and Promotion 4,124
Utilities Expense 14,014
Repairs and Maintenance 23,376
Real Estate Taxes and Insurance 15,570
Mortgage Interest Expense 77,965
Management Fees 17,513
Other Operating Expense 11,009
-------
Total Operating Expense 198,057
Revenues in Excess of Certain Expenses 70,721
=======
D-11
<PAGE>
BLOSSOM CORNERS APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 89%
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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-12
<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
D-13
<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
D-14
<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.
D-15
<PAGE>
Bridgepoint Apartments
Bridgepoint Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 185,158
Other Income ______
Total Revenue 185,158
Certain Expenses
Personnel 13,260
Advertising and Promotion 6,958
Utilities Expense 26,227
Repairs and Maintenance 18,394
Real Estate Taxes and Insurance 10,225
Mortgage Interest Expense 47,103
Management Fees 12,283
Other Operating Expense 6,551
-------
Total Operating Expense 141,001
Revenues in Excess of Certain Expenses 44,157
=======
D-16
<PAGE>
BRIDGEPOINT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-17
<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
D-18
<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
D-19
<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.
D-20
<PAGE>
Brookwood Way Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 206,024
Other Income _______
Total Revenue 206,024
Certain Expenses
Personnel 15,688
Advertising and Promotion 6,842
Utilities Expense 16,060
Repairs and Maintenance 15,139
Real Estate Taxes and Insurance 12,587
Mortgage Interest Expense 57,338
Management Fees 13,396
Other Operating Expense 4,195
-------
Total Operating Expense 141,245
Revenues in Excess of Certain Expenses 64,779
=======
D-21
<PAGE>
BROOKWOOD WAY APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-22
<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
D-23
<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
D-24
<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.
D-25
<PAGE>
Camellia Court Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 213,762
Other Income _______
Total Revenue 213,762
Certain Expenses
Personnel 26,292
Advertising and Promotion 5,137
Utilities Expense 15,076
Repairs and Maintenance 22,774
Real Estate Taxes and Insurance 15,749
Mortgage Interest Expense 81,678
Management Fees 13,603
Other Operating Expense 10,066
-------
Total Operating Expense 190,375
Revenues in Excess of Certain Expenses 23,387
=======
D-26
<PAGE>
CAMELLIA COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-27
<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
D-28
<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
D-29
<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.
D-30
<PAGE>
Eagle Lake Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 302,920
Other Income 3,585
-------
Total Revenue 306,505
Certain Expenses
Personnel 36,669
Advertising and Promotion 10,497
Utilities Expense 27,224
Repairs and Maintenance 26,731
Real Estate Taxes and Insurance 22,628
Mortgage Interest Expense 106,580
Management Fees 18,564
Other Operating Expense 8,604
-------
Total Operating Expense 257,497
Revenues in Excess of Certain Expenses 49,008
=======
D-31
<PAGE>
EAGLE LAKE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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.
September 30, 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-32
<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
D-33
<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
D-34
<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.
D-35
<PAGE>
Forest Glen I Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 277,130
Other Income _______
Total Revenue 277,130
Certain Expenses
Personnel 39,702
Advertising and Promotion 4,902
Utilities Expense 9,609
Repair and Maintenance 31,160
Real Estate Taxes and Insurance 23,373
Mortgage Interest Expense 107,071
Management Fees 15,232
Other Operating Expense 14,957
-------
Total Operating Expense 246,006
Revenues in Excess of Certain Expenses 31,124
=======
D-36
<PAGE>
FOREST GLEN APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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 period ending date:
September 30, 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-37
<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
D-38
<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
D-39
<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.
D-40
<PAGE>
Forest Glen II Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 157,829
Other Income _______
Total Revenue 157,829
Certain Expenses
Personnel 3,824
Advertising and Promotion 2,890
Utilities Expense 5,885
Repairs and Maintenance 16,752
Real Estate Taxes and Insurance 13,502
Mortgage Interest Expense 47,988
Management Fees 9,466
Other Operating Expense 8,037
-------
Total Operating Expense 118,344
Revenues in Excess of Certain Expenses 39,485
=======
D-41
<PAGE>
FOREST GLEN APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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 period ending date:
September 30, 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-42
<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
D-43
<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
D-44
<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.
D-45
<PAGE>
Forest Glen III Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 142,199
Other Income _______
Total Revenue 142,199
Certain Expenses
Personnel 12,041
Advertising and Promotion 2,413
Utilities Expense 4,078
Repairs and Maintenance 14,639
Real Estate Taxes and Insurance 13,547
Mortgage Interest Expense 42,192
Management Fees 8,292
Other Operating Expense 4,025
-------
Total Operating Expense 101,227
Revenues in Excess of Certain Expenses 40,972
=======
D-46
<PAGE>
FOREST GLEN APARTMENTS, PHASE III
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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 period ending date:
September 30, 1998 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-47
<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
D-48
<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
D-49
<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.
D-50
<PAGE>
Forest Glen IV Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 38,648
Other Income _______
Total Revenue 38,648
Certain Expenses
Personnel 4,306
Advertising and Promotion 762
Utilities Expense 1,257
Repairs and Maintenance 4,368
Real Estate Taxes and Insurance 3,591
Mortgage Interest Expense 13,029
Management Fees 2,610
Other Operating Expense 2,487
------
Total Operating Expense 32,410
Revenues in Excess of Certain Expenses 6,238
======
D-51
<PAGE>
FOREST GLEN APARTMENTS, PHASE IV
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 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 period ending date:
September 30, 1998 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-52
<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
D-53
<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
D-54
<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.
D-55
<PAGE>
Glen Lake Arms Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 571,980
Other Income ______
Total Revenue 571,980
Certain Expenses
Personnel 104,297
Advertising and Promotion 24,572
Utilities Expense 89,904
Repairs and Maintenance 118,256
Real Estate Taxes and Insurance 88,015
Mortgage Interest Expense 192,536
Management Fees 0
Other Operating Expense 93,019
--------
Total Operating Expense 710,599
Revenues in Excess of Certain Expenses (138,619)
========
D-56
<PAGE>
GLEN LAKE ARMS APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 48%
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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-57
<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
D-58
<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
D-59
<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.
D-60
<PAGE>
Laurel Oaks Apartments
(formerly Grove Hamlet Apartments)
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 217,728
Other Income _______
Total Revenue 217,728
Certain Expenses
Personnel 30,427
Advertising and Promotion 1,227
Utilities Expense 10,157
Repairs and Maintenance 21,020
Real Estate Taxes and Insurance 16,655
Mortgage Interest Expense 90,261
Management Fees 13,574
Other Operating Expense 6,611
-------
Total Operating Expense 189,932
Revenues in Excess of Certain Expenses 27,796
=======
D-61
<PAGE>
GROVE HAMLET APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-62
<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
D-63
<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
D-64
<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.
D-65
<PAGE>
Stadium Club Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 311,584
Other Income _______
Total Revenue 311,584
Certain Expenses
Personnel 55,544
Advertising and Promotion 10,867
Utilities Expense 49,905
Repairs and Maintenance 29,733
Real Estate Taxes and Insurance 10,277
Mortgage Interest Expense 102,025
Management Fees 32,982
Other Operating Expense 30,026
--------
Total Operating Expense 321,359
Revenues in Excess of Certain Expenses (9,775)
========
D-66
<PAGE>
STADIUM CLUB APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 64%
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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-67
<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
D-68
<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
D-69
<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.
D-70
<PAGE>
Steeplechase Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 232,453
Other Income _______
Total Revenue 232,453
Certain Expenses
Personnel 46,225
Advertising and Promotion 2,422
Utilities Expense 41,559
Repairs and Maintenance 35,791
Real Estate Taxes and Insurance 18,362
Mortgage Interest Expense 68,203
Management Fees 14,696
Other Operating Expense 14,020
--------
Total Operating Expense 241,278
Revenues in Excess of Certain Expenses (8,825)
========
D-71
<PAGE>
STEEPLECHASE APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 1998 75%
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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-72
<PAGE>
EXCHANGE HYBRID PARTNERSHIPS
D-73
<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 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 audit 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 combined 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 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
March 28, 1998
D-74
<PAGE>
CRYSTAL COURT 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 $ 282,679 $ 270,046
Other income 14,701 9,356
--------- ---------
Total revenues 297,380 279,402
--------- ---------
CERTAIN EXPENSES
Personnel 30,622 31,136
Advertising and promotion 2,628 2,768
Utilities 20,609 25,684
Repairs and maintenance 26,081 37,278
Real estate taxes and insurance 34,604 33,957
Mortgage interest expense 139,652 147,658
Management fees 20,019 19,102
Other operating expenses 5,015 3,893
--------- ---------
Total certain expenses 279,230 301,476
--------- ---------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 18,150 $ (22,074)
========= =========
See Note to Statement of Revenues and Certain Expenses
D-75
<PAGE>
CRYSTAL COURT 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
Crystal Court Apartments, Phase I, consist of 72 units located in Lakeland,
Florida. The property was acquired by purchase in 1997 by Cystal Court
Properties, Ltd. The following percentage of units were occupied at the
various period ending dates:
December 31, 1996 92%
December 31, 1997 89%
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 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.
D-76
<PAGE>
Crystal Court I Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 199,919
Other Income 4,391
-------
Total Revenue 204,310
Certain Expenses
Personnel 18,169
Advertising and Promotion 1,986
Utilities Expense 12,796
Repairs and Maintenance 16,133
Real Estate Taxes and Insurance 11,393
Mortgage Interest Expense 62,950
Management Fees 8,143
Other Operating Expense 5,133
-------
Total Operating Expense 136,708
Revenues in Excess of Certain Expenses 67,602
=======
D-77
<PAGE>
CRYSTAL COURT APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Crystal Court Apartments, Phase I, consist of 72 units located in Lakeland,
Florida. The property was acquired by purchase in 1997 by Cystal Court
Properties, Ltd. The following percentage of units were occupied at the
various period ending dates:
September 30, 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 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-78
<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
D-79
<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
D-80
<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.
D-81
<PAGE>
Lamplight Court Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
<TABLE>
<CAPTION>
Undivided 31.7% Interest
held by Lamplight Court of Undivided 68.3% Interest
Bellefontaine Apartments, Ltd. held by Non-affiliate Total
------------------------------ --------------------- -----
<S> <C> <C> <C>
Revenue
Rent Base 86,411 186,179 272,590
Other Income 766 1,649 2,415
------- ------- -------
Total Revenue 87,177 187,828 275,005
Certain Expenses
Personnel 8,018 17,276 25,294
Advertising and Promotion 602 1,296 1,898
Utilities Expense 8,688 18,720 27,408
Repairs and Maintenance 2,021 4,353 6,374
Real Estate Taxes and Insurance 7,691 16,572 24,263
Mortgage Interest Expense 29,804 64,214 94,018
Management Fees 3,525 7,596 11,121
Other Operating Expenses 5,504 11,859 17,363
------- ------- -------
Total Operating Expenses 65,853 141,886 207,739
------- ------- -------
Revenues in Excess
of Certain Expenses 21,323 45,943 67,266
======= ======= =======
</TABLE>
D-82
<PAGE>
LAMPLIGHT COURT APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 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 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-83
<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 Pine
View 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 audit 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 combined 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 Pine View 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
D-84
<PAGE>
PINE VIEW 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 $358,074 $382,792
Other income 32,557 19,469
-------- --------
Total revenues 390,631 402,261
-------- --------
CERTAIN EXPENSES
Personnel 33,083 40,056
Advertising and promotion 16,713 19,452
Utilities 49,502 46,699
Repairs and maintenance 52,329 64,718
Real estate taxes and insurance 43,589 45,005
Mortgage interest expense 131,707 138,693
Management fees 25,709 28,159
Other operating expenses 13,185 8,201
-------- --------
Total certain expenses 365,817 390,983
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 24,814 $ 11,278
======== ========
See Note to Statement of Revenues and Certain Expenses
D-85
<PAGE>
PINE VIEW 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
Pine View Apartments consist of 92 units located in Orlando, Florida. The
property was acquired by purchase in 1986 by Pineview Apartments, Ltd. The
following percentage of units were occupied at the various period ending
dates:
December 31, 1996 93%
December 31, 1997 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 Pine View 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.
D-86
<PAGE>
Pineview Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
Revenue
Rent Base 288,547
Other Income 18,664
-------
Total Revenue 307,211
Certain Expenses
Personnel 30,650
Advertising and Promotion 4,685
Utilities Expense 32,319
Repairs and Maintenance 28,670
Real Estate Taxes and Insurance 14,457
Mortgage Interest Expense 73,004
Management Fees 10,541
Other Operating Expense 12,062
-------
Total Operating Expense 206,388
Revenues in Excess of Certain Expenses 100,823
=======
D-87
<PAGE>
PINE VIEW APARTMENTS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Pine View Apartments consist of 92 units located in Orlando, Florida. The
property was acquired by purchase in 1986 by Pineview Apartments, Ltd. The
following percentage of units were occupied at the various period ending
dates:
September 30, 1998 92%
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 Pine View 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.
Other Matters
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. (the "Operating Partnership"), will offer to exchange Operating
Partnership Units to the limited partners of partnerships which directly or
indirectly own the equity interest in residential apartment properties,
including the subject property. These Units are exchangeable for an
equivalent number of Common Shares of beneficial interest in Baron Capital
Trust, a real estate investment trust under common control, for whom Baron
Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the
assets acquired and the liabilities assumed at their fair value at the date
of acquisition.
D-88
<PAGE>
DEBT PROPERTIES
================================================================================
BARON STRATEGIC INVESTMENT FUND, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-89
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-90
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment
Fund, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Note 3, the Partnership and its affiliates have
engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the third paragraph 7 of
Note 6, as to which the date is December 15, 1998
D-91
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 39,440
Notes receivable from affiliates 559,000
Advances receivable from affiliate 249,739
Accrued interest receivable from affiliate 21,459
--------
$869,638
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 9,500
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 90
Limited partners 860,048
--------
860,138
--------
$869,638
========
See notes to financial statements.
D-92
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliate $76,981
Other 1,906
-------
78,887
-------
Expenses:
General and administrative 10,745
Administrative fees to general partner 6,000
-------
16,745
-------
Net Income $62,142
=======
See notes to financial statements.
D-93
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 90 $ 910,570 $ 910,660
Distributions -- (112,664) (112,664)
Net Income -- 62,142 62,142
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 860,048 $ 860,138
========= ========= =========
See notes to financial statements.
D-94
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 62,142
Adjustments to reconcile net income to net
cash provided by operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (15,981)
Increase in administrative fees payable to general partner 6,000
---------
Net cash provided by operating activities 52,161
---------
Cash Flows from Investing Activities:
Investment in notes receivables from affiliates (339,000)
Advances to affiliate (7,239)
---------
Net cash used in investing activities (346,239)
---------
Cash Flows from Financing Activities:
Distributions to limited partners (112,664)
Syndication costs (6,800)
---------
Net cash used in financing activities (119,464)
---------
Net Decrease in Cash (413,542)
Cash, Beginning 452,982
---------
Cash, Ending $ 39,440
=========
</TABLE>
See notes to financial statements.
D-95
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund, Ltd. ("the Partnership") was initially
organized on April 24, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-96
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of May 20, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
12.5% non-cumulative annual cash-on-cash return on the aggregate
amount of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated 50% to the limited partners and 50% to the general partner.
D-97
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them when added to
all prior distributions of distributable cash and net proceeds made to
them, is equal to the sum of their capital contributions plus an
annual 12.5% cash-on-cash return; and (b) next to the general partner,
until the total amount so distributed to it when added to all prior
distributions of distributable cash and net proceeds made to it, is
equal to the sum of its capital contribution plus an annual 12.5%
cash-on-cash return and; (c) the balance, if any is distributed 50% to
the limited partners and 50% to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-98
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $500 per
month through December 1, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the balances of the notes receivable from affiliates at
December 31, 1997:
Notes
Receivable
----------
Blossom Corners Apartments II, Ltd. ("Blossom II") $457,000 (a)
Falls Properties III, Ltd. ("Falls III") 102,000 (b)
--------
$559,000
========
(a) In November 1996, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Blossom II, were converted into promissory notes as more fully described in
the table below:
Blossom II Second Mortgage Note; matures on April 1, 2002;
accrues interest at an minimum annual rate of 6% and provides for
participation interest at the rate of 3% per annum based upon the
amount of the unpaid principal, which shall be due and payable to
the extent that it does not exceed the available cash flow, as
defined in the note; provides for additional participation
interest in an annual equal to 20% of remaining available cash
flow, as defined, which will continue to be made until such time
as the collateral has been sold, and which obligation will
continue notwithstanding total repayment of the principal amount
of the note; secured by a lien upon certain real and personal
property of Blossom II; subordinated to the first mortgage which
had a balance of approximately $1,130,000 as of December 31,
1997. $622,103
D-99
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the
former general partner to Blossom II. The note is payable
upon demand and bears interest at 1% over prime (9.5% as of
December 31,1997). 68,861
Other receivables, related to advances for refinancing fees
and professional services. 29,732
--------
720,696
Less discount 263,696
--------
Notes receivable, net of discount $457,000
========
See Note 6 regarding a subsequent amendment to the second mortgage.
(b) In April 1997, the Partnership acquired, at a discount, certain receivables
owed Falls III from an unrelated entity. In connection with Falls III
filing for reorganization under Chapter 11 of the Bankruptcy Code in August
1994, the notes, which had included a Second Mortgage Note Receivable, were
converted into two unsecured promissory notes of $198,750 and $44,398
(total of $234,148). The notes provide for the partial repayment of the
principal balance in April 1999 using 20% of the excess cash flow of Falls
III. The remaining principal is to be repaid after all secured notes and
other claims designated by the court have been paid in full.
Notes receivable $ 243,148
Less discount (141,148)
---------
Notes receivable, net of discount $ 102,000
=========
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATE
During 1996 and 1997, the Partnership provided funding to Blossom II by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and accrue interest at 12% per annum. The balance of
$249,739 remained outstanding as of December 31, 1997. Interest income of
$36,427 was recognized during the year, of which $21,459 was accrued as of
December 31, 1997. Subsequent to December 31, 1997, the Partnership received
$134,992 from Blossom II as payment towards the principal and interest.
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum dated
May 20, 1996, the Partnership issued the 2,400 units of limited partner interest
being offered at $500 per unit for total gross proceeds of $1,200,000. Costs of
$284,000 incurred in connection with syndicating the limited partnership units
were recorded as a reduction of limited partners' capital contributions. Of the
$284,000 in syndication costs, the Partnership paid $164,000 to its general
partner for administrative, legal and investment fees.
D-100
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS
Loan to Affiliate
In March 1998, the Partnership made a loan of $128,000 to Sycamore Real Estate
Development, an affiliate. The loan is due on demand and has an annual interest
rate of 12%.
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $76,000 to the
limited partners.
Amendment to Second Mortgage
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to April 1, 2002.
The amendment also provides for additional advances to be secured under a future
advance clause up to $1,250,000 maximum.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership.
D-101
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND IV, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-102
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-103
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund IV, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund IV, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
IV, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Notes 3 and 4, the Partnership and its
affiliates have engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the second paragraph of
Note 6, as to which the date is December 15, 1998
D-104
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 98,947
Notes receivable from affiliates 968,751
Advances receivable from affiliates 19,500
Accrued interest receivable from affiliate 20,858
----------
$1,108,056
==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Note payable to affiliate $ 379,267
Accrued syndication costs 20,100
Administrative fees payable to general partner 14,000
Accrued interest payable to affiliate 2,182
----------
415,549
----------
Commitments and Other Matter --
Partners' Capital:
General partner 511
Limited partners 692,507
----------
692,507
----------
$1,108,056
==========
See notes to financial statements.
D-105
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliate $128,047
Other 1,573
--------
129,620
--------
Costs and Expenses:
Interest expense to affiliate 67,699
Administrative fees to general partner 12,000
General and administrative 5,181
--------
84,880
--------
Net Income $ 44,740
========
See notes to financial statements.
D-106
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' Capital, Beginning $ 64 $ 70,023 $ 70,087
Capital Contributions, Net of Syndication Costs -- 604,810 604,810
Distributions -- (27,130) (27,130)
Net Income 447 44,293 44,740
--------- --------- ---------
Partners' Capital, Ending $ 511 $ 691,996 $ 692,507
========= ========= =========
</TABLE>
See notes to financial statements.
D-107
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net loss $ 44,740
Adjustments to reconcile net loss to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (20,858)
Increase in administrative fees payable to general partner 12,000
Increase in accrued interest payable to affiliate 2,182
---------
Net cash provided by operating activities 38,064
---------
Cash Flows from Investing Activities:
Investment in notes receivable from affiliate (981,237)
Payment received on notes receivable from affiliate 12,486
Advances to affiliates (19,500)
---------
Net cash used in investing activities (988,251)
---------
Cash Flows from Financing Activities:
Proceeds from notes payable to affiliate 690,000
Payments on note payable to affiliate (310,733)
Partners' capital contributions 769,263
Syndication costs (144,353)
Distributions to limited partners (27,130)
---------
Net cash provided by financing activities 977,047
---------
Net Increase in Cash 26,860
Cash, Beginning 72,087
---------
Cash, Ending $ 98,947
=========
</TABLE>
See notes to financial statements.
D-108
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund IV, Ltd. ("the Partnership") was initially
organized on October 1, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,000,000, to be divided into 2,000 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-109
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of October 22,
1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,000,000, to be
divided into 2,000 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
12% non-cumulative annual cash-on-cash return on the aggregate amount
of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated to the general partner.
D-110
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 18% cash-on-cash return; and (b) the balance, if any, is
distributed to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-111
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
The following are the balances of the notes receivable and accrued interest
receivable from affiliates at December 31, 1997: Notes Accrued Receivable
Interest
Country Square Apartments, Ltd. ("Country Square") $797,189 $ -- (a)
-------
Country Square 171,562 20,858 (b)
-------- -------
$968,751 $20,858
======== =======
(a) In March 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Country Square, were converted into promissory notes as more fully
described in the table below:
Country Square Second Mortgage Note; matures on April 30, 2008;
accrues interest at an minimum annual rate of 12%; secured by a
lien upon certain real and personal property of Country Square;
subordinated to the first mortgage which had a balance of
approximately $1,240,000 as of December 31, 1997. $1,192,987
Less discount 395,798
----------
Note receivable, net of discount $ 797,189
==========
(b) In July 1997, the Partnership made a loan to Country Square of $171,562
pursuant to the terms of a promissory note. The note is due on demand and
accrues interest quarterly at 12% per annum.
D-112
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
See Note 6 regarding a subsequent amendment to the second mortgage.
NOTE 4. Note Payable to Affiliate
In March 1997, the Partnership borrowed funds from Baron Strategic Investment
Fund VI, Ltd. ("Fund VI") pursuant to the terms of a promissory note. The note
matures in September 2002 with interest payable monthly at 15% per annum. As
collateral for the note payable, the Partnership has granted Fund VI a security
interest in the second mortgage notes and mortgages (see Note 3). The note had
an unpaid principal balance of $379,267 as of December 31, 1997. Interest
expense to the affiliate amounted to $67,699 for 1997 of which $2,182 was unpaid
and accrued at December 31, 1997.
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum dated
October 22, 1996, the Partnership issued 180 units of limited partnership
interest of the 2,000 units being offered at $500 per unit for total gross
proceeds of $90,000. Costs of $17,400 incurred in connection with syndicating
the partnership units were recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $14,000 was paid to the General Partner
for administrative, legal and investment fees.
During 1997, the Partnership issued 1,538.5 units of limited partnership
interest at $500 per unit for total gross proceeds of $769,263. This issuance
increased the total units sold to 1,718.5 units of the 2,000 units being
offered. Costs of $164,453 incurred in connection with syndicating these
partnership units have been recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $80,570 was incurred with regard to the
General Partner for administrative, legal and investment fees. Syndicated costs
of $20,100 were unpaid and accrued at December 31, 1997.
Subsequent to December 31, 1997, the Partnership issued 280.5 units of the
remaining 281.5 units at $500 per unit for a total of $140,237. This issuance
increased the total units sold to 1,999 units of the 2,000 units being offered.
Costs of $26,647 incurred in connection with syndicating these partnership units
were recorded as a reduction of limited partner's capital contributions in 1998.
Of the syndication costs, $22,524 was paid to the General Partner for
administrative, legal and investment fees.
NOTE 6. SUBSEQUENT EVENTS
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $15,000 to the
limited partners.
D-113
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS (Continued)
Amendment to Second Mortgage
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to April 30,
2008. The amendment also provides for additional advances to be secured under a
future advance clause up to $1,750,000 maximum.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-114
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND V, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-115
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
D-116
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund V, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund V, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations and partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
V, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the stockholder and president of the Partnership's general
partner. As discussed in Notes 3 and 4, the Partnership and its affiliates have
engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the third paragraph
of Note 6, as to which the date is December 15, 1998.
D-117
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $112,521
Notes receivable from affiliates 706,100
Advances receivable from affiliates 54,800
Accrued interest receivable from affiliates 55,694
--------
$929,115
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 14,000
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 69
Limited partners 915,046
--------
915,115
--------
$929,115
========
See notes to financial statements.
D-118
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliates $55,694
Other 3,423
-------
59,117
-------
Costs and Expenses:
Administrative fees to general partner 12,000
General and administrative 5,117
-------
17,117
-------
Net income $42,000
=======
See notes to financial statements.
D-119
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' Capital, Beginning $ 69 $ 85,614 $ 85,683
Capital Contributions, Net of Syndication Costs -- 850,300 850,300
Distributions -- (62,868) (62,868)
Net Income -- 42,000 42,000
--------- --------- ---------
Partners' Capital, Ending $ 69 $ 915,046 $ 915,115
========= ========= =========
</TABLE>
See notes to financial statements.
D-120
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 42,000
Adjustments to reconcile net loss to net cash
used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (55,694)
Increase in administrative fees payable to general partner 12,000
-----------
Net cash used in operating activities (1,694)
-----------
Cash Flows from Investing Activities:
Investment in notes receivable from affiliates (706,100)
Investment in advances receivable from affiliates (54,800)
-----------
Net cash used in investing activities (760,900)
-----------
Cash Flows from Financing Activities:
Partners' capital contributions 1,090,000
Syndication costs paid (239,700)
Distributions to limited partners (62,868)
-----------
Net cash provided by financing activities 787,432
-----------
Net Increase in Cash 24,838
Cash, Beginning 87,683
-----------
Cash, Ending $ 112,521
===========
</TABLE>
See notes to financial statements.
D-121
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
D-122
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund V, Ltd. ("the Partnership") was initially
organized on October 1, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-123
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the allowance for impairment and the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of October 23,
1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
15% non-cumulative annual cash-on-cash return on the aggregate amount
of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated to the general partner.
D-124
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 15% cash-on-cash return; and (b) the balance, if any, is
distributed 50% to the limited partners and 50% to the general
partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-125
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the balances of the notes receivable, net of allowance for
impairment, and accrued interest due from affiliates at December 31, 1997:
Notes Accrued
Receivable Interest
---------- --------
Sunrise Apartments, Ltd.("Sunrise") $488,000 $ 26,309(a)
Curiosity Creek Apartments, Ltd. ("Curiosity Creek") 218,100 29,385(b)
-------- --------
$706,100 $ 55,694
======== ========
(a) In June 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Sunrise, were converted into promissory notes as more fully described in
the table below.
Sunrise Second Mortgage Note; matures on October 1, 2007;
accrues interest at an minimum annual rate of 6% and
provides for participation interest at the rate of 3% per
annum based upon the amount of the unpaid principal, which
shall be due and payable to the extent that it does not
exceed the available cash flow, as defined in the note;
provides for additional participation interest in an annual
equal to 20% of remaining available cash flow, as defined,
which will continue to be made until such time as the
collateral has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of
the note; secured by a lien upon certain real and personal
property of Sunrise; subordinated to the first mortgage
which had a balance of approximately $1,037,000 as of
December 31, 1997. $ 335,000
D-126
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the
former general partner to Sunrise. The note is payable upon
demand and bears interest at an annual rate of 4%. 621,515
Unsecured promissory note, representing advances made by the
former general partner to Sunrise. The note is payable upon
demand and bears interest at 1% over prime (9.5% as of
December 31, 1997). 1,467
Other receivables, related to advances for refinancing fees
and professional services 48,468
----------
1,006,450
Less discount 518,450
----------
Notes receivable, net of discount $ 488,000
==========
(b) In March 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Curiosity Creek, were converted into promissory notes as more fully
described in the table below.
Curiosity Creek Second Mortgage Note; matures on April 1,
2007; accrues interest at an minimum annual rate of 6% and
participation interest at the rate of 3% per annum based
upon the amount of the unpaid principal, which shall be due
and payable to the extent that it does not exceed the
available cash flow, as defined in the note; provides for
additional participation interest in an annual equal to 20%
of remaining available cash flow, as defined, which will
continue to be made until such time as the collateral has
been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of
the note; secured by a lien upon certain real and personal
property of Curiosity Creek; subordinated to the first
mortgage which had a balance of approximately $1,180,000 as
of December 31, 1997. $ 807,560
Unsecured promissory note, representing advances made by the
former general partner to Curiosity Creek. The note is
payable upon demand and bears an annual interest rate of
12.5%. 416,000
Unsecured promissory note, representing advances made by the
former general partner to Curiosity Creek. The note is
payable on demand and bears interest at 1% over prime (9.5%
as of December 31, 1997). 414,380
Other receivables, related to advances for refinancing fees
and professional fees 29,732
-----------
1,667,672
Percentage purchased 26.27%
-----------
438,097
Less discount 219,997
-----------
Notes receivable, net of discount $ 218,100
===========
D-127
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATES
During 1997, the Partnership provided funding to affiliates by means of advances
in an arrangement equivalent to an open ended line of credit. The advances are
due on demand and provide for interest at 12% per annum. Interest income related
to the advances was not material for 1997. The balances as of December 31, 1997
are as follows:
Sunrise $51,200
Curiosity Creek 3,600
-------
Total $54,800
=======
See Note 6 for subsequent transactions relating to these advances.
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum dated
October 23, 1996, the Partnership issued 220 units of limited partnership
interest units at $500 per unit for gross proceeds of $110,000. Costs of $22,300
incurred in connection with syndicating the limited partnership units were
recorded as a reduction of limited partners' capital contributions. Of the
$22,300 in syndication costs incurred in 1996, the Partnership paid $17,500 to
its general partner for administrative, legal and investment fees.
During 1997, the Partnership issued the 2,180 units of the limited partner
interest units at $500 per unit for gross proceeds of $1,090,000. Costs of
$239,700 incurred in connection with syndicating the limited partnership units
were recorded as a reduction of limited partners' capital contributions. Of the
$239,700 in syndication costs incurred in 1997, the Partnership paid $124,500 to
its general partner for administrative, legal and investment fees.
NOTE 6. SUBSEQUENT EVENTS
Distributions
In 1998, the Partnership made distributions of approximately $90,000 to the
limited partners.
Advances Receivable from Affiliates
In 1998, the Partnership continued to provide funding to affiliates by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and provide for interest at 12% per annum. The
following is a summary of the transactions subsequent to December 31, 1997
relating to these advances:
Additional Advances:
Candelwood Apartments II, Ltd. $ 21,000
Baron Strategic Vulture Fund I, Ltd. 44,500
--------
$ 65,500
========
Repayments:
Sunrise $(43,700)
========
D-128
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS (Continued)
Amendment to Sunrise and Curiosity Creek Second Mortgages
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to November 1,
2007 and April 1, 2007, respectively. The amendment also provides for additional
advances to be secured under a future advance clause up to a maximum of $______
and $2,000,000, respectively.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-129
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND VI, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-130
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-131
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund VI, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund VI, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
VI, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Notes 3 and 4, the Partnership and its
affiliates have engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998
D-132
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $184,572
Note receivable from affiliate 379,267
Investment in affiliate 320,819
Advance receivable from affiliate 2,570
Accrued interest receivable from affiliate 2,182
--------
$889,410
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Advance payable to affiliate $ 8,050
Administrative fees payable to general partner 13,000
--------
21,050
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 81
Limited partners 868,279
--------
868,360
--------
$889,410
========
See notes to financial statements.
D-133
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliates $67,699
Other 4,638
-------
72,337
-------
Costs and Expenses:
Equity in net loss of affiliate 26,181
Administrative fees to general partner 12,000
General and administrative 5,974
-------
44,155
-------
Net Income $28,182
=======
See notes to financial statements.
D-134
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' Capital, Beginning $ 81 $ 449,650 $ 449,731
Capital Contributions, Net of Syndication Costs -- 475,450 475,450
Distributions -- (85,003) (85,003)
Net Income -- 28,182 28,182
--------- --------- ---------
Partners' Capital, Ending $ 81 $ 868,279 $ 868,360
========= ========= =========
</TABLE>
See notes to financial statements.
D-135
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
Cash Flows from Operating Activities:
Net income $ 28,182
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in net loss of affiliate 26,181
Changes in operating assets and liabilities:
Increase in administrative fees payable to general partner 12,000
Increase in accrued interest receivable from affiliate (2,182)
---------
Net cash provided by operating activities 64,181
---------
Cash Flows from Investing Activities:
Investment in affiliate (347,000)
Investment in note receivable from affiliate (690,000)
Repayments of note receivable from affiliate 310,733
Advances to affiliates (2,570)
Net cash used in investing activities (728,837)
---------
Cash Flows from Financing Activities:
Partners' capital contributions 668,000
Syndication costs (192,550)
Distributions to limited partners (85,003)
Advances from affiliates 8,050
---------
Net cash provided by financing activities 398,497
---------
Net Decrease in Cash (266,159)
Cash, Beginning 450,731
---------
Cash, Ending $ 184,572
=========
See notes to financial statements.
D-136
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund VII, Ltd. ("the Partnership") was initially
organized on October 30, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-137
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate
The Partnership holds a 56.43% limited partner interest in Pineview Apartments,
Ltd. ("Pineview"), a limited partnership which owns a residential apartment
property in Orlando, Florida. The investment in Pineview is accounted for using
the equity method of accounting as a result of the Partnership and Pineview
having the same general partner president and the general partner's ability to
exercise significant influence on Pineview. As such, the investment in Pineview
is carried at cost and adjusted for the Partnership's share of undistributed
earnings or losses using the equity method of accounting.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of November 12,
1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
D-138
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
12.5% non-cumulative annual cash-on-cash return on the aggregate
amount of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated 50% to the limited partners and 50% to the general partner.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 12.5% cash-on-cash return; and (b) the balance, if any, is
distributed 50% to the limited partners and 50% to the general
partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
D-139
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2003.
NOTE 3. NOTE RECEIVABLE FROM AFFILIATE
In March 1997, the Partnership advanced funds to, and received a $690,000 note
from, Baron Strategic Investment Fund IV, Ltd. ("BSIF IV"), an affiliate, with
an annual interest rate of 15%. The note, which is secured by real property of
County Square Apartments, Ltd., an affiliate, provides for monthly payments of
interest only on the unpaid principal balance, with principal plus any accrued
interest due in September 2002. Interest income recognized on the note during
1997 was $67,699. As of December 31, 1997, the note had an outstanding balance
of $379,267 and accrued interest of $2,182.
D-140
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of operations
of Pineview as of and for the year ended December 31, 1997.
Financial position:
Rental apartments $ 1,849,363
Other assets 119,836
-----------
Total assets $ 1,969,199
===========
Mortgage payable $ 1,622,364
Other liabilities 493,337
-----------
Total liabilities 2,115,701
Partners' deficiency (146,502)
-----------
$ 1,969,199
===========
Results of operations:
Revenues (including rental income of $416,192) $ 419,085
Costs and expenses 465,471
-----------
Net loss $ (46,386)
===========
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum dated
November 12, 1996, the Partnership issued 1,064 units of limited partnership
interest at $500 per unit for gross proceeds of $532,000. Costs of $81,450
incurred in connection with syndicating the limited partnership units were
recorded as a reduction of limited partners' capital contributions. Of the
$81,450 in syndication costs incurred in 1996, the Partnership paid $38,890 to
its general partner for administrative, legal and investment fees.
During 1997, the Partnership issued 1,336 units of limited partner interest at
$500 per unit for gross proceeds of $668,000. Costs of $192,550 incurred in
connection with syndicating the limited partnership units were recorded as a
reduction of limited partners' capital contributions. Of the $192,550 in
syndication costs incurred in 1997, the Partnership paid $115,110 to its general
partner for administrative, legal and investment fees.
NOTE 6. SUBSEQUENT EVENTS
Notes Receivable from Affiliates
In February 1998, the Partnership received a payment of $125,000 on the note
receivable from BSIF IV (see Note 3), which was applied to the outstanding
balance of principal and interest.
In February 1998, the Partnership purchased from Baron Strategic Investment Fund
X, an affiliate, an undivided 20% interest in the second mortgage note and
accrued interest of Garden Terrace Apartments III, Ltd. for $160,000.
D-141
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS (Continued)
Advances Receivable from Affiliates
In 1998, the Partnership continued to provide funding to affiliates by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and provide for interest at 12% per annum. The
following is a summary of the transactions subsequent to December 31, 1997
relating to these advances:
Additional Advances:
Candlewood Apartments II, Ltd. $68,000
Pineview 24,500
-------
$92,500
=======
Distributions
In 1998, the Partnership made distributions of approximately $90,000 to the
limited partners.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-142
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-143
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
D-144
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund VIII, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund VIII, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
VIII, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Note 3, the Partnership and its affiliates have
engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the third paragraph of
Note 6, as to which the date is December 15, 1998
D-145
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 84,615
Notes receivable from affiliates 685,650
Advances receivable from affiliates 65,095
Accrued interest receivable from affiliates 38,892
--------
$874,252
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 10,000
Accrued syndication costs 2,854
--------
12,854
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 90
Limited partners 861,308
--------
861,398
--------
$874,252
========
See notes to financial statements.
D-146
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliates $38,892
Other 1,708
-------
40,600
-------
Costs and Expenses:
Administrative fees to general partner 10,000
General and administrative 4,453
-------
14,453
-------
Net Income $26,147
=======
See notes to financial statements.
D-147
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' Capital, Beginning $ -- $ -- $ --
Capital Contributions, Net of Syndication Costs 90 865,611 865,701
Distributions -- (30,450) (30,450)
Net Income -- 26,147 26,147
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 861,308 $ 861,398
========= ========= =========
</TABLE>
See notes to financial statements.
D-148
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 26,147
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates (38,892)
Increase in administrative fees payable to general partner 10,000
-----------
Net cash used in operating activities (2,745)
-----------
Cash Flows from Investing Activities:
Investment in notes receivable from affiliates (685,650)
Advances to affiliates (65,095)
-----------
Net cash used in investing activities (750,745)
-----------
Cash Flows from Financing Activities:
Partners' capital contributions 1,149,131
Syndication costs paid (280,576)
Distributions to limited partners (30,450)
-----------
Net cash provided by financing activities 838,105
-----------
Net Increase in Cash 84,615
Cash, Beginning --
-----------
Cash, Ending $ 84,615
===========
</TABLE>
See notes to financial statements.
D-149
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund VIII, Ltd. ("the Partnership") was initially
organized on February 25, 1997 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-150
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable from affiliates. Although
these estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from actual
results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of February 26,
1997.
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2025, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
12.5% non-cumulative annual cash-on-cash return on the aggregate
amount of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated 50% to the limited partners and 50% to the general partner.
D-151
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 12.5% cash-on-cash return; and (b) the balance, if any, is
distributed 50% to the limited partners and 50% to the general
partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-152
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2004.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the principal balances of the notes receivable, net of
unamortized discount and accrued interest due from affiliates at December 31,
1997:
Notes Accrued
Receivable Interest
---------- --------
Longwood Apartments I, Ltd.("Longwood I") $525,150 $ 34,221(a)
Heatherwood Apartments II, Ltd. ("Heatherwood II") 160,500 3,416(b)
-------- --------
$685,650 $ 37,637
======== ========
(a) In July 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Longwood I, were converted into promissory notes as more fully described in
the table below:
Longwood I Second Mortgage Note; matures on October 1, 2007;
accrues interest at an minimum annual rate of 6% and
provides for participation interest at the rate of 3% per
annum based upon the amount of the unpaid principal, which
shall be due and payable to the extent that it does not
exceed the available cash flow, as defined in the note;
provides for additional participation interest in an annual
equal to 20% of remaining available cash flow, as defined,
which will continue to be made until such time as the
collateral has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of
the note; secured by a lien upon certain real and personal
property of Longwood I; subordinated to the first mortgage
which had a balance of approximately $1,036,000 as of
December 31, 1997. $368,558
D-153
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the
former general partner to Longwood I. The note is payable
upon demand and bears interest at 1% over prime (9.5% as of
December 31, 1997). 526,465
Other receivables, related to advances for refinancing fees
and professional services. 21,966
--------
916,989
Less discount 391,839
--------
Notes receivable, net of discount $525,150
========
See Note 6 regarding a subsequent amendment to the second mortgage.
(b) In August 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Heatherwood II, were converted into promissory notes as more fully
described in the table below:
Heatherwood II Second Mortgage Note; matures on October 1,
2004; accrues interest at an minimum annual rate of 6% and
participation interest at the rate of 3% per annum based
upon the amount of the unpaid principal, which shall be due
and payable to the extent that it does not exceed the
available cash flow, as defined in the note; provides for
additional participation interest in an annual equal to 20%
of remaining available cash flow, as defined, which will
continue to be made until such time as the collateral has
been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of
the note; secured by a lien upon certain real and personal
property of Heatherwood II; subordinated to the first
mortgage which had a balance of approximately $710,000 as of
December 31, 1997. $325,000
Unsecured promissory note, representing advances made by the
former general partner to Heatherwood II. The note is
payable on demand and bears interest at 1% over prime (9.5%
as of December 31, 1997). 1,742
Other receivables related to advances and professional
services 13,404
--------
340,146
Percentage purchased 58%
--------
197,285
Less discount 36,785
--------
Notes receivable, net of discount $160,500
========
D-154
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATES
During 1997, the Partnership provided funding to affiliates by means of advances
in an arrangement equivalent to an open ended line of credit. The advances are
due on demand and accrue interest at 12% per annum. The balance of $65,095
remained outstanding as of December 31, 1997. Interest income of $1,255 was
recognized during the year and accrued at December 31, 1997.
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement Memorandum
dated February 26, 1997, the Partnership issued 2,298 units of limited partner
interest of the 2,400 units being offered at $500 per unit for gross proceeds of
$1,149,041. Costs of $283,430 incurred in connection with syndicating the
partnership units were recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $168,525 was paid to the General
Partner for administrative, legal and investment fees.
