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Registration Number 333-30210
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
SHELBOURNE PROPERTIES II, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 6798 04-3502382
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
incorporation or organization) Classification Code Number)
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SHELBOURNE PROPERTIES II, INC.
5 CAMBRIDGE CENTER
9th FLOOR
CAMBRIDGE, MA 02142
(617) 234-3000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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COPY TO:
MARK I. FISHER, ESQ.
TODD J. EMMERMAN, ESQ.
ROSENMAN & COLIN LLP
575 MADISON AVENUE
NEW YORK, NEW YORK 10022
(212) 940-8800
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Approximate Date of Commencement of Proposed Sale to the Public: From
time to time after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If the Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
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. (1)
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PROSPECTUS/CONSENT SOLICITATION STATEMENT
Shelbourne Properties II, Inc.
1,237,916 Shares of common stock
If you are a limited partner in High Equity Partners L.P. - Series 86,
your vote is very important.
Through this consent solicitation statement, we, as the general
partners of your partnership, are asking you, the limited partners of your
partnership, to approve the conversion of your partnership into a
publicly-traded real estate investment trust called Shelbourne Properties II,
Inc. If the conversion is approved, you will receive two shares of Shelbourne
common stock, on a tax-free basis, for each of your partnership units.
Shelbourne's common stock will be listed on the American Stock Exchange.
We are making this proposal to satisfy the final requirement of a class
action settlement approved by the California Superior Court. Holders of a
majority of the limited partnership units must vote "YES" on the enclosed
consent form for the proposal to be approved. If you have any questions, you may
call (888) 448-5554.
While you may realize a number of potential benefits from the
conversion, there are material risks and potential disadvantages associated with
the conversion as described in "Risk Factors," starting on page 16. In
particular, you should consider that:
o Unlike your partnership, Shelbourne will have perpetual
existence with no specific timing for liquidation of its
assets.
o The estimated range of values for shares of common stock is
less than the range of estimated liquidation values for your
units. However, we are not proposing a liquidation of your
partnership and a liquidation at this time would not be
approved by our affiliates which own approximately 20.96% of
the units. Shares of common stock may also trade below the net
asset value of Shelbourne or below the going concern value of
your partnership.
o Unlike your partnership, Shelbourne will be permitted to
reinvest sale and financing proceeds.
o Shelbourne may incur substantial debt which could create the
risk of default on its obligations and hinder its ability to
pay dividends.
o The amount of Shelbourne's dividends may be less than prior
distributions by your partnership.
o Shelbourne may make investments which are riskier than your
partnership's current investments.
o If the conversion is approved, we will no longer be obligated
to repay limited partners a maximum of $4.06 per unit, or
$2,384,398 in the aggregate, upon liquidation of your
partnership as repayment of fees previously received. Our
obligation is reduced by approximately $0.49 per unit each
year, and is eliminated in 2008.
o We have a conflict in recommending the conversion because our
affiliate, Shelbourne Management LLC, will continue to receive
fees for managing Shelbourne.
o If you vote against the conversion and the conversion is
approved by your partnership, you will not be entitled to
dissenters' or appraisal rights for your units.
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 consent solicitation statement. Any representation
to the contrary is a criminal offense.
The date of this consent solicitation statement is ________ __, 2000.