Subsequent to December 31, 1997, the Partnership issued the remaining 102 units
at $500 per unit for gross proceeds of $50,959. Costs of $13,163 incurred in
connection with syndicating the partnership units were recorded as a reduction
of limited partners' capital contributions in 1998. Of the syndication costs,
$8,067 was paid to the General Partner for administrative, legal and investment
fees.
NOTE 6. SUBSEQUENT EVENTS
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $30,000 to the
limited partners.
Notes Receivable from Affiliate
In February 1998, the Partnership made a loan of $98,000 to Burlington
Development Holdings, Ltd. ("Burlington"), an affiliate, pursuant to the terms
of a promissory note. The note provides for interest at 12% per annum and
principal is due on demand. In April 1998, the partnership received $21,000 from
Burlington as a partial payment on the note.
Amendment to Second Mortgage
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to October 1,
2007. The amendment also provides for additional advances to be secured under a
future advance clause up to $1,300,000 maximum.
D-155
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for and equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-156
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND IX, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-157
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-158
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund IX, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund IX, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
IX, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Notes 3 and 4, the Partnership and its
affiliates have engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998
D-159
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $195,984
Investment in affiliate 293,207
Advances receivable from affiliate 21,495
Accrued interest receivable from affiliate 392
--------
$511,078
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued syndication costs, including $23,165
to general partner $ 42,435
Administrative fees payable to general partner 7,000
--------
49,435
--------
Commitments, Subsequent Event and Other Matter --
Partners' Capital:
General partner 27
Limited partners 461,616
--------
461,643
--------
$511,078
========
See notes to financial statements.
D-160
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Equity in net income of affiliate $ 4,207
Interest income from affiliate 392
Other 676
--------
5,275
--------
Costs and Expenses:
Administrative fees to general partner 7,000
General and administrative 4,533
--------
11,533
--------
Net Loss $ (6,258)
========
See notes to financial statements.
D-161
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -----
<S> <C> <C> <C>
Partners' Capital, Beginning $ -- $ -- $ --
Capital Contributions, Net of Syndication Costs 90 471,400 471,490
Distributions -- (3,589) (3,589)
Net Loss (63) (6,195) (6,258)
--------- --------- ---------
Partners' Capital, Ending $ 27 $ 461,616 $ 461,643
========= ========= =========
</TABLE>
See notes to financial statements.
D-162
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net loss $ (6,258)
Adjustments to reconcile net loss to
net cash used in operating activities:
Equity in net income of affiliate (4,207)
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (392)
Increase in administrative fees payable to general partner 7,000
---------
Net cash used in operating activities (3,857)
---------
Cash Flows from Investing Activities:
Investment in affiliate (289,000)
Investment in advances receivable from affiliate (21,495)
---------
Net cash used in investing activities (310,495)
---------
Cash Flows from Financing Activities:
Partners' capital contributions 623,090
Syndication costs paid (109,165)
Distributions to limited partners (3,589)
---------
Net cash provided by financing activities 510,336
---------
Net Increase in Cash 195,984
Cash, Beginning --
---------
Cash, Ending $ 195,984
=========
</TABLE>
See notes to financial statements.
D-163
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund IX, Ltd. ("the Partnership") was initially
organized on June 2, 1997 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue consisting of equivalent income of affiliate is recognized on the equity
method, as more fully described below.
Revenue consisting of interest on notes receivable is recognized as it becomes
due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Investment in Affiliate
The Partnership holds a 41.1% limited partner interest in Crystal Court
Properties, Ltd. ("Crystal Court"), a limited partnership which owns a
residential apartment property in Jacksonville, Florida. The investment in
Crystal Court is accounted for using the equity method of accounting as a result
of the Partnership and Crystal Court having the same general partner president
and the general partner's ability to exercise significant influence on Crystal
Court. As such, the investment in Crystal Court is carried at cost and adjusted
for the Partnership's share of undistributed earnings or losses using the equity
method of accounting.
D-164
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of June 2, 1997:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
15% non-cumulative annual cash-on-cash return on the aggregate amount
of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated to the general partner.
D-165
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 15% cash-on-cash return; and (b) the balance, if any, is
distributed 50% to the limited partners and 50% to the general
partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-166
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2004.
NOTE 3. ADVANCES TO AFFILIATE
During 1997, the Partnership provided funding to Crystal Court by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and accrue interest at 12% per annum. The principal
balance of $21,549 remained outstanding as of December 31, 1997. Interest income
of $392 was recognized during 1997 and accrued at December 31, 1997.
NOTE 4. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of operations
of Crystal Court as of and for the year ended December 31, 1997.
Financial position:
Rental apartments $1,101,444
Other assets 194,027
----------
Total assets $1,295,471
==========
Mortgage payable $1,260,447
Other liabilities 24,861
Total liabilities 1,285,308
Partners' capital 10,163
----------
$1,295,471
==========
Results of operations:
Revenues (including rental income of $63,628) $ 63,825
Costs and expenses 53,242
----------
Net income $ 10,163
==========
D-167
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement Memorandum
dated June 3, 1997, the Partnership issued 1,246 units of limited partner
interest being offered at $500 per unit for total gross proceeds of $623,000.
Costs of $151,600 incurred in connection with syndicating the partnership units
were recorded as a reduction of limited partners' capital contributions. Of the
syndication costs, $88,530 was paid or accrued to the General Partner for
administrative, legal and investment fees. Of the total syndication costs
incurred, $42,435 remained unpaid and accrued at December 31, 1997, including
$23,165 to the General Partner.
NOTE 6. SUBSEQUENT EVENTS
Distributions
In 1998, the Partnership made distributions of approximately $33,000 to the
limited partners.
Note Receivable from Affiliate
In January 1998, the Partnership purchased from an unrelated party an undivided
25% interest of Garden Terrace Apartments III, Ltd. second mortgage note and
accrued interest for $200,000.
Advances Receivable from Affiliates
The Partnership continued to provide funding to affiliates in the form of
advances. The advances are due on demand and accrue interest at 12% per annum.
The following are affiliates which received funding:
Apartment Development Holdings, Ltd. $128,000
Burlington Development Holdings, Ltd. 95,500
Candlewood Apartments II, Ltd. 75,500
--------
Total $299,000
========
Limited Partners' Capital Contributions
In 1998, the Partnership issued 1,104 units of limited partner interest, which
increased the total units issued to 2,350 of the 2,400 available units, at $500
per unit for total gross proceeds of $552,000. Costs of $175,105 incurred with
syndicating the partnership have been recorded as a reduction of limited
partners' capital contributions. Of the syndication costs, $98,905 was paid or
accrued to the General Partner for administrative, legal and investment fees.
D-168
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-169
<PAGE>
================================================================================
BARON STRATEGIC INVESTMENT FUND X, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-170
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-171
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Investment Fund X, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Investment
Fund X, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Investment Fund
X, Ltd. at December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Notes 3 and 4, the Partnership and its
affiliates have engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998
D-172
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 171,989
Investments in affiliates 562,670
Notes receivable from affiliate 117,500
Advances receivable from affiliate 56,500
Accrued interest receivable from affiliates 7,622
---------
$ 916,281
=========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued syndication costs, including
$70,258 to general partner $ 79,708
Administrative fees payable to general partner 6,000
---------
85,708
---------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner (68)
Limited partners 830,641
---------
830,573
---------
$ 916,281
=========
See notes to financial statements.
D-173
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliates $ 7,622
Other 2,116
--------
9,738
--------
Costs and Expenses:
Equity in net losses of affiliates 15,330
Administrative fees to general partner 6,000
General and administrative 4,237
--------
25,567
--------
Net Loss $(15,829)
========
See notes to financial statements.
D-174
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
General Limited
Partner Partners Total
--------- --------- ---------
Partners' Capital, Beginning $ -- $ -- $ --
Capital Contributions 90 859,740 859,830
Distributions -- (13,428) (13,428)
Net Loss (158) (15,671) (15,829)
--------- --------- ---------
Partners' Capital, Ending $ (68) $ 830,641 $ 830,573
========= ========= =========
See notes to financial statements.
D-175
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net loss $ (15,829)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in net losses of affiliates 15,330
Changes in operating assets and liabilities:
Increase in administrative fees payable to general partner 6,000
Increase in accrued interest receivable from affiliates (7,622)
-----------
Net cash used in operating activities (2,121)
-----------
Cash Flows from Investing Activities:
Investments in affiliates (578,000)
Investment in notes receivable from affiliate (117,500)
Investment in advances receivable from affiliate (56,500)
-----------
Net cash used in investing activities (752,000)
-----------
Cash Flows from Financing Activities:
Partner capital contributions 1,128,090
Syndication costs paid (188,552)
Distributions to limited partners (13,428)
-----------
Net cash provided by financing activities 926,110
-----------
Net Increase in Cash 171,989
Cash, Beginning --
-----------
Cash, Ending $ 171,989
===========
</TABLE>
See notes to financial statements.
D-176
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund X, Ltd. ("the Partnership") was initially
organized on June 26, 1997 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$1,200,000, to be divided into 2,400 equal units of limited partnership
interest. b See Note 2 for a summary of other provisions of the Agreement of
Limited Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliate
Notes receivable from affiliate are recorded at cost, less the related allowance
for impairment of such notes receivable. The Partnership accounts for such notes
under the provisions of Statement of Financial Accounting Standard No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by Statement of
Financial Accounting Standard No. 118, Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosure. Management, considering current
information and events regarding the borrowers' ability to repay their
obligations, considers a note to be impaired when it is probable that the
Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-177
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Affiliates
The Partnership holds a 43.5% limited partner interest in Crystal Court
Properties, Ltd. ("Crystal Court"), a limited partnership which owns a
residential apartment property in Lakeland, Florida. The investment in Crystal
Court is accounted for using the equity method of accounting as a result of the
Partnership and Crystal Court having the same general partner president and the
general partner's ability to exercise significant influence on Crystal Court. As
such, the investment in Crystal Court is carried at cost and adjusted for the
Partnership's share of undistributed earnings or losses using the equity method
of accounting.
The Partnership holds a 42.57% limited partner interest in Pineview Apartments,
Ltd. ("Pineview"), a limited partnership which owns a residential apartment
property in Orlando, Florida. The investment in Pineview is accounted for using
the equity method of accounting as a result of the Partnership and Pineview
having the same general partner president and the general partner's ability to
exercise significant influence on Pineview. As such, the investment in Pineview
is carried at cost and adjusted for the Partnership's share of undistributed
earnings or losses using the equity method of accounting.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
D-178
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of June 26, 1997:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $1,200,000, to be
divided into 2,400 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
12.5% non-cumulative annual cash-on-cash return on the aggregate
amount of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated 50% to the limited partners and 50% to the general partner.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 12.5% cash-on-cash return; and (b) the balance, if any, is
distributed 50% to the limited partners and 50% to the general
partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
D-179
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $1,000 per
month through December 31, 2003.
D-180
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
In August 1997, the Partnership acquired certain receivables from an unrelated
entity at a discount from the face amount thereof. The receivables, which
included notes receivable and accrued interest due from Heatherwood Apartments
II, Ltd. ("Heatherwood II") were converted into promissory notes as more fully
described in the table below.
Heatherwood II Second Mortgage Note; matures on October
1, 2004; accrues interest at an minimum annual rate of
6% and provides for participation interest at the rate
of 3% per annum based upon the amount of the unpaid
principal, which shall be due and payable to the extent
that it does not exceed the available cash flow, as
defined in the note; provides for additional
participation interest in an annual equal to 20% of
remaining available cash flow, as defined, which will
continue to be made until such time as the collateral
has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount
of the note; secured by a lien upon certain real and
personal property of Heatherwood II; subordinated to
the first mortgage which had a balance of approximately
$710,000 as of December 31, 1997. $325,000
Unsecured promissory note, representing advances made
by the former general partner to Heatherwood II. The
note is payable upon demand and bears interest at 1%
over prime (9.5% as of December 31, 1997). 1,742
Other receivables, related to advances for refinancing
fees and professional services 13,404
--------
340,146
Percentage purchased 42%
--------
142,861
Less discount 25,361
--------
Notes receivable, net of discount $117,500
========
NOTE 4. INVESTMENTS IN AFFILIATES
The following is a summary of the financial position and results of operations
of Crystal Court as of and for the year ended December 31, 1997.
Financial position:
Rental apartments $1,101,444
Other assets 194,027
----------
Total assets $1,295,471
==========
Mortgage payable $1,260,447
Other liabilities 24,861
----------
Total liabilities 1,285,308
Partners' capital 10,163
----------
$1,295,471
==========
D-181
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. INVESTMENTS IN AFFILIATES (Continued)
Results of operations:
Revenues (including rental income of $63,628) $63,825
Costs and expenses 53,242
-------
Net income $10,163
=======
The following is a summary of the financial position and results of operations
of Pineview as of and for the year ended December 31, 1997.
Financial position:
Rental apartments $ 1,849,363
Other assets 119,836
-----------
Total assets $ 1,969,199
===========
Mortgage payable $ 1,622,364
Other liabilities 493,337
-----------
Total liabilities 2,115,701
Partners' deficiency (146,502)
-----------
$ 1,969,199
===========
Results of operations:
Revenues (including rental income of $416,192) $ 419,085
Costs and expenses 465,471
-----------
Net loss $ (46,386)
===========
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement Memorandum
dated June 26, 1997, the Partnership issued 2,256 units of limited partner
interest at $500 per unit for gross proceeds of $1,128,000. Costs of $268,260
incurred in connection with syndicating the limited partnership units were
recorded as a reduction of limited partners' capital contributions. Of the
$268,260 in syndication costs incurred in 1997, the Partnership incurred a total
of $164,000 to its general partner for administrative, legal and investment
fees. Of the syndication costs incurred, costs of $79,708 remained unpaid and
were accrued as of December 31,1997, including $70,258 to the general partner.
Subsequent to December 31, 1997, the Partnership issued 144 units at $500 per
unit for gross proceeds of $72,000. Costs of $15,800 incurred in connection with
syndicating the limited partners units were recorded as a reduction of limited
partners' capital contributions in 1998.
NOTE 6. SUBSEQUENT EVENTS
Distributions
In 1998, the Partnership made distributions of approximately $82,615 to the
limited partners.
D-182
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS (Continued)
Notes Receivable from Affiliates
In January 1998, the Partnership purchased from an unrelated entity an undivided
75% interest of Garden Terrace Apartments III, Ltd. ("Garden Terrace"), an
affiliate, second mortgage note and accrued interest for $40,000 in cash and a
promissory note of $560,000. The note has an original maturity date of June 30,
1998, which was extended to March 31, 1999, and bears interest of 10% per annum.
In February 1998, the Partnership sold to Baron Strategic Investment Fund VI, an
affiliate, an undivided 20% interest of Garden Terrace second mortgage note and
accrued interest for $160,000.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-183
<PAGE>
================================================================================
BARON STRATEGIC VULTURE FUND I, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-184
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-10
D-185
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Baron Strategic Vulture Fund I, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Baron Strategic Vulture Fund
I, Ltd. (the "Partnership") as of December 31, 1997, and the related statements
of operations, partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baron Strategic Vulture Fund I,
Ltd. at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Note 3, the Partnership and its affiliates have
engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the third paragraph of
Note 5, as to which the date is December 15, 1998
D-186
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 1,204
Notes receivable from affiliate 612,000
Advances receivable from affiliates 14,513
Accrued interest receivable from affiliate 55,471
--------
$683,188
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Advance payable to affiliate $ 17,000
Administrative fees payable to general partner 10,000
--------
27,000
--------
Commitments, Subsequent Events and Other Matters --
Partners' Capital:
General partner 81
Limited partners 656,107
--------
656,188
--------
$683,188
========
See notes to financial statements.
D-187
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliate $82,471
Other 1,581
-------
84,052
=======
Costs and Expenses:
General and administrative 8,246
Administrative fees to general partner 6,000
14,246
-------
Net Income $69,806
=======
See notes to financial statements.
D-188
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
General Limited
Partner Partners Total
--------- --------- ---------
Partners' Capital, Beginning $ 81 $ 676,196 $ 676,277
Distributions -- (89,895) (89,895)
Net Income -- 69,806 69,806
--------- --------- ---------
Partners' Capital, Ending $ 81 $ 656,107 $ 656,188
========= ========= =========
See notes to financial statements.
D-189
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 69,806
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (55,471)
Increase in administrative fees payable to general partner 6,000
---------
Net cash provided by operating activities 20,335
---------
Cash Flows from Investing Activities:
Investment in notes receivable from affiliate (128,000)
Advances to affiliates (8,513)
---------
Net cash used in investing activities (136,513)
---------
Cash Flows from Financing Activities:
Distributions to limited partners (89,895)
Advance from affiliate 17,000
---------
Net cash used in financing activities (72,895)
---------
Net Decrease in Cash (189,073)
Cash, Beginning 190,277
---------
Cash, Ending $ 1,204
=========
</TABLE>
See notes to financial statements.
D-190
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Vulture Fund I, Ltd. ("the Partnership") was initially organized
on April 9, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$900,000, to be divided into 1,800 equal units of limited partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-191
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the allowance for impairment and the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of April 24,
1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $900,000, to be divided
into 1,800 units of limited partnership units. A capital account is maintained
for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
15% non-cumulative annual cash-on-cash return on the aggregate amount
of their capital contribution as calculated from each limited
partner's admission date; and (b) the excess, if any, will be
allocated to the general partner.
D-192
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them when added to
all prior distributions of distributable cash and net proceeds made to
them, is equal to the sum of their capital contributions plus an
annual 10% cash-on-cash return; (b) the general partner until the
total amount distributed to them when added to all prior distributions
of distributable cash and net proceeds made to it, is equal to the sum
of its capital contribution plus an annual 10% cash-on-cash return
and; (c) the balance, if any, is distributed 50% to the limited
partners and 50% to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-193
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $500 per
month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
In January 1997, the Partnership acquired certain receivables from an unrelated
entity at a discount from the face amount thereof. The receivables, which
included notes receivable and accrued interest due from Curiosity Creek
Apartments, Ltd. ("Curiosity Creek"), were converted into promissory notes as
more fully described in the table below:
Curiosity Creek Second Mortgage Note; matures on April
1, 2007; accrues interest at an minimum annual rate of
6% and provides for participation interest at the rate
of 3% per annum based upon the amount of the unpaid
principal, which shall be due and payable to the extent
that it does not exceed the available cash flow, as
defined in the note; provides for additional
participation interest in an annual equal to 20% of
remaining available cash flow, as defined, which will
continue to be made until such time as the collateral
has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount
of the note; secured by a lien upon certain real and
personal property of Curiosity Creek; subordinated to
the first mortgage which had a balance of approximately
$1,188,000 as of December 31, 1997. $ 807,560
Unsecured promissory note, representing advances made
by the former general partner to Curiosity Creek. The
note is payable upon demand and bears interest at 1%
over prime (9.5% as of December 31, 1997). 414,280
Unsecured promissory note, representing advances made
by the former general partner to Curiosity Creek. The
note is payable upon demand and bears interest at
12.5%. 416,000
Other receivables, related to advances for refinancing
fees and professional services. 29,732
1,667,672
Percentage purchased 73.73%
1,229,575
Less discount 617,575
----------
Notes receivable, net of discount $ 612,000
==========
D-194
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
See Note 5 regarding a subsequent amendment to the second mortgage.
In June 1998, the Partnership collected the $55,471 accrued interest receivable
due from Curiosity Creek related to the notes receivable.
NOTE 4. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum dated
April 24, 1996, the Partnership issued the 1,800 units of limited partner
interest being offered at $500 per unit for total gross proceeds of $900,000.
Costs of $209,000 incurred in connection with syndicating the limited
partnership units were recorded as a reduction of limited partners' capital
contributions. Of the $209,000 in syndication costs, the Partnership paid
$119,000 to its general partner for administrative, legal and investment fees.
NOTE 5. SUBSEQUENT EVENTS
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $67,500 to the
limited partners.
Advances Payable to Affiliates
In January and April 1998, the Partnership received a loan of $22,500 and
$22,000, respectively, from Baron Strategic Investment Fund V, Ltd., an
affiliate. The loans bear interest at 12% and are due on demand.
Amendment to Second Mortgage
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to April 1, 2007.
The amendment also provides for additional advances to be secured under a future
advance clause up to $2,000,000 maximum.
NOTE 6. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-195
<PAGE>
================================================================================
BREVARD MORTGAGE PROGRAM, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-196
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-197
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Brevard Mortgage Program, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Brevard Mortgage Program, Ltd.
(the "Partnership") as of December 31, 1997, and the related statements of
operations, partners' capital and cash flows for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Brevard Mortgage Program, Ltd.
at December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the sole stockholder and president of the Partnership's
general partner. As discussed in Note 3, the Partnership and its affiliates have
engaged in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998 except for the second paragraph of
Note 5, as to which the date is December 15, 1998
D-198
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 25,387
Notes receivable from affiliate 474,191
Accrued interest receivable from affiliate 65,094
--------
$564,672
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 18,000
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 832
Limited partners 545,840
--------
546,672
--------
$564,672
========
See notes to financial statements.
D-199
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliate $72,300
Other 909
-------
73,209
-------
Costs and Expenses:
Administrative fees to general partner 9,000
General and administrative 2,119
-------
11,119
-------
Net Income $62,090
=======
See notes to financial statements.
D-200
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
General Limited
Partner Partners Total
--------- --------- ---------
Partners' Capital, Beginning $ 683 $ 541,399 $ 542,082
Distributions -- (57,500) (57,500)
Net Income 149 61,941 62,090
--------- --------- ---------
Partners' Capital, Ending $ 832 $ 545,840 $ 546,672
========= ========= =========
See notes to financial statements.
D-201
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 62,090
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliate (56,200)
Increase in administrative fees payable to general partner 9,000
--------
Net cash provided by operating activities 14,890
--------
Cash Flows from Investing Activities:
Advances to affiliate (25,000)
--------
Net cash used in investing activities (25,000)
--------
Cash Flows from Financing Activities:
Distributions to limited partners (57,500)
--------
Net cash used in financing activities (57,500)
--------
Net Decrease in Cash (67,610)
Cash, Beginning 92,997
--------
Cash, Ending $ 25,387
========
</TABLE>
See notes to financial statements.
D-202
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Brevard Mortgage Program, Ltd. ("the Partnership") was initially organized on
November 14, 1995 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$575,000, to be divided into 575 equal units of limited partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-203
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the collectibility of the notes receivable due from affiliates.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of December 8,
1995.
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $575,000 to be divided
into 575 units of limited partnership units. A capital account is maintained for
each partner.
Term
The Partnership will continue through December 31, 2025, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 99% of the distributable cash; and (b) to the general
partner who will receive 1% of the distributable cash.
D-204
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the entire principal amount of the purchased
second mortgage loan has been repaid; and (b) the balance, if any, is
distributed to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; (e) the repayment in full of
all loans made by the Partnership, unless the Partnership thereafter continues
to own non-loan assets; and (f) the occurrence of any other event which, by law,
would require the Partnership to be dissolved.
D-205
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $750 per
month through December 31, 2002.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
The Partnership had the following receivables from Florida Opportunity Income
Partners II, Ltd. ("FOIP II") at December 31, 1997:
Notes Accrued
Receivable Interest
---------- --------
Notes receivable, net of discount $450,000 $ 63,792(a)
Advances 24,191 1,302(b)
-------- --------
$474,191 $ 65,094
======== ========
(a) In December 1995, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. These
receivables, which include notes receivable and accrued interest due from
FOIP II, were converted into promissory notes as more fully described in
the table below:
FOIP II Second Mortgage Note; matures on July 31, 2001;
accrues interest at a minimum annual rate of 6% and
provides for participation interest at the rate of 3%
per annum based upon the amount of the unpaid
principal, which shall be due and payable to the extent
that it does not exceed the available cash flows, as
defined in the note; provides for additional
participation interest in an amount equal to 20% of
remaining available cash flow, as defined, which will
continue to be made until such time as the collateral
has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount
of the note; secured by a lien upon certain real and
personal property of FOIP II and; subordinated to a
first mortgage, which had a balance of approximately
$974,000 as of December 31, 1997. $ 752,747
D-206
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
Unsecured promissory note representing advances made by
the former general partner to FOIF II. The note is
payable upon demand and bears an annual interest rate
of 1% over prime (9.5% as of December 31, 1997) 271,923
----------
1,024,670
Less discount 574,670
----------
Notes receivable, net of discount $ 450,000
==========
(b) During 1997, the Partnership provided funds to FOIF II by means of advances
in an arrangement equivalent to an open ended line of credit. The advances
are due on demand and accrue interest at a rate of 12% per annum.
See Note 5 regarding a subsequent amendment to the second mortgage.
NOTE 4. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1996, in accordance with the terms of a Private Placement Memorandum
dated December 8, 1995, the Partnership issued the 575 units of limited partner
interest being offered at $1,000 per unit for total gross proceeds of $575,000.
Costs of $67,500 incurred in connection with syndicating the partnership units
were recorded as a reduction of limited partners' capital contributions. Of the
syndication costs, $10,000 was paid to the General Partner for administrative,
legal and investment fees.
NOTE 5. SUBSEQUENT EVENTS
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $14, 375 to the
limited partners.
Amendment to Second Mortgage
On December 15, 1998, the Partnership entered into a Second Amendment to
Open-End Second Mortgage and Security Agreement by which all of the notes will
be secured by the Second Mortgage, and the maturities extended to August 1,
2001. The amendment also provides for additional advances to be secured under a
future advance clause up to $500,000 maximum.
D-207
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-208
<PAGE>
================================================================================
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
================================================================================
D-209
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
TABLE OF CONTENTS
PAGE
----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Operations 3
Statement of Partners' Capital 4
Statement of Cash Flows 5
Notes to Financial Statements 6-11
D-210
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
Lamplight Court of Bellefontaine, Ltd.
Cincinnati, Ohio
We have audited the accompanying balance sheet of Lamplight Court of
Bellefontaine, Ltd. (the "Partnership") as of December 31, 1997, and the related
statements of operations, partners' capital and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lamplight Court of
Bellefontaine, Ltd. at December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
The Partnership is affiliated with certain other limited partnerships (the
"affiliates") in similar lines of business, all of whom are controlled by a
common person who is the stockholder and president of the Partnership's general
partner. As discussed in Note 3, the Partnership and its affiliates have engaged
in significant transactions with each other.
RACHLIN COHEN & HOLTZ
Miami, Florida
August 14, 1998
D-211
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash $ 50,793
Note receivable from affiliate 365,000
Advances receivable from affiliate 93,302
Accrued interest receivable from affiliate 77,800
--------
$586,895
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 10,500
--------
Commitments, Subsequent Events and Other Matter --
Partners' Capital:
General partner 90
Limited partners 576,305
--------
576,395
--------
$586,895
========
See notes to financial statements.
D-212
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Revenues:
Interest income from affiliate $63,188
Other 1,973
-------
65,161
-------
Costs and Expenses:
Administrative fees to general partner 6,000
General and administrative 1,262
-------
7,262
-------
Net Income $57,899
=======
See notes to financial statements.
D-213
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
STATEMENT OF PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1997
General Limited
Partner Partners Total
--------- --------- ---------
Partners' Capital, Beginning $ 90 $ 587,931 $ 588,021
Distributions -- (69,525) (69,525)
Net Income -- 57,899 57,899
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 576,305 $ 576,395
========= ========= =========
See notes to financial statements.
D-214
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 57,899
Adjustments to reconcile net income to
net cash provided by operating activities:
Changes in operating assets and liabilities:
Increase in interest receivable from affiliate (55,188)
Increase in administrative fees payable to the general partner 6,000
---------
Net cash provided by operating activities 8,711
---------
Cash Flows from Investing Activities:
Advances to affiliate (17,366)
---------
Net cash used in investing activities (17,366)
---------
Cash Flows from Financing Activities:
Distributions to limited partners (69,526)
---------
Net cash used in financing activities (69,526)
---------
Net Decrease in Cash (78,181)
Cash, Beginning 128,974
---------
Cash, Ending $ 50,793
=========
</TABLE>
See notes to financial statements.
D-215
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Lamplight Court of Bellefontaine, Ltd. ("the Partnership") was initially
organized on February 16, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of $90
in cash; and (b) the maximum capital contributions of the limited partners of
$700,000, to be divided into 700 equal units of limited partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in Ohio.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is recognized
as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts for
such notes under the provisions of Statement of Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
Statement of Financial Accounting Standard No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Management,
considering current information and events regarding the borrowers' ability to
repay their obligations, considers a note to be impaired when it is probable
that the Partnership will be unable to collect all amounts due according to the
contractual terms of the note. When a loan is considered to be impaired, the
amount of impairment is measured based upon (a) the present value of expected
future cash flows discounted at the note's effective interest rate; and (b) the
liquidation value of the note's collateral reduced by expected selling costs and
other notes secured by the same collateral. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such receivables until
the principal has been recovered, and are recognized as interest income
thereafter.
D-216
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate
In 1996, the Partnership acquired certain receivables and a limited partner
interest in Independence Village, Ltd. ("Independence Village") from an
unrelated entity at a discount from the face amount thereof (see Note 3). As a
result, the Partnership holds a 31.7% limited partner interest in Independence
Village, a limited partnership which owns a residential apartment property in
Bellefontaine, Ohio. The investment in Independence Village is accounted for
using the equity method of accounting as a result of the Partnership and
Independence Village having the same general partner president and the general
partner's ability to exercise significant influence on Independence Village. As
such, the investment in Independence Village is carried at cost and adjusted for
the Partnership's share of undistributed earnings or losses using the equity
method of accounting. At the date of purchase, management estimated the value of
the limited partner interest to be insignificant and did not allocate any of the
purchase price to the investment.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amount of assets and liabilities as of the date of the balance sheet
and operations for the year then ended. Material estimates as to which it is
reasonably possible that a change in the estimate could occur in the near term
relates to the value of the limited partner interest and the collectibility of
the notes receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in the
future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed depending
on their personal tax situations. The financial statements do not reflect a
provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement of
Limited Partnership ("the Agreement") made and entered into as of March 7, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash, and
maximum capital contributions of the limited partners of $700,000, to be divided
into 700 units of limited partnership units. A capital account is maintained for
each partner.
D-217
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will
not be reinvested but will be distributed in order of priority to the
Partners, if available, quarterly, to (a) the limited partners who
will receive 100% of the distributable cash until they have received a
10% non-cumulative annual cash-on-cash return on the aggregate amount
of their capital contribution as calculated from each limited
partner's admission date; and (b) the general partner will receive
100% of the remaining distributable cash.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets
will not be reinvested but will be distributed to the partners in
order of priority after repayment of all indebtedness secured by the
assets to (a) the limited partners who will receive 100% of the
distributions until the total amount distributed to them, when added
to all prior distributions of distributable cash and net proceeds made
to them, is equal to the sum of their capital contributions plus an
annual 10% cash-on-cash return; and (b) then 31.7% of up to $350,000
of any remaining net proceeds to the limited partners; and (c) the
balance, if any, to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and credit
recognized by the Partnership for federal income tax purposes will be made as
follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net
proceeds. The balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are
allocated 99% to the limited partners and 1% to the general partner.
D-218
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of the
Agreement; (b) the determination of the limited partners exercising their voting
rights to dissolve the Partnership; (c) the death, resignation, retirement,
dissolution, removal, bankruptcy, adjudication of insolvency, or adjudication of
insanity or incompetence of the last remaining general partner then in office
and the refusal of any successor general partner to replace it, unless the
holders of a majority of the units then outstanding 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; (d) the sale of all
or substantially all of the Partnership's property; and (e) the occurrence of
any other event which, by law, would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the assets,
and the proceeds will be applied and distributed (a) first to the Partnership
creditors, other than partners; (b) then, any loans owed by the Partnership to
the partners shall be paid in proportion thereto; and (c) finally, to the
limited partners and the general partner in proportion to their respective
positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between the
Partnership and the general partner stipulated in the Agreement, the Partnership
retained the general partner to provide administrative services for $500 per
month through December 31, 2002.
NOTE 3. NOTE RECEIVABLE FROM AFFILIATE
In 1996, the Partnership acquired certain receivables and a 31.7% interest in
Independence Village from an unrelated entity at a discount from the face amount
thereof. The receivables, which included notes receivable and accrued interest
due from Independence Village, were converted into promissory notes as more
fully described in the table below.
Independence Village Second Mortgage Note; matures in
December 1998; accrues interest at an annual rate of
9.5%; secured by a lien upon certain real and personal
property of Independence Village; subordinated to the
first mortgage which had a balance of approximately
$1,383,000 as of December 31, 1997. $585,000
Less discount 220,000
--------
Note receivable, net of discount $365,000
========
D-219
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTE RECEIVABLE FROM AFFILIATE (Continued)
The second mortgage matures on December 1, 1998, and may be extended at the
option of Independence Village by payment of a fee equal to 1% of the loan's
initial principal amount of $585,000.
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATE
In 1996 and during 1997, the Partnership provided funding to Independence
Village by means of advances in an arrangement equivalent to an open ended line
of credit advances. The outstanding advances are due on demand and accrue
interest at 12% per annum. The balance of $93,302 remained outstanding as of
December 31, 1997. Interest income of $7,613 was recognized during the year and
$11,343 remained outstanding as accrued interest at December 31, 1997.
NOTE 5. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of operations
of Independence Village as of and for the year ended December 31, 1997.
Financial position:
Rental apartments $ 928,650
Other assets 96,590
-----------
Total assets $ 1,025,240
===========
Mortgage payable $ 1,383,125
Other liabilities 711,602
-----------
Total liabilities 2,094,727
Partners' deficiency (1,069,487)
-----------
$ 1,025,240
===========
Results of operations:
Revenues (including rental income of $316,241) $ 354,764
Costs and expenses 393,935
-----------
Net loss $ (39,171)
===========
As discussed in Note 1, upon acquisition of certain receivables and the limited
partnership interest in Independence Village, the Partnership did not allocate
any of the purchase price to the investment in affiliate. The Partnership has
deferred recognition of its proportionate share of net losses because there is
no personal obligation to fund the resulting negative limited partner's capital
account balance. Future net income, if any, will not be recognized until such
time as the limited partner's capital account becomes a positive balance.
D-220
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1996, in accordance with the terms of a Private Placement Memorandum
dated March 7, 1996, the Partnership issued 700 units of limited partnership
interest units at $1,000 per unit for total gross proceeds of $700,000. Costs of
$120,000 incurred in connection with syndicating the partnership were recorded
as a reduction of limited partners' capital contributions. Of the syndication
costs, $57,000 was paid to the General Partner for administrative, legal and
investment fees.
NOTE 7. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Partnership made distributions of
approximately $35,000 to the limited partners.
NOTE 8. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties, L.P.
("the Operating Partnership"), a partnership under common control, will offer to
exchange Operating Partnership Units to the limited partners of the Partnership
in exchange for their limited partner interests. These units are exchangeable
for an equivalent number of common shares of beneficial interest in Baron
Capital Trust, a real estate investment trust under common control, for whom
Baron Capital Properties, L.P. is the operating partnership. Subject to the
completion of the proposed Exchange Offering, the Trust and the Operating
Partnership will account for the acquisition of the limited partnership
interests in the offering on the purchase method and therefore record the assets
acquired and the liabilities assumed at their fair value at the date of
acquisition.
D-221
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
BALANCE SHEET
NINE MONTHS ENDING SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 21,679
Notes receivable from affiliates 552,008
Accrued interest receivable from affiliates 28,146
Advances to affiliates 256,949
--------
$858,782
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 9,500
--------
9,500
--------
Commitments and Other Matter
Partners' Capital:
General partner 90
Limited partners 849,192
--------
849,282
--------
$858,782
========
D-222
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $63,687
Other 315
-------
64,002
-------
Costs and Expenses:
Administrative fees to general partner 6,000
General and administrative 11,858
-------
17,858
-------
Net Income $46,144
=======
D-223
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
--------- --------- ---------
Partners' Capital, Beginning $ 90 $ 860,048 $ 860,138
Distributions -- (57,000) (57,000)
Net Income -- 46,144 46,144
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 849,192 $ 849,282
========= ========= =========
D-224
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net income $ 46,144
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates (6,687)
--------
Net cash used in operating activities 39,457
--------
Cash Flows from Investing Activities:
Purchase of receivables due from affiliates 6,992
Net proceeds provided to affiliate under line of credit (7,210)
--------
Net cash used in investing activities (218)
--------
Cash Flows from Financing Activities:
Limited partner distributions (57,000)
--------
Net cash provided by financing activities (57,000)
--------
Net Increase in Cash (17,761)
Cash, Beginning 39,440
--------
Cash, Ending $ 21,679
========
D-225
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund, Ltd. ("the Partnership") was initially
organized on April 24, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-226
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of May
20, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 12.5% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated 50% to the limited partners and
50% to the general partner.
D-227
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 12.5% cash-on-cash return; and
(b) next to the general partner, until the total amount so distributed to
it when added to all prior distributions of distributable cash and net
proceeds made to it, is equal to the sum of its capital contribution plus
an annual 12.5% cash-on-cash return and; (c) the balance, if any is
distributed 50% to the limited partners and 50% to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-228
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $500 per month through December 1, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the balances of the notes receivable and accrued interest
from affiliates at September 30, 1998:
Notes
Receivable
----------
Blossom Corners Apartments II, Ltd. ("Blossom II") $322,008(a)
Falls Properties III, Ltd. ("Falls III") 102,000(b)
Sycamore Real Estate Development, LP ("Sycamore") 128,000(c)
--------
$552,008
========
(a) In November 1996, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Blossom II, were converted into promissory notes as more fully
described in the table below:
Blossom II Second Mortgage Note; matures on April 1, 2002; accrues
interest at an minimum annual rate of 6% and provides for
participation interest at the rate of 3% per annum based upon the
amount of the unpaid principal, which shall be due and payable to the
extent that it does not exceed the available cash flow, as defined in
the note; secured by a lien upon certain real and personal property of
Blossom II; provides for additional participation interest in an
amount equal to 30% of remaining available cash flow, as defined,
which will continue to be made until such time as the collateral has
been sold, and which obligation will continue notwithstanding total
repayment of the principal amount of the note; subordinated to the
first mortgage which had a balance of approximately $1,130,000 as of
September 30, 1998.
$622,103
D-229
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the former general
partner to Blossom II. The note is payable upon demand and bears interest
at 1% over prime (9.5% as of September 30, 1998). 68,861
Other receivables, related to advances for refinancing fees and
professional services.
29,732
--------
720,696
Less discount 263,696
Less principal payment 134,992
Notes receivable, net of payment and discount $322,008
========
See Note 6 regarding a subsequent amendment to the second mortgage.
(b) In April 1997, the Partnership acquired, at a discount, certain
receivables owed Falls III from an unrelated entity. In connection
with Falls III filing for reorganization under Chapter 11 of the
Bankruptcy Code in August 1994, the notes, which had included a Second
Mortgage Note Receivable, were converted into two unsecured promissory
notes of $198,750 and $44,398 (total of $234,148). The notes provide
for the partial repayment of the principal balance in April 1999 using
20% of the excess cash flow of Falls III. The remaining principal is
to be repaid after all secured notes and other claims designated by
the court have been paid in full.
Notes receivable $243,148
Less discount (141,148)
--------
Notes receivable, net of discount $102,000
========
c) In March 1998, the Partnership made a loan of $128,000 to Sycamore
Real Estate Development, Ltd. The note matures on December 14, 2003,
accrues interest at an annual rate of 12%; is secured by a lien upon
certain real and personal property of Villas at Lake Sycamore; and is
subordinated to the first mortgage which had a balance of
approximately $800,000 as of September 30, 1998.
Note receivable $128,000
========
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATE
During 1996 through 1998, the Partnership provided funding to Blossom II by
means of advances in an arrangement equivalent to an open ended line of
credit. The advances are due on demand and accrue interest at 12% per
annum. The balance of $256,949 remained outstanding as of September 30,
1998. Interest income of $49,887 was recognized during the period.
D-230
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum
dated May 20, 1996, the Partnership issued the 2,400 units of limited
partner interest being offered at $500 per unit for total gross proceeds of
$1,200,000. Costs of $284,000 incurred in connection with syndicating the
limited partnership units were recorded as a reduction of limited partners'
capital contributions. Of the $284,000 in syndication costs, the
Partnership paid $164,000 to its general partner for administrative, legal
and investment fees.
NOTE 6. SUBSEQUENT EVENTS
Loan to Affiliate
In December 1998, the Partnership endorsed to Sycamore the note from Falls
III in the principal amount of $102,000 and the $128,000 note payable by
Sycamore; in exchange Sycamore delivered to the Partnership a new
promissory note in the original principal amount of $230,000. The new note
matures on December 14, 2003; accrues interest at an annual rate of 12%; is
secured by a lien upon certain real and personal property of Villas at Lake
Sycamore; and is subordinated to the first mortgage which had a balance of
approximately $800,000 as of September 30, 1998. Two other affiliated
partnerships also hold second mortgage notes in the aggregate principal
amount of $341,500 secured by the property. The lending parties have agreed
to share the benefits of the second mortgage on a pari-passu basis.
Amendment to Blossom II Second Mortgage
On December 15, 1998, Blossom II amended and restated the $622,103 second
mortgage note and the $68,861 promissory note and made a new promissory
note in favor of the Partnership in the original principal amount of
$160,002 to consolidate prior advances in that amount as of such date. The
Partnership and Blossom II also entered into a Second Amendment to Open-End
Second Mortgage and Security Agreement by which all of the Blossom II notes
will be secured by the Second Mortgage, and the maturities extended to
April 1, 2002. The amendment also provides for additional advances up to a
$1,250,000 maximum to be secured under a future advance clause.
Distributions to Limited Partners
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $14,375 to the limited partners.
D-231
<PAGE>
BARON STRATEGIC INVESTMENT FUND, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership. Subject to the completion of the proposed Exchange
Offering, the Trust and the Operating Partnership will account for the
acquisition of the limited partnership interests in the offering on the
purchase method and therefore record the assets acquired and the
liabilities assumed at their fair value at the date of acquisition.