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TABLE OF CONTENTS
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SUMMARY 1
Background Of The Proposal...................................................................................................1
Your Partnership..........................................................................................................1
The Class Action Settlement...............................................................................................1
Shelbourne...................................................................................................................2
Risk Factors.................................................................................................................3
Benefits of the Conversion...................................................................................................4
Comparison of Your Partnership and Shelbourne................................................................................5
Allocation of Common stock..................................................................................................11
Alternatives to the Conversion..............................................................................................11
Liquidation and Dissolution of Your Partnership..........................................................................11
Continuation of Your Partnership.........................................................................................12
Comparison Valuation Analysis...............................................................................................12
General Partners'Recommendation.............................................................................................12
Voting......................................................................................................................14
Limited Partner List........................................................................................................15
RISK FACTORS...................................................................................................................16
The conversion will result in a fundamental change in the nature of your investment to
aninterest in an entity with perpetual existence that may change its investments without
your approval............................................................................................................16
Shelbourne's common stock may trade at prices below the estimated value of your units
or the value of Shelbourne's net assets..................................................................................16
Shelbourne's ability to incur debt increases Shelbourne's risk of default on its obligations
which could, in turn, adversely affect Shelbourne's results of operations and distributions to
stockholders.............................................................................................................17
Shelbourne may make investments which have a higher degree of risk than the investments
held by your partnership.................................................................................................17
Dividend levels are not guaranteed and may fluctuate.....................................................................17
If the conversion is approved our obligations to repay fees previously received by us upon
liquidation of your partnership will be eliminated.......................................................................17
We have a conflict of interest in recommending the conversion because we are affiliated with
Shelbourne Management which will continue to receive fees for managing Shelbourne........................................18
You will not have any dissenters'or appraisal rights if you vote against the conversion..................................18
The estimated value of Shelbourne's common stock is based upon anticipated growth that
will take time to achieve................................................................................................18
Stockholders will be diluted by any subsequent equity issuances..........................................................18
Shelbourne may enter into transactions with our affiliates which may not solely serve your
interests as a stockholder...............................................................................................19
Provisions in the Certificate, Bylaws and Shareholder Rights Agreement could inhibit changes
in control...............................................................................................................19
Shelbourne is subject to risks of default by borrowers and interest rate risks associated with
investments in mortgage loans............................................................................................20
Shelbourne's performance and value are subject to risks associated with the real estate industry.........................20
Shelbourne may not be able to re-lease properties upon the expiration of leases..........................................21
Shelbourne will be managed by a third-party advisor and will therefore have less control
over its operations......................................................................................................21
Shelbourne Management will have conflicts of interest in managing Shelbourne's business
and may therefore make decisions or take actions that do not solely reflect your interests as a
stockholder..............................................................................................................21
Shelbourne's retention of an external manager could adversely affect the value of your shares............................21
Shelbourne's ability to grow could be adversely affected if Shelbourne is not successful in
raising capital..........................................................................................................21
Fluctuations in interest rates could adversely affect the value of your shares...........................................22
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Illiquidity of real estate investments could adversely affect Shelbourne's financial condition...........................22
The uncertainty of the outcome of lawsuits pending against your partnership could adversely
affect Shelbourne's financial condition..................................................................................22
Liability for environmental matters could adversely affect Shelbourne's financial condition..............................22
Stockholder approval is not required for Shelbourne to discontinue its status as a real estate
investment trust.........................................................................................................23
Uninsured losses could adversely affect Shelbourne's financial condition.................................................23
FEDERAL INCOME TAX RISKS.......................................................................................................23
Failure to qualify or remain qualified as a real estate investment trust would cause Shelbourne
to be taxed as a corporation................................................................................................23
Shelbourne will be subject to a 4% nondeductible excise tax if it fails to distribute required
amounts.....................................................................................................................24
There are potential tax disadvantages to conducting business as a real estate investment trust..............................24
BENEFITS OF THE CONVERSION.....................................................................................................25
Greater Market Value........................................................................................................25
Tax-Free Receipt of Common Stock............................................................................................25
Greater Liquidity and More Efficient Market.................................................................................25
Ability to Make New Investments.............................................................................................25
Required Dividends..........................................................................................................25
Beneficial Company Structure................................................................................................25
Elected Governance..........................................................................................................26
Ability to Raise Capital....................................................................................................26
No Unrelated Business Taxable Income........................................................................................26
Simplified Tax Reporting....................................................................................................26
Reduced State Income Tax Reporting..........................................................................................26
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE..................................................................................26
Form of Organization........................................................................................................27
General Business............................................................................................................28
Duration of Existence.......................................................................................................28
Voting Rights...............................................................................................................29
Fiduciary Duties, Limitation of Liability and Indemnification...............................................................30
Review of Books and Records.................................................................................................31
Management..................................................................................................................31
Distributions; distribution policy..........................................................................................32
Leverage; borrowing policy..................................................................................................33
Lending Policy..............................................................................................................33
Management Fees to Affiliates...............................................................................................34
Taxation of Taxable Limited Partners........................................................................................37
Taxation of Tax-Exempt Limited Partners.....................................................................................37
BACKGROUND OF THE CONVERSION...................................................................................................38
General.....................................................................................................................38
Your Partnership............................................................................................................38
The Class Action............................................................................................................41
The Class Action Settlement.................................................................................................42
ALTERNATIVES TO THE CONVERSION.................................................................................................44
Appraisals..................................................................................................................45
Valuation Analyses..........................................................................................................49
General..................................................................................................................49
Continuation.............................................................................................................49
Liquidation Analysis.....................................................................................................50
Conversion and Continuation Company Analysis.............................................................................51
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RECOMMENDATION AND FAIRNESS....................................................................................................53
General Partners'Recommendation.............................................................................................53
Fairness of the Conversion..................................................................................................53
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................55
SELECTED FINANCIAL DATA........................................................................................................56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................................................57
General.....................................................................................................................57
Liquidity and Capital Resources.............................................................................................57
Capital Improvements and Capitalized Tenant Procurement Costs...............................................................58
Real Estate Market..........................................................................................................58
Impairment of Assets........................................................................................................60
THE CONVERSION.................................................................................................................64
Mechanics of the Conversion.................................................................................................64
Effective Time..............................................................................................................64
Conditions to the Conversion................................................................................................64
Fees And Expenses...........................................................................................................65
Accounting Treatment........................................................................................................65
VOTING ........................................................................................................................65
General.....................................................................................................................65
Vote Required...............................................................................................................65
Voting Procedure............................................................................................................66
Record Date and Outstanding Units...........................................................................................66
Effect of Voting to Approve the Conversion..................................................................................67
Solicitation of Votes; Solicitation Expenses................................................................................67
Limited Partner Lists.......................................................................................................67
CONFLICTS OF INTEREST..........................................................................................................68
Conflicts Relating to the Conversion........................................................................................68
Conflicts Following the Conversion..........................................................................................69
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................................70
AP-PCC III, L.P. Services Agreement.........................................................................................70
Management Fees To Affiliates...............................................................................................70
Olympia Agreement...........................................................................................................70
SHELBOURNE.....................................................................................................................71
General.....................................................................................................................71
The Operating Partnership...................................................................................................71
Objectives and Strategies...................................................................................................73
The Properties..............................................................................................................75
Other Assets and Liabilities................................................................................................81
Cash Dividend Policy........................................................................................................81
Management..................................................................................................................82
PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE..................................................................................87
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DESCRIPTION OF CAPITAL STOCK...................................................................................................96
General.....................................................................................................................96
Common Stock................................................................................................................96
Preferred Stock.............................................................................................................97
Listing, Price and Trading..................................................................................................97
Restrictions on Transfers...................................................................................................97
Additional Issuances.......................................................................................................100
Shareholder Rights Agreement...............................................................................................100
MATERIAL PROVISIONS OF DELAWARE LAW AND SHELBOURNE'S
CERTIFICATE AND BYLAWS........................................................................................................103
Amendment of Certificate and Bylaws........................................................................................103
Dissolution of Shelbourne..................................................................................................103
Meetings of Stockholders...................................................................................................104
The Board of Directors.....................................................................................................104
Limitation of Liability and Indemnification................................................................................104
Business Combinations......................................................................................................105
Indemnification Agreements.................................................................................................105
FEDERAL INCOME TAX CONSEQUENCES...............................................................................................106
The Conversion.............................................................................................................106
Taxation of Shelbourne as a Real Estate Investment Trust...................................................................107
General.................................................................................................................107
Requirements for Qualification..........................................................................................108
Organizational Requirements.............................................................................................109
Income Tests............................................................................................................109
Asset Tests.............................................................................................................111
Annual Distribution Requirements........................................................................................112
Failure of Shelbourne to Qualify as a Real Estate Investment Trust......................................................113
Taxation of Taxable U.S. Stockholders......................................................................................114
Distributions by Shelbourne.............................................................................................114
Passive Activity Losses and the Investment Interest Limitation..........................................................114
Sale of Common Stock....................................................................................................115
Backup Withholding......................................................................................................115
Taxation of Tax-Exempt Stockholders........................................................................................115
Taxation of Non-U.S. Stockholders..........................................................................................116
Distributions by Shelbourne.............................................................................................116
Sale of Common Stock....................................................................................................116
Backup Withholding Tax and Information Reporting........................................................................117
Tax Status of the Operating Partnership....................................................................................117
Other Taxes................................................................................................................118
Transfer Taxes.............................................................................................................118
Possible Tax Law Changes...................................................................................................118
Importance of Obtaining Professional Tax Assistance........................................................................118
AVAILABLE INFORMATION.........................................................................................................118
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...............................................................................119
FORWARD-LOOKING STATEMENTS....................................................................................................120
EXPERTS ......................................................................................................................120
LEGAL MATTERS.................................................................................................................120
APPENDIX A - Consent Form.....................................................................................................A-1
APPENDIX B - Agreement and Plan of Merger.....................................................................................B-1
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SUMMARY
The following is a summary of information relating to your partnership
and the conversion. This summary highlights selected information from this
consent solicitation statement and may not contain all of the information
regarding the conversion that is important to you. We are Resources High Equity,
Inc., Resources Capital Corp. and Presidio AGP Corp., the general partners of
your partnership, High Equity Partners L.P. - Series 86. The conversion will be
accomplished by merging your partnership into a newly-formed limited partnership
called Shelbourne Properties II L.P. Shelbourne Properties II L.P. will function
as the operating partnership through which Shelbourne Properties II, Inc., the
publicly-traded real estate investment trust, will conduct all of its business.