D-232
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 875
Notes receivable from affiliates 976,439
Accrued interest receivable from affiliates 125,668
Advances receivable from affiliates 19,500
----------
$1,122,482
==========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Note payable to afilliate $ 254,267
Administrative fees payable to general partner 14,000
Accrued syndication costs 20,100
Accrued interest payable to afilliate 39,419
----------
327,786
----------
Commitments and Other Matter
Partners' Capital:
General partner 511
Limited partners 794,185
----------
794,696
----------
$1,122,482
==========
D-233
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $124,110
Other 342
--------
124,452
--------
Costs and Expenses:
Interest expense to affiliate 37,237
General and administrative 10,503
--------
47,740
--------
Net Income $ 76,712
========
D-234
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 511 $691,996 $692,507
Contributions, Net of Syndication Costs -- 92,490 92,490
Distributions -- 67,013 67,013
Net Income -- 76,712 76,712
-------- -------- --------
Partners' Capital, Ending $ 511 $794,185 $794,696
======== ======== ========
D-235
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net income $ 76,712
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates (104,810)
Decrease in accrued interest payable to affiliate 37,237
---------
Net cash provided by operating activities 9,137
---------
Cash Flows from Investing Activities:
Advances to Affiliates (7,688)
---------
Net cash used in investing activities (7,688)
Cash Flows from Financing Activities:
Payments on note payable to affiliate (125,000)
Partners' capital contributions 140,237
Syndication costs (47,747)
Distributions to limited partners (67,013)
---------
Net cash provided by financing activities (99,523)
---------
Net increase in Cash (98,072)
Cash, Beginning 98,947
---------
Cash, Ending $ 875
=========
D-236
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund IV, Ltd. ("the Partnership") was initially
organized on October 1, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,000,000, to be divided into 2,000 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-237
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of
October 22, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,000,000, to
be divided into 2,000 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 12% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated to the general partner.
D-238
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 18% cash-on-cash return; and (b)
the balance, if any, is distributed to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-239
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
The following are the balances of the notes receivable and accrued interest
receivable from affiliates at September 30, 1998:
Notes Accrued
Receivable Interest
---------- --------
Country Square Apartments, Ltd. ("Country Square") $797,189 $110,224(a)
Country Square 179,250 20,858(b)
-------- --------
$976,439 $ 20,858
======== ========
(a) In March 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Country Square, were converted into promissory notes as more
fully described in the table below:
Country Square Second Mortgage Note; matures on April 30, 2008;
accrues interest at an minimum annual rate of 12%; is secured by a
lien upon certain real and personal property of Country Square; and is
subordinated to the first mortgage which had a balance of
approximately $1,240,000 as of September 30, 1998. $1,192,987
Less discount 502,987
----------
Note receivable, net of discount $797,189
==========
D-240
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
In July 1997, the Partnership made a loan to Country Square of $171,562
pursuant to the terms of a promissory note. The note is due on demand and
accrues interest quarterly at 12% per annum.
Note receivable $179,250
========
See Note 6 regarding subsequent amendments to the second mortgage.
NOTE 4. Note Payable to Affiliate
In March 1997, the Partnership borrowed funds from Baron Strategic
Investment Fund VI, Ltd. ("Fund VI") pursuant to the terms of a promissory
note. The note matures in September 2002 with interest payable monthly at
15% per annum. As collateral for the note payable, the Partnership has
granted Fund VI a security interest in the second mortgage notes and
mortgages (see Note 3). The note had an unpaid principal balance of
$254,363 as of September 30, 1998. Interest expense to the affiliate
amounted to $67,699 for the period of which $29,895 was unpaid and accrued
at September 30, 1998.
NOTE 5. LIMITED PARTNER'S CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum
dated October 22, 1996, the Partnership issued 180 units of limited
partnership interest of the 2,000 units being offered at $500 per unit for
a total of $90,000. Costs of $17,400 incurred in connection with
syndicating the partnership were recorded as a reduction of limited partner
contributions. Of the syndication costs, $14,000 was paid to the General
Partner for administrative, legal and investment fees.
In 1997, the Partnership issued 1,538.5 units of limited partnership
interest at $500 per unit for $769,263. This issuance increased the total
units sold to 1,718.5 units of the 2,000 units being offered. Costs of
$164,453 incurred in connection with syndicating these partnership units
have been recorded as a reduction of limited partner's capital
contributions. Of the syndication costs, $80,570 was incurred with regard
to the General Partner for administrative, legal and investment fees.
Syndicated costs of $20,100 were unpaid and accrued at December 31, 1997.
During 1998, the Partnership issued 280.5 units of the remaining 281.5
units at $500 per unit for a total of $140,237. This issuance increased the
total units sold to 1,999 units of the 2,000 units being offered. Costs of
$26,647 incurred in connection with syndicating these partnership units
were recorded as a reduction of limited partner's capital contributions in
1998. Of the syndication costs, $22,524 was paid to the General Partner for
administrative, legal and investment fees.
D-241
<PAGE>
BARON STRATEGIC INVESTMENT FUND IV, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS
Amendment to Second Mortgage
On December 15, 1998, Country Square restated and amended the $1,192,987
second mortgage note and the $179,250 promissory note in favor of the
Partnership to extend the maturities to April 30, 2008. The Partnership and
Country Square also entered into a Second Amendment to Consolidated Renewal
Replacement Second Mortgage and Security Agreement under which Country
Square agreed to secure repayment of both notes and any future advances up
to a $1,750,000 maximum under the second mortgage.
Distributions to Limited Partners
In 1998, the Partnership made distributions of approximately $15,000 to the
limited partners.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for common stock of Baron Capital Trust, a real
estate investment trust under common control, for whom Baron Capital
Properties, L.P. is the operating partnership.
D-242
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 20,987
Notes receivable from affiliates 731,802
Advances to affiliates 96,939
Accrued interest 26,309
--------
$876,037
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 13,500
--------
13,500
--------
Commitments and Other Matter
Partners' Capital:
General partner 1,551
Limited partners 864,088
862,537
--------
$876,037
========
D-243
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $75,215
Other 474
-------
75,689
-------
Costs and Expenses:
Administrative fees to general partner 4,500
General and administrative 7,458
-------
11,957
-------
Net Income $63,731
=======
D-244
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ (2,188) $ 652,994 $ 650,806
Contributions, Net of Syndication Costs 238,000 238,000
Distributions -- (90,000) (90,000)
Net Income 637 63,094 63,737
--------- --------- ---------
Partners' Capital, Ending $ (1,551) $ 864,088 $ 862,537
========= ========= =========
D-245
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 63,731
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates 3,076
Increase in administrative fees payable to general partner (500)
Net cash used in operating activities 66,307
---------
Cash Flows from Financing Activities:
Advances to affiliates (93,339)
Investment in notes receivable from affiliates (212,502)
Net cash used in investing activities (305,841)
---------
Cash Flows from Financing Activities:
Partners' capital contibutions 238,000
Limited partners' distributions (90,000)
Net cash provided by financing activities 148,000
---------
Net Increase in Cash (91,534)
Cash, Beginning 112,521
---------
Cash, Ending $ 20,987
=========
</TABLE>
D-246
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund V, Ltd. ("the Partnership") was initially
organized on October 1, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-247
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the allowance for impairment and the
collectibility of the notes receivable due from affiliates. Although these
estimates are based on management's knowledge of current events and actions
it may undertake in the future, they may ultimately differ from actual
results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of
October 23, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 15% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated to the general partner.
D-248
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 15% cash-on-cash return; and (b)
the balance, if any, is distributed 50% to the limited partners and 50% to
the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-249
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the balances of the notes receivable, net of allowance
for impairment, and accrued interest due from affiliates at September 30,
1998:
<TABLE>
<CAPTION>
Notes Accrued
Receivable Interest
---------- --------
<S> <C> <C>
Sunrise Apartments, Ltd.("Sunrise") $488,000 $27,927(a)
Curiosity Creek Apartments, Ltd. ("Curiosity Creek") 213,451 20,979(b)
Baron Strategic Investment Fund III, Ltd. ("Strategic III") 21,000 1,890(c)
-------- -------
$722,451 $50,796
(a) In June 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Sunrise, were converted into promissory notes as more fully
described in the table below.
Sunrise Second Mortgage Note; matures on October 1, 2007; accrues
interest at an minimum annual rate of 6% and provides for
participation interest at the rate of 3% per annum based upon the
amount of the unpaid principal, which shall be due and payable to the
extent that it does not exceed the available cash flow, as defined in
the note; provides for additional participation interest in an amount
equal to 20% of remaining available cash flow, as defined, which will
continue to be made until such time as the collateral has been sold,
and which obligation will continue notwithstanding total repayment of
the principal amount of the note; secured by a lien upon certain real
and personal property of Sunrise; subordinated to the first mortgage
which had a balance of approximately $1,037,000 as of September 30,
1998.
$ 335,000
</TABLE>
D-250
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the former
general partner to Sunrise. The note is payable upon demand and bears
interest at an annual rate of 4%. 621,515
Unsecured promissory note, representing advances made by the former
general partner to Sunrise. The note is payable upon demand and bears
interest at 1% over prime (9.5% as of September 30, 1998). 1,467
Other receivables, related to advances for refinancing fees and
professional services
48,468
----------
1,006,450
Less unamortized discount 518,450
----------
Notes receivable, net of unamortized discount $ 488,000
==========
(b) In March 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Curiosity Creek, were converted into promissory notes as more
fully described in the table below.
Curiosity Creek Second Mortgage Note; matures on April 1, 2007;
accrues interest at an minimum annual rate of 6% and participation
interest at the rate of 3% per annum based upon the amount of the
unpaid principal, which shall be due and payable to the extent that it
does not exceed the available cash flow, as defined in the note;
provides for additional participation interest in an amount equal to
30% of remaining available cash flow, as defined, which will continue
to be made until such time as the collateral has been sold, and which
obligation will continue notwithstanding total repayment of the
principal amount of the note; secured by a lien upon certain real and
personal property of Curiosity Creek; subordinated to the first
mortgage which had a balance of approximately $1,180,000 as of
September 30, 1998.
$ 807,560
Unsecured promissory note, representing advances made by the former
general partner to Curiosity Creek. The note is payable upon demand
and bears an annual interest rate of 12.5%. 416,000
Unsecured promissory note, representing advances made by the former
general partner to Curiosity Creek. The note is payable on demand and
bears interest at 1% over prime (9.5% as of September 30, 1998).
414,380
Other receivables related to advances for refinancing fees and
professional fees
29,732
1,667,672
Percentage purchased 26.27%
----------
438,097
Less unamortized discount 219,997
----------
Less reclassification of one payment 4,649
Notes receivable, net of unamortized discount $213,451
==========
D-251
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
In April, 1998 Strategic III made a promissory note in favor of the
Partnership in the original principal amount of $21,000 to cover certain
advances made to Strategic III. The note matures on March 1, 2003, and
accrues interest at an annual rate of 12%. The note is secured by a Second
Mortgage on the Candlewood II apartment property. Two other loans by
affiliated partnerships in the aggregate principal amount of $143,500 are
also secured by separate second mortgages on the property. Each of the
lending parties has agreed to share the benefits of the second mortgages on
a pari-passu basis.
Notes receivable $ 21,000
========
NOTE 4. ADVANCES TO AFFILIATES
In 1998, the Partnership provided funding to affiliates by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and provide for interest at 12% per annum. The
balances as of September 30, 1998 are as follows:
Sunrise $ 51,659
Curiosity Creek 36,439
Baron Strategic Vulture Fund I 44,500
--------
Total $153,598
========
NOTE 5. LIMITED PARTNERS CAPITAL CONTRIBUTIONS
In 1996, in accordance with a Private Placement Memorandum, dated October
23, 1996, the Partnership issued 220 units of limited partnership interest
units at $500 per unit for gross proceeds of $110,000. Costs of $22,300
incurred in connection with syndicating the limited partnership were
recorded as a reduction of limited partner contributions. Of the $22,300 in
syndication costs incurred in 1996, the Partnership paid $17,500 to its
general partner for administrative, legal and investment fees.
During 1997, the Partnership issued the 2,180 units of the limited partner
interest units at $500 per unit for gross proceeds of $1,090,000. Costs of
$239,700 incurred in connection with syndicating the limited partnership
were recorded as a reduction of limited partner contributions. Of the
$239,700 in syndication costs incurred in 1997, the Partnership paid
$124,500 to its general partner for administrative, legal and investment
fees.
D-252
<PAGE>
BARON STRATEGIC INVESTMENT FUND V, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS
Amendment to Sunrise Second Mortgage
In December 1998, Sunrise restated and amended the $335,000 second mortgage
note and the $621,515 promissory note and made a new promissory note in the
original principal amount of $48,468 and a new promissory note in the
original principal amount of $25,351 in favor of the Partnership. In
addition, the parties entered into a mortgage modification agreement under
which Sunrise agreed to secure its repayment obligations under the notes
with a second mortgage on the Sunrise property.
Amendment to Curiosity Creek Mortgage
In December 1998, Curiosity Creek, the Partnership and Baron Strategic
Vulture Fund I, Ltd. ("Baron Vulture I"), entered into a mortgage
modification agreement pursuant to which the Partnership and Baron Vulture
I agreed to set the maturity date of the unsecured notes and advances at
April 1, 2007 (the maturity date of the second mortgage note) and Curiosity
Creek agreed to secure the unsecured notes and advances under the second
mortgage secured by the Curiosity Creek property.
Distributions
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $30,000 to the limited partners.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-253
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 5,366
Notes receivable from affiliates 349,337
Investment in affiliate 480,433
Advances to affiliates 31,834
--------
$866,970
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Advance payable to affiliate $ 8,050
Administrative fees payable to general partner 17,500
--------
25,550
--------
Commitments, Subsequent Events and Other Matter
Partners' Capital:
General partner 81
Limited partners 841,339
--------
841,420
--------
$866,970
========
D-254
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $29,652
Other 636
Equity in net income of affiliate 41,289
-------
71,577
-------
Costs and Expenses:
Administrative fees to general partner 4,500
General and administrative 4,017
-------
8,517
-------
Net Income $63,060
=======
D-255
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 81 $ 868,279 $ 868,360
Distributions -- (90,000) (90,000)
Net Income -- 63,060 63,060
------ --------- ---------
Partners' Capital, Ending $ 81 $ 841,339 $ 841,420
====== ========= =========
D-256
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 63,060
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in net income of affiliate (41,289)
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates 4,500
Increase in administrative fees payable to general partner (29,652)
---------
Net cash used in operating activities (3,381)
---------
Cash Flows from Investing Activities:
Investment in affiliate (118,325)
Repayments of notes receivable from affiliate 29,930
Advances to affiliates 2,570
---------
Net cash used in investing activities (85,825)
---------
Cash Flows from Financing Activities:
Distributions to limited partners (90,000)
---------
Net cash provided by financing activities (90,000)
---------
Net Decrease in Cash (179,206)
Cash, Beginning 184,572
---------
Cash, Ending $ 5,366
=========
</TABLE>
D-257
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund VI, Ltd. (the "Partnership") was initially
organized on October 30, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-258
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate
The Partnership holds a 57% limited partner interest in Pineview
Apartments, Ltd. ("Pineview"), a limited partnership which owns a
residential apartment property in Orlando, Florida. The investment in
Pineview is accounted for using the equity method of accounting as a result
of the Partnership and Pineview having the same general partner president
and the general partner's ability to exercise significant influence on
Pineview. As such, the investment in Pineview is carried at cost and
adjusted for the Partnership's share of undistributed earnings or losses
using the equity method of accounting.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of
November 12, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
D-259
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 12.5% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated 50% to the limited partners and
50% to the general partner.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 12.5% cash-on-cash return; and
(b) the balance, if any, is distributed 50% to the limited partners and 50%
to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
D-260
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2003.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
The following are the balances of the notes receivable and accrued interest
due from affiliates at September 30, 1998:
Baron Strategic Investment Fund IV, Ltd. ("BSIF IV") $349,337 (a)
Baron Strategic Investment Fund III, Ltd. ("Strategic III") $ 68,000 (b)
-------
$417,337
a) In March 1997, the Partnership advanced $690,000 and received a note
with an annual interest rate of 15% payable by BSIF IV, an affiliate.
The note, which is secured by real property of Country Square
Apartments, Ltd., an affiliate, provides for monthly payments of
interest only on the unpaid principal balance with principal plus any
accrued interest due in September 2002.
D-261
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
Interest income recognized on the note during 1998 was $13,213. As of
September 30, 1998, the note had an outstanding balance of $349,337 and
accrued interest of $31,834. In February 1998, the Partnership received a
payment of $125,000 on the note receivable from BSIF IV which was applied
to the outstanding accrued interest and the outstanding principal balance.
Note receivable $349,337
========
b) In April 1998, Strategic III made a promissory note in favor of the
Partnership in the original principal amount of $68,000 to cover certain
advances made to Strategic III. The note matures on March 1, 2003 and
accrues interest at an annual rate of 12%. The note is secured by a Second
Mortgage on the Candlewood II apartment property. Two other loans by
affiliated partnerships in the aggregate principal amount of $96,500 are
also secured by separate Second Mortgages on the property. Each of the
lending parties has agreed to share the benefits of the Second Mortgages on
a pari-passu basis.
Note receivable $68,000
=======
NOTE 4. INVESTMENT IN NON-AFFILIATE
In February 1998, the Partnership purchased from Baron Strategic Investment
Fund X, Ltd. ("Strategic X"), an affiliate, for $160,000, an undivided 20%
interest in a second mortgage note in the original principal amount of
$735,000 (with accrued unpaid interest thereon of $506,767) payable by
Garden Terrace Apartments III ("Garden Terrace"), a non-affiliate. The
second mortgage note matures on January 1, 2007 and bears interest at a
minimum annual rate of 2% plus participation interest of up to 7% based on
the amount of the unpaid principal, payable out of excess cash flow.
Second Mortgage Note $ 735,000
Accrued Interest $ 506,767
----------
Total $1,241,767
Percentage Purchased 20%
$ 248,353
Less unamortized discount $ 88,353
----------
$ 160,000
==========
Advances to Affiliates
In 1998, the Partnership continued to provide funding to affiliates by
means of advances in an arrangement equivalent to an open ended lines of
credit. The advances are due on demand and provide for interest at 12% per
annum. The following is a summary of the transactions, at September 30,
1998, relating to advances:
Pineview 26,935
--------
$ 26,935
========
D-262
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of
operations of Pineview as of the nine months ended September 30, 1998.
Financial position:
Rental apartments $1,815,945
Other assets 214,580
----------
Total assets $2,030,525
==========
Mortgage payable $1,593,060
Other liabilities 511,529
----------
Total liabilities 2,104,589
Partners' capital -74,064
Results of operations:
Revenues (including rental income of $269,986) $ 307,211
Costs and expenses 234,773
----------
Net loss $ 72,438
NOTE 6. LIMITED PARTNERS CAPITAL
Contributions
In 1996, in accordance with a Private Placement Memorandum, dated November
12, 1996, the Partnership issued 1,064 units of limited partnership
interest units at $500 per unit for gross proceeds of $532,000. Costs of
$81,450 incurred in connection with syndicating the limited partnership
were recorded as a reduction of limited partner contributions. Of the
$81,450 in syndication costs incurred in 1996, the Partnership paid $38,890
to its general partner for administrative, legal and investment fees.
During 1997, the Partnership issued 1,336 units of the limited partner
interest units at $500 per unit for gross proceeds of $668,000. Costs of
$192,550 incurred in connection with syndicating the limited partnership
were recorded as a reduction of limited partner contributions. Of the
$192,550 in syndication costs incurred in 1997, the Partnership paid
$115,110 to its general partner for administrative, legal and investment
fees.
D-263
<PAGE>
BARON STRATEGIC INVESTMENT FUND VI, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. SUBSEQUENT EVENTS
Investment in Non-Affiliate- Garden Terrace
In October 1998, Garden Terrace III restated and amended the $735,000
second mortgage note and created a new second mortgage note in the original
principal amount of $506,767 to cover accrued interest. Both notes mature
on January 1, 2007 and are secured by a second mortgage on the Garden
Terrace III property. The terms of the amended $735,000 second mortgage
note remained the same as the prior note except that it provides for
additional participation interest (after payment of minimum interest and
participation interest) to be payable to the holder of the $506,767 note in
an amount equal to 30% of any remaining cash flow from the property. The
$506,767 second mortgage note bears interest at an annual rate of 9%
payable from excess cash flows after minimum interest of 2% and
participation interest of 7% are paid on the $735,000 second mortgage note.
Baron Strategic Investment Fund IX, Ltd. ("Strategic IX") and Strategic X,
affiliates of the Partnership, own the remaining undivided 80% interest in
the notes.
Distributions
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $30,000 to the limited partners.
NOTE 8. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-264
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 7,074
Notes receivable from affiliates 675,602
Accrued interest receivable from affiliates 6,195
Advances receivable from affiliates 182,313
--------
$871,184
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Loan payable - Affiliate $ 21,420
--------
21,420
--------
Commitments and Other Matter
Partners' Capital:
General partner 90
Limited partners 849,674
--------
849,764
--------
$871,184
========
D-265
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $63,098
Other 326
-------
63,424
-------
Costs and Expenses:
General and administrative 22,069
-------
22,069
-------
Net Income $41,355
=======
D-266
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 90 $ 861,308 $ 861,398
Contributions, Net of Syndication Costs -- 35,535 35,535
Distributions -- (88,524) (88,524)
Net Income -- 41,355 41,355
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 849,674 $ 849,764
========= ========= =========
D-267
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 41,355
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates 32,697
Increase in administrative fees payable to general partner (12,854)
---------
Net cash used in operating activities 61,198
---------
Cash Flows from Investing Activities:
Advances to affiliates (163,338)
Investment in notes receivable from affiliates 56,168
Loan payable affiliate 21,420
---------
Net cash used in investing activities (85,750)
---------
Cash Flows from Financing Activities:
Partners' capital contributions 35,535
Limited partners' distribution (88,524)
---------
Net cash provided by financing activities (52,989)
---------
Net Increase in Cash (77,541)
Cash, Beginning 84,615
---------
Cash, Ending $ 7,074
=========
</TABLE>
D-268
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund VIII, Ltd. ("the Partnership") was
initially organized on February 25, 1997 under the laws of the State of
Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-269
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of
February 26, 1997.
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2025, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 12.5% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated 50% to the limited partners and
50% to the general partner.
D-270
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 12.5% cash-on-cash return; and
(b) the balance, if any, is distributed 50% to the limited partners and 50%
to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-271
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2004.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
The following are the principal balances of the notes receivable, net of
unamortized discount and accrued interest due from affiliates at September
30, 1998:
09/30/98 09/30/98
Notes Accrued
Receivable Interest
---------- --------
Longwood Apartments I, Ltd. ("Longwood I") $515,102 $ 42,273(a)
Heatherwood Apartments II, Ltd. ("Heatherwood II") $160,500 $ 15,435(b)
Burlington Development, L.P. ("Burlington") $ 98,000 $ 5,390(c)
-------- --------
$773,602 $ 63,098
======== ========
(a) In July 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Longwood I, were converted into promissory notes as more fully
described in the table below:
Longwood I Second Mortgage Note; matures on October 1, 2007; accrues
interest at an minimum annual rate of 6% and provides for
participation interest at the rate of 3% per annum based upon the
amount of the unpaid principal, which shall be due and payable to the
extent that it does not exceed the available cash flow, as defined in
the note; provides for additional participation interest in an amount
equal to 30% of remaining available cash flow, as defined, which will
continue to be made until such time as the collateral has been sold,
and which obligation will continue notwithstanding total repayment of
the principal amount of the note; secured by a lien upon certain real
and personal property of Longwood I; subordinated to the first
mortgage which had a balance of approximately $1,036,000 as of
September 30, 1998.
$368,558
D-272
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES (Continued)
Unsecured promissory note, representing advances made by the former
general partner to Longwood I. The note is payable upon demand and
bears interest at 1% over prime (9.5% as of September 30, 1998).
526,465
Other receivables, related to advances for refinancing fees and
professional services.
21,966
--------
916,989
Less discount 391,839
Less refund on receivable purchase 10,048
--------
Notes receivable, net of discount and refund $515,102
========
See Note 6 regarding a subsequent amendment to the second mortgage.
(b) In August 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due
from Heatherwood II, were converted into promissory notes as more
fully described in the table below:
Heatherwood II Second Mortgage Note; matures on October 1, 2004;
accrues interest at an minimum annual rate of 6% and participation
interest at the rate of 3% per annum based upon the amount of the
unpaid principal, which shall be due and payable to the extent that it
does not exceed the available cash flow, as defined in the note;
secured by a lien upon certain real and personal property of
Heatherwood II; provides for additional participation interest in an
amount equal to 30% of remaining available cash flow, as defined,
which will continue to be made until such time as the collateral has
been sold and which obligation will continue notwithstanding total
repayment of the principal amount of the note; subordinated to the
first mortgage which had a balance of approximately $710,000 as of
September 30, 1998.
$325,000
Unsecured promissory note, representing advances made by the former
general partner to Heatherwood II. The note is payable on demand and
bears interest at 1% over prime (9.5% as of September 30, 1998).
1,742
Other receivables related to advances and professional services
13,404
--------
340,146
Percentage purchased 58%
--------
197,285
Less discount 36,785
--------
Notes receivable, net of discount $160,500
========
(c) In February 1998, the Partnership made a loan of $98,000 to
Burlington, an affiliate, pursuant to the terms of a promissory note.
The note provides for interest at 12% per annum and principal is due
on demand.
Note Receivable 98,000
D-273
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATES
During 1998, the Partnership provided funding to affiliates by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and accrue interest at 12% per annum. The
balance of $52,279 and $8,975 remained outstanding from Longwood I and
Heatherwood II as of September 30, 1998. Interest income of $4,705 was
recognized in respect of the Longwood advance during the year and accrued
at September 30, 1998.
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement Memorandum
dated February 26, 1997, the Partnership issued 2,298 units of limited
partner interest of the 2,400 units being offered at $500 per unit for
gross proceeds of $1,149,041. Costs of $283,430 incurred in connection with
syndicating the partnership units were recorded as a reduction of limited
partners' capital contributions. Of the syndication costs, $168,525 was
paid to the General Partner for administrative, legal and investment fees.
During 1998, the Partnership issued the remaining 102 units at $500 per
unit for gross proceeds of $50,959. Costs of $13,163 incurred in connection
with syndicating the partnership units were recorded as a reduction of
limited partners' capital contributions in 1998. Of the syndication costs,
$8,067 was paid to the General Partner for administrative, legal and
investment fees.
NOTE 6. SUBSEQUENT EVENTS
Note Receivable from Affiliate
In December 1998, the Partnership endorsed the $98,000 promissory note
payable by Burlington to Sycamore Real Estate Development, Ltd.
("Sycamore") The new note matures on December 14, 2003; accrues interest at
an annual rate of 12%; is secured by a lien upon certain real and personal
property of Villas of Lake Sycamore and is subordinated to the first
mortgage which had a balance of approximately $800,000 as of September 30,
1998. Two other affiliated partnerships also hold second mortgage notes in
the aggregate principal amount of $473,500 secured by the property. The
lending parties have agreed to share the benefits of the second mortgage on
a pari-passu basis.
Amendment to Longwood Second Mortgage
In December 1998, Longwood I restated and amended the second mortgage note
and the unsecured promissory note. The new second mortgage note is in the
original principal amount of $368,558 (which includes the prior principal
balance and accrued unpaid interest) and has a maturity date of October 1,
2007. The other terms remain unchanged. The new demand note is in the
original principal amount of $526,465 (which includes the prior
D-274
<PAGE>
BARON STRATEGIC INVESTMENT FUND VIII, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. SUBSEQUENT EVENTS (Continued)
principal and accrued unpaid interest) and has a maturity date of October
1, 2007. The other terms remain unchanged.
Longwood I also created a new promissory note in favor of the Partnership
in the original principal amount of $74,243, which includes prior advances
of $21,966 described above and of $52,279. The new note bears interest at
the annual rate of 12% and has a maturity date of October 1, 2007. On
December 15, 1998, the Partnership and Longwood I entered into a Second
Amendment to Open-End Second Mortgage and Security Agreement by which all
of the notes will be secured by the Second Mortgage. The amendment also
provides for additional advances to be secured under a future advance
clause up to $1,300,000 maximum.
Distributions to Limited Partners
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $30,000 to the limited partners.
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-275
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 9,964
Investment in affiliate 576,244
Advances receivable from affiliate 342,995
Accrued interest receivable from affiliate 33,967
--------
$963,170
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to the general partner $ 11,500
--------
11,500
--------
Commitments, Subsequent Events and Other Matter
Partners' Capital:
General partner 27
Limited partners 951,643
--------
951,670
--------
$963,170
========
D-276
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Equity in net income of affiliate $ 7,297
Interest income from affiliate 33,575
Other 523
-------
41,395
-------
Costs and Expenses:
Administrative fees to general partner 4,500
General and administrative 9,167
-------
13,667
-------
Net Income $27,728
=======
D-277
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 27 $ 461,616 $ 461,643
Contributions, Net of Syndication Costs -- 520,070 520,070
Distributions -- (57,771) (57,771)
Net Income -- 27,728 27,728
------- --------- ---------
Partners' Capital, Ending September 30, 1998 $ 27 $ 951,643 $ 951,670
======= ========= =========
D-278
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 27,728
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Equity in net income of affiliate (7,297)
Increase in accrued interest receivable from affiliates (33,575)
Increase in administrative fees payable to general partner 4,500
---------
Net cash used in operating activities (8,644)
---------
Cash Flows from Investing Activities:
Investment in affiliate (335,698)
Investment in notes receivable from affiliates (283,037)
Accrued syndication costs (42,435)
---------
Net cash used in investing activities (661,170)
---------
Cash Flows from Financing Activities:
Partners' capital contributions 577,000
Syndication costs (56,930)
Distributions to limited partners (57,771)
Payments on line of credit from affiliate 21,495
---------
483,794
Net Increase in Cash (186,020)
Cash, Beginning 195,984
---------
Cash, Ending $ 9,964
=========
</TABLE>
D-279
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund IX, Ltd. ("the Partnership") was initially
organized on June 2, 1997 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue consisting of equity in net income of affiliate is recognized on
the equity method, as more fully described below. Revenue consisting of
interest on notes receivable is recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-280
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate
The Partnership holds a 41.1% limited partner interest in Crystal Court
Properties, Ltd. ("Crystal Court"), a limited partnership which owns a
residential apartment property in Jacksonville, Florida. The investment in
Crystal Court is accounted for using the equity method of accounting as a
result of the Partnership and Crystal Court having the same general partner
and the general partner's ability to exercise significant influence on
Crystal Court. As such, the investment in Crystal Court is carried at cost
and adjusted for the Partnership's share of undistributed earnings or
losses using the equity method of accounting.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of June
2, 1997:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
D-281
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 15% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated to the general partner.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 15% cash-on-cash return; and (b)
the balance, if any, is distributed 50% to the limited partners and 50% to
the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
D-282
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2004.
NOTE 3. ADVANCES TO AFFILIATE
For the period ended September 30, 1998, the Partnership provided funding
to the following by means of advances in an arrangement equivalent to an
open ended line of credit. The advances are due on demand and accrue
interest at 12% per annum.
Accrued
Outstanding Balance Interest
------------------- -------
Crystal Court Apartments, Ltd. $ 23,995 0
("Crystal Court")
Apartment Development Holding, L.P.
("Apartment Development") $148,000 $ 8,960
Burlington Development, L.P. $ 95,500 $ 6,685
-------- --------
("Burlington")
Total $267,495 $ 15,645
-------- --------
D-283
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 4. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of
operations of Crystal Court as of and for the year ended September 30,
1998.
Financial position:
Rental apartments $1,064,434
Other assets 242,868
----------
Total assets $1,307,302
==========
Mortgage payable $1,202,529
Other liabilities 76,811
----------
Total liabilities 1,279,340
Partners' Capital 27,962
----------
1,307,302
==========
Results of operations:
Revenues (including rental income of $63,628) $ 204,310
Costs and expenses 186,511
----------
Net income $ 17,799
==========
NOTE 5. NOTES RECEIVABLE FROM AFFILIATE
In April 1998, Baron Strategic Investment Fund III, Ltd. ("Strategic III")
made a promissory note in favor of the Partnership in the original
principal amount of $75,500 to cover certain advances made to Strategic
III. The note matures on March 1, 2003, and accrues interest at an annual
rate of 12%. The note is secured by a Second Mortgage on the Candlewood II
apartment property. Two other loans by affiliated partnerships in the
aggregate principal amount of $89,000 are also secured by separate second
mortgages on the property. Each of the lending parties has agreed to share
the benefits of the second mortgages on a pari-passu basis.
Note receivable $ 75,500
==========
NOTE 6. INVESTMENT IN NON-AFFILIATE
In January 1998, the Partnership purchased from an unrelated party for
$200,000 an undivided 25% interest in a second mortgage note in the
original principal amount of $735,000 (with accrued unpaid interest thereon
of $506,767) payable by Garden Terrace Apartments III, Ltd. ("Garden
Terrace"), a non-affiliate. The second mortgage note matures on January 1,
2007, and bears interest at a minimum annual rate of 2% plus participation
interest of up to 7% based on the amount of the unpaid principal, payable
out of excess cash flow
Second Mortgage Note $ 735,000
Accrued Interest $ 506,767
----------
Total $1,241,767
Percentage Purchased 25%
$ 310,442
Less unamortized discount $ 110,442
----------
$ 200,000
==========
D-284
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. LIMITED PARTNERS CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement Memorandum
dated June 3, 1997, the Partnership issued 1,246 units of limited partner
interest being offered at $500 per unit for total gross proceeds of
$623,000. Costs of $151,600 incurred in connection with syndicating the
partnership units were recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $88,530 was paid or accrued to the
General Partner for administrative, legal and investment fees. Of the total
syndication costs incurred, $42,435 remained unpaid and accrued at December
31, 1997, including $23, 165 to the General Partner.
During 1998 the Partnership issued 1,104 equal units of limited partner
interest, which increased the total units issued to 2,350 of the 2,400
available units, at $500 per unit for a total of $552,000. Costs incurred
with syndicating the Partnership of $175,105 have been recorded as a
reduction of limited partner contributions. Of the syndication costs,
$98,905 was paid to the General Partner for administrative, legal, and
investment fees.
NOTE 8. SUBSEQUENT EVENTS
Note Receivable from Affiliate
In December 1998, the Partnership endorsed to Sycamore Real Estate
Development, Ltd. ("Sycamore") the promissory note from Burlington in the
principal amount of $95,500 and the promissory note from Apartment
Development in the principal amount of $148,000; in exchange Sycamore
delivered to the Partnership a new promissory note in the original
principal amount of $243,500. The new note matures on December 14, 2003;
accrues interest at an annual rate of 12%; is secured by a lien upon
certain real and personal property of Villas of Lake Sycamore and is
subordinated to the first mortgage which had a balance of approximately
$800,000 as of September 30, 1998.
Investment in Non-Affiliate
In October 1998, Garden Terrace III restated and amended the $735,000
second mortgage note and created a new second mortgage note in the original
principal amount of $506,767 to cover accrued interest. Both notes mature
on January 1, 2007 and are secured by a second mortgage on the Garden
Terrace III property. The terms of the amended $735,000 second mortgage
note remained the same as the prior note except that it provides for
additional participation interest (after payment of minimum interest and
participation interest) to be payable to the holder of the $506,767 note in
an amount equal to 30% of any remaining cash flow from the property. The
$506,767 second mortgage note bears interest at an annual rate of 9%
payable from excess cash flows after minimum interest of 2% and
participation interest of 7% are paid on the $735,000 second mortgage note.
Baron Strategic Investment Fund VI, Ltd. ("Strategic VI") and Strategic X,
affiliates of the Partnership, own the remaining undivided 75% interest in
the notes.
D-285
<PAGE>
BARON STRATEGIC INVESTMENT FUND IX, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. SUBSEQUENT EVENTS (Continued)
Distributions
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $29,750 to the limited partners.
NOTE 9. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-286
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 39,374
Investment in affiliates 1,044,317
Notes receivable from affiliates 167,500
Advances receivable from affiliate 6,500
Accrued interest receivable from affiliates 39,977
-----------
$ 1,297,668
===========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Liabilities:
Accrued syndication costs $ 12,900
Administrative fees payable to general partner 10,500
Note payable to affiliate 400,000
-----------
423,400
-----------
Commitments, Subsequent Events and Other Matter
Partners' Capital (Deficit):
General partner (68)
Limited partners 874,336
-----------
874,268
$ 1,297,668
===========
D-287
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Equity in net income of affiliate $41,647
Interest income from affiliates 54,145
Other 600
-------
96,392
-------
Costs and Expenses:
General and administrative 12,784
Administrative fees to general partner 15,500
-------
28,284
-------
Net Loss $68,108
=======
D-288
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital (Deficit), Beginning $ (68) $ 830,641 $ 830,573
Contributions, Net of Syndication Costs 58,202 58,202
Distributions -- (82,615) (82,615)
Net Loss -- 68,108 68,108
--------- --------- ---------
Partners' Capital (Deficit), Ending $ (68) $ 874,336 $ 874,268
========= ========= =========
D-289
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 68,108
Adjustments to reconcile net loss to net
cash provided by operating activities:
Changes in operating assets and liabilities:
Equity in net income of affiliates (41,647)
Increase in administrative fees payable to general partner 4,500
Increase in accrued interest receivable from affiliates (32,355)
Decrease in accrued syndication costs (66,808)
---------
Net cash used in operating activities (68,202)
---------
Cash Flows from Investing Activities:
Investments in affiliates (440,000)
Investments in notes receivable from affiliate 50,000
Investment in advances receivable from affiliate (50,000)
Advances to affiliates 400,000
---------
Net cash used in investing activities (40,000)
---------
Cash Flows from Financing Activities:
Partner capital contributions 71,550
Syndication costs paid (13,348)
Distributions to limited partners (82,615)
---------
Net cash provided by financing activities (24,413)
---------
Net Decrease in Cash (132,615)
Cash, Beginning 171,989
---------
Cash, Ending $ 39,374
=========
</TABLE>
D-290
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Investment Fund X, Ltd. ("the Partnership") was initially
organized on June 26, 1997 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $1,200,000, to be divided into 2,400 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliate
Notes receivable from affiliate are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-291
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Affiliates
The Partnership holds a 43.5% limited partner interest in Crystal Court
Properties, Ltd. ("Crystal Court"), a limited partnership which owns a
residential apartment property in Jacksonville, Florida. The investment in
Crystal Court is accounted for using the equity method of accounting as a
result of the Partnership and Crystal Court having the same general partner
president and the general partner's ability to exercise significant
influence on Crystal Court. As such, the investment in Crystal Court is
carried at cost and adjusted for the Partnership's share of undistributed
earnings or losses using the equity method of accounting.
The Partnership holds a 43% limited partner interest in Pineview
Apartments, Ltd. ("Pineview"), a limited partnership which owns a
residential apartment property in Orlando, Florida. The investment in
Pineview is accounted for using the equity method of accounting as a result
of the Partnership and Pineview having the same general partner president
and the general partner's ability to exercise significant influence on
Pineview. As such, the investment in Pineview is carried at cost and
adjusted for the Partnership's share of undistributed earnings or losses
using the equity method of accounting.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
D-292
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of June
26, 1997:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $1,200,000, to
be divided into 2,400 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 12.5% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated 50% to the limited partners and
50% to the general partner.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 12.5% cash-on-cash return; and
(b) the balance, if any, is distributed 50% to the limited partners and 50%
to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
D-293
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $1,000 per month through December 31, 2003.
D-294
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATES
In August 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Heatherwood Apartments II, Ltd. ("Heatherwood II") were converted into
promissory notes as more fully described in the table below.
Heatherwood II Second Mortgage Note; matures on October 1, 2004; accrues
interest at an minimum annual rate of 6% and provides for participation
interest at the rate of 3% per annum based upon the amount of the unpaid
principal, which shall be due and payable to the extent that it does not
exceed the available cash flow, as defined in the note; provides for
additional participation interest in an amount equal to 30% of remaining
available cash flow, as defined, which will continue to be made until such
time as the collateral has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of the note;
secured by a lien upon certain real and personal property of Heatherwood
II; subordinated to the first mortgage which had a balance of approximately
$710,000 as of September 30, 1998.
$325,000
Unsecured promissory note, representing advances made by the former general
partner to Heatherwood II. The note is payable upon demand and bears
interest at 1% over prime (9.5% as of September 30, 1998). 1,742
Other receivables, related to advances for refinancing fees and
professional services
13,404
----------
340,146
Percentage purchased 42%
----------
142,861
Less discount 25,361
----------
Notes receivable, net of discount $ 17,500
==========
NOTE 4. NOTES FROM NON-AFFILIATE
In January 1998, the Partnership purchased from an unrelated party for
$40,000 and a promissory note in the original principal amount of $560,000,
an undivided 75% interest in a second mortgage note in the original
principal amount of $735,000 (with accrued unpaid interest thereon of
$506,767) made by Garden Terrace Apartments III, Ltd. ("Garden Terrace"), a
non-affiliate. The second mortgage note matures on January 1, 2007, bears
interest at a minimum annual rate of 2% plus participation interest of up
to 7% based on the amount of the unpaid principal, payable out of excess
cash flow. In February 1998, the Partnership sold to Baron Strategic
Investment Fund VI, Ltd., an affiliate, an undivided 20% interest of the
Garden Terrace second mortgage note and accrued interest for $160,000.
Second Mortgage Note $ 735,000
Accrued Interest $ 506,767
----------
$1,241,767
----------
Percentage Purchased 55%
$ 682,972
Less unamortized discount, $ 282,972
----------
Second mortgage note and accrued interest,
net of unamortized discount $ 400,000
==========
D-295
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 5. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of
operations of Crystal Court as of and for the nine month period ended
September 30, 1998.
Financial position:
Rental apartments $1,064,434
Other assets 242,868
----------
Total assets $1,307,302
==========
Mortgage payable $1,202,529
Other liabilities 76,811
----------
Total liabilities 1,279,302
27,962
----------
Partners' capital 1,307,302
Results of operations:
Revenues $ 204,310
Costs and expenses 186,511
----------
Net income $ 17,799
==========
The following is a summary of the financial position and results of
operations of Pineview as of and for the nine month period ended September
30, 1998.
Financial position:
Rental apartments $ 1,815,945
Other assets 214,580
-----------
Total assets $ 2,030,525
===========
Mortgage payable $ 1,593,060
Other liabilities 511,529
-----------
Total liabilities 2,104,589
Partners' capital (74,064)
Results of operations:
Revenues $ 307,211
Costs and expenses 234,773
-----------
Net income $ 72,438
===========
D-296
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. ADVANCES RECEIVABLE FROM AFFILIATE
During 1998, the Partnership provided funding to an affiliate by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and accrue interest at 12% per annum. The
balance of $6,500 remained outstanding from Heatherwood II as of September
30, 1998.
NOTE 7. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1997, in accordance with the terms of a Private Placement
Memorandum, dated June 26, 1997, the Partnership issued 2,256 units of
limited partner interest units at $500 per unit for gross proceeds of
$1,128,000. Costs of $268,260 incurred in connection with syndicating the
limited partnership were recorded as a reduction of limited partners'
capital contributions. Of the $268,260 in syndication costs incurred in
1997, the Partnership paid $93,742 to and accrued $70,258 for its general
partner for administrative, legal and investment fees.
During 1998, the Partnership issued 144 units at $500 per unit for gross
proceeds of $72,000. Costs of $15,800 incurred in connection with
syndicating the limited partners were recorded as a reduction of limited
partners' contributions in 1998.
NOTE 8. SUBSEQUENT EVENTS
Investment in Non-Affiliate
In October 1998, Garden Terrace III restated and amended the $735,000
second mortgage note and created a new second mortgage note in the original
principal amount of $506,767 to cover accrued interest. Both notes mature
on January 1, 2007 and are secured by a second mortgage on the Garden
Terrace property The terms of the $735,000 second mortgage note are as
described above in Note 4 except that the restated note provides for
additional participation interest (payable to the holder of the $506,767
second mortgage note) in an amount equal to 20% of any available cash flow
remaining after payment of minimum interest and participation interest. The
$506,767 second mortgage note bears interest at an annual rate of 9%
payable from excess cash flows after 2% minimum interest and 7%
participation interest has been paid on the $735,000 second mortgage note.
Baron Strategic Investment Fund VI, Ltd. ("Strategic VI") and Baron
Strategic Investment Fund IX, Ltd. ("Strategic IX"), affiliates of the
Partnership, own the remaining undivided 45% interest on the notes.
Distributions
Subsequent to September 30, 1998 the partnership distributed $30,000 to the
limited partners.
D-297
<PAGE>
BARON STRATEGIC INVESTMENT FUND X, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 9. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-298
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 31,922
Notes receivable from affiliates 612,000
Accrued interest receivable from affiliates 68,898
--------
$712,820
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Advances payable to affiliate 64,000
Administrative fees payable to general partner $ 14,500
Accrued interest payable 2,900
--------
81,400
--------
Commitments, Subsequent Events and Other Matter
Partners' Capital:
General partner 81
Limited partners 631,339
--------
631,420
--------
$712,820
========
D-299
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $59,248
Other 354
-------
59,602
-------
Costs and Expenses:
General and administrative 16,870
-------
16,870
-------
Net Income $42,732
=======
D-300
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 81 $ 656,107 $ 656,188
Distributions -- (67,500) (67,500)
Net Income -- 42,732 42,732
--------- --------- ---------
Partners' Capital, Ending $ 81 $ 631,339 $ 631,420
========= ========= =========
D-301
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net income $ 42,732
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates 1,086
Decrease in administrative fees payable to general partner 4,500
Decrease in accrued interest payable 2,900
--------
Net cash used in operating activities 51,218
--------
Cash Flows from Financing Activities:
Advances to affiliates 47,000
--------
Net cash used in investing activities 47,000
--------
Cash Flows from Financing Activities:
Limited partners' distributions (67,500)
--------
Net cash provided by financing activities (67,500)
--------
Net Increase in Cash 30,718
Cash, Beginning 1,204
--------
Cash, Ending $ 31,922
========
</TABLE>
D-302
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Baron Strategic Vulture Fund I, Ltd. ("the Partnership") was initially
organized on April 9, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $900,000, to be divided into 1,800 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-303
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the allowance for impairment and the
collectibility of the notes receivable due from affiliates. Although these
estimates are based on management's knowledge of current events and actions
it may undertake in the future, they may ultimately differ from actual
results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of April
24, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $900,000, to
be divided into 1,800 units of limited partnership units. A capital account
is maintained for each partner.
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 15% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the excess, if any, will be allocated to the general partner.
D-304
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 10% cash-on-cash return; (b) the
general partner until the total amount distributed to them when added to
all prior distributions of distributable cash and net proceeds made to it,
is equal to the sum of its capital contribution plus an annual 10%
cash-on-cash return and; (c) the balance, if any, is distributed 50% to the
limited partners and 50% to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-305
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $500 per month through December 31, 2003. No fees were incurred in
1998.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
In January 1997, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. The
receivables, which included notes receivable and accrued interest due from
Curiosity Creek Apartments, Ltd. ("Curiosity Creek"), were converted into
promissory notes as more fully described in the table below:
Curiosity Creek Second Mortgage Note; matures on April 1, 2007; accrues
interest at an minimum annual rate of 6% and provides for participation
interest at the rate of 3% per annum based upon the amount of the unpaid
principal, which shall be due and payable to the extent that it does not
exceed the available cash flow, as defined in the note; provides for
additional participation interest in an amount equal to 30% of remaining
available cash flow, as defined, which will continue to be made until such
time as the collateral has been sold, and which obligation will continue
notwithstanding total repayment of the principal amount of the note;
secured by a lien upon certain real and personal property of Curiosity
Creek; subordinated to the first mortgage which had a balance of
approximately $1,188,000 as of September 30, 1998.
$ 807,560
Unsecured promissory note, representing advances made by the former general
partner to Curiosity Creek. The note is payable upon demand and bears
interest at 1% over prime (9.5% as of September 30, 1998). 414,280
Unsecured promissory note, representing advances made by the former general
partner to Curiosity Creek. The note is payable upon demand and bears
interest at 12.5%.
416,000
Other receivables, related to advances for refinancing fees and
professional services.
29,732
----------
1,667,672
Percentage purchased 73.73%
----------
1,229,575
Less discount 617,575
----------
Notes receivable, net of discount $ 612,000
==========
D-306
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
See Note 6 regarding a subsequent amendment to the second mortgage.
NOTE 4. NOTES PAYABLE FROM AFFILIATE
Advances Payable to Affiliates
In 1998, the Partnership received loans of $19,500 and $44,500, from
affiliate partnerships Baron Strategic Investment Fund IV, Ltd., and Baron
Strategic Investment Fund V, Ltd., respectively. The loans bear interest at
12% and are due on demand.
NOTE 5. ADVANCES TO AFFILIATE
During 1998, the Partnership provided funding to an affiliate by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and accrue interest at 12%. The balance of
$14,513 remained outstanding from Curiosity Creek as of September 30, 1998.
NOTE 6. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
In 1996, in accordance with the terms of a Private Placement Memorandum
dated April 24, 1996, the Partnership issued the 1,800 units of limited
partner interest being offered at $500 per unit for total gross proceeds of
$900,000. Costs of $209,000 incurred in connection with syndicating the
limited partnership units were recorded as a reduction of limited partners'
capital contributions. Of the $209,000 in syndication costs, the
Partnership paid $119,000 to its general partner for administrative, legal
and investment fees.
NOTE 7. SUBSEQUENT EVENTS
Amendment to Second Mortgage
In December 1998, Curiosity Creek, the Partnership and Baron Strategic
Investment Fund V, Ltd. ("Strategic V"), entered into a mortgage
modification agreement pursuant to which the Partnership and Strategic V
agreed to set the maturity date of the unsecured notes and advances at
April 1, 2007 (the maturity date of the second mortgage note) and Curiosity
Creek agreed to secure the unsecured notes and advances under the second
mortgage secured by the Curiosity Creek property.
Distributions
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $90,000 to the limited partners
D-307
<PAGE>
BARON STRATEGIC VULTURE FUND I, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 8. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-308
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 104
Notes receivable from affiliates 474,191
Accrued interest receivable from affiliates 94,029
--------
$568,324
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 18,000
Loan Payable to Affiliate 1,750
--------
19,750
--------
Commitments, Subsequent Events and Other Matter
Partners' Capital:
General partner 832
Limited partners 547,742
--------
548,574
--------
$568,324
========
D-309
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $48,285
Other 35
-------
48,320
-------
Costs and Expenses:
General and administrative 3,293
-------
3,293
-------
Net Income $45,027
=======
D-310
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 832 $ 545,840 $ 546,672
Distributions -- (43,125) (43,125)
Net Income -- 45,027 45,027
--------- --------- ---------
Partners' Capital, Ending $ 832 $ 547,742 $ 548,574
========= ========= =========
D-311
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net income $ 45,027
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates (28,935)
--------
Net cash used in operating activities 16,092
--------
Cash Flows from Investing Activities:
Advances to affiliates 1,750
--------
Net cash used in investing activities 1,750
--------
Cash Flows from Financing Activities:
Limited partners' distributions (43,125)
--------
Net cash provided by financing activities (43,125)
--------
Net Increase in Cash (25,283)
Cash, Beginning 25,387
--------
Cash, Ending $ 104
========
D-312
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Brevard Mortgage Program, Ltd. ("the Partnership") was initially organized
on November 14, 1995 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $575,000, to be divided into 575 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt financing to existing affiliated limited
partnerships owning residential apartment communities located in Florida.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the year the Partnership had deposits in financial
institutions in excess of the federally insured limits. The Partnership
maintains its cash with a high quality financial institution which the
Partnership believes limits these risks.
Notes Receivable from Affiliates
Notes receivable from affiliates are recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-313
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates as
to which it is reasonably possible that a change in the estimate could
occur in the near term relates to the collectibility of the notes
receivable due from affiliates. Although these estimates are based on
management's knowledge of current events and actions it may undertake in
the future, they may ultimately differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership ("the Agreement") made and entered into as of
December 8, 1995.
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $575,000 to be
divided into 575 units of limited partnership units. A capital account is
maintained for each partner.
Term
The Partnership will continue through December 31, 2025, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 99%
of the distributable cash; and (b) to the general partner who will receive
1% of the distributable cash.
D-314
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Distributions (Continued)
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
entire principal amount of the purchased second mortgage loan has been
repaid; and (b) the balance, if any, is distributed to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; (e) the repayment in full
of all loans made by the Partnership, unless the Partnership thereafter
continues to own non-loan assets; and (f) the occurrence of any other event
which, by law, would require the Partnership to be dissolved.
D-315
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $750 per month through December 31, 2002.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
The Partnership had the following receivables from Florida Opportunity
Income Partners II, Ltd. ("FOIP II") at September 30, 1998:
Notes Accrued
Receivable Interest
---------- --------
Notes receivable, net of discount $450,000 $ 78,318(a)
Advances 24,191 15,711(b)
-------- --------
$474,191 $ 94,029
======== ========
(a) In December 1995, the Partnership acquired certain receivables from an
unrelated entity at a discount from the face amount thereof. These
receivables, which include notes receivable and accrued interest due
from FOIP II, were converted into promissory notes as more fully
described in the table below:
FOIP II Second Mortgage Note matures on July 31, 2001; accrues
interest at a minimum annual rate of 6% and provides for participation
interest at the rate of 3% per annum based upon the amount of the
unpaid principal, which shall be due and payable to the extent that it
does not exceed the available cash flows, as defined in the note;
provides for additional participation interest in an amount equal to
20% of remaining available cash flow, as defined, which will continue
to be made until such time as the collateral has been sold, and which
obligation will continue notwithstanding total repayment of the
principal amount of the note; is secured by a lien upon certain real
and personal property of FOIP II and; is subordinated to a first
mortgage, which had a balance of approximately $974,000 as of
September 30, 1998.
$752,747
D-316
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE (Continued)
Unsecured promissory note representing advances made by the former general
partner to FOIF II. The note matures October 1, 2007 and bears an annual
interest rate of 1% over prime (9.5% as of September 30, 1998).
271,923
----------
1,024,670
Less discount 574,670
----------
Notes receivable, net of discount $ 450,000
==========
See Note 5 regarding a subsequent amendment to the second mortgage.
NOTE 4. ADVANCES TO AFFILIATE
In 1998, the Partnership provided funding to affiliates by means of
advances in an arrangement equivalent to an open ended line of credit. The
advances are due on demand and provide for interest at 12% per annum. The
balance as of September 30, 1998 are as follows:
FOIP II $24,191
=======
NOTE 5. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1996, in accordance with the terms of a Private Placement Memorandum
dated December 8, 1995, the Partnership issued the 575 units of limited
partner interest being offered at $1,000 per unit for total gross proceeds
of $575,000. Costs of $67,500 incurred in connection with syndicating the
partnership units were recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $10,000 was paid to the General
Partner for administrative, legal and investment fees.
NOTE 6. SUBSEQUENT EVENTS
Distributions to Limited Partners
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $14,375 to the limited partners.
Amendment to Second Mortgage
On December 15, 1998 FOIPII restated and amended the second mortgage note
and the promissory note and created a new promissory note in favor of the
Partnership in the original principal amount of $24,191 (12% annual
interest rate) to cover prior advances. The Partnership and FOIPII also
entered into a Second Amendment to Open-End Second Mortgage and Security
Agreement. Pursuant to these transactions, all of the notes will be secured
by the Second Mortgage, and the maturities extended to October 1, 2001. The
amendment also provides for additional advances to be secured under a
future advance clause up to $500,000 maximum.
D-317
<PAGE>
BREVARD MORTGAGE PROGRAM, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 7. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership. Subject to the completion of the proposed Exchange
Offering, the Trust and the Operating Partnership will account for the
acquisition of the limited partnership interests in the offering on the
purchase method and therefore record the assets acquired and the
liabilities assumed at their fair value at the date of acquisition.
D-318
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD.
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 38
Notes receivable from affiliates 365,000
Accrued interest receivable from affiliates 114,985
Advances to affiliates 93,302
--------
$573,325
========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Administrative fees payable to general partner $ 10,500
--------
Commitments and Other Matters
Partners' Capital:
General partner 90
Limited partners 562,735
--------
562,825
--------
$573,325
========
D-319
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD.
STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Revenues:
Interest income from affiliates $50,085
Other 157
-------
50,242
-------
Costs and Expenses:
Administrative fees to general partner 6,000
General and administrative 5,312
-------
11,312
-------
Net Income $38,930
=======
D-320
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE APARTMENTS, LTD.
STATEMENT OF PARTNERS' CAPITAL
NINE MONTHS ENDED SEPTEMBER 30, 1998
General Limited
Partner Partners Total
------- -------- -----
Partners' Capital, Beginning $ 90 $ 576,305 $ 576,395
Distributions -- (52,500) (52,500)
Net Income -- 38,930 38,930
--------- --------- ---------
Partners' Capital, Ending $ 90 $ 562,735 $ 562,825
========= ========= =========
D-321
<PAGE>
LAMPLIGHT COURT OF BELLEFOUNTAINE APARTMENTS, LTD.
STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
Cash Flows from Operating Activities:
Net income $ 38,930
Adjustments to reconcile net income to
net cash used in operating activities:
Changes in operating assets and liabilities:
Increase in accrued interest receivable from affiliates (37,185)
--------
Net cash used in operating activities 1,745
--------
Cash Flows from Financing Activities:
Limited partners' distributions (52,500)
--------
Net cash provided by financing activities (52,500)
--------
Net Increase in Cash (50,755)
Cash, Beginning 50,793
--------
Cash, Ending $ 38
========
D-322
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Lamplight Court of Bellefontaine, Ltd. (the "Partnership") was initially
organized on February 16, 1996 under the laws of the State of Florida.
The Agreement of Limited Partnership provides for capital contributions of
partners to be comprised of (a) the general partner capital contribution of
$90 in cash; and (b) the maximum capital contributions of the limited
partners of $700,000, to be divided into 700 equal units of limited
partnership interest.
See Note 2 for a summary of other provisions of the Agreement of Limited
Partnership.
Business
The Partnership provides debt and equity financing to existing affiliated
limited partnerships owning residential apartment communities located in
Ohio.
Revenue Recognition
Revenue, which consists primarily of interest on notes receivable, is
recognized as it becomes due.
Concentration of Credit Risk
At various times during the nine months ended September 30, 1998 the
Partnership had deposits in financial institutions in excess of the
federally insured limits. The Partnership maintains its cash with a high
quality financial institution which the Partnership believes limits these
risks.
Note Receivable from Affiliates
Note receivable from affiliates is recorded at cost, less the related
allowance for impairment of such notes receivable. The Partnership accounts
for such notes under the provisions of Statement of Financial Accounting
Standard No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by Statement of Financial Accounting Standard No. 118, Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure.
Management, considering current information and events regarding the
borrowers' ability to repay their obligations, considers a note to be
impaired when it is probable that the Partnership will be unable to collect
all amounts due according to the contractual terms of the note. When a loan
is considered to be impaired, the amount of impairment is measured based
upon (a) the present value of expected future cash flows discounted at the
note's effective interest rate; and (b) the liquidation value of the note's
collateral reduced by expected selling costs and other notes secured by the
same collateral. Cash receipts on impaired notes receivable are applied to
reduce the principal amount of such receivables until the principal has
been recovered, and are recognized as interest income thereafter.
D-323
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Affiliate
In 1996, the Partnership acquired certain receivables and a limited partner
interest in Independence Village, Ltd. ("Independence Village") from an
unrelated entity at a discount from the face amount thereof (see Note 3).
As a result, the Partnership holds a 31.7% limited partner interest in
Independence Village, a limited partnership which owns a residential
apartment property in Bellefontaine, Ohio. The investment in Independence
Village is accounted for using the equity method of accounting as a result
of the Partnership and Independence Village having the same general partner
president and the general partner's ability to exercise significant
influence on Independence Village. As such, the investment in Independence
Village is carried at cost and adjusted for the Partnership's share of
undistributed earnings or losses using the equity method of accounting. At
the date of purchase, management estimated the value of the limited partner
interest to be insignificant and did not allocate any of the purchase price
to the investment.
Use of Estimates
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the year then ended. Material estimates,
as to which it is reasonably possible that a change in the estimate could
occur in the near term, relates to the value of the limited partner
interest and the collectibility of the note receivable due from affiliates.
Although these estimates are based on management's knowledge of current
events and actions it may undertake in the future, they may ultimately
differ from actual results.
Income Taxes
The Partnership is treated as a limited partnership for federal income tax
purposes and as such does not incur income taxes. Instead, its earnings and
losses are included in the personal returns of the partners and taxed
depending on their personal tax situations. The financial statements do not
reflect a provision for income taxes.
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP
The following is a summary of the significant provisions of the Agreement
of Limited Partnership (the "Agreement") made and entered into as of March
7, 1996:
Capital Contributions of Partners
The Agreement provides for the general partner to contribute $90 in cash,
and maximum capital contributions of the limited partners of $700,000, to
be divided into 700 units of limited partnership units. A capital account
is maintained for each partner.
D-324
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Term
The Partnership will continue through December 31, 2026, unless sooner
terminated by law or under certain provisions of the Agreement.
Distributions
Cash Distributions
The Partnership's distributable cash, if any, in each fiscal year will not
be reinvested but will be distributed in order of priority to the Partners,
if available, quarterly, to (a) the limited partners who will receive 100%
of the distributable cash until they have received a 10% non-cumulative
annual cash-on-cash return on the aggregate amount of their capital
contribution as calculated from each limited partner's admission date; and
(b) the general partner will receive 100% of the remaining distributable
cash.
Distributions of Net Proceeds
Net proceeds from the sale or refinancing of the Partnership's assets will
not be reinvested but will be distributed to the partners in order of
priority after repayment of all indebtedness secured by the assets to (a)
the limited partners who will receive 100% of the distributions until the
total amount distributed to them, when added to all prior distributions of
distributable cash and net proceeds made to them, is equal to the sum of
their capital contributions plus an annual 10% cash-on-cash return; and (b)
then 31.7% of up to $350,000 of any remaining net proceeds to the limited
partners; and (c) the balance, if any, to the general partner.
Allocation of Income and Loss
Allocations of all items of income, gain, expense, loss, deduction and
credit recognized by the Partnership for federal income tax purposes will
be made as follows:
Income
The first 100% of income is allocated to the general partner until the
profits allocated plus the cumulative profits allocated 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 under the terms of the distributions of cash and net proceeds. The
balance, if any, is allocated to the limited partners.
Losses
After giving effect to certain tax provisions, taxable losses are allocated
99% to the limited partners and 1% to the general partner.
D-325
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 2. AGREEMENT OF LIMITED PARTNERSHIP (Continued)
Dissolution
The Partnership will be dissolved upon (a) the expiration of the term of
the Agreement; (b) the determination of the limited partners exercising
their voting rights to dissolve the Partnership; (c) the death,
resignation, retirement, dissolution, removal, bankruptcy, adjudication of
insolvency, or adjudication of insanity or incompetence of the last
remaining general partner then in office and the refusal of any successor
general partner to replace it, unless the holders of a majority of the
units then outstanding 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; (d) the sale of all or
substantially all of the Partnership's property; and (e) the occurrence of
any other event which, by law, would require the Partnership to be
dissolved.
Winding Up
Upon the dissolution of the partnership, the general partner will take full
account of the Partnership's assets and liabilities, and the assets will be
liquidated as promptly as is consistent with obtaining fair value of the
assets, and the proceeds will be applied and distributed (a) first to the
Partnership creditors, other than partners; (b) then, any loans owed by the
Partnership to the partners shall be paid in proportion thereto; and (c)
finally, to the limited partners and the general partner in proportion to
their respective positive capital accounts.
Fees to the General Partner
Pursuant to a Partnership Administration Contract (the "Contract") between
the Partnership and the general partner stipulated in the Agreement, the
Partnership retained the general partner to provide administrative services
for $500 per month through December 31, 2002.
NOTE 3. NOTES RECEIVABLE FROM AFFILIATE
In 1996, the Partnership acquired certain receivables and a 31.7% interest
in Independence Village from an unrelated entity at a discount from the
face amount thereof. The receivables, which included note receivable and
accrued interest due from Independence Village, were converted into
promissory note as more fully described in the table below.
Independence Village Second Mortgage Note; matures in December 2006;
accrues interest at an annual rate of 9.5%; secured by a lien upon certain
real and personal property of Independence Village (the Lamplight Court
Property); subordinated to the first mortgage which had a balance of
approximately $585,000 as of September 30, 1998. $585,000
Less discount 220,000
--------
Note receivable, net of discount $365,000
========
D-326
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 3. NOTE RECEIVABLE FROM AFFILIATE (Continued)
The second mortgage matures on December 1, 1998, and may be extended at the
option of Independence Village by payment of a fee equal to 1% of the
loan's initial principal amount of $585,000.
NOTE 4. ADVANCES RECEIVABLE FROM AFFILIATE
In 1996 and during 1997, the Partnership provided funding to Independence
Village by means of advances in an arrangement equivalent to an open ended
line of credit advances. The outstanding advances are due on demand and
accrue interest at 12% per annum. The balance of $93,302 remained
outstanding as of September 30, 1998.
NOTE 5. INVESTMENT IN AFFILIATE
The following is a summary of the financial position and results of
operations of Independence Village as of and for the nine months ended
September 30, 1998.
Financial position:
Rental apartments $ 823,912
Other assets 217,953
-----------
Total assets $ 1,041,865
===========
Mortgage payable $ 1,676,259
Other liabilities 424,947
-----------
Total liabilities 2,101,206
Partners' deficiency (1,059,341)
-----------
$ 1,041,865
===========
Results of operations:
Rent Income 179,564
Costs and expenses 156,520
-----------
Net loss $ 123,044
===========
As discussed in Note 1, upon acquisition of certain receivables and the
limited partnership interest in Independence Village, the Partnership did
not allocate any of the purchase price to the investment in affiliate. The
Partnership has deferred recognition of its proportionate share of net
losses because there is no personal obligation to fund the resulting
negative limited partner's capital account balance. Future net income, if
any, will not be recognized until such time as the limited partner's
capital account becomes a positive balance.
D-327
<PAGE>
LAMPLIGHT COURT OF BELLEFONTAINE, LTD.
NOTES TO FINANCIAL STATEMENTS
(Continued)
NOTE 6. LIMITED PARTNERS' CAPITAL CONTRIBUTIONS
During 1996, in accordance with the terms of a Private Placement Memorandum
dated March 7, 1996, the Partnership issued 700 units of limited
partnership interest units at $1,000 per unit for total gross proceeds of
$700,000. Costs of $120,000 incurred in connection with syndicating the
partnership were recorded as a reduction of limited partners' capital
contributions. Of the syndication costs, $57,000 was paid to the General
Partner for administrative, legal and investment fees.
NOTE 7. SUBSEQUENT EVENTS
Distribution
Subsequent to September 30, 1998, the Partnership made distributions of
approximately $17,500 to the limited partners.
Amendment to Second Mortgage
In December 1998, Independence Village and the Partnership entered into a
mortgage modification agreement under which the Partnership agreed to set
the maturity date on the unsecured indebtedness at December 2006, in
exchange for the agreement of Independence Village to secure its repayment
obligations on the unsecured indebtedness with a second mortgage on the
Lamplight Court property.
NOTE 8. OTHER MATTER
In connection with a proposed Exchange Offering, Baron Capital Properties,
L.P. ("the Operating Partnership"), a partnership under common control,
will offer to exchange Operating Partnership Units to the limited partners
of the Partnership in exchange for their limited partner interests. These
units are exchangeable for an equivalent number of common shares of
beneficial interest in Baron Capital Trust, a real estate investment trust
under common control, for whom Baron Capital Properties, L.P. is the
operating partnership.
D-328
<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
Nine-Month Period Ended September 30, 1998
Notes to Statement of Revenues and Certain Expenses
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
Nine-Month Period Ended September 30, 1998
Notes to Statement of Revenues and Certain Expenses
RIVERWALK 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
Nine-Month Period Ended September 30, 1998
Notes to Statement of Revenues and Certain Expenses
E-1
<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
E-2
<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
E-3
<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.
E-4
<PAGE>
Crystal Court II Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 268,778
Other Income _______
Total Revenue 268,778
Certain Expenses
Personnel 34,486
Advertising and Promotion 4,124
Utilities Expense 14,014
Repairs and Maintenance 23,376
Real Estate Taxes and Insurance 15,570
Mortgage Interest Expense 77,965
Management Fees 17,513
Other Operating Expense 11,009
-------
Total Operating Expense 198,057
Revenues in Excess of Certain Expenses 70,721
=======
E-5
<PAGE>
CRYSTAL COURT APARTMENTS, PHASE II
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 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.
E-6
<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
E-7
<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
E-8
<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.
E-9
<PAGE>
Heatherwood I Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 275,595
Other Income _______
Total Revenue 275,595
Certain Expenses
Personnel 47,625
Advertising and Promotion 4,176
Utilities Expense 25,487
Repairs and Maintenance 17,347
Real Estate Taxes and Insurance 24,330
Mortgage Interest Expense 67,568
Management Fees 16,055
Other Operating Expense 7,178
-------
Total Operating Expense 209,766
Revenues in Excess of Certain Expenses 65,829
=======
E-10
<PAGE>
HEATHERWOOD APARTMENTS, PHASE I
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 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:
September 30, 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.
E-11
<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
Riverwalk Villas 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 audit 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 combined 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 Riverwalk Villas 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
August 6, 1998
E-12
<PAGE>
RIVERWALK VILLAS
STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
December 31, December 31,
1997 1996
-------- --------
REVENUES
Rental income $296,939 $302,218
Other income 4,877 6,398
-------- --------
Total revenues 301,816 308,616
-------- --------
CERTAIN EXPENSES
Personnel 31,446 26,262
Advertising and promotion 3,465 2,586
Utilities 5,446 7,658
Repairs and maintenance 43,145 57,855
Real estate taxes and insurance 45,785 41,822
Mortgage interest expense 120,194 121,834
Management fees 1,086 1,433
Other operating expenses 3,380 3,333
-------- --------
Total certain expenses 253,947 262,783
-------- --------
REVENUES IN EXCESS
OF CERTAIN EXPENSES $ 47,869 $ 45,833
======== ========
See Note to Statement of Revenues and Certain Expenses
E-13
<PAGE>
RIVERWALK VILLAS
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
Riverwalk Villas consist of 50 units located in New Smyrna Beach, Florida.
The property was acquired during 1990 by Riverwalk Enterprises, Ltd. The
following percentage of units were occupied at the various period ending
dates:
December 31, 1996 90%
December 31, 1997 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 Riverwalk
Villas.
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.
E-14
<PAGE>
Riverwalk Apartments
Statement of Revenues and Certain Expenses
For the Nine-Month Period Ending 9/30/98
1/1/98-9/30/98
--------------
Revenue
Rent Base 268,778
Other Income _______
Total Revenue 268,778
Certain Expenses
Personnel 34,486
Advertising and Promotion 4,124
Utilities Expense 14,014
Repairs and Maintenance 23,376
Real Estate Taxes and Insurance 15,570
Mortgage Interest Expense 77,965
Management Fees 17,513
Other Operating Expense 11,009
-------
Total Operating Expense 198,057
Revenues in Excess of Certain Expenses 70,721
=======
E-15
<PAGE>
RIVERWALK VILLAS
NOTE TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998
1. Descriptions and Summary of Significant Accounting Policies
Description
Riverwalk Villas consist of 50 units located in New Smyrna Beach, Florida.
The property was acquired during 1990 by Riverwalk Enterprises, Ltd. The
following percentage of units were occupied at the period ending date:
September 30, 1998 [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 Riverwalk
Villas.
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.
E-16
<PAGE>
EXHIBIT F
EXCHANGE PROPERTY APPRAISAL VALUES
<TABLE>
<CAPTION>
EXCHANGE EQUITY PARTNERSHIPS Appraised Date of Cost Income
(Equity Property Interest) Value Appraisal Approach Approach
- ---------------------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd.
Steeplechase Apts. $1,690,000 8/98 N/A $1,700,000
Central Florida Income Appreciation Fund, Ltd.
Laurel Oaks, formerly Grove Hamlet, Apts. $2,881,000 9/98 N/A N/A
Florida Capital Income Fund, Ltd.
Eagle Lake Apts. $2,530,000 1/98 $2,511,000 $2,421,000
Florida Capital Income Fund II, Ltd.
Forest Glen Apts. - Phase I $2,990,820 10/97 $3,122,813 $2,954,615
Florida Capital Income Fund III, Ltd.
Bridge Point Apts. - Phase II $1,610,000 2/98 $1,608,000 $1,672,000
Florida Capital Income Fund IV, Ltd.
Glen Lake Apts. $5,550,000 3/98 $5,544,000 $5,726,000
933,079 3/98 933,079 933,079
---------- ---------- ----------
$6,483,079 $6,477,079 $6,659,079
Florida Income Advantage Fund I, Ltd.
Forest Glen Apts. - Phase III $1,940,339 10/97 $2,081,892 $1,969,760
Florida Income Appreciation Fund I, Ltd.
Forest Glen Apts. - Phase IV $ 471,679 10/97 $ 480,437 $ 454,560
Florida Income Growth Fund V, Ltd.
Blossom Corners Apts. - Phase I $2,195,000 1/98 $2,195,000 $2,244,000
Florida Opportunity Income Partners, Ltd.
Camellia Court Apts. $1,833,000 8/98 $1,828,000 $1,832,000
GSU Stadium Student Apartments, Ltd.
Stadium Club Apts. $2,800,000 8/97 $2,762,000 $2,749,000
Midwest Income Growth Fund VI, Ltd.
Brookwood Way Apts. $1,780,000 9/98 $1,766,000 $1,829,000
Realty Opportunity Income Fund VIII, Ltd.
Forest Glen Apts. - Phase II $2,173,162 11/97 $2,322,111 $2,197,040
<CAPTION>
Replacement
EXCHANGE EQUITY PARTNERSHIPS Market Cost
(Equity Property Interest) Approach New Appraiser
- ---------------------------- -------- --------- ---------
<S> <C> <C> <C>
Baron Strategic Investment Fund II, Ltd.
Steeplechase Apts. $1,675,000 N/A Strickland & Wright
Central Florida Income Appreciation Fund, Ltd.
Laurel Oaks, formerly Grove Hamlet, Apts. $2,881,000 N/A Dennis J. Voyt
Florida Capital Income Fund, Ltd.
Eagle Lake Apts. $2,531,000 $3,960,803 Consortium Appraisal, Inc.
Florida Capital Income Fund II, Ltd.
Forest Glen Apts. - Phase I $3,016,915 Richards Appraisal Service, Inc.
Florida Capital Income Fund III, Ltd.
Bridge Point Apts. - Phase II $1,545,000 $2,219,035 Consortium Appraisal, Inc.
Florida Capital Income Fund IV, Ltd.
Glen Lake Apts. $5,364,000 $7,346,055 Consortium Appraisal, Inc. (real
933,079 N/A property) Allied Appraisal Services,
---------- Inc. (furniture and equipment)
$6,297,079
Florida Income Advantage Fund I, Ltd.
Forest Glen Apts. - Phase III $2,011,294 Richards Appraisal Service, Inc.
Florida Income Appreciation Fund I, Ltd.
Forest Glen Apts. - Phase IV $ 464,145 Richards Appraisal Service, Inc.
Florida Income Growth Fund V, Ltd.
Blossom Corners Apts. - Phase I $2,144,000 $3,576,239 Consortium Appraisal, Inc.
Florida Opportunity Income Partners, Ltd.
Camellia Court Apts. $1,827,000 $2,849,389 Consortium Appraisal, Inc.
GSU Stadium Student Apartments, Ltd.
Stadium Club Apts. $2,907,000 $3,501,561 Consortium Appraisal and
Consulting Services, Inc.
Midwest Income Growth Fund VI, Ltd.
Brookwood Way Apts. $1,700,000 $2,913,496 Consortium Appraisal and Consulting
Services, Inc.
Realty Opportunity Income Fund VIII, Ltd.
Forest Glen Apts. - Phase II $2,243,367 Richards Appraisal Service, Inc.
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE EQUITY PARTNERSHIPS Appraised Date of Cost Income
(Property Securing Mortgages) Value Appraisal Approach Approach
- ---------------------------- ---------- ---------- -------- --------
<S> <C> <C>
Baron Strategic Investment Fund, Ltd.
Blossom Corners Apts. - Phase II $ 2,250,000 1/98 $2,239,000 $2,322,000
The Villas at Lake Sycamore $14,312,000(1) 7/98 N/A N/A
Baron Strategic Investment Fund IV, Ltd.
Country Square Apts. - Phase I $2,185,000 1/98 $2,185,000 $2,281,000
Baron Strategic Investment Fund V, Ltd.
Candlewood Apts. - Phase II $ 925,000 1/98 $ 926,000 $ 922,000
Curiosity Creek Apts. - Phase I $2,425,000 3/98 $2,426,000 $2,552,000
Sunrise Apts. - Phase I $1,510,000 7/97(3) $1,361,500 $1,424,000
Baron Strategic Investment Fund VIII, Ltd.
Heatherwood Apts. - Phase II $1,285,000 6/97(3) $1,188,000 $1,259,000
Longwood Apts. - Phase I $1,820,000 7/97(3) $1,664,000 $1,788,000
The Villas at Lake Sycamore $14,312,000(1) 7/98 N/A N/A
Baron Strategic Vulture Fund I, Ltd.
Curiousity Creek Apts. - Phase I $2,425,000 3/98 $2,426,000 $2,552,000
Brevard Mortgage Program, Ltd.
Meadowdale Apts. $1,717,000 8/98 $1,636,000 $1,629,000
<CAPTION>
Replacement
EXCHANGE EQUITY PARTNERSHIPS Market Cost
(Property Securing Mortgages) Approach New Appraiser
- ---------------------------- -------- --------- ---------
<S> <C> <C> <C>
Baron Strategic Investment Fund, Ltd.
Blossom Corners Apts. - Phase II $ 2,160,000 $3,390,187 Consortium Appraisal, Inc.
The Villas at Lake Sycamore $14,312,000(1) $9,376,039(2) Strickland & Wright
Baron Strategic Investment Fund IV, Ltd.
Country Square Apts. - Phase I $2,090,000 $3,554,776 Consortium Appraisal, Inc.
Baron Strategic Investment Fund V, Ltd.
Candlewood Apts. - Phase II $ 932,000 $1,590,447 Consortium Appraisal, Inc.
Curiosity Creek Apts. - Phase I $2,297,000 $3,941,164 Consortium Appraisal, Inc.
Sunrise Apts. - Phase I $1,591,000 $2,700,611 Consortium Appraisal, Inc.
Baron Strategic Investment Fund VIII, Ltd.
Heatherwood Apts. - Phase II $1,312,000 $1,862,475 Consortium Appraisal, Inc.
Longwood Apts. - Phase I $1,844,000 $2,666,862 Consortium Appraisal, Inc.
The Villas at Lake Sycamore $14,312,000(1) $9,376,039(2) Strickland & Wright
Baron Strategic Vulture Fund I, Ltd.
Curiousity Creek Apts. - Phase I $2,297,000 $3,941,164 Consortium Appraisal, Inc.
Brevard Mortgage Program, Ltd.
Meadowdale Apts. $1,643,000 $3,094,043 Consortium Appraisal, Inc.
</TABLE>
- ----------
(1) Upon completion; $1,080,000 as is.
(2) Estimated construction cost.
(3) Revised in March 1998.
F-2
<PAGE>
<TABLE>
<CAPTION>
EXCHANGE EQUITY PARTNERSHIPS
(Equity Property Interest/ Appraised Date of Cost Income
Property Securing Mortgages) Value Appraisal Approach Approach
- ---------------------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Baron Strategic Investment Fund VI, Ltd.
Candlewood Apts. - Phase II $ 925,000 1/98 $ 926,000 $ 922,000
Country Square Apts. - Phase I $2,185,000 1/98 $2,185,000 $2,281,000
Garden Terrace Apts. - Phase III $1,850,000 5/98 $1,835,000 $1,782,000
Pineview Apts. $2,848,000 6/97(3) $2,533,000 $2,498,000
Baron Strategic Investment Fund IX, Ltd.
Candlewood Apts. - Phase II $ 925,000 6/98 $ 926,000 $ 922,000
Crystal Court Apts. - Phase I $2,040,000 6/98 $2,040,000 $2,034,000
Garden Terrace Apts. - Phase III $1,850,000 5/98 $1,835,000 $1,782,000
The Villas at Lake Sycamore $14,312,000(1) 7/98 N/A N/A
Baron Strategic Investment Fund X, Ltd.
Crystal Court Apts. - Phase I $2,040,000 6/98 $2,040,000 $2,034,000
Garden Terrace Apts. - Phase III $1,850,000 5/98 $1,835,000 $1,782,000
Heatherwood Apts. - Phase II $1,285,000 3/98 $1,188,000 $1,259,000
Pineview Apts. $2,848,000 6/97(3) $2,533,000 $2,498,000
Lamplight Court of Bellefontaine
Apartments, Ltd.
Lamplight Court Apts. $2,183,000 9/98 $2,295,000 $2,214,000
<CAPTION>
EXCHANGE EQUITY PARTNERSHIPS Replacement
(Equity Property Interest/ Market Cost
Property Securing Mortgages) Approach New Appraiser
- ---------------------------- -------- --------- ---------
<S> <C> <C> <C>
Baron Strategic Investment Fund VI, Ltd.
Candlewood Apts. - Phase II $ 932,000 $1,590,447 Consortium Appraisal, Inc.
Country Square Apts. - Phase I $2,090,000 $3,554,776 Consortium Appraisal, Inc.
Garden Terrace Apts. - Phase III $1,901,000 $4,297,897 Consortium Appraisal, Inc.
Pineview Apts. $2,572,000 $4,284,608 Consortium Appraisal, Inc.
Baron Strategic Investment Fund IX, Ltd.
Candlewood Apts. - Phase II $ 932,000 $1,590,447 Consortium Appraisal, Inc.
Crystal Court Apts. - Phase I $2,046,000 $3,482,928 Consortium Appraisal, Inc.
Garden Terrace Apts. - Phase III $1,901,000 $4,297,897 Consortium Appraisal, Inc.
The Villas at Lake Sycamore $14,312,000(1) $9,376,0392 Strickland & Wright
Baron Strategic Investment Fund X, Ltd.
Crystal Court Apts. - Phase I $2,046,000 $3,482,928 Consortium Appraisal, Inc.
Garden Terrace Apts. - Phase III $1,901,000 $4,297,897 Consortium Appraisal, Inc.
Heatherwood Apts. - Phase II $1,312,000 $1,862,475 Consortium Appraisal, Inc.
Pineview Apts. $2,572,000 $4,284,608 Consortium Appraisal, Inc.
Lamplight Court of Bellefontaine
Apartments, Ltd.
Lamplight Court Apts. $2,111,000 $3,727,599 Consortium Appraisal and
</TABLE>
- ----------
(1) Upon completion; $1,080,000 as is.
(2) Estimated construction cost.
(3) Revised in March 1998.
F-3
<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 ...............................................................
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 or Plan of Operation ................
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/Exchange Partnerships
E ... Financial Statements of the Acquired Properties
F ... Exchange Property Appraisal Values
BARON CAPITAL PROPERTIES, L.P.
------------
2,500,000 Units
of
Limited Partnership Interest
PROSPECTUS
_____________, 1999
------------
- --------------------------------------------------------------------------------
<PAGE>
Blossom Corners I
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,254,750 125,475 Units ($1,254,750) 105 Units ($1,050) 5.22%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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 partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath) 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
November 1, 1998 of approximately $1,026,732, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership
7
<PAGE>
Units to be offered in the Exchange Offering have not yet been finally
determined. In addition, as described in this Supplement and the
Prospectus, the Operating Partnership has acquired beneficial ownership of
four properties for cash, entered into an agreement to acquire two
properties under development and invested in other real estate limited
partnerships (including certain of the Exchange 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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of the property securing such indebtedness (without taking into account
the deficiencies of the existing improvements as compared to a new
building), which may significantly exceed the cost approach valuation, and
the debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,254,750. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Blossom Corners I)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,195,000
Cash and cash equivalent assets: $ 3,678
Other assets(1): $ 108,362
11/1/98 principal balance of mortgage financing secured by $1,026,732
property:
Other liabilities(2): $ 103,360
Valuation of the Partnership(3): $1,254,750
Aggregate number of Units offered to all Limited Partners in
the Partnership (dollar value)(4): 125,475 Units ($1,254,750)
Number of Units offered to each Limited Partner in the
Partnership per $1,000 of original investment (dollar
value)(4): 105 Units ($1,050)
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: 5.22%
Consideration paid by Original Investors for Units $100,000 capital contribution
subscribed for in connection with the formation of the Trust
and the Operating Partnership:
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$150,187. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $21,948 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
17
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1996: $ 77,039
1997: $114,988
1998 (through
September 30th): $ 39,000
--------
Total: $231,027 ($100 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 partners other than
pursuant to provisions of the agreement which set forth procedures for
20
<PAGE>
admission or pertain to transfers of limited partnership interests. In addition,
as a result of such amendments, the 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
Limited Partners. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately one year following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Brevard
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Brevard Mortgage Program, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XII, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$599,000 59,900 Units ($599,000) 104 Units ($1,040) 2.49%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 Brevard Mortgage Program, Ltd. and
the term "Exchange Partnerships" shall refer collectively to such partnership
and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
November 1995. In January 1996, Baron Capital XII, Inc., the partnership's
General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath), sponsored a private offering of 575
units of limited partner interest in the Exchange Partnership at a purchase
price of $1,000 per unit (gross proceeds of $575,000). The offering was fully
subscribed and closed in April 1996.