When we refer to Shelbourne in this consent solicitation statement we mean both
Shelbourne Properties II, Inc. and Shelbourne Properties II L.P., together,
unless the context requires otherwise. Shelbourne will be managed by Shelbourne
Management LLC. To understand the conversion fully and for a more complete
description of the terms of and risks related to the conversion, you should read
carefully this entire consent solicitation statement and the other documents to
which we have referred you.
BACKGROUND OF THE PROPOSAL
YOUR PARTNERSHIP
Your partnership was formed in 1985 to invest in and hold existing or
to-be-constructed income-producing properties. Your partnership currently owns
interests in four office buildings, a vacant lot, a group of warehouses and
manufacturing buildings, a group of industrial buildings and three shopping
centers. Units in your partnership were publicly offered and sold during 1986
and 1987. Your partnership invested substantially all of the capital raised from
the sale of units in the ten properties in which it currently owns an interest
as well as in two other properties that have been sold. There are no mortgages
on any of your partnership's properties. Your partnership originally anticipated
holding its properties for seven to ten years and is required to liquidate by no
later than December 31, 2015.
Units in your partnership are not listed on any national stock exchange
or traded in any formal trading market. There is, however, a limited and
informal secondary market for your units.
In November 1994, Presidio Capital Corp. acquired control of your
general partners as part of a Chapter 11 reorganization of Integrated Resources,
Inc., the entity which originally owned and controlled your general partners. In
August 1998, NorthStar Capital Investment Corp. acquired control of Presidio. In
October 1999, Presidio retained AP-PCC III, L.P. to provide asset management and
investor relations services to your partnership on behalf of your general
partners. AP-PCC III, L.P. is an affiliate of Winthrop Financial Associates, a
Boston-based partnership and property management company which is not affiliated
with NorthStar.
THE CLASS ACTION SETTLEMENT
In 1993 limited partners commenced an action against your general
partners in the California Superior Court. The action included claims for breach
of fiduciary duty; breach of contract; unfair and fraudulent business practices;
negligence; dissolution, accounting, receivership and removal of general
partner; fraud; and negligent misrepresentation. This action was brought years
before NorthStar acquired control of your general partners in August 1998. Your
general partners at all times considered the action to be without merit.
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In February 1996, your general partners submitted a settlement proposal
to the court but the court declined to grant final approval to the proposal,
indicating that it did not consider that settlement proposal to be fair. After
further negotiations, in January 1999 the parties agreed on the terms of a
revised settlement. In February 1999, you received a notice containing a
detailed description of the terms of the settlement. In April 1999, the court
approved the revised settlement after finding it to be fair, reasonable and
adequate and in the best interest of the limited partners.
Under the terms of the settlement:
1. In July 1999, we proposed amendments to your partnership's
agreement of limited partnership to provide for:
o a $312,139 reduction of the partnership management
fee payable to us for 1999;
o a partnership management fee for subsequent years
based on 1.25% of the current gross assets of your
partnership rather than 1.05% of the gross amount of
your partnership's original offering proceeds paid or
allocated to acquire properties; and
o a fixed amount that we would be obligated to pay you
upon liquidation of your partnership as repayment of
fees previously received by us and our affiliates,
which amount would be reduced by 10% for each year
after 1998 in which a liquidation does not occur and
eliminated in 2008.
The amendments were approved and became effective in August
1999.
2. Presidio Capital Corp. guaranteed our repayment obligation to
limited partners upon liquidation of your partnership.