The Exchange Partnership invested the net proceeds of its offering to
provide or acquire three unrecorded second mortgage loans (the "Second Mortgage
Loans") secured by a residential apartment properties located in Melbourne,
Florida (Meadowdale Property). The Second Mortgage Loans are subordinate to
large-scale first mortgage financing and are non-recourse beyond the underlying
property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Methods" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have
7
<PAGE>
a deemed purchase price totaling approximately $24,022,880, comprised of
Operating Partnership Units to be issued. The property interests to be
acquired with the balance of the Operating Partnership Units to be offered
in the Exchange Offering have not yet been finally determined. In addition,
as described in this Supplement and the Prospectus, the Operating
Partnership has acquired beneficial ownership of four properties for cash,
entered into an agreement to acquire two properties under development and
invested in other real estate limited partnerships (including certain of
the Exchange 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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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
12
<PAGE>
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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $599,000. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Brevard)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Debt Interests Held:
Meadowdale Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest
in loans (accrued unpaid interest thereon): $1,048,861 ($116,742)
11/1/98 principal balance of first mortgage loan
secured by property: $ 963,343
Appraised replacement cost new of property: $3,084,043
Appraised value of property - income approach: $1,629,000
Total balance due on debt interests: $1,165,603
Total valuation of debt interests: $ 599,000
Discount applied to debt balance: 48.6%
Cash and cash equivalent assets: $ 104
Other assets: $ 0
Other liabilities: $ 19,750
Valuation of the Partnership(1): $ 599,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(2): 59,900 Units ($599,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(2): 104 Units ($1,040)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 2.49%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$67,500. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $12,844 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $ 2,806,104
Distributions: 0
Combined amount of As described in greater detail in the
compensation and distributions next paragraph, Mr. McGrath, an
that would have been paid by affiliate of the General Partner, has
the 23 Exchange Partnerships agreed to serve as Chief Executive
if the compensation and Officer of the Operating Partnership and
distributions structure to be the Trust in exchange for up to 25,000
in effect following the Common Shares of the Trust (amount to be
Exchange Offering had been in determined by the Executive Compensation
effect from inception of the Committee of the Trust) and health
partnerships through September benefits for the first year of
30, 1998: operations and thereafter in exchange
for compensation and benefits determined
annually by the committee. Mr. McGrath
would have received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all distributions) on
Units subscribed for by him in
connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
17
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1996: $ 34,572
1997: $ 57,500
1998 (through
September 30th): $ 43,125
--------
Total: $135,197 ($235 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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, Limited Partners and
the General Partner share distributable cash 99%/1%.
Allocation of Net Proceeds from Property Sale or Refinancing: Limited
Partners are entitled to 100% of net proceeds until the entire amount of the
second mortgage loans owned by the partnership have been repaid; the General
Partner is entitled to receive any remaining net proceeds.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials did not specify the
anticipated period that the Partnership intended to hold property interests
acquired.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
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
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner 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 would be that following the Exchange Offering, if
the partnership constitutes a Participating Exchange Partnership and has one or
more Non-participating Limited Partners, the General Partner may be removed only
if the Non-participating
25
<PAGE>
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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
26
<PAGE>
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $750.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Bridge Point
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$885,030 88,503 Units ($885,030) 105 Units ($1,050) 3.68%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $716,243, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of the property securing such indebtedness (without taking into account
the deficiencies of the existing improvements as compared to a new
building), which may significantly exceed the cost approach valuation, and
the debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $885,030. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Bridgepoint)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $1,610,000
Cash and cash equivalent assets: $(1,101)
Other assets(1): $78,903
11/1/98 principal balance of mortgage financing secured by $716,243
property:
Other liabilities(2): $64,590
Valuation of the Partnership(3): $885,030
Aggregate number of Units offered to all Limited Partners in
the Partnership (dollar value)(4): 88,503 Units ($885,030)
Number of Units offered to each Limited Partner in the
Partnership per $1,000 of original investment (dollar
value)(4): 105 Units ($1,050)
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: 3.68%
Consideration paid by Original Investors for Units $100,000 capital contribution
subscribed for in connection with the formation of the Trust
and the Operating Partnership:
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$109,276. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of $18,938 (9.5% of all distributions). The amount of
compensation the General Partner and its affiliates would have received for
managing the Exchange Partnership and other Exchange Partnerships is described
in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 22,482
1996: $ 79,867
1997: $ 80,000
1998 (through
September 30th): $ 17,000
--------
Total: $199,349 ($125 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 partners other than
pursuant to provisions of the agreement which set forth procedures for
20
<PAGE>
admission or pertain to transfers of limited partnership interests. In addition,
as a result of such amendments, the 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
Limited Partners of the partnership holding a majority of the then outstanding
units of the partnership held by all Non-participating Limited Partners. See the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately two years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Brookwood Way
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Midwest Income Growth Fund VI, Ltd.,
a Florida 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$305,130 30,513 Units ($305,130) 102 Units ($1,020) 1.27%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
June 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
November 1, 1998 of approximately $1,053,408, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $305,130. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
<TABLE>
<CAPTION>
(Brookwood Way)
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $1,780,000
Cash and cash equivalent assets: $70,753
Other assets(1): $240,172
11/1/98 principal balance of mortgage financing $1,053,408
secured by property:
Other liabilities(2): $336,269
Valuation of the Partnership(3): $305,130
Aggregate number of Units offered to all Limited Partners in
the Partnership (dollar value)(4): 30,513 Units ($305,130)
Number of Units offered to each Limited Partner in
the Partnership per $1,000 of original investment
(dollar value)(4): 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: 1.27%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of the
Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$59,799. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of $4,783 (9.5% of all distributions). The amount of
compensation the General Partner and its affiliates would have received for
managing the Exchange Partnership and other Exchange Partnerships is described
in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in the
distributions that would have been next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner, has
Partnerships if the compensation agreed to serve as Chief Executive
and distributions structure to be Officer of the Operating Partnership and
in effect following the Exchange the Trust in exchange for up to 25,000
Offering had been in effect from Common Shares of the Trust (amount to be
inception of the partnerships determined by the Executive Compensation
through September 30, 1998: Committee of the Trust) and health
benefits for the first year of
operations and thereafter in exchange
for compensation and benefits determined
annually by the committee. Mr. McGrath
would have received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all distributions) on
Units subscribed for by him in
connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1996: $ 5,547
1997: $29,799
1998 (through
September 30th): $15,000
-------
Total: $50,346 ($84 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Camellia Court
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$840,000 84,000 Units ($840,000) 105 Units ($1,050) 3.50%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 and Florida Opportunity Income
Partners, Ltd. the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $1,075,624, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $840,000. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Camellia Court)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $1,833,000
Cash and cash equivalent assets: $(7,296)
Other assets(1): $79,636
11/1/98 principal balance of mortgage financing secured by $1,075,624
property:
Other liabilities(2): $107,028
Valuation of the Partnership(3): $840,000
Aggregate number of Units offered to all Limited Partners in
the Partnership (dollar value)(4): 84,000 Units ($840,000)
Number of Units offered to each Limited Partner in the
Partnership per $1,000 of original investment (dollar
value)(4): 105 Units ($1,050)
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: 3.50%
Consideration paid by Original Investors for Units subscribed $100,000 capital contribution
for in connection with the formation of the Trust and the
Operating Partnership:
</TABLE>
- -------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$126,510. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $20,979 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
16
<PAGE>
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding Common Shares, calculated 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, each
Original Investor has agreed to return any excess Units to the Operating
Partnership for cancellation. As described further below, Mr. McGrath and Mr.
Geiger have deposited Units subscribed for by them into a security escrow
account for six to nine years, subject to earlier release under certain
conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating
17
<PAGE>
Partnership, caused the Exchange Partnerships to cancel the partnerships' prior
property management agreements and agreed to forego the right to have a property
management firm controlled by the Original Investors assume the property
management role in respect of properties in which the Trust or the Operating
Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 3,390
1996: $ 77,441
1997: $ 80,000
1998 (through
September 30th): $ 60,000
--------
Total: $220,831 ($276 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within 30 months following the commencement of the original offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Eagle Lake
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$886,890 88,689 Units ($886,890) 102 Units ($1,020) 3.69%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $1,443,015, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $886,890. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
<TABLE>
<CAPTION>
(Eagle Lake)
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,530,000
Cash and cash equivalent assets: $50,140
Other assets(1): $34,463
11/1/98 principal balance of mortgage financing $1,443,015
secured by property:
Other liabilities(2): $218,014
Valuation of the Partnership(3): $886,890
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 88,689 Units ($886,890)
Number of Units offered to each Limited Partner in the
Partnership per $1,000 of original investment (dollar
value)(4):
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: 3.69%
Consideration paid by Original Investors for Units $100,000 capital contribution
subscribed for in connection with the formation of the
Trust and the Operating Partnership:
</TABLE>
- -------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$135,473. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $22,084 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23 Exchange
Partnerships to their respective general
partner and its affiliates from
inception of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
17
<PAGE>
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding Common Shares, calculated 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, each
Original Investor has agreed to return any excess Units to the Operating
Partnership for cancellation. As described further below, Mr. McGrath and Mr.
Geiger have deposited Units subscribed for by them into a security escrow
account for six to nine years, subject to earlier release under certain
conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 56,059
1996: $ 80,700
1997: $ 80,700
1998 (through
September 30th): $ 15,000
--------
Total: $232,459 ($144 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Forest Glen I
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,171,690 117,169 Units ($1,171,690) 102 Units ($1,020) 4.88%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $1,783,075, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership
7
<PAGE>
Units to be issued. The property interests to be acquired with the balance
of the Operating Partnership Units to be offered in the Exchange Offering
have not yet been finally determined. In addition, as described in this
Supplement and the Prospectus, the Operating Partnership has acquired
beneficial ownership of four properties for cash, entered into an agreement
to acquire two properties under development and invested in other real
estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and debtor's
repayment history and current net equity interest in such property.
Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
transactions are expected to be completed by the Trust and the Operating
Partnership with Affiliates of the Managing Shareholder. See the Prospectus
at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) believes that
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,171,690. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
<TABLE>
<CAPTION>
(Forest Glen I)
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,990,820
Cash and cash equivalent assets: $30,077
Other assets(1): $460,578
11/1/98 principal balance of mortgage
financing secured by property: $1,783,075
Other liabilities(2): $578,391
Valuation of the Partnership(3): $1,171,690
Aggregate number of Units offered to all
Limited Partners in the Partnership (dollar
value)(4): 117,169 Units ($1,171,690)
Number of Units offered to each Limited
Partner in the Partnership per $1,000 of
original investment (dollar value)(4): 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: 4.88%
Consideration paid by Original Investors for $100,000 capital contribution
Units subscribed for in connection with the
formation of the Trust and the Operating
Partnership:
</TABLE>
- -------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$138,059. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $15,710 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
17
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 52,468
1996: $ 92,000
1997: $ 0
1998 (through
September 30th): $ 20,900
--------
Total: $165,368 ($83 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating
26
<PAGE>
Limited Partners of the 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Forest Glen II
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,111,080 111,108 Units ($1,111,080) 118 Units ($1,180) 4.63%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $1,030,840, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,111,080. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Forest Glen II)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,173,162
Cash and cash equivalent assets: $13,788
Other assets(1): $238,380
11/1/98 principal balance of mortgage
financing secured by property: $1,030,840
Other liabilities(2): $123,542
Valuation of the Partnership(3): $1,111,080
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 111,108 Units ($1,111,080)
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(4): 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: 4.63%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$128,609. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $18,259 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of As described in greater detail
compensation and distributions in the next paragraph, Mr.
that would have been paid by McGrath, an affiliate of the
the 23 Exchange Partnerships General Partner, has agreed to
if the compensation and serve as Chief Executive
distributions structure to be Officer of the Operating
in effect following the Partnership and the Trust in
Exchange Offering had been in exchange for up to 25,000
effect from inception of the Common Shares of the Trust
partnerships through September (amount to be determined by
30, 1998: the Executive Compensation
Committee of the Trust) and
health benefits for the first
year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would
have received distributions in
the aggregate amount of
approximately $380,528 (9.5%
of all distributions) on Units
subscribed for by him in
connection with the formation
of the Operating Partnership
and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 94,400
1996: $ 80,800
1997: $ 0
1998 (through
September 30th): $ 17,000
---------
Total: $ 192,200 ($204 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: The Exchange Partnership may issue additional securities
only if such issuance is approved by the General Partner and Limited Partners
holding at least a majority of the limited partnership interests.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, without the majority approval of the Non-participating Limited
Partners of the
20
<PAGE>
partnership voting as a class, the partnership will not be authorized to admit
any additional persons as limited partners 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 majority approval of Non-participating Limited Partners voting as a class is
required to approve the issuance of additional securities where the selling
price for such shares is not less than the approximate market value of the
units. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
Limited Partners. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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. Described below in this paragraph are the partnership
agreement provisions relating to the allocation of taxable income and loss.
Assuming that all distributions (including distributions required under the
special distribution provisions of the Code) required to be made have been made,
taxable income attributable to operations is allocable first to those partners
who have deficit balances in their capital accounts, in proportion to such
deficit balances, until the capital accounts have been restored to zero; and
then 90% to the Limited Partners and 10% to the General Partner. Taxable losses
attributable to operations are allocable 90% to the Limited Partners and 10% to
the General Partner. Taxable gain attributable to the sale of the partnership
property is allocable first to those partners who have deficit balances in their
capital accounts, in proportion to those deficit balances, until the capital
accounts are restored to zero, and then in accordance with the partners' capital
accounts. Taxable losses attributable to the sale of partnership
22
<PAGE>
property are allocable among the partners in proportion to the positive or
negative balances of their respective capital accounts; provided, however that,
in the event that some partners have positive capital account balances and other
partners have negative capital account balances, then such losses will be
allocated first to those partners who have positive capital account balances in
proportion to such positive balances until the capital account balances of such
partners have been reduced to zero, and then 90% to the Limited Partners and 10%
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 partnership agreement. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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).
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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.
24
<PAGE>
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 exceeds 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: The General Partner may be removed only on the condition
that (i) Limited Partners holding at least a majority of the limited partnership
interests vote to remove the General Partner and provide notice thereof to the
General Partner and (ii) the removed General Partner receives a written release
from the partnership and all of the Limited Partners which releases the General
Partner from any claims by them in respect of the partnership. In addition,
following removal, a removed general partner is entitled to retain its economic
interest in the partnership unless the partnership acquires such interest at a
25
<PAGE>
price determined by applying an 8% capitalization rate to the projected net
operating income of the partnership during the year of removal minus major
maintenance expenditures.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner 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 would be that following the Exchange Offering, if
the partnership constitutes a Participating Exchange Partnership and has one or
more Non-participating Limited Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
26
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
28
<PAGE>
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 against any loss,
liability or damage incurred by the General Partner arising out of the
management of the partnership's affairs, unless the General Partner's negligence
or misconduct caused the same; 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 the offering of
securities. The General Partner is not 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 the General Partner if the General Partner, in good faith,
determined that such course of conduct was in the best interests of the
partnership and did not constitute the negligence or misconduct of the General
Partner.
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
29
<PAGE>
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 entitled to earn a real estate
commission in an amount up to 6% of the proceeds from the sale of partnership
property, if permitted under applicable law. The Exchange Partnership pays the
General Partner a monthly administrative fee of $500.
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
30
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Forest Glen III
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,094,340 109,434 Units ($1,094,340) 101 Units ($1,010) 4.56%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $891,537, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership
7
<PAGE>
Units to be issued. The property interests to be acquired with the balance
of the Operating Partnership Units to be offered in the Exchange Offering
have not yet been finally determined. In addition, as described in this
Supplement and the Prospectus, the Operating Partnership has acquired
beneficial ownership of four properties for cash, entered into an agreement
to acquire two properties under development and invested in other real
estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
transactions are expected to be completed by the Trust and the Operating
Partnership with Affiliates of the Managing Shareholder. See the Prospectus
at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) believes that
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,094,340. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Forest Glen III)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $1,940,339
Cash and cash equivalent assets: $10,677
Other assets(1): $210,098
11/1/98 principal balance of mortgage financing
secured by property: $891,537
Other liabilities(2): $86,543
Valuation of the Partnership(3): $1,094,340
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 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)(4): 101 Units ($1,010)
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: 4.56%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$122,085. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $19,519 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of As described in greater detail
compensation and distributions in the next paragraph, Mr.
that would have been paid by McGrath, an affiliate of the
the 23 Exchange Partnerships General Partner, has agreed to
if the compensation and serve as Chief Executive
distributions structure to be Officer of the Operating
in effect following the Partnership and the Trust in
Exchange Offering had been in exchange for up to 25,000
effect from inception of the Common Shares of the Trust
partnerships through September (amount to be determined by
30, 1998: the Executive Compensation
Committee of the Trust) and
health benefits for the first
year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would
have received distributions in
the aggregate amount of
approximately $380,528 (9.5%
of all distributions) on Units
subscribed for by him in
connection with the formation
of the Operating Partnership
and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 94,000
1996: $ 82,500
1997: $ 0
1998 (through
September 30th): $ 28,959
---------
Total: $ 205,459 ($219 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: The Exchange Partnership may issue additional securities
only if such issuance is approved by the General Partner and Limited Partners
holding at least a majority of the limited partnership interests.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, without the majority approval of the Non-participating Limited
Partners of the
20
<PAGE>
partnership voting as a class, the partnership will not be authorized to admit
any additional persons as limited partners 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 majority approval of Non-participating Limited Partners voting as a class is
required to approve the issuance of additional securities where the selling
price for such shares is not less than the approximate market value of the
units. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
Limited Partners. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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. Described below in this paragraph are the partnership
agreement provisions relating to the allocation of taxable income and loss.
Assuming that all distributions (including distributions required under the
special distribution provisions of the Code) required to be made have been made,
taxable income attributable to operations is allocable first to those partners
who have deficit balances in their capital accounts, in proportion to such
deficit balances, until the capital accounts have been restored to zero; and
then 90% to the Limited Partners and 10% to the General Partner. Taxable losses
attributable to operations are allocable 90% to the Limited Partners and 10% to
the General Partner. Taxable gain attributable to the sale of the partnership
property is allocable first to those partners who have deficit balances in their
capital accounts, in proportion to those deficit balances, until the capital
accounts are restored to zero, and then in accordance with the partners' capital
accounts. Taxable losses attributable to the sale of partnership
22
<PAGE>
property are allocable among the partners in proportion to the positive or
negative balances of their respective capital accounts; provided, however that,
in the event that some partners have positive capital account balances and other
partners have negative capital account balances, then such losses will be
allocated first to those partners who have positive capital account balances in
proportion to such positive balances until the capital account balances of such
partners have been reduced to zero, and then 90% to the Limited Partners and 10%
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 partnership agreement. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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).
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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.
24
<PAGE>
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 exceeds 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: The General Partner may be removed only on the condition
that (i) Limited Partners holding at least a majority of the limited partnership
interests vote to remove the General Partner and provide notice thereof to the
General Partner and (ii) the removed General Partner receives a written release
from the partnership and all of the Limited Partners which releases the General
Partner from any claims by them in respect of the partnership. In addition,
following removal, a removed general partner is entitled to retain its economic
interest in the partnership unless the partnership acquires such interest at a
25
<PAGE>
price determined by applying an 8% capitalization rate to the projected net
operating income of the partnership during the year of removal minus major
maintenance expenditures.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner 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 would be that following the Exchange Offering, if
the partnership constitutes a Participating Exchange Partnership and has one or
more Non-participating Limited Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
26
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
28
<PAGE>
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 against any loss,
liability or damage incurred by the General Partner arising out of the
management of the partnership's affairs, unless the General Partner's negligence
or misconduct caused the same; 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 the offering of
securities. The General Partner is not 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 the General Partner if the General Partner, in good faith,
determined that such course of conduct was in the best interests of the
partnership and did not constitute the negligence or misconduct of the General
Partner.
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
29
<PAGE>
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 entitled to earn a real estate
commission in an amount up to 6% of the proceeds from the sale of partnership
property, if permitted under applicable law. The Exchange Partnership pays the
General Partner a monthly administrative fee of $500.
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
30
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Forest Glen IV
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$237,780 23,778 Units ($237,780) 116 Units ($1,160) .99%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $274,625, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have
7
<PAGE>
a deemed purchase price totaling approximately $24,022,880, comprised of
Operating Partnership Units to be issued. The property interests to be
acquired with the balance of the Operating Partnership Units to be offered
in the Exchange Offering have not yet been finally determined. In addition,
as described in this Supplement and the Prospectus, the Operating
Partnership has acquired beneficial ownership of four properties for cash,
entered into an agreement to acquire two properties under development and
invested in other real estate limited partnerships (including certain of
the Exchange 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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) believes that
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $237,780. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Forest Glen IV)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $471,679
Cash and cash equivalent assets: $570
Other assets(1): $77,842
11/1/98 principal balance of mortgage financing
secured by property: $274,625
Other liabilities(2): $168,424
Valuation of the Partnership(3): $237,780
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 23,778 Units ($237,780)
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(4): 101 Units ($1,010)
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: .99%
Consideration paid by Original Investors for Units subscribed
for in connection with the formation of the Trust and the
Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$35,723. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $4,130 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of As described in greater detail
compensation and distributions in the next paragraph, Mr.
that would have been paid by McGrath, an affiliate of the
the 23 Exchange Partnerships General Partner, has agreed to
if the compensation and serve as Chief Executive
distributions structure to be Officer of the Operating
in effect following the Partnership and the Trust in
Exchange Offering had been in exchange for up to 25,000
effect from inception of the Common Shares of the Trust
partnerships through September (amount to be determined by
30, 1998: the Executive Compensation
Committee of the Trust) and
health benefits for the first
year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would
have received distributions in
the aggregate amount of
approximately $380,528 (9.5%
of all distributions) on Units
subscribed for by him in
connection with the formation
of the Operating Partnership
and the Trust.
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) each subscribed
for 601,080 Units. INSERT If the Cash Offering and the Exchange Offering are
fully subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding
17
<PAGE>
Common Shares, calculated 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, each Original Investor has agreed to
return any excess Units to the Operating Partnership for cancellation. As
described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 20,500
1996: $ 19,375
1997: $ 0
1998 (through
September 30th): $ 3,600
---------
Total: $ 43,475 ($212 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: The Exchange Partnership may issue additional securities
only if such issuance is approved by the General Partner and Limited Partners
holding at least a majority of the limited partnership interests.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, without the majority approval of the Non-participating Limited
Partners of the
20
<PAGE>
partnership voting as a class, the partnership will not be authorized to admit
any additional persons as limited partners 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 majority approval of Non-participating Limited Partners voting as a class is
required to approve the issuance of additional securities where the selling
price for such shares is not less than the approximate market value of the
units. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
Limited Partners. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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. Described below in this paragraph are the partnership
agreement provisions relating to the allocation of taxable income and loss.
Assuming that all distributions (including distributions required under the
special distribution provisions of the Code) required to be made have been made,
taxable income attributable to operations is allocable first to those partners
who have deficit balances in their capital accounts, in proportion to such
deficit balances, until the capital accounts have been restored to zero; and
then 90% to the Limited Partners and 10% to the General Partner. Taxable losses
attributable to operations are allocable 90% to the Limited Partners and 10% to
the General Partner. Taxable gain attributable to the sale of the partnership
property is allocable first to those partners who have deficit balances in their
capital accounts, in proportion to those deficit balances, until the capital
accounts are restored to zero, and then in accordance with the partners' capital
accounts. Taxable losses attributable to the sale of partnership
22
<PAGE>
property are allocable among the partners in proportion to the positive or
negative balances of their respective capital accounts; provided, however that,
in the event that some partners have positive capital account balances and other
partners have negative capital account balances, then such losses will be
allocated first to those partners who have positive capital account balances in
proportion to such positive balances until the capital account balances of such
partners have been reduced to zero, and then 90% to the Limited Partners and 10%
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 partnership agreement. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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).
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately 32 months following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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.
24
<PAGE>
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 exceeds 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: The General Partner may be removed only on the condition
that (i) Limited Partners holding at least a majority of the limited partnership
interests vote to remove the General Partner and provide notice thereof to the
General Partner and (ii) the removed General Partner receives a written release
from the partnership and all of the Limited Partners which releases the General
Partner from any claims by them in respect of the partnership. In addition,
following removal, a removed general partner is entitled to retain its economic
interest in the partnership unless the partnership acquires such interest at a
25
<PAGE>
price determined by applying an 8% capitalization rate to the projected net
operating income of the partnership during the year of removal minus major
maintenance expenditures.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner 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 would be that following the Exchange Offering, if
the partnership constitutes a Participating Exchange Partnership and has one or
more Non-participating Limited Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
26
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
28
<PAGE>
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 against any loss,
liability or damage incurred by the General Partner arising out of the
management of the partnership's affairs, unless the General Partner's negligence
or misconduct caused the same; 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 the offering of
securities. The General Partner is not 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 the General Partner if the General Partner, in good faith,
determined that such course of conduct was in the best interests of the
partnership and did not constitute the negligence or misconduct of the General
Partner.
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
29
<PAGE>
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 entitled to earn a real estate
commission in an amount up to 6% of the proceeds from the sale of partnership
property, if permitted under applicable law. The Exchange Partnership pays the
General Partner a monthly administrative fee of $500.
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
30
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Glen Lake
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$2,270,600 227,060 Units ($2,270,600) 123 Units ($1,230) 9.45%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $2,709,330, 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 $356,993, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have
7
<PAGE>
a deemed purchase price totaling approximately $24,022,880, comprised of
Operating Partnership Units to be issued. The property interests to be
acquired with the balance of the Operating Partnership Units to be offered
in the Exchange Offering have not yet been finally determined. In addition,
as described in this Supplement and the Prospectus, the Operating
Partnership has acquired beneficial ownership of four properties for cash,
entered into an agreement to acquire two properties under development and
invested in other real estate limited partnerships (including certain of
the Exchange 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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) believes that
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $2,270,600. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Glen Lake)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $6,483,079
Cash and cash equivalent assets: $(14,915)
Other assets(1): $124,984
11/1/98 principal balance of mortgage financing $3,066,323
secured by property:
Other liabilities(2): $696,874
Valuation of the Partnership(3): $2,270,600
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 227,060 Units ($2,270,600)
Number of Units offered to each Limited Partner in
the Partnership per $1,000 of original investment
(dollar value)(4): 123 Units ($1,230)
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: 9.45%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- -------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$265,115. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $44,379 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding Common Shares, calculated 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
17
<PAGE>
of Common Shares, each Original Investor has agreed to return any excess Units
to the Operating Partnership for cancellation. As described further below, Mr.
McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1995: $ 676
1996: $149,240
1997: $180,233
1998 (through
September 30th): $137,000
--------
Total: $467,149 ($128 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately two years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Lamplight
(Exchange Hybrid)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$780,980 78,098 Units ($780,980) 112 Units ($1,120) 3.25%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of
factors, including, among others, the estimated appraised market value and
operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent
of its mortgage interests in properties and other debt interests, takes
into account the current principal balance of the debt interests held by
the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E in the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), 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 Exchange Partnership invested the net proceeds of its offering (i) to
acquire a 31.7% limited partnership interest in a limited partnership which
holds fee simple title to a residential apartment property located in
Bellefontaine, Ohio (Lamplight Property), and (ii) to provide or acquire an
undivided interest in two unrecorded second mortgage loans secured by the
Lamplight Property. The second mortgage loans are subordinate to large-scale
first mortgage financing and are non-recourse beyond the underlying property
and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the direct and indirect equity and debt interests it holds,
first mortgage financing to which the mortgage interests are subordinated, and
the estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Methods" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the Operating Partnership will seek to acquire. The Trust and
the Operating Partnership may be restricted
8
<PAGE>
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
the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity
10
<PAGE>
interests in properties, and the appreciation of the properties since such
purchase. As a result, the return on investment of the Exchange
Partnerships based on the initial assigned value of the Units offered for
limited partnership interests in such partnerships will be less than the
return on investment of the partnerships based on their respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Hybrid Partnership) has
been estimated at $780,980. The valuation of the partnership, to the extent of
its direct or indirect equity interest in a property, takes into account a
number of factors, including, among others, the estimated appraised market value
and operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent of its mortgage
interests in properties and other debt interests, takes into account the current
principal balance of the debt interests held by the Exchange Partnership, the
replacement cost new of property securing such indebtedness determined by an
independent appraiser and the debtor's repayment history and current net equity
interest in such property. 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 the same factors as they relate to the respective partnerships.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of equity and debt interests
held by the partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying properties, (iii) the independently
appraised value of property in which the partnership directly or indirectly owns
an equity interest and the replacement cost new of property in which the
partnership owns a mortgage interest and the independently appraised value of
such property under the income approach, (iv) other assets and liabilities of
the partnership and (v) the valuation of Units to be offered to the Limited
Partners in the Exchange Offering.
15
<PAGE>
(Lamplight)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Equity Interest Held:
Lamplight Property:
Appraised value of property (31.7% of such
amount, representing the Exchange
Partnership's interest): $2,183,000 ($692,011)
11/1/98 principal balance of first mortgage loan
secured by property (31.7% of such amount): $1,368,976 ($433,965)
11/1/98 principal balance of second mortgage
loans secured by property and accrued unpaid
interest thereon (31.7% of such amount): $ 678,302 ($215,022)
Valuation of Equity Interest: $ 43,024
Valuation of Debt Interests Held:
Lamplight Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest
in loans (accrued unpaid interest thereon): $ 678,302 ($114,171)
11/1/98 principal balance of first mortgage loan
secured by property: $1,368,976
Appraised replacement cost new of property: $3,727,598
Appraised value of property - income approach: $2,183,000
Total balance due on debt interests: $ 792,473
Total debt balance plus valuation of
equity interests: $ 835,497
Total valuation of debt and equity
interests: $ 780,980
Discount applied to total debt balance
and valuation of equity interest: 6.5%
Cash and cash equivalent assets: $ 38
Other assets: $ 0
Other liabilities: $ 10,500
Valuation of the Partnership(1): $ 780,980
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(2): 78,098 Units ($780,980)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(2): 112 Units ($1,120)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation
to the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 3.25%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of factors,
including, among others, the estimated appraised market value and operating
history of the property, the current principal balance of first mortgage and
other indebtedness to which the property is subject, 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 valuation
of the Exchange Partnership, to the extent of its mortgage interests in
properties and other debt interests, takes into account the current principal
balance of the debt interests held by the Exchange Partnership, the replacement
cost new of property securing such indebtedness determined by an independent
appraiser and the debtor's repayment history and current net equity interest in
such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$95,172. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $12,228 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of As described in greater detail
compensation and distributions in the next paragraph, Mr.
that would have been paid by McGrath, an affiliate of the
the 23 Exchange Partnerships General Partner, has agreed to
if the compensation and serve as Chief Executive
distributions structure to be Officer of the Operating
in effect following the Partnership and the Trust in
Exchange Offering had been in exchange for up to 25,000
effect from inception of the Common Shares of the Trust
partnerships through September (amount to be determined by
30, 1998: the Executive Compensation
Committee of the Trust) and
health benefits for the first
year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would
have received distributions in
the aggregate amount of
approximately $380,528 (9.5%
of all distributions) on Units
subscribed for by him in
connection with the formation
of the Operating Partnership
and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1996: $ 16,593
1997: $ 69,525
1998 (through
September 30th): $ 42,600
--------
Total: $128,718 ($184 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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 any remaining distributable cash during the fiscal
year.
Allocation of Net Proceeds from Property Sale or Refinancing: All net proceeds
are allocated to the Limited Partners until the entire principal amount of the
Lamplight Second Mortgage Loans has been repaid; then 31.7% of up to $350,000 of
any remaining net proceeds to the Limited Partners; and any balance to the
General Partner.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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.
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials did not specify the
anticipated period that the Partnership intended to hold property interests
acquired.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
26
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
27
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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.
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
29
<PAGE>
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.
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,
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately
31
<PAGE>
following the completion of the Exchange Offering the partnership has one or
more Non-participating Limited Partners, the 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
Laurel Oaks
(formerly Grove Hamlet)
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Central Florida Income Appreciation Fund, Ltd.,
a Florida 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,252,750 125,275 Units ($1,252,750) 101 Units ($1,010) 5.21%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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 Ohio III, 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
November 30, 1998 of approximately $1,306,124, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
o Any Offeree who is a limited partner of an Exchange his or her limited
partnership interest in his or her respective Exchange Partnership on
substantially the same terms and conditions as his or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,252,750. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Laurel Oaks)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,881,000
Cash and cash equivalent assets: $25,773
Other assets(1): $19,121
11/1/98 principal balance of mortgage financing
secured by property: $1,306,124
Other liabilities(2): $485,373
Valuation of the Partnership(3): $1,252,750
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 125,275 Units ($1,252,750)
Number of Units offered to each Limited Partner in
the Partnership per $1,000 of original investment
(dollar value)(4): 101 Units ($1,010)
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: 5.21%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of the
Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- -------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$173,616. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $17,675 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
---------
1995: $ 78,750
1996: $105,000
1997: $ 0
1998 (through
September 30th): $ 2,300
--------
Total: $186,050 ($89 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately 30 months following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $750.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Stadium Club
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,050,000 105,000 Units ($1,050,000) 117 Units ($1,170) 4.37%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 1, 1998 of approximately $1,728,653, 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 set forth in the exhibit attached hereto. Also see the
tables relating to all of the Exchange Partnerships set forth in the Prospectus
at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
7
<PAGE>
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $1,050,000. 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, each of the other Exchange Equity
Partnerships and each of the Exchange Hybrid Partnerships (to the extent of
their direct or indirect equity interests in properties) 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 current principal balance of first mortgage and other indebtedness to which
the property is subject, 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 number of Units being offered in
respect of each of the Exchange Mortgage Partnerships and Exchange Hybrid
Partnerships (to the extent of their mortgage interests in properties and other
debt interests) differs based upon the current principal balance of the
respective debt interest held, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Stadium Club)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $2,800,000
Cash and cash equivalent assets: $(7)
Other assets(1): $38,994
11/1/98 principal balance of mortgage financing
secured by property: $1,728,653
Other liabilities(2): $183,215
Valuation of the Partnership(3): $1,050,000
Aggregate number of Units offered to all Limited
Partners in the Partnership (dollar value)(4): 105,000 Units ($1,050,000)
Number of Units offered to each Limited Partner
in the Partnership per $1,000 of original
investment (dollar value)(4): 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: 4.37%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$151,980. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $36,572 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of As described in greater detail
compensation and distributions in the next paragraph, Mr.
that would have been paid by McGrath, an affiliate of the
the 23 Exchange Partnerships General Partner, has agreed to
if the compensation and serve as Chief Executive
distributions structure to be Officer of the Operating
in effect following the Partnership and the Trust in
Exchange Offering had been in exchange for up to 25,000
effect from inception of the Common Shares of the Trust
partnerships through September (amount to be determined by
30, 1998: the Executive Compensation
Committee of the Trust) and
health benefits for the first
year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would
have received distributions in
the aggregate amount of
approximately $380,528 (9.5%
of all distributions) on Units
subscribed for by him in
connection with the formation
of the Operating Partnership
and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
17
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
---------
1995 $ 25,000
1996: $ 84,961
1997: $ 203,105
1998 (through
September 30th): $ 71,904
---------
Total: $ 384,970 ($192 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list the property interests on the market for sale
within approximately three years following the commencement of the original
offering.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Steeplechase
(Exchange Equity)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund II, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$876,060 87,606 Units ($876,060) 102 Units ($1,020) 3.65%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests 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").
3
<PAGE>
The commencement of the Exchange Offering in respect of the Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Method." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to be acquired with the balance of the
registered Units to be offered in the Exchange Offering have not yet been
finally determined.
4
<PAGE>
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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
In July 1998, the Operating Partnership also made capital contributions in
the range of $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
6
<PAGE>
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
November 30, 1998 of approximately $1,260,000, 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 set forth in the exhibit attached hereto. Also see
the tables relating to all of the Exchange Partnerships set forth in the
Prospectus at "Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership
7
<PAGE>
Units to be offered in the Exchange Offering have not yet been finally
determined. In addition, as described in this Supplement and the
Prospectus, the Operating Partnership has acquired beneficial ownership of
four properties for cash, entered into an agreement to acquire two
properties under development and invested in other real estate limited
partnerships (including certain of the Exchange 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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
the Managing Shareholder. See the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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.
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective book value.
10
<PAGE>
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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
12
<PAGE>
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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Equity Partnership) has
been estimated at $876,060. 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, each of the other Exchange Equity Partnerships and
each of the Exchange Hybrid Partnerships (to the extent of their direct or
indirect equity interests in properties) 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 current
principal balance of first mortgage and other indebtedness to which the property
is subject, 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 number of Units being offered in respect of
each of the Exchange Mortgage Partnerships and Exchange Hybrid Partnerships (to
the extent of their mortgage interests in properties and other debt interests)
differs based upon the current principal balance of the respective debt interest
held, the replacement cost new of property securing such indebtedness determined
by an independent appraiser and the debtor's repayment history and current net
equity interest in such property.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 principal
balance as of November 1, 1998 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:
15
<PAGE>
(Steeplechase)
<TABLE>
<CAPTION>
Valuation of Exchange Partnership
<S> <C>
Appraised value of property interests: $1,690,000
Cash and cash equivalent assets: $23,693
Other assets(1): $18,571
11/1/98 principal balance of mortgage financing $1,260,000
secured by property:
Other liabilities(2): $184,175
Valuation of the Partnership(3): $876,060
Aggregate number of Units offered to all Limited Partners in
the Partnership (dollar value)(4): 87,606 Units ($876,060)
Number of Units offered to each Limited Partner in the
Partnership per $1,000 of original investment (dollar
value)(4): 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: 3.65%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of the Trust
and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Comprised of mortgage escrow account balance held by first mortgage lender
to cover taxes, insurance, maintenance and repair reserves and other items,
and other miscellaneous assets.
(2) Comprised of security deposits payable, accounts payable to vendors, notes
or advances payable to third parties (including affiliates) and accrued
expenses (such as real estate taxes).
(3) Takes into account the appraised market value of the Exchange Partnership's
interest in residential apartment property, the current principal balance
of first mortgage and other indebtedness to which property interest is
subject and other considerations discussed below at "Valuation Method."
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$100,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $9,704 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has
17
<PAGE>
been completed and the number of Units subscribed for by each Original Investor
represents a percentage greater than 9.5% of the then outstanding Common Shares,
calculated 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, each Original Investor has agreed to return any excess
Units to the Operating Partnership for cancellation. As described further below,
Mr. McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1996: $ 2,942
1997: $ 79,601
1998 (through
September 30th): $ 19,600
--------
Total: $102,143 ($64 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS ."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials did not specify an
anticipated holding period for property interests acquired by the Exchange
Partnership.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
25
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
26
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Strategic I
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XXXII, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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>
- ---------------------------------------------------------------------------------------------------------------------
TABLE OF EXCHANGE VALUES
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units offered to Percentage of Units offered to
Exchange offered to all Limited each Limited Partner per Limited Partners in the Exchange
Partnership(1) Partners in the Exchange $1,000 of original Partnership in relation to Units
Partnership (dollar investment (dollar value)(2) offered to limited partners in
value)(2) all partnerships participating in
the initial transactions of the
Exchange Offering
<S> <C> <C> <C>
$959,000 95,900 Units ($959,000) 104 Units ($1,040) 3.99%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property. See "Valuation
Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 June 1996, Baron Capital XXXII, Inc., the partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), sponsored a private offering of 2,400 units of limited
partner interest in the Exchange Partnership at a purchase price of $500 per
unit (gross proceeds of $1,200,000). The offering was fully subscribed and
closed in December 1996.
The Exchange Partnership invested the net proceeds of its offering to
acquire or provide (1) three unrecorded second mortgage loans secured by the
Blossom Corners Property (Phase II) and (2) an unrecorded second mortgage loan
secured by the Lake Sycamore Property under development (the "Second Mortgage
Loans"). The second mortgage loans are subordinate to large-scale first mortgage
financing and are non-recourse beyond the underlying property and/or other
assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Method" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the Operating Partnership will seek to acquire. The Trust and
the Operating Partnership may be restricted
8
<PAGE>
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
the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity
10
<PAGE>
interests in properties, and the appreciation of the properties since such
purchase. As a result, the return on investment of the Exchange
Partnerships based on the initial assigned value of the Units offered for
limited partnership interests in such partnerships will be less than the
return on investment of the partnerships based on their respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $959,000. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Strategic I)
Valuation of Exchange Partnership
<TABLE>
<S> <C> <C>
Valuation of Debt Interests Held:
Blossom Corners Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in loans
(accrued unpaid interest thereon): $ 850,966 ($15,766)
12/31/98 principal balance of first mortgage loan
secured by property $ 1,106,894
Appraised replacement cost new of property $ 3,390,187
Appraised value of property - income approach $ 2,322,000
Sycamore Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in
loan (accrued unpaid interest thereon): $ 230,000 ($20,700)
12/31/98 aggregate principal balance of other
second mortgage loans secured by property
which are owned by other Exchange
Partnerships (accrued unpaid interest thereon): $ 341,500 ($31,715)
11/1/98 principal balance of first mortgage loan
secured by property: $ 800,000; approved maximum $2,000,000
Appraised replacement cost new of property
(under development): $ 9,376,039
Appraised value of property:
"As is" value: $ 1,080,000
Prospective market value: $14,312,000 (assuming completion of project as
planned, full rent up and satisfactory
environmental-quality test)
Total balance due on debt interests: $1,117,432
Total valuation of debt interests: $ 959,000
Discount applied to debt balance: 14.2%
Cash and cash equivalent assets: $ 21,679
Other assets: $ 0
Other liabilities: $ 9,500
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Valuation of the Partnership(1): $ 959,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
Value)(2): 95,900 Units ($959,000)
Number of Units offered to each Limited Partner in
The Exchange Partnership per $1,000 of original
Investment (dollar value)(2): 104 Units ($1,040)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
The maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 3.99%
Consideration paid by Original Investors for Units
Subscribed for in connection with the formation of
The Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$140,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $16,962 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in the
distributions that would have been next paragraph, Mr. McGrath, an
paid by the 23 Exchange Partnerships affiliate of the General Partner, has
if the compensation and distributions agreed to serve as Chief Executive
structure to be in effect following Officer of the Operating Partnership and
the Exchange Offering had been in the Trust in exchange for up to 25,000
effect from inception of the Common Shares of the Trust (amount to be
partnerships through September 30, determined by the Executive Compensation
1998: Committee of the Trust) and health
benefits for the first year of
operations and thereafter in exchange
for compensation and benefits determined
annually by the committee. Mr. McGrath
would have received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all distributions) on
Units subscribed for by him in
connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1996: $ 8,884
1997: $112,664
1998 (through
September 30th): $ 57,000
---------
Total: $178,548 ($74 per Exchange Partnership Unit
outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials did not specify the
anticipated period that the Partnership intended to hold property interests
acquired.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
26
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
27
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
29
<PAGE>
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.
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.
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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
31
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
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.
33
<PAGE>
Strategic IV
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund IV, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XVII, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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,
holders of Units in the Operating Partnership (individually, a
"Unitholder" and collectively, the "Unitholders") and Limited Partners of
the Exchange Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations.
Offerees should note, however, that appraisals 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 property
interests acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
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>
$1,306,800 130,680 Units ($1,306,800) 103 Units ($1,030) 5.44%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property. See "Valuation
Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 IV,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
October 1996. In November 1996, Baron Capital XVII, Inc., the partnership's
General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath), 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 April 1997.
The Exchange Partnership invested the net proceeds of its offering to
provide or acquire two unrecorded second mortgage loans (the "Second Mortgage
Loans") secured by the Country Square Property - Phase I. The Second Mortgage
Loans are subordinate to large-scale first mortgage financing and are
non-recourse beyond the underlying property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Method" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership
7
<PAGE>
Units to be issued. The property interests to be acquired with the balance
of the Operating Partnership Units to be offered in the Exchange Offering
have not yet been finally determined. In addition, as described in this
Supplement and the Prospectus, the Operating Partnership has acquired
beneficial ownership of four properties for cash, entered into an
agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner
of each of the Exchange Partnerships, by Mr. McGrath) and collectively
will own an amount of Operating Partnership Units (up to 1,202,160 Units)
which are exchangeable (subject to escrow restrictions described below)
into 19% of the Trust Common Shares outstanding as of the earlier to occur
of the completion of the Cash Offering and the Exchange Offering or May
14, 1999, calculated 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 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 in the Prospectus 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 below at "Compensation" and the
Prospectus at "MANAGEMENT" and "THE TRUST AND THE OPERATING PARTNERSHIP -
Formation Transactions" and " - Ownership of the Trust and the Operating
Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
transactions are expected to be completed by the Trust and the Operating
Partnership with Affiliates of the Managing Shareholder. See the
Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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
below at "Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution
of Offerees who elect to accept this Exchange Offering and Shareholders of
the Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than
the $24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be
less than the return on investment of the partnerships based on their
respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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
12
<PAGE>
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 (wholly owned and controlled, along with the Managing Shareholder
of the Trust, by Mr. McGrath) 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.
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 (wholly owned and controlled, along with the
general partner of each of the Exchange Partnerships, by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $1,306,800. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of any
Exchange Partnership if limited partners holding more than 10% of the
limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Strategic IV)
Valuation of Exchange Partnership
<TABLE>
<S> <C> <C>
Valuation of Debt Interests Held:
Country Square Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in loans
(accrued unpaid interest thereon)(1): $1,364,549 ($141,226)
11/1/98 principal balance of first mortgage loan
secured by property: $1,592,633
Appraised replacement cost new of property: $3,554,776
Appraised value of property - income approach: $2,281,000
Total balance due on debt interests (net of
note payable by Exchange Partnership)(1): $1,217,543
Total valuation of debt interests: $1,306,800
Premium over debt balance: 7.3%
Cash and cash equivalent assets: $ 875
Other assets: $ 0
Other liabilities:(1) $ 327,786
Valuation of the Partnership(2): $1,306,800
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)2: 130,680 Units ($1,306,800)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(3): 103 Units($1,030)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.44%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) In March 1997, the Exchange Partnership received a loan with a current
principal balance of $254,267 (with accrued unpaid interest of $33,965) from
another Exchange Partnership, Baron Strategic Investment Fund VI, Ltd. ("Baron
Fund VI"). The Exchange Partnership, in turn, lent the loan proceeds to the
borrower as part of the Country Square Second Mortgage Loans. The Baron Fund VI
loan bears interest at the rate of 15%, payable monthly, matures in 9/02 and is
secured by the Exchange Partnership's interest in two second mortgage notes and
a second mortgage. The remaining liabilities represent administrative fees
payable to the general partner and accrued syndication costs.
(2) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(3) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$90,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $8,944 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $ 2,806,104
Distributions: 0
Combined amount of As described in greater detail in the next
compensation and distributions paragraph, Mr. McGrath, an affiliate of the
that would have been paid by General Partner, has agreed to serve as Chief
the 23 Exchange Partnerships Executive Officer of the Operating
if the compensation and Partnership and the Trust in exchange for up
distributions structure to be to 25,000 Common Shares of the Trust (amount
in effect following the to be determined by the Executive
Exchange Offering had been in Compensation Committee of the Trust) and
effect from inception of the health benefits for the first year of
partnerships through September operations and thereafter in exchange for
30, 1998: compensation and benefits determined annually
by the committee. Mr. McGrath would have
received distributions in the aggregate
amount of approximately $380,528 (9.5% of all
distributions) on Units subscribed for by him
in connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
17
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
1997: $ 27,130
1998 (through
September 30th): $ 67,013
---------
Total: $ 94,143 ($47 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
25
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
26
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
28
<PAGE>
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.
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.
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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
30
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<PAGE>
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.
32
<PAGE>
Strategic V
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund V, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XL, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,246,000 124,600 Units ($1,246,000) 104 Units ($1,040) 5.19%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 V,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
October 1996. In November 1996, Baron Capital XL, Inc., the partnership's
General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath), sponsored a private offering of 2,400
units of limited partner interest in the Exchange Partnership at a purchase
price of $500 per unit (gross proceeds of $1,200,000). The offering was fully
subscribed and closed in June 1997.
The Exchange Partnership invested the net proceeds of its offering to
provide or acquire undivided interests in 10 unrecorded second mortgage loans
(the "Second Mortgage Loans") secured by residential apartment properties
located in Tampa, Florida (Candlewood Property and Curiosity Creek Property) and
Titusville, Florida (Sunrise Property). The Second Mortgage Loans are
subordinate to large-scale first mortgage financing and are non-recourse beyond
the underlying property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Method" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the Operating Partnership will seek to acquire. The Trust and
the Operating Partnership may be restricted
8
<PAGE>
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
the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity
10
<PAGE>
interests in properties, and the appreciation of the properties since such
purchase. As a result, the return on investment of the Exchange
Partnerships based on the initial assigned value of the Units offered for
limited partnership interests in such partnerships will be less than the
return on investment of the partnerships based on their respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $1,246,000. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Strategic V)
Valuation of Exchange Partnership
<TABLE>
<S> <C> <C>
Valuation of Debt Interests Held:
Candlewood Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in loan
(accrued unpaid interest thereon): $ 21,000 ($1,890)
12/31/98 aggregate principal balance of other
second mortgage loans secured by property and
owned by other Exchange Partnerships
(accrued unpaid interest thereon): $ 143,500 ($10,045)
11/1/98 principal balance of first mortgage loan
secured by property (12.8% of such amount,
representing the percentage of the current
principal balance of the Exchange Partnership's
second mortgage loan in relation to the
aggregate principal balance of all second
mortgage loans secured by property): $ 596,528 ($76,356)
Appraised replacement cost new of property
(12.8% of such amount): $ 1,590,447 ($203,577)
Appraised value of property - income approach
(12.8% of such amount): $ 922,000 ($118,016)
Curiosity Creek Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 26.3% interest in three
loans and undivided 100% interest in one loan
(accrued unpaid interest thereon): $ 365,804 ($22,998)
12/31/98 principal balance of other Exchange
Partnerships' undivided 73.7% interest in three
loans and undivided 100% interest in one loan
(accrued unpaid interest thereon): $ 938,440 ($74,650)
11/1/98 principal balance of first mortgage loan
secured by property (26.3% of such amount): $ 1,294,866 ($340,550)
Appraised replacement cost new of property
(26.3% of such amount): $ 3,941,164 ($1,036,526)
Appraised value of property - income approach
(26.3% of such amount): $ 2,552,000 ($671,176)
Sunrise Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in
loans (accrued unpaid interest thereon): $ 1,031,801 ($29,678)
11/1/98 principal balance of first mortgage loan
secured by property: $ 1,029,898
Appraised replacement cost new of property: $ 2,700,611
Appraised value of property - income approach: $ 1,424,000
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Total balance due on debt interests: $ 1,473,171
Total valuation of debt interests: $ 1,246,000
Discount applied to debt balance: 15.4%
Cash and cash equivalent assets: $ 20,987
Other assets: $ 0
Other liabilities: $ 13,500
Valuation of the Partnership(1): $ 1,246,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(2): 124,600 Units ($1,246,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(2): 104 Units ($1,040)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.19%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$120,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $14,522 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $ 2,806,104
Distributions: 0
Combined amount of As described in greater detail in the
compensation and distributions next paragraph, Mr. McGrath, an
that would have been paid by affiliate of the General Partner, has
the 23 Exchange Partnerships agreed to serve as Chief Executive
if the compensation and Officer of the Operating Partnership and
distributions structure to be the Trust in exchange for up to 25,000
in effect following the Common Shares of the Trust (amount to be
Exchange Offering had been in determined by the Executive Compensation
effect from inception of the Committee of the Trust) and health
partnerships through September benefits for the first year of
30, 1998: operations and thereafter in exchange
for compensation and benefits determined
annually by the committee. Mr. McGrath
would have received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all distributions) on
Units subscribed for by him in
connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1997: $ 62,868
1998 (through
September 30th): $ 90,000
--------
Total: $152,868 ($64 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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 15%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive any remaining distributable cash during the fiscal
year.
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 15% yearly cash-on-cash return, 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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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.
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
26
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
27
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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.
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
29
<PAGE>
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.
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,
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately
31
<PAGE>
following the completion of the Exchange Offering the partnership has one or
more Non-participating Limited Partners, the 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
Strategic VI
(Exchange Hybrid)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund VI, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,237,000 123,700 Units ($1,237,000) 103 Units ($1,030) 5.15%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of
factors, including, among others, the estimated appraised market value and
operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent
of its mortgage interests in properties and other debt interests, takes
into account the current principal balance of the debt interests held by
the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 VI,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E in the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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
October 1996. In November 1996, Baron Capital XXXI, Inc., the partnership's
General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath), sponsored a private offering of 2,400
units of limited partner interest in the Exchange Partnership at a purchase
price of $500 per unit (gross proceeds of $1,200,000). The offering was fully
subscribed and closed in April 1997.
The Exchange Partnership invested the net proceeds of its offering to
acquire (i) a 57% limited partnership interest in a limited partnership which
holds fee simple title to a residential apartment property located in Orlando,
Florida (Pineview Property), (ii) undivided interests in four unrecorded second
mortgage loans secured by residential apartment properties located in Tampa,
Florida (Candlewood Property) and Orlando, Florida (Garden Terrace Property),
and (iii) a note payable from another Exchange Partnership which is secured by
two unrecorded second mortgages on a property located in Tampa, Florida. The
second mortgage loans are subordinate to large-scale first mortgage financing
and are non-recourse beyond the underlying property and/or other assets of the
debtor.
For further information concerning the Exchange Partnership, its original
private offering, the direct and indirect equity and debt interests it holds,
first mortgage financing to which the mortgage interests are subordinated, and
the estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Methods" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the
8
<PAGE>
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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by
10
<PAGE>
Exchange Equity Partnerships and the Exchange Hybrid Partnerships for
direct or indirect equity interests in properties, and the appreciation of
the properties since such purchase. As a result, the return on investment
of the Exchange Partnerships based on the initial assigned value of the
Units offered for limited partnership interests in such partnerships will
be less than the return on investment of the partnerships based on their
respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
- - 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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Hybrid Partnership) has
been estimated at $1,237,000. The valuation of the partnership, to the extent of
its direct or indirect equity interest in a property, takes into account a
number of factors, including, among others, the estimated appraised market value
and operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent of its mortgage
interests in properties and other debt interests, takes into account the current
principal balance of the debt interests held by the Exchange Partnership, the
replacement cost new of property securing such indebtedness determined by an
independent appraiser and the debtor's repayment history and current net equity
interest in such property. 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 the same factors as they relate to the respective partnerships.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of equity and debt interests
held by the partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying properties, (iii) the independently
appraised value of property in which the partnership directly or indirectly owns
an equity interest and the replacement cost new of property in which the
partnership owns a mortgage interest and the independently appraised value of
such property under the income approach, (iv) other assets and liabilities of
the partnership and (v) the valuation of Units to be offered to the Limited
Partners in the Exchange Offering.
15
<PAGE>
(Strategic VI)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Equity Interest Held:
Pineview Property:
Appraised value of property (57% of such
Amount, representing Exchange Partnership's
Indirect net interest): $ 2,848,000 ($1,623,360)
11/1/98 principal balance of mortgage financing
secured by property (57% of such amount): $ 1,605,781 ($915,295)
Valuation of Equity Interest: $ 708,065
Valuation of Debt Interests Held:
Candlewood Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest
in loan (accrued unpaid interest thereon): $ 68,000 ($4,760)
12/31/98 aggregate principal balance of other
second mortgage loans secured by same property
and owned by other Exchange Partnerships
(accrued unpaid interest thereon): $ 96,500 ($7,175)
11/1/98 principal balance of first mortgage loan
secured by property (41.3% of amount,
representing the percentage of the current
principal balance of the Exchange Partnership's
second mortgage loan in relation to the
aggregate principal balance of all second
mortgage loans secured by property): $ 596,528 ($246,366)
Appraised replacement cost new of property
(41.3% of amount): $ 1,590,447 ($656,855)
Appraised value of property - income approach
(41.3% of amount): $ 922,000 ($380,786)
Garden Terrace Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 20% interest
in loans (accrued unpaid interest thereon): $ 248,353 ($12,418)
12/31/98 principal balance of other Exchange
Partnerships' undivided 80% interest in loans
(accrued unpaid interest thereon): $ 993,414 ($91,063)
11/1/98 principal balance of first mortgage loan
secured by property (20% of such amount): $ 970,167 ($194,033)
Appraised replacement cost new of property
(20% of such amount): $ 4,297,897 ($859,579)
Appraised value of property - income approach
(20% of such amount): $ 1,782,000 ($356,400)
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Note Payable by Baron Strategic Investment
Fund IV, Ltd. ("Baron Fund IV"):(1)
12/31/98 principal balance payable to Exchange
Partnership (collateralized by security interest in
Baron Fund IV's second mortgage on Country
Square Phase I Property) (accrued unpaid
interest payable to Exchange Partnership): $ 254,267 ($33,965)
11/1/98 principal balance of first mortgage loan
secured by property: $ 1,592,633
12/31/98 principal balance of Baron Fund IV's
second mortgage loans secured by property
(accrued unpaid interest thereon): $ 1,364,549 ($141,226)
Appraised replacement cost new of property: $ 3,554,776
Appraised value of property - income approach: $ 2,281,000
Total balance due on debt interests: $ 621,763
Total debt balance plus valuation of
equity interest: $ 1,329,828
Total valuation of debt and
equity interests: $ 1,237,000
Discount applied to total debt balance
and valuation of equity interest: 7.0%
Cash and cash equivalent assets: $ 5,366
Other assets: $ 0
Other liabilities: $ 25,550
Valuation of the Partnership(2): $ 1,237,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(3): 123,700 Units ($1,237,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(3): 103 Units ($1,030)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.15%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) In March 1997, the Exchange Partnership provided a loan with a current
principal balance of $254,267 (with accrued unpaid interest of $33,965) to
another Exchange Partnership, Baron Strategic Investment Fund IV, Ltd. ("Baron
Fund IV"). Baron Fund IV, in turn, lent the loan proceeds to the borrower as
part of the Country Square Second Mortgage Loans. The loan from Baron Fund VI to
Baron IV bears interest at the rate of 15%, payable monthly, matures in 9/02 and
is secured by Baron Fund IV's interest in the second mortgage note and second
mortgage.
(2) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of factors,
including, among others, the estimated appraised market value and operating
history of the property, the current principal balance of first mortgage and
other indebtedness to which the property is subject, 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 valuation
of the Exchange Partnership, to the extent of its mortgage interests in
properties and other debt interests, takes into account the current principal
balance of the debt interests held by the Exchange Partnership, the replacement
cost new of property securing such indebtedness determined by an independent
appraiser and the debtor's repayment history and current net equity interest in
such property.
(3) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$130,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $16,625 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1996: $ 0
1997: $ 85,003
1998 (through
September 30th): $ 90,000
--------
Total: $175,003 ($73 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
26
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
27
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
29
<PAGE>
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.
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.
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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
31
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
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.
33
<PAGE>
Strategic VIII
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund VIII, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XLIV, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,248,000 124,800 Units ($1,248,000) 104 Units ($1,040) 5.12%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- --------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 VIII,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 1997. In May 1997, Baron Capital XLIV, Inc., the partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), sponsored a private offering of 2,400 units of limited
partner interest in the Exchange Partnership at a purchase price of $500 per
unit (gross proceeds of $1,200,000). The offering was fully subscribed and
closed in February 1998.
The Exchange Partnership invested the net proceeds of its offering to
acquire undivided interests in (i)five unrecorded second mortgage loans (the
"Second Mortgage Loans") secured by residential apartment properties located in
Cocoa, Florida (Longwood Property); Kissimmee, Florida (Heatherwood Property);
and Cincinnati, Ohio (Sycamore Property, which is under development) and (ii)
three unsecured loans associated with the Heatherwood Property. The Second
Mortgage Loans are subordinate to large-scale first mortgage financing and are
non-recourse beyond the underlying property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Methods" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the Operating Partnership will seek to acquire. The Trust and
the Operating Partnership may be restricted
8
<PAGE>
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
the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity
10
<PAGE>
interests in properties, and the appreciation of the properties since such
purchase. As a result, the return on investment of the Exchange
Partnerships based on the initial assigned value of the Units offered for
limited partnership interests in such partnerships will be less than the
return on investment of the partnerships based on their respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $1,248,000. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Strategic VIII)
Valuation of Exchange Partnership
<TABLE>
<S> <C> <C>
Valuation of Debt Interests Held:
Heatherwood Second Mortgage Loans(1):
12/31/98 principal balance of Exchange
Partnership's undivided 58% interest in loans
(accrued unpaid interest thereon): $ 206,260 ($0)
12/31/98 principal balance of other Exchange
Partnership's undivided 42% interest in loans
(accrued unpaid interest thereon): $ 149,361 ($17,338)
11/1/98 principal balance of first mortgage loan
secured by property (58% of such amount): $ 704,306 ($408,497)
Appraised replacement cost new of property
(58% of such amount): $ 1,862,475 ($1,080,236)
Appraised value of property - income approach
(58% of such amount): $ 1,259,000 ($730,220)
Longwood Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in loans
(accrued unpaid interest thereon): $ 969,268 ($47,892)
11/1/98 principal balance of first mortgage loan
secured by property: $ 1,028,684
Appraised replacement cost new of property: $ 2,666,862
Appraised value of property - income approach: $ 1,788,000
Sycamore Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in
loan (accrued unpaid interest thereon): $ 98,000 ($9,800)
12/31/98 principal balance of other second
mortgage loans secured by property which are
owned by other Exchange Partnerships (accrued
unpaid interest thereon): $ 473,500 ($42,615)
11/1/98 principal balance of first mortgage loan
secured by property: $ 800,000; approved maximum $2,000,000
Appraised replacement cost new of property
(under development): $ 9,376,039
Appraised value of property:
"As is" value: $ 1,080,000
Prospective market value: $14,312,000 (assuming completion of project as
planned, full rent up and satisfactory
environmental-quality test)
Total balance due on debt interests: $1,331,220
Total valuation of debt interests: $ 1,248,000
Discount applied to debt balance: 6.3%
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Cash and cash equivalent assets: $ 7,074
Other assets: $ 0
Other liabilities: $ 21,420
Valuation of the Partnership(2): $ 1,248,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(3): 124,800 Units ($1,248,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(3): 104 Units ($1,040)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.12%
Consideration paid by Original Investors for Units
Subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) The loans consist of one second mortgage loan secured by the Heatherwood
Property with a current principal balance of $325,000 and three unsecured loans
associated with the property with an aggregate current principal balance of
$24,121.
(2) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(3) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$108,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $12,528 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $ 2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1997: $ 30,450
1998 (through
September 30th): $101,424
--------
Total: $131,874 ($55 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have
26
<PAGE>
personal liability for any debts of the partnership) the General Partner 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
would be that following the Exchange Offering, if the partnership constitutes a
Participating Exchange Partnership and has one or more Non-participating Limited
Partners, the General Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating
27
<PAGE>
Limited Partners, 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 may require that the annual financial
statements required to be delivered by the partnership to limited partners be
audited. See the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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."
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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).
29
<PAGE>
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.
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.
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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
31
<PAGE>
other than a partnership purpose and (e) amending the Exchange Partnership
Agreements in certain respects as described above at "- Amendments of Governing
Agreements."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, the 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 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 the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
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.
33
<PAGE>
Strategic IX
(Exchange Hybrid)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund IX, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital LXII, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,230,000 123,000 Units ($1,230,000) 103 Units ($1,030) 5.12%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of
factors, including, among others, the estimated appraised market value and
operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent
of its mortgage interests in properties and other debt interests, takes
into account the current principal balance of the debt interests held by
the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 IX,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E in the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 1997. In June 1997, Baron Capital LXII, Inc., the partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), sponsored a private offering of 2,400 units of limited
partner interest in the Exchange Partnership at a purchase price of $500 per
unit (gross proceeds of $1,200,000). The offering was fully subscribed and
closed in May 1998.
The Exchange Partnership invested the net proceeds of its offering to
acquire (i) a 41.1% limited partnership interest in a limited partnership which
holds fee simple title to a residential apartment property located in Lakeland,
Florida (Crystal Court Property), and (ii) undivided interests in four
unrecorded second mortgage loans secured by residential apartment properties
located in Tampa, Florida (Candlewood Property), Orlando, Florida (Garden
Terrace Property) and Cincinnati, Ohio (Lake Sycamore Property - under
construction). The second mortgage loans are subordinate to large-scale first
mortgage financing and are non-recourse beyond the underlying property and/or
other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the direct and indirect equity and debt interests it holds,
first mortgage financing secured by the underlying properties and to which the
mortgage interests are subordinated, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to "Valuation Method" below and to the tables set forth in the exhibit
attached hereto. Also see the tables relating to all of the Exchange
Partnerships set forth in the Prospectus at "Initial Real Property Investments"
and in 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."
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 the Prospectus at "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 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 Original
Investors 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.
7
<PAGE>
o If the Operating Partnership consummates investments in respect of all 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 the
8
<PAGE>
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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
9
<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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by
10
<PAGE>
Exchange Equity Partnerships and the Exchange Hybrid Partnerships for
direct or indirect equity interests in properties, and the appreciation of
the properties since such purchase. As a result, the return on investment
of the Exchange Partnerships based on the initial assigned value of the
Units offered for limited partnership interests in such partnerships will
be less than the return on investment of the partnerships based on their
respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
- - 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."
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.
12
<PAGE>
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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Hybrid Partnership) has
been estimated at $1,230,000. The valuation of the partnership, to the extent of
its direct or indirect equity interest in a property, takes into account a
number of factors, including, among others, the estimated appraised market value
and operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent of its mortgage
interests in properties and other debt interests, takes into account the current
principal balance of the debt interests held by the Exchange Partnership, the
replacement cost new of property securing such indebtedness determined by an
independent appraiser and the debtor's repayment history and current net equity
interest in such property. 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 the same factors as they relate to the respective partnerships.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of equity and debt interests
held by the partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying properties, (iii) the independently
appraised value of property in which the partnership directly or indirectly owns
an equity interest and the replacement cost new of property in which the
partnership owns a mortgage interest and the independently appraised value of
such property under the income approach, (iv) other assets and liabilities of
the partnership and (v) the valuation of Units to be offered to the Limited
Partners in the Exchange Offering.
15
<PAGE>
(Strategic IX)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Equity Interest Held:
Crystal Court Property:
Appraised value of property (41.1% of such
amount, representing Exchange Partnership's
indirect net interest): $ 2,040,000 ($838,440)
11/1/98 principal balance of mortgage financing
secured by property (41.1% of such amount): $ 1,211,706 ($498,011)
Valuation of Equity Interest: $ 340,429
Valuation of Debt Interests Held:
Candlewood Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest
in loan (accrued unpaid interest thereon): $ 75,500 ($5,285)
12/31/98 aggregate principal balance of other
second mortgage loans secured by same property
and owned by other Exchange Partnerships
(accrued unpaid interest thereon): $ 89,000 ($6,650)
11/1/98 principal balance of first mortgage loan
secured by property (45.9% of amount,
representing the percentage of the current
principal balance of the Exchange Partnership's
second mortgage loan in relation to the $ 596,528 ($273,806)
aggregate principal balance of all second
mortgage loans secured by property): $ 596,528 ($273,806)
Appraised replacement cost new of property
(45.9% of amount): $ 1,590,447 ($730,015)
Appraised value of property - income approach
(45.9% of amount): $ 922,000 ($423,198)
Garden Terrace Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 25% interest
in loans (accrued unpaid interest thereon): $ 310,442 ($28,457)
12/31/98 principal balance of other Exchange
Partnerships' undivided 75% interest in loans
(accrued unpaid interest thereon): $ 931,325 ($75,024)
11/1/98 principal balance of first mortgage loan
secured by property (25% of such amount): $ 970,167 ($242,542)
Appraised replacement cost new of property
(25% of such amount): $ 4,297,897 ($1,074,474)
Appraised value of property - income approach
(25% of such amount): $ 1,782,000 ($445,500)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C>
Sycamore Second Mortgage Loan:
12/31/98 principal balance of Exchange
Partnership's undivided 100% interest in
loan (accrued unpaid interest thereon): $ 243,500 ($21,915)
12/31/98 aggregate principal balance of other
second mortgage loans secured by same property
and owned by other Exchange Partnerships
(accrued unpaid interest thereon): $ 328,000 ($30,500)
11/1/98 principal balance of first mortgage loan
secured by property: $ 800,000; approved maximum $2,000,000
Appraised replacement cost new of property
(under development): $ 9,376,039
Appraised value of property:
"As is" value: $ 1,080,000
Prospective market value: $14,312,000 (assuming completion of project as
planned, full rent up and satisfactory
environmental-quality test)
Total balance due on debt interests: $ 685,099
Total debt balance plus valuation of
equity interests: $ 1,025,528
Total valuation of debt and equity
interests: $ 1,230,000
Premium over total debt balance and
valuation of equity interest: 16.6%
Cash and cash equivalent assets: $ 9,964
Other assets: $ 0
Other liabilities: $ 11,500
Valuation of the Partnership(1): $ 1,230,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(2): 123,000 Units ($1,230,000)
Number of Units offered to each Limited Partner in
The Exchange Partnership per $1,000 of original
investment (dollar value)(2): 103 Units ($1,030)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
The maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.12%
Consideration paid by Original Investors for Units
Subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of factors,
including, among others, the estimated appraised market value and operating
history of the property, the current principal balance of first mortgage and
other indebtedness to which the property is subject, 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 valuation
of the Exchange Partnership, to the extent of its mortgage interests in
properties and other debt interests, takes into account the current principal
balance of the debt interests held by the Exchange Partnership, the replacement
cost new of property securing such indebtedness determined by an independent
appraiser and the debtor's repayment history and current net equity interest in
such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$120,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $5,785 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in the
distributions that would have been next paragraph, Mr. McGrath, an
paid by the 23 Exchange Partnerships affiliate of the General Partner, has
if the compensation and distributions agreed to serve as Chief Executive
structure to be in effect following Officer of the Operating Partnership
the Exchange Offering had been in and the Trust in exchange for up to
effect from inception of the 25,000 Common Shares of the Trust
partnerships through September 30, (amount to be determined by the
1998: Executive Compensation Committee of
the Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits determined
annually by the committee. Mr. McGrath
would have received distributions in
the aggregate amount of approximately
$380,528 (9.5% of all distributions)
on Units subscribed for by him in
connection with the formation of the
Operating Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1996: $ 0
1997: $ 3,589
1998 (through
September 30th): $ 57,309
--------
Total: $ 60,898 ($25 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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 15%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive any remaining distributable cash during the fiscal
year.
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 15% yearly cash-on-cash return; 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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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.
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
26
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
27
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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.
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
29
<PAGE>
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.
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,
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately
31
<PAGE>
following the completion of the Exchange Offering the partnership has one or
more Non-participating Limited Partners, the 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
Strategic X
(Exchange Hybrid)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Investment Fund X, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital LXIV, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$1,236,000 123,600 Units ($1,236,000) 103 Units ($1,030) 5.15%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of
factors, including, among others, the estimated appraised market value and
operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent
of its mortgage interests in properties and other debt interests, takes
into account the current principal balance of the debt interests held by
the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 X,
Ltd. and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E in the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 1997. In Julu 1997, Baron Capital LXIV, Inc., the partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), sponsored a private offering of 2,400 units of limited
partner interest in the Exchange Partnership at a purchase price of $500 per
unit (gross proceeds of $1,200,000). The offering was fully subscribed and
closed in March 1998.
The Exchange Partnership invested the net proceeds of its offering to
acquire (i) a 43.5% limited partnership interest in a limited partnership which
holds fee simple title to a residential apartment property located in Lakeland,
Florida (Crystal Court Property), (ii) a 43% limited partnership interest in a
limited partnership which holds fee simple title to a residential apartment
property located in Orlando, Florida (Pineview Property), and (iii) undivided
interests in six unrecorded second mortgage loans secured by residential
apartment properties located in Kissimmee, Florida (Heatherwood Property) and
Tampa, Florida (Garden Terrace Property). The second mortgage loans are
subordinate to large-scale first mortgage financing and are non-recourse beyond
the underlying property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the direct and indirect equity and debt interests it holds,
first mortgage financing secured by the underlying properties and to which the
mortgage interests are subordinated, and the estimated deferred taxable gain of
each Limited Partner who elects to participate in the Exchange Offering, please
refer to "Valuation Methods" below and to the tables set forth in the exhibit
attached hereto. Also see the tables relating to all of the Exchange
Partnerships set forth in the Prospectus at "Initial Real Property Investments"
and in 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."
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 the Prospectus at "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 the Trust (into
which the Units are exchangeable), if listed on a national securities
exchange, will trade at a lower price.
7
<PAGE>
o The terms of the Exchange Offering were determined by the Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership Units to be issued. The property interests to be acquired with
the balance of the Operating Partnership Units to be offered in the
Exchange Offering have not yet been finally determined. In addition, as
described in this Supplement and the Prospectus, the Operating Partnership
has acquired beneficial ownership of four properties for cash, entered into
an agreement to acquire two properties under development and invested in
other real estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
8
<PAGE>
Partnerships, by Mr. McGrath), 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 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 the Prospectus at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "MANAGEMENT."
9
<PAGE>
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.
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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.
10
<PAGE>
o The $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units offered for limited partnership
interests in such partnerships will be less than the return on investment
of the partnerships based on their respective 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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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
11
<PAGE>
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."
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.
12
<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 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 (wholly owned
and controlled, along with the Managing Shareholder of the Trust, by
Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Hybrid Partnership) has
been estimated at $1,236,000. The valuation of the partnership, to the extent of
its direct or indirect equity interest in a property, takes into account a
number of factors, including, among others, the estimated appraised market value
and operating history of the property, the current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 valuation of the Exchange Partnership, to the extent of its mortgage
interests in properties and other debt interests, takes into account the current
principal balance of the debt interests held by the Exchange Partnership, the
replacement cost new of property securing such indebtedness determined by an
independent appraiser and the debtor's repayment history and current net equity
interest in such property. 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 the same factors as they relate to the respective partnerships.
The General Partner (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of equity and debt interests
held by the partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying properties, (iii) the independently
appraised value of property in which the partnership directly or indirectly owns
an equity interest and the replacement cost new of property in which the
partnership owns a mortgage interest and the independently appraised value of
such property under the income approach, (iv) other assets and liabilities of
the partnership and (v) the valuation of Units to be offered to the Limited
Partners in the Exchange Offering.
15
<PAGE>
(Strategic X)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Equity Interests Held:
Crystal Court Property:
Appraised value of property (43.5% of such
amount, representing Exchange Partnership's
indirect net interest): $ 2,040,000 ($887,400)
11/1/98 principal balance of mortgage financing
secured by property (43.5% of such amount): $ 1,211,706 ($527,092)
Pineview Property:
Appraised value of property (43% of such
amount, representing Exchange Partnership's
indirect net interest): $ 2,848,000 ($1,224,640)
11/1/98 principal balance of mortgage financing
secured by property (43% of such amount): $ 1,605,781 ($690,486)
Valuation of Equity Interests: $ 894,462
Valuation of Debt Interests Held:
Heatherwood Second Mortgage Loans(1):
12/31/98 principal balance of Exchange
Partnership's undivided 42% interest
in loans (accrued unpaid interest thereon): $ 149,361 ($17,338)
12/31/98 principal balance of other Exchange
Partnerships' undivided 58% interest in loans
(accrued unpaid interest thereon): $ 202,260 ($0)
11/1/98 principal balance of first mortgage loan
secured by property (42% of amount) $ 704,306 ($295,809)
Appraised replacement cost new of property
(42% of amount): $ 1,862,475 ($782,240)
Appraised value of property - income approach
(42% of amount): $ 1,259,000 ($528,780)
Garden Terrace Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 55% interest
in loans (accrued unpaid interest thereon): $ 682,972 ($82,606)
12/31/98 principal balance of other Exchange
Partnerships' undivided 45% interest in loans
(accrued unpaid interest thereon): $ 558,795 ($40,875)
11/1/98 principal balance of first mortgage loan
secured by property (55% of such amount): $ 970,167 ($533,592)
Appraised replacement cost new of property
(55% of such amount): $ 4,297,897 ($2,363,843)
Appraised value of property - income approach
(55% of such amount): $ 1,782,000 ($980,100)
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Total balance due on debt interests: $ 932,277
Total debt balance (net of note
payable by Exchange Partnership(2))
plus valuation of equity interest: $ 1,426,739
Total valuation of debt and equity
interests: $ 1,236,000
Discount applied to total debt balance
and valuation of equity interest: 13.4%
Cash and cash equivalent assets: $ 39,374
Other assets: $ 0
Other liabilities(2): $ 423,400
Valuation of the Partnership(3): $ 1,236,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(4): 123,600 Units ($1,236,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(4): 103 Units ($1,030)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 5.15%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) The loans consist of one second mortgage loan secured by the Heatherwood
Property with a current principal balance of $325,000 and three unsecured loans
associated with the property with an aggregate current principal balance of
$24,121.
(2) The Exchange Partnership paid a note (the "Note") with a current principal
balance of $400,000 to the seller in connection with the Exchange Partnership's
acquisition of an undivided 75% interest in the Garden Terrace Second Mortgage
Loans. The Exchange Partnership in turn sold an undivided 20% interest (and
retained an undivided 55% interest) in the loans. The Note bears an annual
interest rate of 10%, has a maturity date of June 30, 1998 and is secured by a
collateral assignment of the Exchange Partnership's interest in the Garden
Terrace Second Mortgage Loans and a second mortgage on the property.
(3) The valuation of the Exchange Partnership, to the extent of its direct or
indirect equity interest in a property, takes into account a number of factors,
including, among others, the estimated appraised market value and operating
history of the property, the current principal balance of first mortgage and
other indebtedness to which the property is subject, 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 valuation
of the Exchange Partnership, to the extent of its mortgage interests in
properties and other debt interests, takes into account the current principal
balance of the debt interests held by the Exchange Partnership, the replacement
cost new of property securing such indebtedness determined by an independent
appraiser and the debtor's repayment history and current net equity interest in
such property.
(4) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
17
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$120,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $9,124 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and its
affiliates from inception of the
partnerships through September 30,
1998:
Compensation: $2,806,104
Distributions: 0
Combined amount of compensation and As described in greater detail in
distributions that would have been the next paragraph, Mr. McGrath, an
paid by the 23 Exchange affiliate of the General Partner,
Partnerships if the compensation has agreed to serve as Chief
and distributions structure to be Executive Officer of the Operating
in effect following the Exchange Partnership and the Trust in
Offering had been in effect from exchange for up to 25,000 Common
inception of the partnerships Shares of the Trust (amount to be
through September 30, 1998: determined by the Executive
Compensation Committee of the
Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number
18
<PAGE>
of Common Shares. If, however, as of May 14, 1999, the Cash Offering and/or the
Exchange Offering has been completed and the number of Units subscribed for by
each Original Investor represents a percentage greater than 9.5% of the then
outstanding Common Shares, calculated 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, each Original Investor has
agreed to return any excess Units to the Operating Partnership for cancellation.
As described further below, Mr. McGrath and Mr. Geiger have deposited Units
subscribed for by them into a security escrow account for six to nine years,
subject to earlier release under certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
19
<PAGE>
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:
All LP's
--------
1997: $ 13,428
1998 (through
September 30th): $ 82,615
--------
Total: $ 96,043 ($40 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
20
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
21
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
22
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
23
<PAGE>
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 12.5%
non-cumulative return on their capital contributions; thereafter the Limited
Partners and the General Partner share any remaining distributable cash during
the year 50%/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
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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.
24
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials indicated that the
General Partner intended to list equity interests in property acquired, on the
market for sale within three to five years following their acquisition.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
25
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
26
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
27
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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.
28
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
29
<PAGE>
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.
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,
30
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $1,000.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately
31
<PAGE>
following the completion of the Exchange Offering the partnership has one or
more Non-participating Limited Partners, the 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
32
<PAGE>
Vulture I
(Exchange Mortgage)
SUPPLEMENT DATED _____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
Baron Strategic Vulture Fund I, Ltd.,
a Florida limited partnership
(the "Exchange Partnership")
(General Partner: Baron Capital XXVI, 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 22
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 such 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 below under
"Certain Risks" and under the heading "Risk Factors" set forth in the Prospectus
(the "Prospectus") of the Operating Partnership dated ________, 1999 in
evaluating the Exchange Offering, the Operating Partnership, Baron Capital Trust
(the "Trust"), the general partner and a limited partner of the Operating
Partnership, 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 on a one-for-one basis), 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 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 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, the Operating Partnership and the Exchange
Partnerships, 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, holders
of Units in the Operating Partnership (individually, a "Unitholder" and
collectively, the "Unitholders") and Limited Partners of the Exchange
Partnerships.
o The purchase price to be paid by the Operating Partnership and the Trust
for property interests will be based upon appraisals prepared by qualified
and licensed independent appraisal firms and other considerations. Offerees
should note, however, that appraisals 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 property interests
acquired will reflect their fair market value.
o Offerees 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.
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.
<PAGE>
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
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Valuation of Aggregate number of Units Number of Units Percentage of Units offered
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
$944,000 94,400 Units ($944,000) 105 Units ($1,050) 3.93%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THIS PROSPECTUS SUPPLEMENT FORMS A PART OF AND
SHOULD BE READ TOGETHER WITH THE PROSPECTUS
- ----------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing
such indebtedness determined by an independent appraiser and the debtor's
repayment history and current net equity interest in such property. See
"Valuation Methods" below.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including
recipients of Units in the Exchange Offering, 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 ____, 1999
TO PROSPECTUS OF
BARON CAPITAL PROPERTIES, L.P.
DATED _____, 1999
INTRODUCTION
The Trust and the Operating Partnership constitute an integrated real
estate company which has been organized to acquire equity interests in
residential apartment properties located in the United States and to provide or
acquire mortgage loans secured by 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, Units it will issue in the Exchange Offering and other
transactions and available cash flow from operations 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 Vulture Fund I, Ltd.
and the term "Exchange Partnerships" shall refer collectively to such
partnership and the 22 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 22 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 residential apartment property and/or one
or more subordinated mortgage interests secured by such type of property. The
Operating Partnership will acquire interests in particular properties by
acquiring
3
<PAGE>
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 Exchange
Partnership and the 22 other 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. Affiliates of Mr. McGrath are also the corporate general partners
of limited partnerships which are debtors under substantially all second
mortgage loans and other debt interests owned by certain of the Exchange
Partnerships, and in such capacity, Mr. McGrath holds an indirect minority
economic interest in such partnerships which is subordinate to the preferred
returns of their limited partners.
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 of the particular Exchange Partnerships 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 assigned 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 with limited partners holding at least 90%
of the limited partnership interest therein who elect to accept the offering.
The initial transactions of the Exchange Offering involve 26 targeted
properties (individually, an "Exchange Property" and collectively, the "Exchange
Properties"). Certain of the Exchange Partnerships directly or indirectly own
equity interests in 16 Exchange Properties, which consist of an aggregate of
1,012 residential units (comprised of studio, one, two, three and four-bedroom
units). Certain of the Exchange Partnerships directly or indirectly own mortgage
interests in 10 Exchange Properties, which consist of an aggregate of 650
existing residential units (studio and one and two bedroom) and 164 units (two
and three bedroom) under development. Of the Exchange Properties, 21 properties
are located in Florida, one property is located in Georgia, one property in
Indiana and three 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.
The sole asset of each of 13 of the Exchange Partnerships (individually, an
"Exchange Equity Partnership" and collectively, the "Exchange Equity
Partnerships") is record title to a single residential apartment property or the
entire limited partnership or other equity interest in a limited partnership or
other entity which owns fee simple title to a property. The sole assets of each
of six of the Exchange Partnerships (individually, an "Exchange Mortgage
Partnership" and collectively, the "Exchange Mortgage Partnerships") are the
entire or an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the remaining four
Exchange Partnerships (individually, an "Exchange Hybrid Partnership" and
collectively, the "Exchange Hybrid Partnerships") own a combination of (i) all
or a portion of the direct or indirect equity interest in one or more properties
and (ii) an undivided subordinated mortgage interest in one or more properties
(and, in one case, unsecured debt interests). Each of the debtors of
subordinated mortgage loans and other loans provided or acquired by the Exchange
Mortgage Partnerships and the Exchange Hybrid Partnerships is a limited
partnership which owns fee simple title to the property which secures such
mortgage loans. Affiliates of Mr. McGrath are the corporate general partners of
substantially all such debtor partnerships, and in such capacity Mr. McGrath is
entitled to share indirectly in cash distributions and net profits (losses) in
such partnerships in the range of 2% to 20% after the limited partners therein
have received a preferred return.
The aggregate appraised market value of 16 Exchange Properties in which
Exchange Equity Partnerships and Exchange Hybrid Partnerships directly or
indirectly own an equity interest (net to the partnerships' interest, less the
current principal balance of mortgage loans secured by such properties) is
approximately $16,664,836. The total current aggregate balance due (including
current aggregate principal balances of second mortgage loans and other debt and
accrued unpaid interest thereon) on the debt interests owned by Exchange
Mortgage Partnerships and Exchange Hybrid Partnerships in respect of 11 Exchange
Properties is approximately $10,792,991.
For purposes of the Exchange Offering, the 23 Exchange Partnerships have
been valued at $24,022,880. The value is based upon an appraisal performed by
qualified and licensed independent appraisal firms on each property in which a
respective partnership owns a direct or indirect equity or mortgage interest and
other considerations described below at "Valuation Methods." See also the
Prospectus at "The Exchange Offering - Exchange Property Appraisals." Each Unit
offered in the offering has been arbitrarily assigned 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 further herein, a Unitholder
may elect to exchange Units for an equivalent number of Common Shares, subject
to certain exceptions. If the Exchange Offering is fully completed in respect of
all 23 Exchange Partnerships (i.e., all limited partners in the Exchange
Partnerships accept the offering), the partnership interests acquired will have
an aggregate purchase price of approximately $24,022,880, comprised of Units to
be issued. The partnership interests to
4
<PAGE>
be acquired with the balance of the registered Units to be offered in the
Exchange Offering 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 exchange all 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 and each of
the other Exchange Partnerships 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 substantially all 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 $10.00 per
share. As of the date of this Supplement, the Trust has sold ____________ Common
Shares in the Cash Offering (representing gross proceeds of $____________. 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.
5
<PAGE>
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 $2,000 to $59,000 (aggregate amount approximately $341,000) to 20
real estate partnerships managed by affiliates of the Managing Shareholder,
including certain of the Exchange Partnerships. In exchange, the Operating
Partnership received a limited partnership interest in such partnerships which
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 Operating Partnership applied a portion of the net
proceeds from the Cash Offering to acquire the entire limited partnership
interests in Riverwalk Enterprises, Ltd., a Florida limited partnership which
owns fee simple title to a 50-unit residential apartment property referred to as
Riverwalk Villas located in New Smyrna Beach, Florida. The total cost of the
acquisition to the Operating Partnership was approximately $655,000 above the
then current $1,330,000 principal balance of the underlying first mortgage loan,
including transaction costs.
In September 1998, the Operating Partnership entered into an agreement to
acquire two luxury residential apartment properties (total 652 units) in
Louisville and Burlington, Kentucky upon the completion of construction for an
aggregate purchase price in the range of approximately $41,000,000 to
$43,000,000. The Louisville property is expected to be completed prior to the
end of 2000, and the Burlington property is expected to be completed by the end
of 2001. In connection with the transaction, the Operating Partnership agreed to
co-guarantee (along with Mr. McGrath), for a period of 60 days (plus any
extensions which may be granted), up to $3,000,000 of the development portion of
long-term construction loans to be made by an institutional lender to three
development companies controlled by Mr. McGrath in connection with the
development and construction of the two residential apartment properties and a
shopping center in Burlington, Kentucky. The Trust also agreed that, if the
loans are not repaid prior to the expiration of the guarantee, it will either
buy out the bank'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 from the date of the
agreement.
In October 1998, the Operating Partnership applied a portion of the net
proceeds to acquire an approximately 12.3% limited partnership interest in
Alexandria Development, L.P. (the "Alexandria Partnership"), a Delaware limited
partnership which is the owner and developer of a 168-unit residential apartment
property under construction in Alexandria, Kentucky. Thirty eight of the 168
residential units (approximately 22.6%) have been completed and are in the
rent-up stage. The Operating Partnership paid $400,000 for the acquired
partnership interest and retains an option to acquire the remaining limited
partnership interests at the same price per percentage interest (for a total
price of approximately $3,250,000 for the entire limited partnership interest).
The option is exercisable as additional apartment buildings are completed and
rented. An affiliate of Mr. McGrath sold the partnership interest in the
Alexandria Partnership to the Operating Partnership and also serves as its
managing general partner. During the construction stage of the apartment
property, the Operating Partnership's limited partnership interest in the
Alexandria Partnership is entitled to an annual 12% preferential return which is
senior to the other limited partnership interests and the general partner's
nominal 1% interest.
Set forth in the Prospectus at "Initial Real Estate Investments" is certain
additional information, including a description of the foregoing investments
made by the Operating Partnership to date and first mortgage financing to which
property interests acquired are subject. Financial statements reflecting the
results of operations of the properties are set forth in Exhibit E to the
Prospectus. 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 (wholly owned and controlled, along with the general partner of each
of the Exchange Partnerships, by Mr. McGrath).
6
<PAGE>
Limited Partners will not have any vote in the selection of property
investments by the Operating Partnership 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 1997, Baron Capital XXVI, Inc., the partnership's General
Partner (wholly owned and controlled, along with the Managing Shareholder of the
Trust, by Mr. McGrath), sponsored a private offering of 1,800 units of
$900,000). The offering was fully subscribed and closed in October 1996.
The Exchange Partnership invested the net proceeds of its offering to
provide or acquire undivided interests in four unrecorded second mortgage loans
(the "Second Mortgage Loans") secured by a residential apartment property
located in Tampa, Florida (Curiosity Creek Property). The Second Mortgage Loans
are subordinate to large-scale first mortgage financing and are non-recourse
beyond the underlying property and/or other assets of the debtor.
For further information concerning the Exchange Partnership, its original
private offering, the Second Mortgage Loan interests it holds, first mortgage
financing to which the Second Mortgage Loan interests are subordinated, and the
estimated deferred taxable gain of each Limited Partner who elects to
participate in the Exchange Offering, please refer to "Valuation Methods" below
and to the tables set forth in the exhibit attached hereto. Also see the tables
relating to all of the Exchange Partnerships set forth in the Prospectus at
"Initial Real Property Investments" and in 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."
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 the Prospectus at "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 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 Original
Investors 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 23
Exchange Partnerships initially targeted for investment in the Exchange
Offering, the partnership interests acquired will have a deemed purchase
price totaling approximately $24,022,880, comprised of Operating
Partnership
7
<PAGE>
Units to be issued. The property interests to be acquired with the balance
of the Operating Partnership Units to be offered in the Exchange Offering
have not yet been finally determined. In addition, as described in this
Supplement and the Prospectus, the Operating Partnership has acquired
beneficial ownership of four properties for cash, entered into an agreement
to acquire two properties under development and invested in other real
estate limited partnerships (including certain of the Exchange
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 (wholly owned and controlled, along with the general partner of
each of the Exchange Partnerships, by Mr. McGrath) and collectively will
own an amount of Operating Partnership Units (up to 1,202,160 Units) which
are exchangeable (subject to escrow restrictions described below) into 19%
of the Trust Common Shares outstanding as of the earlier to occur of the
completion of the Cash Offering and the Exchange Offering or May 14, 1999,
calculated 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 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 in the Prospectus 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
below at "Compensation" and the Prospectus at "MANAGEMENT" and "THE TRUST
AND THE OPERATING PARTNERSHIP - Formation Transactions" and " - Ownership
of the Trust and the Operating Partnership."
o The Operating Partnership and the Trust will use Units, Common Shares, net
proceeds from the sale of securities, including the Trust's Cash Offering,
and available cash flow from operations to acquire direct or indirect
equity and debt interests in residential apartment properties. The purchase
price to be paid for equity interests in properties will be based upon,
among other considerations, appraisals prepared by qualified and licensed
independent appraisal firms employing the three traditional property
valuation methods: the income approach, direct sales comparison approach
and cost approach. The purchase price to be paid for mortgage interests in
properties or other debt interests will be based upon the current principal
balance of such interests, independent appraisals of the replacement cost
new of property securing such indebtedness (without taking into account the
deficiencies of the existing improvements as compared to a new building),
which may significantly exceed the cost approach valuation, and the
debtor's repayment history and current net equity interest in such
property. Appraisals 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 property interests acquired is fair and
reasonable and will reflect their fair market value.
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 (wholly owned
and controlled, along with the general partner of each of the Exchange
Partnerships, by Mr. McGrath), 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 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
8
<PAGE>
transactions are expected to be completed by the Trust and the Operating
Partnership with Affiliates of the Managing Shareholder. See the Prospectus
at "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 in the Prospectus 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; financing such
acquisitions and improvements in turn may limit cash available for
distribution to Shareholders and Unitholders. See below at "Tax
Consequences" and the Prospectus at "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 the Prospectus at "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.
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
9
<PAGE>
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 below at
"Tax Consequences" and the Prospectus at "FEDERAL INCOME TAX
CONSIDERATIONS."
o Under certain circumstances described below at "Tax Consequences" and the
Prospectus 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 in turn may result in the dilution of
Offerees who elect to accept this Exchange Offering and Shareholders of the
Trust and affect 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 Partnerships
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 interests held by the partnership 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 $8,113,659 aggregate book value of the 23 Exchange Partnerships
initially targeted for investment in the Exchange Offering is less than the
$24,022,880 total of the initial value assigned to the Operating
Partnership Units being offered for limited partnership interests in the
Exchange Partnerships. This discrepancy is due to depreciation taken
against the original price paid by Exchange Equity Partnerships and the
Exchange Hybrid Partnerships for direct or indirect equity interests in
properties, and the appreciation of the properties since such purchase. As
a result, the return on investment of the Exchange Partnerships based on
the initial assigned value of the Units
10
<PAGE>
offered for limited partnership interests in such partnerships will be less
than the return on investment of the partnerships based on their respective
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 or her limited partnership interest in his or her respective
Exchange Partnership on substantially the same terms and conditions as his
or her 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.
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.
11
<PAGE>
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."
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
12
<PAGE>
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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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.
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 (wholly owned and controlled,
along with the general partner of each of the Exchange Partnerships,
by Mr. McGrath), 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.
13
<PAGE>
VALUATION METHOD
The value of the Exchange Partnership (an Exchange Mortgage Partnership)
has been estimated at $944,000. The value is based upon the current principal
balance of mortgage interests in properties held by the partnership, independent
appraisals of the replacement cost new of property securing such indebtedness
and the debtor's repayment history and current net equity interest in such
property. 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 Mortgage Partnerships and Exchange
Hybrid Partnerships (to the extent of their mortgage interests in properties and
other debt interests) differs based upon the foregoing factors as they relate to
the respective partnerships. The number of Units being offered in respect of
each of the Exchange Equity Partnerships and each of the Exchange Hybrid
Partnerships (to the extent of their direct or indirect equity interests in
properties) 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 current principal balance of first
mortgage and other indebtedness to which the property is subject, 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 (wholly owned and controlled, along with the Managing
Shareholder of the Trust, by Mr. McGrath) 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 Operating Partnership will not complete the offering in respect of
any Exchange Partnership if limited partners holding more than 10% of
the limited partnership interests therein 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.
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 integrated 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
14
<PAGE>
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 the valuation of the
Exchange Partnership, including (i) the valuation of debt interests held by the
Exchange Partnership, (ii) the principal balance as of November 1, 1998 of
mortgage financing secured by the underlying property, (iii) independently
appraised replacement cost new of the underlying property and appraised value of
the property under the income approach, (iv) other assets and liabilities of the
partnership and (v) the valuation of Units to be offered to the Limited Partners
in the Exchange Offering.
15
<PAGE>
(Vulture I)
Valuation of Exchange Partnership
<TABLE>
<CAPTION>
<S> <C> <C>
Valuation of Debt Interests Held:
Curiosity Creek Second Mortgage Loans:
12/31/98 principal balance of Exchange
Partnership's undivided 73.7% interest in loans
(accrued unpaid interest thereon): $ 938,440 ($74,650)
12/31/98 principal balance of other Exchange
Partnerships' undivided 26.3% interest in loans
(accrued unpaid interest thereon): $ 365,804 ($22,998)
11/1/98 principal balance of first mortgage loan
secured by property (73.7% of such amount): $ 1,294,866 ($954,316)
Appraised replacement cost new of property
(73.7% of such amount): $ 3,941,164 ($2,904,638)
Appraised value of property - income approach
(73.7% of such amount): $ 2,552,000 ($1,880,824)
Total balance due on debt interests: $ 1,013,090
Total valuation of debt interests: $ 944,000
Discount applied to debt balance: 6.8%
Cash and cash equivalent assets: $ 31,922
Other assets: $ 0
Other liabilities: $ 81,400
Valuation of the Partnership(1): $ 944,000
Aggregate number of Units offered to all Limited
Partners in the Exchange Partnership (dollar
value)(2): 94,400 Units ($944,000)
Number of Units offered to each Limited Partner in
the Exchange Partnership per $1,000 of original
investment (dollar value)(2): 105 Units ($1,050)
Percentage of all Units offered to the Limited
Partners in the Exchange Partnership in relation to
the maximum number of Units offered to Limited
Partners in all Exchange Partnerships: 3.93%
Consideration paid by Original Investors for Units
subscribed for in connection with the formation of
the Trust and the Operating Partnership: $100,000 capital contribution
</TABLE>
- ----------
(1) Takes into account the current principal balance of the debt interests held
by the Exchange Partnership, the replacement cost new of property securing such
indebtedness determined by an independent appraiser and the debtor's repayment
history and current net equity interest in such property.
(2) For purposes of the Exchange Offering, each Unit to be issued has been
assigned 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, including recipients of Units in
the Exchange Offering, 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.
16
<PAGE>
COMPENSATION
From the inception of the Exchange Partnership through September 30, 1998,
the aggregate amount of compensation paid to the General Partner and affiliates
in connection with the operation of the partnership (including commissions and
fees in connection with the original private offering) has been approximately
$119,000. 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 and its affiliates, including
Mr. McGrath, would have been entitled to be paid cash distributions during such
period in the amount of approximately $16,287 (9.5% of all distributions). The
amount of compensation the General Partner and its affiliates would have
received for managing the Exchange Partnership and other Exchange Partnerships
is described in the second item of the following table.
Changes in Compensation and Distributions
Combined amount paid by the 23
Exchange Partnerships to their
respective general partner and
its affiliates from inception
of the partnerships through
September 30, 1998:
Compensation: $ 2,806,104
Distributions: 0
Combined amount of As described in greater detail in
compensation and distributions the next paragraph, Mr. McGrath, an
that would have been paid by affiliate of the General Partner,
the 23 Exchange Partnerships has agreed to serve as Chief
if the compensation and Executive Officer of the Operating
distributions structure to be Partnership and the Trust in
in effect following the exchange for up to 25,000 Common
Exchange Offering had been in Shares of the Trust (amount to be
effect from inception of the determined by the Executive
partnerships through September Compensation Committee of the
30, 1998: Trust) and health benefits for the
first year of operations and
thereafter in exchange for
compensation and benefits
determined annually by the
committee. Mr. McGrath would have
received distributions in the
aggregate amount of approximately
$380,528 (9.5% of all
distributions) on Units subscribed
for by him in connection with the
formation of the Operating
Partnership and the Trust.
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) each subscribed
for 601,080 Units. In consideration for the Units subscribed for by them, the
Original Investors made a $100,000 capital contribution to the Operating
Partnership. If the Cash Offering and the Exchange Offering are fully
subscribed, those Units would represent 9.5% of the total Common Shares
outstanding after completion of the Cash Offering and exchange by the Operating
Partnership of 2,500,000 of its Units for units of limited partnership interest
in real estate limited partnerships (including any exchange completed pursuant
to the Exchange Offering), calculated on a fully diluted basis assuming all then
outstanding Units (other than those acquired by the Trust) have been exchanged
into an equivalent number of Common Shares. If, however, as of May 14, 1999, the
Cash Offering and/or the Exchange Offering has been completed and the number of
Units subscribed for by each Original Investor represents a percentage greater
than 9.5% of the then outstanding Common Shares, calculated 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
17
<PAGE>
of Common Shares, each Original Investor has agreed to return any excess Units
to the Operating Partnership for cancellation. As described further below, Mr.
McGrath and Mr. Geiger have deposited Units subscribed for by them into a
security escrow account for six to nine years, subject to earlier release under
certain conditions.
Under the subscription agreement, the Original Investors agreed to waive
future administrative fees for managing Participating Exchange Partnerships;
agreed to assign to the Operating Partnership the right to receive all residual
economic rights attributable to the general partner interests in Participating
Exchange Partnerships; and, in order to permit management of the Exchange
Properties by the Operating Partnership, caused the Exchange Partnerships to
cancel the partnerships' prior property management agreements and agreed to
forego the right to have a property management firm controlled by the Original
Investors assume the property management role in respect of properties in which
the Trust or the Operating Partnership invest.
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. The Original
Investors will retain any voting rights to which the escrowed Units (and/or
Common Shares into which escrowed Units have been exchanged) are entitled, as
long as the Units (and/or such Common Shares) are escrowed, provided that, until
May 14, 1999, each Original Investor may vote Units (and/or Common Shares) owned
by him and held in escrow which represent 9.5% of the then outstanding Common
Shares, calculated on a fully diluted basis assuming all then outstanding Units
(other than those acquired by the Trust) have been exchanged into an equivalent
number of Common Shares. While Units (and/or Common Shares) owned by them are
held in escrow, the Original Investors are entitled to receive dividends and
distributions based on the amount of such securities they may vote at the time
of such payments. Any dividends paid on the escrowed securities 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.
18
<PAGE>
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:
All LP's
--------
1996: $ 14,044
1997: $ 89,894
1998 (through
September 30th): $ 67,500
---------
Total: $ 171,438 (95 per Exchange Partnership Unit outstanding)
SELECTED FINANCIAL INFORMATION
The table set forth in the Prospectus at "SELECTED FINANCIAL DATA" includes
selected financial information on a pro forma basis for the Operating
Partnership for the nine months ended September 30, 1998. The operating data has
been derived from the unaudited financial statements for the Operating
Partnership, the three Acquired Properties acquired by the Operating Partnership
to date which have historical operating results, and the 23 Exchange
Partnerships whose limited partners are being offered the opportunity to
exchange their limited partnership interests therein for Operating Partnership
Units in the Exchange Offering. The data for Exchange Equity Partnerships and
Exchange Hybrid Partnerships (to the extent of their direct or indirect equity
interest in a property) and for the three Acquired Properties was derived from
the statements of revenues and certain expenses of the limited partnerships
which directly or indirectly hold record title to such properties. The
statements of revenues and certain expenses, including the notes thereto, for
such Exchange Properties are included in Exhibit D to the Prospectus and those
for the Acquired Properties are included in Exhibit E to the Prospectus. The
data for the Exchange Mortgage Partnerships and the Exchange Hybrid Partnerships
was derived from their respective balance sheets, statements of operations,
statements of partners' capital and statements of cash flow, which are set forth
in Exhibit D to the Prospectus. The foregoing statements should be reviewed by
the Offerees prior to making a decision whether or not to accept the Exchange
Offering.
19
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF EXCHANGE
PARTNERSHIP UNITS, OPERATING PARTNERSHIP UNITS
AND TRUST COMMON SHARES
The rights and obligations of the General Partner (wholly owned and
controlled, along with the Managing Shareholder of the Trust, by Mr. McGrath)
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 with Non-participating Limited
Partners," 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."
Set forth below under the applicable category is a summary of the specific
Exchange Partnership Agreement amendments that will be effected in respect of
the Exchange Partnership if the requisite percentage of Limited Partners elect
to accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners.
Issuance of Additional Securities
Exchange Partnership: Additional partnership interests may be sold in the future
in the sole discretion of the General Partner.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
20
<PAGE>
limited partners 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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, 2026, 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 (the Exchange Partnership currently has 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
21
<PAGE>
partnership holding a majority of the then outstanding units of the partnership
held by all Non-participating Limited Partners. See the Prospectus at
"AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITING PARTNERS."
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, any amendment of any agreement entered into between the Exchange
Partnership and any affiliates of the 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 the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF
PARTICIPATING EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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).
22
<PAGE>
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 15%
non-cumulative return on their capital contributions; the General Partner is
then entitled to receive any remaining distributable cash during the fiscal
year.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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
the Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING
EXCHANGE PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
partners 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.
23
<PAGE>
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 and Anticipated Holding Period
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. The original private placement offering materials did not specify the
anticipated period that the Partnership intended to hold property interests
acquired.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, 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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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."
24
<PAGE>
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 exceeds 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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, (except where any officer or affiliate of the General Partner would
continue to have personal liability for any debts of the partnership) the
General Partner may be removed only if a court of
25
<PAGE>
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 would be that following
the Exchange Offering, if the partnership constitutes a Participating Exchange
Partnership and has one or more Non-participating Limited Partners, the General
Partner 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 (it 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, Non-participating Limited Partners of the partnership holding a
majority of the then
26
<PAGE>
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 the Prospectus
at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS
WITH NON-PARTICIPATING LIMITED PARTNERS."
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 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.
27
<PAGE>
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.
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately following the completion of the
Exchange Offering the partnership has one or more Non-participating Limited
Partners, except in certain circumstances, 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 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 the Prospectus at "AMENDMENTS TO
PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE PARTNERSHIPS WITH
NON-PARTICIPATING LIMITED PARTNERS."
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
28
<PAGE>
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.
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,
29
<PAGE>
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 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 Exchange Partnership pays the General Partner a
monthly administrative fee of $500.
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."
As a result of certain amendments to be made to the partnership agreement of the
Exchange Partnership if the requisite percentage of Limited Partners elect to
accept the Exchange Offering and immediately
30
<PAGE>
following the completion of the Exchange Offering the partnership has one or
more Non-participating Limited Partners, the 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 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 the
Prospectus at "AMENDMENTS TO PARTNERSHIP AGREEMENTS OF PARTICIPATING EXCHANGE
PARTNERSHIPS WITH NON-PARTICIPATING LIMITED PARTNERS."
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
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.
31
<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. 2 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 January 28, 1999.
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. 2 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 January 28, 1999
- ---------------------- 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 Amended and Restated 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 ____
10.5 Founders' Subscription Agreement ____
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 Consents 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 ____
* Previously filed
</TABLE>
AMENDED AND RESTATED SECURITY ESCROW AGREEMENT
THIS AMENDED AND RESTATED ESCROW AGREEMENT (this "Agreement") made and
entered into as of May 15, 1998, among Gregory K. McGrath and Robert S. Geiger
(herein referred to individually as a "Security Holder" and collectively as the
"Security Holders"), Baron Capital Trust (the "Trust"), Baron Capital
Properties, L.P. (the "Partnership") and American Stock Transfer & Trust Company
(the "Escrow Agent").
WITNESSETH THAT:
A. Each Security Holder is owner of the number of units of limited
partnership interest ("Units") in the Partnership, an affiliate of the Trust,
listed opposite his name on Exhibit A attached hereto which he acquired in
exchange for his initial capital contribution to the Partnership and other
consideration.
B. The Trust has registered with the Securities and Exchange Commission
(the "Commission") 2,500,000 Common Shares of the Trust pursuant to a Form SB-2
Registration Statement in connection with the proposed public offering of such
Common Shares for cash (the "Cash Offering"), and the Partnership will apply for
registration of 2,500,000 Units in the Partnership (which Units may be exchanged
for an equivalent number of Common Shares as described in the Prospectus
contained in the Form SB-2 Registration Statement), pursuant to a Form S-4
Registration Statement in connection with the proposed public exchange offering
of Units (the "Exchange Offering"). As a condition of such registrations, the
Security Holders, the Escrow Agent, the Trust and the Partnership agree to be
bound by this Agreement.
C. Each Security Holder has deposited with the Escrow Agent a certificate
representing the number of Units listed opposite his name on Exhibit A, and the
Escrow Agent hereby acknowledges receipt thereof. Such Units, together with any
Common Shares of the Trust into which the Units may be converted in accordance
with this Agreement, are herein collectively referred to as "Escrowed Shares."
NOW THEREFORE, the parties hereto agree as follows:
1. Deposit of Certificates. Simultaneously with the execution of this
Agreement, each Security Holder has deposited with the Escrow Agent, and the
Escrow Agent hereby acknowledges receipt of, a certificate representing the
Escrowed Shares owned by the respective Security Holder. Escrowed Shares
comprised of Units are exchangeable into an equivalent number of Common Shares
of the Trust in accordance with the terms of the Declaration of Trust of the
Trust (the "Declaration of Trust") and the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement"), as they may be amended from time
to time. The number of Units comprising the Escrowed Shares deposited with the
Escrow Agent was determined based upon the assumption that the Cash Offering and
Exchange Offering would each be fully subscribed, and is intended to evidence
the ownership by each Security Holder of nine and one-half percent (9-1/2%) of
the Common Shares outstanding after completion of the
<PAGE>
Cash Offering and exchange by the Partnership of 2,500,000 of its Units for
units of limited partnership interest in real estate limited partnerships
(including any exchange completed pursuant to the Exchange Offering), calculated
on a fully diluted basis assuming all then outstanding Units (other than those
to be acquired by the Trust) have been exchanged into an equivalent number of
Common Shares. Copies of certificates representing the Escrowed Shares are
attached hereto as Exhibit B.
2. Term. The term of this Agreement and of the escrow provided herein shall
commence on the date that the Cash Offering is declared effective by the
Commission. The certificates evidencing the securities are to be deposited with
the Escrow Agent and are to be held until their release pursuant to paragraph 3
of this Agreement.
3. Release of Escrowed Shares.
3.1 Return of Excess Units and Common Shares. On May 14, 1999, (the "Share
Determination Date"), the Chief Financial Officer of the Partnership shall
certify to the Escrow Agent the number of Units and/or Common Shares comprising
the Escrowed Shares, as the case may be, which are in excess of the number to
which the Security Holders are entitled under the Subscription Agreement dated
as of February 3, 1998 among the Security Holders, the Partnership and the
Trust, and shall simultaneously deliver to the Escrow Agent replacement
certificates evidencing ownership by the Security Holders of the proper number
of Units and/or Common Shares. Upon receipt of such certification and
replacement certificates, the Escrow Agent shall return the certificates
representing the original Escrowed Shares to the Partnership and the replacement
certificates shall thereupon be deemed to represent the Escrowed Shares for all
purposes hereunder.
3.2 Release to the Security Holders. The Escrowed Shares owned by each
Security Holder shall be released to such Security Holder as set forth below,
and once released from escrow hereunder, Escrowed Shares shall no longer be
subject to the terms and conditions of this Agreement:
a. 25% of the Escrowed Shares shall be released from escrow on the sixth,
seventh, eighth, and ninth anniversary dates of the effectiveness of
the Cash Offering; or
b. 100% of the Escrowed Shares shall be released from escrow after the
Trust has had annual net earnings per share according to generally
accepted accounting principles ("GAAP") equal to at least 5% of the
public offering price (after taxes and excluding extraordinary items)
for any two consecutive fiscal years following the date of
effectiveness of the Cash Offering; or
2
<PAGE>
c. 100% of the Escrowed Shares shall be released from escrow after the
Trust has had average annual net earnings per share according to GAAP
(after taxes and excluding extraordinary items) equal to at least 5%
of the public offering price, for any five consecutive fiscal years
following the date of effectiveness of the Cash Offering; or
d. 100% of the Escrowed Shares shall be released from escrow after the
Trust's Common Shares have traded on a national stock exchange at a
price equal to at least 175% of the initial public offering price for
at least 90 consecutive trading days following the first anniversary
of the date of effectiveness of the Cash Offering.
3.2.1 Documentation to Escrow Agent Regarding Release of Escrowed Shares to
Security Holders. A request for termination of the escrow, based on the
satisfaction of the conditions described in paragraphs 3.2.a, 3.2.b, 3.2.c or
3.2.d above, shall be forwarded by each Security Holder to the Escrow Agent. A
request for termination of the escrow based upon satisfaction of the conditions
described in paragraph 3.2.b or 3.2.c. shall be accompanied by an earnings per
share calculation audited and reported on by an independent certified public
accountant retained by the Trust. A request for termination of the escrow based
upon satisfaction of the conditions described in paragraph 3.2.d shall be
accompanied by evidence of the stock price conditions provided therein.
3.3. Terminated or Partial Offerings. The foregoing notwithstanding, the
Escrowed Shares will be released by the Escrow Agent:
a. If the Cash Offering and the Exchange Offering have been terminated
and no securities were sold or exchanged thereunder; or
b. If the Cash Offering is terminated without sale of the minimum
offering amount required to complete the offering and all proceeds
have been returned to investors in such offering.
4. Restriction on Transfer. The Escrowed Shares may be transferred by will,
or pursuant to the laws of descent and distribution, or through appropriate
legal proceedings, but in all cases the Escrowed Shares shall remain in escrow
and subject to the terms of this Agreement until released pursuant to paragraph
3 above. Upon the death of the holder of any Escrowed Shares, the Escrowed
Shares of the deceased holder may be hypothecated, subject to all of the terms
of this Agreement, to the extent necessary to pay the expenses (including,
without limitation, tax liabilities) of the estate. The Escrowed Shares may be
transferred by gift to family members, provided that the Escrowed Shares shall
remain subject to the terms of this Agreement. The Escrowed Shares may not be
pledged to secure a debt except as noted above.
3
<PAGE>
5. Voting Rights. The Security Holders shall be entitled to exercise all
voting rights in respect of the Escrowed Shares owned by him to which the owners
of non-escrowed Units or Common Shares, as the case may be, are entitled;
provided however that until the Share Determination Date, a Security Holder
shall only be entitled to vote those Units and/or Common Shares owned by him and
held in escrow hereunder which, when added to all non-escrowed Units and Common
Shares owned by him, represent nine and one-half percent (9-1/2%) of the Common
Shares then issued and outstanding, calculated on a fully diluted basis assuming
all then outstanding Units (other than those to be acquired by the Trust) have
been exchanged into an equivalent number of Common Shares.
6. Dividends and Distributions.
6.1 Payment to Escrow Agent. Any dividends paid on Common Shares and/or
distributions paid with respect to Units while they are held in escrow hereunder
shall be paid to the Escrow Agent by check or wire transfer by the Trust or the
Partnership, respectively. Until the Share Determination Date, dividends and
distributions shall only be paid with respect to those Escrowed Shares which a
Security Holder would be entitled to vote under paragraph 5 hereof. The Escrow
Agent shall invest such dividends and distributions and interest earned thereon
in an interest-bearing account. Until the Escrowed Shares are released to the
Security Holders pursuant to paragraph 3 of this Agreement, the Escrow Agent
shall treat dividends and distributions paid on the Escrowed Shares and interest
earned thereon (less amounts thereof required under paragraph 6.3 hereof to pay
tax obligations of the Security Holders in respect of Escrowed Shares owned by
them and held in escrow hereunder) as assets of the Trust or the Partnership, as
the case may be, available for distribution under the terms and conditions set
forth in paragraph 10 below.
6.2 Release to the Security Holders with Escrowed Shares. Dividends and
distributions paid on the Escrowed Shares and interest earned thereon while the
Escrowed Shares are held in escrow thereunder (less amounts thereof required
under paragraph 6.3 hereof to pay tax obligations of the Security Holders in
respect of Escrowed Shares owned by them and held in escrow hereunder) shall be
disbursed to the Security Holders together with Escrowed Shares released from
the escrow pursuant to paragraph 3, in an amount proportionate to the number of
Escrowed Shares so released in relation to the number of Escrowed Shares held in
escrow hereunder immediately prior to such disbursement.
6.3 Payment of Tax Obligations on Dividends. At the written request of the
Independent Trustees (identified on Exhibit D hereto, as it may be amended from
time to time), the Escrow Agent shall deliver a check or wire transfer to each
Security Holders each year out of the dividends and distributions paid on the
Escrowed Shares and interest earned thereon held in escrow hereunder, in an
amount equal to the tax due from such Security Holder on such dividends,
distributions and interest.
4
<PAGE>
7. Stock Dividends or Splits. Stock dividends on, and shares resulting from
stock splits of, the Escrowed Shares shall be delivered to the Escrow Agent and
held pursuant to this Agreement. In the event of any stock dividend, stock split
or recapitalization of the Partnership or the Trust, any rights or duties
described in terms of a per share requirement in this Agreement shall be
adjusted appropriately.
8. Additional Shares. Upon the exercise by a Security Holder of any
conversion rights, warrants or options to acquire additional Units or Common
Shares earned by reason of his ownership of Escrowed Shares under any agreement
now effective or coming into effect during the term of the escrow hereunder,
such additional Units or Common Shares received by the Security Holder shall
forthwith be deposited in escrow with the Escrow Agent and shall be subject to
the terms and conditions of this Agreement.
9. Right to Convert Units into Common Shares. Each Security Holder shall
have the right to convert Units which are subject to the escrow hereunder into
Common Shares at any time conversion is permitted under the Declaration of Trust
and the Partnership Agreement; provided, however, that until the Share
Determination Date occurs, only Units which a Security Holder would be entitled
to vote pursuant to paragraph 5 above may be so converted. Security Holders may
exercise their conversion rights by notifying the Escrow Agent of such
conversions and such conversion shall be effected immediately upon the Escrow
Agent's receipt of such notice. Upon each conversion and any partial release of
Escrowed Shares under this Agreement, the Escrow Agent shall immediately revise
Exhibit A to reflect the number of Common Shares and Units which remain subject
to this Agreement.
10. Dissolution Preference. Subject to the limitations set forth below,
each Security Holder agrees in the event of dissolution, liquidation, merger,
consolidation, sale of assets, exchange, or any transaction or proceeding ( a
"Capital Event") that results in the distribution or sale of all or
substantially all of the assets of the Partnership or the Trust, to defer
receipt of and subordinate the economic benefits to which he would otherwise be
entitled by reason of his ownership of the Units and Common Shares held in
escrow hereunder on the effective date of such an event, in favor of any
original purchasers in the Cash Offering or the Exchange Offering which have
remained the holders of Common Shares or Units, until such original purchasers
have received, or have had irrevocably set aside for them, cash, securities, or
assets of any other kind (including, without limitation, any dividends and/or
distributions of any of the foregoing paid to the original investors prior to
the capital event) with an aggregate value at least equal to 100% of their
initial public offering price per Common Share or Unit, adjusted for stock
splits and stock dividends. Thereafter, the Security Holders shall participate
on a pro rata basis. No transferee from an original purchaser other than by
reason of descent shall have benefit of this provision. No original purchaser of
Units or Common Shares in the Exchange Offering or the Cash Offering, as the
case may be, shall have benefit of this provision if such purchaser voted in
favor of the Capital Event at a meeting held for such purpose, unless the
Security Holders also voted in favor of such Capital Event. The Escrow Agent
shall act in accordance with the written direction of the Independent Trustees
(whose determination shall be conclusive) in respect of the
5
<PAGE>
holders of Units and Common Shares which shall be entitled to the benefits of
this Section 10 and the amount of any such benefits.
11. Reliance by Escrow Agent. The Escrow Agent may conclusively rely on,
and shall be protected, when its acts in good faith upon, any statement,
certificate, notice, request, consent, order or other document which it believes
to be genuine and signed by the proper party. The Escrow Agent shall have no
duty or liability to verify any such statement, certificate, notice, request,
consent, order or other document and its sole responsibility shall be to act
only as expressly set forth in this Agreement. The Escrow Agent shall be under
no obligation to institute or defend any action, suit or proceeding in
connection with this Agreement unless it is indemnified to its reasonable
satisfaction. The Escrow Agent may consult counsel with respect to any question
arising under this Agreement and the Escrow Agent shall not be liable for any
action taken, or omitted, in good faith upon advice of counsel. In performing
any of its duties hereunder, the Escrow Agent shall not incur any liability to
anyone for any damages, losses or expenses except those which arise out of the
Escrow Agent's willful default or negligence, and it shall accordingly not incur
any such liability with respect to: (i) any action taken or omitted in good
faith upon advice of its counsel or counsel of the Trust given with respect to
any questions relating to the duties and responsibility of the Escrow Agent
under this Agreement, or (ii) any action taken or omitted in reliance upon any
instrument, including written advice provided for herein, not only as to its due
execution and the validity and effectiveness of its provisions, but also as to
the truth and accuracy of any information contained therein, which the Escrow
Agent shall in good faith believe to be genuine, to have been signed or
presented by a proper person or persons, and to conform with the provisions of
this Agreement. All Escrowed Shares and funds held pursuant to this Agreement
shall constitute trust property. The Escrow Agent shall not be liable for any
interest on the Escrowed Shares.
12. Compensation to Escrow Agent. The Escrow Agent shall be entitled to
receive from the Trust reasonable compensation for its services as set forth in
Exhibit B attached hereto. In the event that the Escrow Agent renders any
additional services not provided for herein, or if any controversy arises
hereunder, or if the Escrow Agent is made a party to, or intervenes in any
action, suit or proceeding pertaining to this Agreement, it shall be entitled to
receive from the Security Holders or at the option of the Escrow Agent, the
Trust, reasonable compensation for such additional services.
13. Qualification and Independence of Escrow Agent. The Trust and each of
the Security Holders hereby represent that a complete list of its respective
officers and members of the Board of the Board is attached hereto as Exhibit D.
Based thereon, the Escrow Agent hereby represents and warrants that it is not
affiliated with the Trust, the Security Holders or any of their respective
officers or directors.
14. Indemnification. The Trust and each Security Holder agrees to hold the
Escrow Agent harmless from, and indemnify the Escrow Agent for, any and all
costs of investigation or claims, costs, expenses, reasonable attorney fees or
other liabilities or disbursements arising out
6
<PAGE>
of any administrative investigation or proceeding or any litigation, commenced
or threatened, relating to this Agreement, including without limitation, the
implementation of this Agreement, the distribution of stock or funds, the
investment of funds, the interpretation of this Agreement or similar matters,
provided that the Escrow Agent shall not be indemnified for any costs of
investigation or claims, costs, expenses, attorney fees or other liability
arising from its bad faith or negligence or that of any of its employees,
officers, directors or agents; and further provided that the Escrow Agent shall
look first to the Trust, its assets, and the assets subject to escrow, before
seeking recourse under this indemnity against the Security Holders.
15. Scope. This Agreement shall be binding upon, and inure to the benefit
of, the parties hereto and their respective heirs, successors and assigns.
16. Termination. Except for the indemnification provisions of paragraph 14
above, which shall survive in any event, this Agreement shall terminate in its
entirety when all the Escrowed Shares have been released as provided in
paragraph 3 above.
17. Substitute Escrow Agent. The Escrow Agent may, upon not less than 60
days prior written notice to the Trust and the Security Holders, resign as the
Escrow Agent. The Trust and the Security Holders shall, before the effective
date of the Escrow Agent's resignation, mutually agree upon and appoint a
successor Escrow Agent. If the Trust and the Security Holders fail to agree upon
a successor Escrow Agent at least 10 days prior to the date of resignation, an
impasse shall be deemed to exist, at which time the Independent Trustees shall
have the right to select the successor Escrow Agent. Pending resolution of the
impasse and selection of the successor Escrow Agent, the Escrow Agent then
serving under this Agreement shall continue to serve as the Escrow Agent, but
shall have no liability for its actions other than for gross negligence or acts
amounting to criminal misconduct.
18. Notice of Non-liability. Under the Delaware Business Trust Act and
Sections 3.3 and 3.4 of the Declaration of Trust, neither the Shareholders, the
Trustees nor any other members of the Board of the Trust shall be personally
liable hereunder, and the Escrow Agent expressly agrees to look solely to the
Trust's property for the satisfaction of any claims hereunder against the Trust
or the Security Holders.
[balance of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the Security Holders, the Trust and the Escrow Agent
have entered into this Agreement as of the date first above written, in multiple
counterparts, each of which shall be considered an original.
SECURITY HOLDERS:
/s/ Gregory K. McGrath
---------------------------------
Gregory K. McGrath
/s/ Robert S. Geiger
---------------------------------
Robert S. Geiger
TRUST:
BARON CAPITAL TRUST
By: /s/ Gregory K. McGrath
-----------------------------
Gregory K. McGrath
Chief Executive Officer
PARTNERSHIP:
BARON CAPITAL PROPERTIES, L.P.
By: /s/ Gregory K. McGrath
-----------------------------
Gregory K. McGrath
Chief Executive Officer
ESCROW AGENT:
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By: /s/ Herbert J. Lemmer
-----------------------------
Herbert J. Lemmer
Vice President
8
<PAGE>
EXHIBIT A
Number of Units
Name of Security Holder Originally Placed in Escrow*
- ----------------------- ---------- -----------------
Gregory K. McGrath 601,080
Robert S. Geiger 601,080
* The number of Units originally placed in escrow is based upon the assumed full
subscription of the Cash Offering and exchange by the Partnership of 2,500,000
Units for units of limited partnership interest in real estate limited
partnerships completed by May 14, 1999. On that date, a calculation will be made
as to whether the Security Holders received excess Escrowed Shares, and if so,
such excess Escrowed Shares will be released from escrow and canceled. Pending
this determination, voting rights as well as distribution payments will be
limited as set forth in this Agreement.
<PAGE>
EXHIBIT B
ESCROWED SHARE CERTIFICATES
<PAGE>
EXHIBIT C
COMPENSATION OF ESCROW AGENT
One-time only fee of $1,000.00.
<PAGE>
EXHIBIT D
LIST OF OFFICERS AND MEMBERS OF THE BOARD OF THE TRUST
Name of Officer and
Member of the Board Position
- ------------------- --------
Gregory K. McGrath Chief Executive Officer
Robert S. Geiger Chief Operating Officer
Baron Advisors, Inc. Member of the Board
James H. Bownas Member of the Board (Independent Trustee)
Peter M. Dickson Member of the Board (Independent Trustee)
Founders' Subscription Agreement
This Founders' Subscription Agreement (this "Subscription Agreement") is
made as of February 3, 1998 among Gregory K. McGrath and Robert S. Geiger
(individually, a "Founder" and collectively, the "Founders"), Baron Capital
Trust, a Delaware business trust (the "Trust"), and Baron Capital Properties,
L.P., a Delaware limited partnership (the "Partnership").
Recitals:
A. Prior to the effective date of this Subscription Agreement, the Founders
organized the Trust and the Partnership (the "Organization") to own and manage
multi-family residential properties in an UPREIT (umbrella partnership real
estate investment trust) business and tax structure.
B. The Founders intend to pursue Federal and State registration of an
initial public offering (the "Cash Offering") by which the Trust will offer
2,500,000 common shares of beneficial interest (the "Common Shares") to the
public at $10.00 per share in order to raise up to $25,000,000 in new capital,
and simultaneously pursue a second similarly registered offering (the "Exchange
Offering") by which the Partnership will offer to exchange up to 2,500,000 units
of limited partnership interest (the "Units") with an initial assigned value of
$10.00 per unit for limited partnership interests held by investors in limited
partnerships owning real property or real property interests of a type
attractive to the Trust. Outstanding Units will be freely exchangeable by their
holders into Common Shares on a one-for-one basis.
C. The Partnership will own and manage all of the real estate assets
acquired by the Organization. The Trust will invest the net proceeds of the Cash
Offering in the Partnership in exchange for a number of Units equal to the
number of Common Shares sold in the Cash Offering, and will be the initial
general partner of the Partnership. Day-to-day operations of the Trust will be
managed by Baron Advisors, Inc. (the "Managing Shareholder"), which is wholly
owned by Mr. McGrath.
D. The Founders own Strategic Management, Inc. ("SMI"), a real estate
management company which has entered into contracts to manage selected real
estate properties; which has a highly experienced management staff; and which
has been presented the opportunity to manage substantially all of the
multi-family residential property controlled or available for control by the
Founders, totaling more than 4,000 potential units. The national model for
multi-family residential property management contracts provides for an annual
management fee in an amount equal to 5% of gross revenues from the property and
a fixed annual fee of approximately $500 per residential unit for bookkeeping or
other financial services. Property management companies are typically valued at
four times annualized gross revenues.
Mr. McGrath is the sole shareholder of approximately 48 corporate general
partners of limited partnerships that directly or beneficially own equity or
debt interests in real property ("Affiliate Partnerships"). In substantially all
cases, the corporate general partner owns 1% of
<PAGE>
the total partnership interest in a particular Affiliate Partnership. In
addition, under the respective agreements of limited partnership, each of the
corporate general partners of the Affiliate Partnerships is generally entitled
to receive: (i) an annual administrative fee; (2) disposition and other fees
resulting from a capital transaction; and (3) upon the limited partners
receiving an aggregate return in an amount equal to their original investment
and a preferred return, up to 100% of the distributable cash from ongoing
operations and capital events (the "Residual Economic Benefits").
NOW THEREFORE, in consideration of the mutual promises, conditions and
covenants as hereinafter set forth, the parties hereto agreee as follows:
1. The Founders hereby each subscribe for 601,080 Units of the Partnership.
Under the Declaration of Trust of the Trust and the Agreement of Limited
Partnership of the Partnership, all or a portion of such Units are exchangeable
by a Founder into an equivalent number of Common Shares at any time and from
time to time. For purposes of this Subscription Agreement, such Units, together
with Common Shares into which any such Units may have been exchanged as of any
given time, are referred to herein as "Founders' Units." If the Cash Offering
and Exchange Offering are pursued and fully subscribed, the Founders' Units
would represent 19% in the aggregate (or 9.5% for each of the Founders) of the
total Common Shares outstanding after completion of the Cash Offering and
exchange by the Partnership of 2,500,000 of its Units for units of limited
partnership interest in real estate limited partnerships (including any exchange
completed pursuant to the Exchange Offering), calculated on a fully diluted
basis assuming all then outstanding Units (other than those to be acquired by
the Trust) have been exchanged into an equivalent number of Common Shares. If,
however, as of May 14, 1999 (the "Share Determination Date"), the Organization
has completed the Cash Offering and/or the Exchange Offering, and the number of
Founders' Units subscribed for hereunder represent a percentage greater than 19%
of the then outstanding Common Shares in the aggregate, calculated on a fully
diluted basis assuming all then outstanding Units (other than those to be
acquired by the Trust) have been exchanged into an equivalent number of Common
Shares, each Founder agrees to return to the Partnership one-half of any such
excess Founders' Units and the same shall be canceled and deemed null and void.
The procedure for cancellation and the method for determining if excess
Founders' Units have been issued is set forth in the Security Escrow Agreement
referenced below.
2. Certificates evidencing the Founders' Units shall contain appropriate
legends indicating that the Founders' Units: (i) are subject to the terms of a
Security Escrow Agreement; (ii) are not registered when issued; (iii) are not
permitted to be registered for at least 12 months following release from the
escrow established thereunder; and (iv) are subject in part to cancellation
under the terms and conditions of the Security Escrow Agreement.
3. The Founder Units shall be issued after execution of a Security Escrow
Agreement among the Founders, the Trust, the Partnership and an institutional
escrow agent, and certificates representing the Founders' Units shall be
delivered directly to the Escrow
2
<PAGE>
Agent thereunder. All of the terms and conditions of the Security Escrow
Agreement are incorporated in and made a part of this Subscription Agreement. A
copy of the Security Escrow Agreement is attached hereto as Exhibit 1.
4. Each of the Founders agrees to contribute up to $50,000 to the capital
of the Partnership prior to the completion of the Cash Offering.
5. The Founders agree to cause SMI to terminate without any fee or expense
payable or reimbursable in SMI's favor, any property management contract
concerning a property in which the Partnership acquires an interest and which
the Partnership has the desire and capability to manage. The Founders agree to
cause SMI to permit the Partnership to hire any employee of SMI which the
Partnership desires. The Founders agree to cause SMI to deliver to the
Partnership financial books and records of account in SMI's possession
pertaining to any property to which the Partnership provides management
services, and to cause SMI to provide the Partnership at no expense with any
training or know-how concerning technology or management software which may be
useful to the Partnership. The Founders agree that SMI will not compete for nor
interfere with any business prospects of the Partnership. The Founders further
agree not to sell SMI as an ongoing business, nor sell any proprietary
information, contracts or contract rights that may be used in any competitive
respect against the Partnership.
6. The Founders agree to afford the Partnership the first opportunity to
purchase and manage any multi-family residential property which the Founders
individually or collectively own or control. In circumstances where a property
controlled by a Founder is self-managed, the Founders agree to use their best
efforts to cause such property to use the resources of the Partnership to
accomplish self-management and reimburse the Partnership for the use of such
resources, on a fair and equitable basis; provided, however, that the
Partnership in each such case shall be required to agree that the cost for use
of the Partnership resources shall not on an annual basis exceed 5% of the gross
revenues generated by the property plus an amount equal to $500 times the number
of units located at the property.
7. Subject to paragraph 8 below, the Founders agree that in each instance
where the Partnership acquires at least a majority limited partnership interest
in a real estate partnership in which the corporate general partner is owned by
a Founder, that such Founder will do one or more of the following as directed by
the Board of the Trust: (i) deliver an irrevocable voting proxy for all of his
shares in such corporation to the Board of the Trust; (ii) elect the Board of
the Trust as the board of directors of the corporation; or (iii) in respect of
any material decision to be made by the corporate general partner seek direction
from the Board of the Trust and act upon its directive, or take such other
action as may be deemed desirable by the Board of the Trust in its sole
discretion.
8. Where permitted under applicable agreements, in lieu of paragraph 7
hereof, the Founders agree to transfer to the Partnership, for the purchase
price of $100) the general partnership interest or the stock of the corporate
general partner in each case where the
3
<PAGE>
Partnership has acquired at least a 90% limited partnership interest in a real
estate limited partnership, and the corporate general partner is owned by a
Founder. The form of the transfer shall be at the election of the Partnership.
Any such transfer shall be made immediately upon request of the Partnership.
9. In each case where the Partnership has acquired at least a majority
limited partnership interest in a real estate limited partnership, and the
corporate general partner of such partnership is owned by a Founder, the Founder
shall cause the corporate general partner to waive the right to receive annual
administrative fees, disposition fees or any other type of fees to which the
corporate general partner is entitled under the terms of the applicable
partnership agreement; provided, however, that the Partnership may in lieu of
such waiver request and receive an assignment of any such rights. In addition,
the Founder shall cause such corporate general partner to assign for the benefit
of the Partnership all Residual Economic Benefits to which such corporate
general partner is entitled under the applicable partnership agreement.
10. This Agreement is binding upon the parties and their respective
successors and assigns.
11. This Agreement is effective as of the day first above written, and
memorializes undertakings made at or before such date. Delaware law shall govern
this Agreement. Venue for enforcement or interpretation of the terms hereof
shall lie exclusively in the State or Federal Courts located in Palm Beach
County, Florida.
12. Each Founder acknowledges that he has acquired the Founders' Units for
investment purposes only.
[balance of page intentionally left blank]
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have signed this Subscription Agreement
on their own behalf or on behalf of the undersigned entity, as the case may be,
as of the date first above written.
FOUNDERS:
/s/ Gregory K. McGrath
---------------------------------
Gregory K. McGrath
/s/ Robert S. Geiger
---------------------------------
Robert S. Geiger
TRUST:
BARON CAPITAL TRUST
By /s/ Gregory K. McGrath
-------------------------------
Gregory K. McGrath
Chief Executive Officer
PARTNERSHIP:
BARON CAPITAL PROPERTIES, L.P.
By /s/ Gregory K. McGrath
-------------------------------
Gregory K. McGrath
Chief Executive Officer
5
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 19 residential
apartment 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" in the
prospectus.
/s/ Elroy D. Miedema
---------------------------
Elroy D. Miedema
Certified Public Accountant
Miami, Florida
January 28, 1999
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
January 28, 1999
<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
January 28, 1999
<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
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 relating to the financial statements of Lamplight
Court of Bellefontaine, Ltd., and to all references to our firm appearing in
such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Brevard Mortgage Program, Ltd., and to all references to our firm appearing in
such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 relating to the financial statements of Baron
Strategic Investment Fund IX, Ltd., and to all references to our firm appearing
in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 relating to the financial statements of Baron
Strategic Investment Fund VI, Ltd., and to all references to our firm appearing
in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 relating to the financial statements of Baron
Strategic Investment Fund X, Ltd., and to all references to our firm appearing
in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Baron Strategic Investment Fund IV, Ltd., and to all references to our firm
appearing in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Baron Strategic Investment Fund, Ltd., and to all references to our firm
appearing in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Baron Strategic Investment Fund V, Ltd., and to all references to our firm
appearing in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Baron Strategic Investment Fund VIII, Ltd., and to all references to our firm
appearing in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Registration Statement on Form S-4 of our
report dated August 14, 1998 (except for the third paragraph of Note 6, as to
which the date is December 15, 1998) relating to the financial statements of
Baron Strategic Vulture Fund I, Ltd., and to all references to our firm
appearing in such Registration Statement.
RACHLIN COHEN & HOLTZ
Miami, Florida
January 28, 1999
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 property: Forest Glen Apartments - Phase III
Daytona Beach, Florida
Residential Apartment Community
Number of units and
total square feet of units: 26 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 property: Forest Glen Apartments - Phase II
Daytona Beach, Florida
Residential Apartment Community
Number of units and
total square feet of units: 30 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder." 010499
VI-1
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
- --------------------------------------------------------------------------------
Florida Income Appreciation Fund I, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: Forest Glen Apartments - Phase IV
Daytona Beach, Florida
Residential Apartment Community
Number of units and
total square feet of units: 8 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 square feet of units: 77 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 83 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 property: Forest Glen Apartments - Phase I
Daytona Beach, Florida
Residential Apartment Community
Number of units and
total square feet of units: 52 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 60 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 square feet of units: 48 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 Price1: $549,000
Cash Reserve: $121,000
Acquisition Fee: $40,000
Total Investment Cost: $710,000
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 78 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 square feet of units: 39 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 144 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 square feet of units: 60 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 64 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 square feet of units: 54 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 195 Units
165,750 total square feet
ate 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 square feet of units: 84 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 84 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 square feet of units: 84 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 - Phase I
Orlando, Florida
Residential Apartment Community
Number of units and
total square feet of units: 70 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 square feet of units: 80 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 (73.7%)
Residential Apartment Community
Number of units and
total square feet of units: 81 Units
43,776 total square feet
Date investment made: 10/96
Principal amount of mortgage financing
existing at date of investment: $1,300,000
Contract Investment Price(1): $612,000
Cash Reserve: $90,000
Acquisition Fee: $90,000
Total Investment Cost: $792,000
- --------------------------------------------------------------------------------
Baron Strategic Investment Fund, Ltd.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Name, location, type of property: Villas at Lake Sycamore Blossom Corners Apartments -Phase
Cincinnati, Ohio II
Townhomes Orlando, Florida
(under development) Residential Apartment Community
Number of units and
total square feet of units: 164 Units 68 Units
217,300 total square feet 38,100 total square feet
Date investment made: 3/98 10/96
Principal amount of mortgage financing
existing at date of investment: $800,000 $1,130,000
Contract Investment Price(1): $128,000 $712,409
Cash Reserve: $18,000 $102,000
Acquisition Fee: $21,600 $122,400
Total Investment Cost: $167,600 $936,809
</TABLE>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-11
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
- --------------------------------------------------------------------------------
Baron Strategic Investment Fund II, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: Steeplechase Apartments
Anderson, Indiana
Residential Apartment Community
Number of units and
total square feet of units: 72 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.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Name, location, type of Candlewood Apts. - Phase II Country Square Apts. - Phase I
property: Tampa, Florida (41.3%) Tampa, Florida
Residential Apt Community Residential Apt.
Community
Number of units and
total square feet of units: 60 Units 73 Units
17,568 total square feet 40,032 total square feet
Date investment made: 4/98 3/97
Principal amount of mortgage
financing existing at date of
investment: $605,000 $1,600,000
Contract Investment Price(1): $68,000 $188,750
Cash Reserve: $10,800 $30,000
Acquisition Fee: $12,960 $36,000
Total Investment Cost: $91,760 $254,750
<CAPTION>
<S> <C> <C>
Name, location, type of Pine View Apartments Garden Terrace Apts. -
property: Orlando, Florida (57%) Phase III
Residential Apt. Tampa, Florida (20%)
Community Residential Apt.
Community
Number of units and
total square feet of units: 91 Units 91 Units
Approx. 50,000 sq. ft. 54,720 total square feet
Date investment made: 10/97 2/98
Principal amount of mortgage
financing existing at date of
investment: $1,620,000 $1,010,000
Contract Investment Price(1): $347,000 $160,000
Cash Reserve: $54,000 $25,200
Acquisition Fee: $64,800 $30,240
Total Investment Cost: $465,800 $215,440
</TABLE>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-12
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
- --------------------------------------------------------------------------------
Baron Mortgage Fund IX, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: Glen Oaks
Louisville, Kentucky
Single Family Homes
Number of units and
total square feet of units: 320 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 square feet of units: 150 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 square feet of units: 84 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 square feet of units: 226 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-14
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
- --------------------------------------------------------------------------------
Baron Mortgage Development Fund XI, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: The Villas at Lake Sycamore
Cincinnati, Ohio
Residential Townhome Community
Number of units and
total square feet of units: 164 Units
217,300 total square feet
Date investment made: 4/97
Principal amount of mortgage financing
existing at date of investment: $800,000
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 150 Units
total 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-15
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------------------
Baron Strategic Investment Fund V, Ltd.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Name, location, type of property: Sunrise Apartments - Phase I Curiosity Creek Apartments Candlewood Apts. - Phase II
Titusville, Florida Tampa, Florida (26.3%) Tampa, Florida (12.8%)
Residential Apartment Residential Apartment Residential Apartment
Community Community Community
Number of units and
total square feet of units: 60 Units 81 Units 60 Units
36,288 total square feet 43,776 total square feet 17,568 total square feet
Date investment made: 6/97 3/97 4/98
Principal amount of mortgage financing
existing at date of investment: $1,079,582 $1,300,000 $605,000
Contract Investment Price(1): $488,000 $218,100 $21,000
Cash Reserve: $80,400 $36,000 $3,600
Acquisition Fee: $80,400 $36,000 $3,600
Total Investment Cost: $648,800 $350,100 $28,200
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Baron Strategic Investment Fund VII, Ltd.
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Name, location, type of property: Crystal Court Apts. - Phase I Longwood Apts. - Phase II Sunrise Apts. - Phase II
Lakeland, Florida Cocoa Beach, Florida Titusville, Florida
Residential Apartment Residential Apartment Residential Apartment Community
Community Community
Number of units and
total square feet of units: 72 Units 36 Units 37 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: $1,222,000 $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>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 84 Units
total 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>
<S> <C> <C>
Name, location, type Heatherwood Apts. -Phase II Pine View Apartments
of property: Kissimmee, Florida (42%) Orlando, Florida (43%)
Residential Apartment Residential Apartment
Community Community
Number of units and
total square feet of units: 41 Units 91 Units
22,176 total square feet 46,656 total square feet
Date investment made: 10/97 10/97
Principal amount of mortgage
financing existing at date
of investment: $710,000 $1,620,000
Contract Investment Price(1): $174,000 $263,000
Cash Reserve: $26,400 $39,600
Acquisition Fee: $31,680 $47,520
Total Investment Cost: $232,080 $350,120
<CAPTION>
<S> <C> <C>
Name, location, type Crystal Court Apts.-Phase I Garden Terrace Apts. -
of property: Lakeland, Florida (43.5%) Phase III
Residential Apartment Tampa, Florida (55%)
Community Residential Apt
Community
Number of units and
total square feet of units: 72 Units 91 Units
43,776 total square feet 40,032 total square feet
Date investment made: 10/97 1/98
Principal amount of mortgage
financing existing at date
of investment: $1,222,000 $1,010,000
Contract Investment Price(1): $359,000 $200,000
Cash Reserve: $54,000 $45,600
Acquisition Fee: $64,800 $45,600
Total Investment Cost: $477,800 $291,200
</TABLE>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 Apartments - Phase I
Tampa, Florida
Residential Apartment Community
Number of units and
total square feet of units: 73 Units
40,032 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
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-18
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
Baron Strategic Investment Fund VIII, Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Name, location, type of property: Longwood Apts. - Phase I Heatherwood Apts. - Phase II The Villas at Lake Sycamore
Cocoa, Florida Kissimmee, Florida Cincinnati, Ohio
Residential Apartment Residential Apartment Townhomes
Community Community (58%) (under development)
Number of units and
total square feet of units: 58 Units 41 Units 164 Units
35,712 square feet 22,176 square feet 217,300 total square feet
Date investment made: 10/97 10/97
Principal amount of mortgage financing
existing at date of investment: $1,037,000 $710,000 $800,000
Contract Investment Price(1): $577,429 $160,500 $77,000
Cash Reserve: $84,000 $24,000 $12,000
Acquisition Fee: $100,800 $28,800 $14,400
Total Investment Cost: $762,229 $213,300 $103,400
</TABLE>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-19
<PAGE>
TABLE VI:
ACQUISITION OF PROPERTIES BY PROGRAM
(continued)
- --------------------------------------------------------------------------------
Florida Tax Credit Fund II, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: Bear Creek Apartments
Bartow, Florida
Residential Apartment Community
Number of units and
total square feet of units: 47 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
- --------------------------------------------------------------------------------
Baron Strategic Investment Fund IX, Ltd.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Name, location, type of Villas at Lake Sycamore Candlewood Apts. - Phase II
property: Cincinnati, Ohio Tampa, Florida (45.9%)
Townhomes Residential Apt.
(under development) Community
Number of units and
total square feet of 164 Units 60 Units
units: 217,300 square feet 17,568 total square feet
Date investment made: 2/98 4/98
Principal amount of mortgage
financing existing at date of
investment: $800,000 $605,000
Contract Investment Price(1): $243,500 $75,500
Cash Reserve: $55,200 $16,800
Acquisition Fee: $55,200 $16,800
Total Investment Cost: $353,900 $109,100
<CAPTION>
<S> <C> <C>
Name, location, type of Garden Terrace Apts. - Crystal Court Apts. -
property: Phase III Phase I
Tampa, Florida (25%) Lakeland, Florida (41.1%)
Residential Apt Residential Apt
Community Community
Number of units and
total square feet of 91 Units 72 Units
units: 40,032 total square feet 43,776 total square feet
Date investment made: 1/98 12/97
Principal amount of mortgage
financing existing at date of
investment: $1,010,000 $1,216,741
Contract Investment Price(1): $200,000 $289,000
Cash Reserve: $45,600 $120,000
Acquisition Fee: $45,600 $120,000
Total Investment Cost: $291,200 $529,000
</TABLE>
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
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 total 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, Ltd.
- --------------------------------------------------------------------------------
Name, location, type of property: Brookwood Way Apartments
Mansfield, Ohio
Residential Apartment Community
Number of units and
total square feet of units: 66 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 Price1: $219,000
Cash Reserve: $70,000
Acquisition Fee: $15,000
Total Investment Cost: $304,000
- --------------------------------------------------------------------------------
(1) The partnership applied net investment proceeds to acquire record title to
residential apartment property, to provide or acquire subordinated mortgage
loans secured by property, or to acquire limited partnership interests in,
or redeem limited partnership interests of prior limited partners of,
limited partnerships which own record title to property or subordinated
mortgage interests secured by property. For the specific type of investment
made, see Table I above and the footnotes thereto and the Prospectus at
"Prior Performance of Affiliates of Managing Shareholder."
VI-21
- --------------------------------------------------------------------------------
THE APPRAISAL OF
BLOSSOM CORNERS II APARTMENTS
LOCATED AT 2143 RAPER DAIRY ROAD,
IN THE CITY OF ORLANDO,
ORANGE COUNTY, FLORIDA, 32822.
- --------------------------------------------------------------------------------
PREPARED FOR
BLOSSOM CORNERS APARTMENTS II, LTD.
DATE OF VALUATION
JANUARY 5, 1998
DATE OF REPORT
JANUARY 14, 1998
<PAGE>
January 14, 1998
Blossom Corners Apartments II, Ltd.
7826 Cooper Road
Cincinnati, Ohio 45242
Gentleman:
At your request, our firm has inspected and appraised the Blossom Corners II
apartment community which contains 68 apartment units. The subject property is
located at 2143 Raper Dairy Road, Orlando, Orange County, Florida. The property
is east of South Semoran Boulevard (S.R. 436) and south of Curry Ford Road.
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 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 1981. The property's management reports a
current occupancy of 100.0%. The Appraiser inspected the exterior of the
apartment community and the interior of the model unit. Access to most of
the 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 visual
inspections of the subject property indicates that it is in good overall
condition. Over the recent past the subject property has reportedly
received significant repairs and renovations. The most significant of these
major repairs and renovations have been summarized as follows:
<PAGE>
Blossom Corners Apartments, II, Ltd.
January 14, 1998
Page 2
1. The deteriorated exterior siding and trim on the property was repaired
and replaced.
2. The building exteriors were painted.
3. The projects patio fencing was repaired and painted.
4. The laundry room was repaired and renovated.
The Appraiser's inspection of the subject property revealed it to be in
good overall condition. However, minor deferred maintenance items including
1) siding pulling away from the building frame and 2) deteriorated siding
were noted. In addition, the property's irrigation system was not
functioning. Deferred maintenance has been estimated at approximately
$4,000. The property also suffers from functional obsolescence relating to
the need to modify a portion (288 SF) of the office area back to a studio
unit. The cost to cure this functional obsolescence has been estimated at
$5,000.
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 TWO HUNDRED FIFTY THOUSAND DOLLARS
($2,250,000)
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>
Blossom Corners Apartments, II, Ltd.
January 14, 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
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 License No. 0000908
PFW/CBB:tms
96-109
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
CANDLEWOOD II APARTMENTS
LOCATED AT 5901 BRYCE LANE,
NEAR THE CITY OF TAMPA,
HILLSBOROUGH COUNTY, FLORIDA, 33615.
- --------------------------------------------------------------------------------
PREPARED FOR
BARON STRATEGIC INVESTMENT
FUND III, LTD.
DATE OF VALUATION
JANUARY 13, 1998
DATE OF REPORT
JANUARY 23, 1998
<PAGE>
January 23, 1998
Baron Strategic Investment Fund III, Ltd.
7826 Cooper Road
Cincinnati, Ohio 45242
Gentleman:
At your request, our firm has inspected and appraised the Candlewood II
apartment community which contains 33 apartment units and a managers office. The
subject property is located northwest of Tampa International Airport at 5901
Bryce Lane, near the city of Tampa, in Hillsborough County, Florida.
The purpose of this appraisal was to estimate the market value of the fee simple
interest in the real estate as if renovated, including chattels, under market
conditions prevailing on January 13, 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 management and analytical decisions
pertaining to 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 1983. The property's management reports a
current occupancy of 93.9%. The Appraiser inspected the exterior of the
apartment community and the interior of one vacant unit. Access to most of
the 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, deferred maintenance items including 1)
deteriorated fascia; 2) deteriorated siding; 3) deteriorated trim; 4)
deteriorated patio fences; and 5) peeling doors were noted throughout the
property. In addition, project management reported that new roofs were
needed. Deferred maintenance has been estimated at approximately $32,500.
<PAGE>
Baron Strategic Investment Fund III, Ltd.
January 23, 1998
Page 2
Project management reports that the deferred maintenance items currently
impacting the subject are proposed to be cured in the near future. At the
request of the client, the subject property has been appraised "as if fully
renovated" with all deferred maintenance items cured. Therefore, this
appraisal has been made contingent upon the completion of the repairs and
renovations described herein in a timely and workmanlike manner.
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 market value, "as if
renovated" under the foregoing contingencies, of:
NINE HUNDRED TWENTY-FIVE THOUSAND DOLLARS
($925,000)
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 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
<PAGE>
Baron Strategic Investment Fund III, Ltd.
January 23, 1998
Page 3
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 License No. 0000908
PFW/CBB:tms
96-024
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
CRYSTAL COURT PHASE I APARTMENTS
LOCATED AT 1969 CRYSTAL GROVE DRIVE,
IN THE CITY OF LAKELAND,
POLK COUNTY, FLORIDA, 33801
- --------------------------------------------------------------------------------
PREPARED FOR
CRYSTAL COURT PROPERTIES, LTD.
DATE OF VALUATION
JUNE 4, 1998
DATE OF REPORT
JUNE 7, 1998
<PAGE>
June 7, 1998
Crystal Court Properties, Ltd.
7826 Cooper Road
Cincinnati, OH 45242
Dear Mr. McGrath:
At your request, our firm has inspected and appraised the Crystal Court Phase I
apartment community which contains 72 apartment units. The subject property is
located at 1969 Crystal Grove Drive, in Lakeland, Polk County, Florida.
The objective of this appraisal was to estimate the "as is" market value of the
fee simple interest in the real estate, including chattels, under market
conditions prevailing on June 4, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1982. The property reports a current
occupancy of 93.1%. The Appraiser inspected the exterior of the apartment
community and the interior of the five units which were vacant on June 4,
1998. Access to most of the 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, roof, mechanical or
other engineering reports depicting the current condition of the property.
It is recommended that such reports be obtained. Visual inspections of the
subject property indicated that the subject improvements are generally in
average to good overall condition. The subject apartment buildings were
reportedly re-sided between 2 to 3 years ago. The siding was applied over
the old siding on most of the buildings and could not be examined by the
Appraiser. However, some deferred maintenance, primarily relating to the
subject's roofs and deteriorated siding was noted by the Appraiser, and
these items have been described in detail within the attached appraisal.
The Appraiser has estimated the cost to cure this deferred maintenance at
$57,500.
<PAGE>
Crystal Court Properties, Ltd.
June 7, 1998
Page 2
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.
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.
5. The market value estimates reported herein are contingent upon the subject
property being sub-metered by Conservation Billing Services, Inc. with the
pass-through of sewer, water and garbage expenses to the tenants. Thus,
this appraisal and the value estimates reported herein are subject to, and
contingent upon, the installation of the sub-metering system in a timely
and workmanlike manner and the lump sum payment of the $14,040 contract
capital charge.
By virtue of the Appraiser's inspection, investigation and analyses, it was the
opinion of the Appraiser that the estimated market value of the fee simple
interest in the subject Crystal Court Phase I Apartments, as if utility
submetering had been installed and completed on the property, based upon market
conditions prevailing on June 4, 1998, equaled:
TWO MILLION FORTY THOUSAND DOLLARS
($2,040,000)
The total estimated cost to install the utility submetering system on the
subject property amounts to $14,040. This system has not been installed as of
the date of valuation, and the following value estimate contemplates that this
system will be installed in the near future. Therefore, the estimated "As Is"
market value of the fee simple interest in the subject property as of June 4,
1998 was:
TWO MILLION TWENTY-FIVE THOUSAND NINE HUNDRED SIXTY DOLLARS
($2,025,960)
<PAGE>
Crystal Court Properties, Ltd.
June 7, 1998
Page 3
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 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
<PAGE>
Crystal Court Properties, Ltd.
June 7, 1998
Page 4
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 License No. 0000908
PFW/CBB:tms
98-044
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
GARDEN TERRACE PHASE III APARTMENTS
LOCATED AT 8725 DEL REY COURT 10A,
IN THE CITY OF TAMPA,
HILLSBOROUGH COUNTY, FLORIDA 33617
- --------------------------------------------------------------------------------
PREPARED FOR
GARDEN TERRACE APARTMENTS III, LTD.
DATE OF VALUATION
MAY 29, 1998
DATE OF REPORT
JUNE 12, 1998
<PAGE>
June 12, 1998
Garden Terrace Apartments III, Ltd.
7826 Cooper Road
Cincinnati, OH 45242
RE: Garden Terrace III
At your request, our firm has inspected and appraised the Garden Terrace Phase
III apartment community which contains 91 apartment units. The subject property
is located at 8725 Del Rey Court 10A, in the city of Tampa, Hillsborough County,
Florida.
The objective of this appraisal was to estimate the "as is" market value of the
fee simple interest in the real estate, including chattels, under market
conditions prevailing on May 29, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1983. The property reports a current
occupancy of 90.1%. The Appraiser inspected the exterior of the apartment
community and the interior of the nine vacant units. Access to most of the
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. Based upon a visual inspection
of the subject property, as well as discussions with property management,
it appears that the subject improvements are in average to good overall
condition.
Based upon the Appraiser's visual inspection of the subject property, some
items of deferred maintenance were noted. These deferred maintenance items
included 1) small areas of deteriorated siding and trim; 2) some
deteriorated door jambs and framing, 3) peeling paint on front doors of
various units; 4) small areas of deteriorated soffitt and fascia; 5) the
need to paint the recently repaired roof fascia on several buildings; 6)
the parking lot needs re- sealing; 7) perimeter fencing that requires
repair; and 8) one "down" unit which will require significant repair and
refurnishing prior to being rentable. The cost to cure the deferred
maintenance impacting these improvements has been estimated at $12,000.
<PAGE>
In addition, it will be necessary to convert one of the subject's 2BR/2BA
units into a 1BR/1BA resident manager's unit with attached rental office.
The cost to cure the functional obsolescence related to the subject's lack
of an on-site rental office has been estimated at $1,500.
4. This appraisal is subject to: a) the 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. The value estimate for the property is
subject to revision based upon the findings of the contractor.
5. 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.
6. Access to the subject property from Busch Boulevard is via Del Rey Court, a
private road serving the subject as well as other properties. The Appraiser
has not been provided with title work relating to the subject property.
Therefore, this appraisal, and the value estimates reported herein are
subject to the subject property's continued legal access to Busch Boulevard
via Del Rey Court.
By virtue of the Appraiser's inspection, investigation and analyses, it was the
opinion of the Appraiser that the estimated market value of the fee simple
interest in the subject Garden Terrace Phase III Apartments, based upon market
conditions prevailing on May 29, 1998, equaled:
ONE MILLION EIGHT HUNDRED FIFTY THOUSAND DOLLARS
($1,850,000)
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
<PAGE>
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, 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 License No. 0000908
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
LAMPLIGHT COURT APARTMENTS
LOCATED AT 1600 SOUTH DETROIT STREET
IN BELLEFONTAINE, LOGAN COUNTY,
OHIO, 43311.
- --------------------------------------------------------------------------------
PREPARED FOR
INDEPENDENCE VILLAGE, LTD.
DATE OF VALUATION
SEPTEMBER 21, 1998
DATE OF REPORT
OCTOBER 5, 1998
<PAGE>
October 5, 1998
Independence Village, Ltd.
7826 Cooper Road
Cincinnati, OH 45242
Gentlemen:
At your request, our firm has inspected and appraised the existing Lamplight
Court apartment community which contains 79 rental apartment units. The subject
property is located at 1600 South Detroit Street, in Bellefontaine, Logan
County, Ohio, 43311.
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 September 21, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1973. The property reports a current
occupancy of 93.7%. The Appraiser inspected the exterior of the apartment
community and the interior of the vacant units. Access to most of the units
was not available due to the high occupancy rate 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 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.
4. 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. Based upon the
Appraiser's visual inspection of the subject property and discussions with
property management, it appears that the subject property is in good
overall condition. Over the last two year period the subject has received
repairs and renovations including 1) the repair and re-sealing of the
parking lot; 2) the replacement of three roofs; 3) complete exterior
painting; 4) the repair and replacement of all of the patio fences; 5) the
replacement and repair of the siding on the ends of six buildings and 6)
the leveling and repair of the project's stoops and sidewalks. However, a
number of items of deferred maintenance were noted and should be cured.
These items of deferred maintenance have been summarized on the following
page.
<PAGE>
Independence Village, Ltd.
October 5, 1998
Page 2
a. Some areas of the parking lots and circulation drives need to be
repaired and re- sealed.
b. Some areas of the property's exterior siding need to be repaired.
c. Some of the property's exterior trim needs to be repaired.
d. One of the subject units needs new carpet and vinyl flooring, as well
as some Walltex replacement.
The cost to cure these items of deferred maintenance has been estimated at
$8,000.
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 cost estimates for the curable physical deterioration set
out herein by a qualified building contractor. This report 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 Lamplight Court Apartments, based upon market
conditions prevailing on September 21, 1998, equaled:
TWO MILLION ONE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS
($2,175,000)
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 also 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 estimated value of the subject property, "as if complete"
based upon market conditions existing on September 21, 1998, and subject to the
limiting conditions and contingencies set out herein, was:
TWO MILLION ONE HUNDRED EIGHTY-THREE THOUSAND DOLLARS
($2,183,000)
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,
<PAGE>
Independence Village, Ltd.
October 5, 1998
Page 3
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 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: an exterior physical inspection of the subject property,
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
<PAGE>
Independence Village, Ltd.
October 5, 1998
Page 4
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 License No. 0000908
PFW/CBB:tms
98-073
This report was prepared under temporary practice permits #437973 and #437969
issued by the State of Ohio Department of Commerce, Division of Real Estate,
Appraiser Section on August 14, 1998.
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
MEADOWDALE APARTMENTS
LOCATED AT 248 E. UNIVERSITY BOULEVARD,
IN MELBOURNE, BREVARD COUNTY,
FLORIDA
- --------------------------------------------------------------------------------
PREPARED FOR
FLORIDA OPPORTUNITY INCOME PARTNERS II, LTD.
DATE OF VALUATION
AUGUST 5, 1998
DATE OF REPORT
AUGUST 14, 1998
<PAGE>
August 14, 1998
Florida Opportunity Income Partners II, Ltd.
7826 Cooper Road
Cincinnati, OH 45242
Dear Mr. McGrath:
At your request, our firm has inspected and appraised the existing Meadowdale
apartment community which contains 64 rental apartment units, a laundry
facility, and a manager's office. The subject property is located at 248 E.
University Boulevard, Melbourne, Brevard County, Florida, 32901.
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 5, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1984. The property reports a current
occupancy of 76.6%. The Appraiser inspected the exterior of the apartment
community and the interior of seven of the vacant units. 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 has not reviewed subsoil, 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>
Florida Opportunity Income Partners II, Ltd.
August 14, 1998
Page 2
5. The Appraiser's inspection of the subject property indicates that it is in
average overall condition, reflecting moderate levels of deferred
maintenance. The most significant items of deferred maintenance noted
during the Appraiser's inspection of the subject property included: 1)
significant amounts of deteriorated siding which should be repaired; 2)
deteriorated door frames and trim which should be repaired; 3) electrical
meter boxes which should be repaired; 4) deteriorated patio fences which
should be repaired; 5) the building exteriors need to be repainted; 6) the
parking lot should be repaired and re-sealed; and 7) the project appears to
need re-roofing. In addition, four of the subject units are unrentable due
to floor deterioration in the bathroom areas. One unit is also seriously
fire damaged. The cost to repair these items of deferred maintenance has
been estimated at $70,000, which excludes the cost to repair the fire
damaged unit.
The repair expenses for the fire damaged unit are reportedly covered by
insurance and no deduction has been made herein for the expenses necessary
to bring this unit back to a rentable state. It was reported to the
Appraiser that repair work on this unit was slated to commence on August
17, 1998. This appraisal is subject to, and contingent upon, the repair and
refurbishing of the fire damaged unit to a rentable state.
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.
6. The market value estimates reported herein are contingent upon the subject
property being submetered by Conservation Billing Services, Inc. with the
pass-through of sewer, water and garbage expenses to the tenants. Thus,
this appraisal and the value estimates reported herein are subject to, and
contingent upon, the installation of the sub-metering system in a timely
and workmanlike manner and the lump sum payment of the $12,100 contract
capital charge.
By virtue of the Appraiser's inspection, investigation and analyses, it was the
opinion of the Appraiser that the estimated market value of the fee simple
interest in the subject Meadowdale Apartments, as if utility submetering has
been installed and completed on the property, based upon market conditions
prevailing on August 5, 1998, equaled:
ONE MILLION SIX HUNDRED THIRTY FIVE THOUSAND DOLLARS
($1,635,000)
At the request of the client, an estimate of the market value of the subject
property has also been made "as-if" the submetering was complete, and as if the
items of deferred maintenance were cured. This value estimate was calculated by
adding the previously estimated costs to submeter
<PAGE>
Florida Opportunity Income Partners II, Ltd.
August 14, 1998
Page 3
the property and 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 5, 1998, and subject to the
limiting conditions and contingencies set out herein, was:
ONE MILLION SEVEN HUNDRED SEVENTEEN THOUSAND DOLLARS
($1,717,000.00)
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 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 written consent of the Appraiser(s) signing this
appraisal report.
<PAGE>
Florida Opportunity Income Partners II, Ltd.
August 14, 1998
Page 4
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 License No. 0000908
PFW/CBB:tms
98-053
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
COUNTRY SQUARE PHASE I APARTMENTS
LOCATED AT 8301 COUNTRY SQUARE BOULEVARD,
NEAR THE CITY OF TAMPA, IN UNINCORPORATED
HILLSBOROUGH COUNTY, FLORIDA 33615
- --------------------------------------------------------------------------------
PREPARED FOR
PRUDENTIAL MORTGAGE CAPITAL COMPANY, L.L.C
ATTENTION: DAVID M. HARVEY
DATE OF VALUATION
JANUARY 22, 1998
DATE OF REPORT
FEBRUARY 17, 1998
<PAGE>
February 17, 1998
Mr. David M. Harvey, Vice President
Prudential Mortgage Capital Company, L.L.C.
Four Gateway Center, 9th Floor
Newark, New Jersey 07102
Gentlemen:
At your request, our firm has inspected and appraised the Country Square Phase I
apartment community which contains 73 apartment units. The subject property is
located at 8301 Country Square Boulevard, near the city of Tampa, in
unincorporated Hillsborough County, Florida.
The objective of this appraisal was to estimate the "as is" market value of the
fee simple interest in the real estate, including chattels, under market
conditions prevailing on January 22, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1981. The property reports a current
occupancy of 93.2%. The Appraiser inspected the exterior of the apartment
community and the interior of the five vacant units. Access to most of the
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. Based upon a visual inspection
of the subject property, as well as discussions with property management,
it appears that the subject improvements are in good overall condition.
Over the last twelve months the subject property received significant
repairs and renovations including the repair and re-sealing of the
property's parking lots and circulation drives, the repair of deteriorated
siding and trim, the painting of the building exteriors, the re-roofing of
the subject building exteriors, and the repair and painting of the patio
fences.
<PAGE>
Based upon the Appraiser's visual inspection of the subject property, only
minor items of deferred maintenance were noted. These deferred maintenance
items included 1) small areas of deteriorated siding and trim which were
painted over; 2) missing and out of place soffit panels; and 3) two "down"
units which will require significant repair and refurnishing prior to being
rentable. The cost to cure the deferred maintenance impacting these
improvements has been estimated at $6,500.
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.
5. The "as-is" market value estimate reported herein is based upon the subject
property being sub-metered by Conservation Billing Services, Inc. and the
pass-through of sewer, water and garbage expenses to the tenants. The
installation of the sub-metering system was contracted for on January 29,
1998 and installation was underway on February 16, 1998. Thus, this
appraisal and the value estimates reported herein are subject to, and
contingent upon, the installation of the sub-metering system in a timely
and workmanlike manner and the lump sum payment of the $17,155 contract
capital charge.
By virtue of the Appraiser's inspection, investigation and analyses, it is the
opinion of the Appraiser that the estimated "As Is" market value of the fee
simple interest in the subject Country Square Phase I Apartments, as described
herein, as of January 22, 1998, equaled:
TWO MILLION ONE HUNDRED EIGHTY-FIVE THOUSAND DOLLARS
($2,185,000)
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>
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 fails 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 License No. 0000908
P-FW/CBB:tms
98-023
<PAGE>
- --------------------------------------------------------------------------------
THE APPRAISAL OF
CURIOSITY CREEK APARTMENTS
LOCATED AT 102 CURIOSITY CREEK LANE,
NEAR THE CITY OF TAMPA, IN UNINCORPORATED
HILLSBOROUGH COUNTY, FLORIDA 33612
- --------------------------------------------------------------------------------
PREPARED FOR
PRUDENTIAL MORTGAGE CAPITAL CO., L.L.C.
DATE OF VALUATION
MARCH 18, 1998
DATE OF REPORT
MARCH 20, 1998
<PAGE>
March 20, 1998
Mr. David M. Harvey, Vice President
Prudential Mortgage Capital Company, L.L.C.
One Prudential Plaza
130 B. Randolph, Suite 1300
Chicago, IL 60601
Gentlemen:
At your request, our firm has inspected and appraised the Curiosity Creek
apartment community which contains 81 apartment units. The subject property is
located at 102 Curiosity Creek Lane, near the city of Tampa, in unincorporated
llillsborough County, Florida.
The objective of this appraisal was to estimate the "as is" market value of the
fee simple interest in the real estate, including chattels, under market
conditions prevailing on March 18, 1998.
The market value estimate, as contained herein, is contingent upon the following
conditions:
1. The subject project opened in 1982. The property reports a current
occupancy of 100.0%. The Appraiser inspected the exterior of the apartment
community and the interior of one unit. Access to most of the 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. Based upon a visual inspection
of the subject property, as well as discussions with property management,
it appears that the subject improvements are in good overall condition.
Over the last twelve months the subject property received significant
repairs and renovations including the repair and re-sealing of the
property's parking lots and circulation drives, the repair of deteriorated
siding and trim, the painting of the building exteriors, the re-roofing of
the subject buildings, and the repair and painting of the patio fences.
<PAGE>
Prudential Mortgage Capital Company, L. L. C.
March 20, 1998
Page 2
Based upon the Appraiser's visual inspection of the subject property, no
significant items of deferred maintenance were noted.
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.
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 Curiosity Creek Apartments, as described herein, as of
March 18, 1998, equaled:
TWO MILLION FOUR HUNDRED TWENTY-FIVE THOUSAND DOLLARS
($2,425,000)
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.
<PAGE>
Prudential Mortgage Capital Company, L.L.C.
March 20, 1998
Page 3
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 ass istance 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 fails 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 License No. 0000908
PFW/CBB:tms
98-031