3. In November 1999, our affiliate, Millennium Funding III LLC,
made a tender offer to acquire up to 39,596 units at a price
of $103.05 per unit. The offer closed in January 2000 and
Millennium acquired all 39,596 units subject to the offer.
4. We agreed to propose and use our best efforts to complete a
conversion of your partnership into a real estate investment
trust or other entity with shares traded on a national
securities exchange or the NASDAQ National Market. We are
proposing the conversion to satisfy this requirement of the
settlement.
SHELBOURNE
Following the conversion, Shelbourne's outstanding shares of common
stock will be owned by you and us in proportion to our respective partnership
interests. Limited partners will receive 95% of the outstanding common stock in
exchange for their partnership units and we will receive 5% of the outstanding
common stock in exchange for our general partnership interest.
Shelbourne's primary business objective will be to maximize the value
of its common stock. Shelbourne will seek to achieve this objective by making
capital improvements to and/or selling properties and by making additional real
estate-related investments. Shelbourne intends to employ a strategy of
opportunistic investing by seeking undervalued assets and value-enhancing
situations in a broad range of property types and geographical locations.
Shelbourne may raise additional capital by mortgaging existing
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properties or by selling equity or debt securities. Shelbourne may acquire its
investments for cash or by issuing equity securities, including limited
partnership interests in Shelbourne Properties II L.P., the operating
partnership.
Shelbourne will have a Board of Directors consisting of seven
directors, three of whom will be independent directors. Directors of Shelbourne
will be elected in the future by holders of common stock. The settlement
contemplated that Shelbourne would be externally managed. Accordingly,
Shelbourne Management will manage the day-to-day affairs of Shelbourne under an
advisory agreement. However, the Board of Directors will be ultimately
responsible for the management, control and investment activities of Shelbourne.
Shelbourne was formed under the Delaware General Corporations Law.
Shelbourne's principal executive offices are located at 5 Cambridge Center, 9th
floor, Cambridge, MA 02142.
RISK FACTORS
There are risks associated with the conversion of your partnership,
which are more fully discussed beginning on page 16 in "RISK FACTORS", that you
should consider in determining whether to vote in favor of the conversion. The
following list summarizes the risks of the conversion that we believe to be most
material to you:
o The nature of your investment will change from an interest in
a specified portfolio of income-producing properties required
to be sold by December 31, 2015 to an interest in a real
estate company with perpetual existence that may change its
investments from time to time without your approval. In
addition, unlike your partnership, Shelbourne will be
permitted to reinvest sale and financing proceeds in new
investments. This means that these amounts may not be
available for distribution to stockholders.
o The estimated range of values for shares of common stock is
less than the range of estimated liquidation values for your
units. This means that the estimated amount that you would
receive if your partnership were currently liquidated is
greater than the estimated amount you would receive by selling
your shares. However, you cannot currently realize the
liquidation value of your units since a liquidation of your
partnership is not being proposed at this time. Shares of
common stock may also trade below the net asset value of
Shelbourne or below the going concern value of your
partnership.
o Shelbourne will likely incur significant amounts of
indebtedness to finance future investments. This use of debt
will subject Shelbourne to the risk of default in its
obligations, which could in turn adversely affect Shelbourne's
results of operations.
o Shelbourne may make investments which have a higher degree of
risk than your partnership's present investments. These
investments may include interests in real property, mortgage
loans and other real estate companies.
o The amount of Shelbourne's dividends may be less than prior
distributions by your partnership. The amount of dividends
will depend upon factors such as the profitability of present
and future investments, the terms of any indebtedness, working
capital fluctuations and prevailing economic conditions.
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o If the conversion is approved we no longer will have any
obligation to pay limited partners an amount which presently
equals $4.06 per unit, or $2,384,398 in the aggregate, upon
liquidation of your partnership as repayment of fees
previously received. The obligation is reduced each year by
approximately $0.49 per unit, or $286,000 in the aggregate,
and is completely eliminated in 2008. Our affiliates, as owner
of 20.96% of the units would receive 20.96% of any amounts
paid.
o We have a conflict in recommending the conversion since our
affiliate, Shelbourne Management, will continue to receive
fees for managing Shelbourne's business.
o Shelbourne Management will have a conflict of interest
following the conversion because it will receive an asset
management fee for managing Shelbourne that is based on
Shelbourne's gross assets and it will have the ability to
increase Shelbourne's gross assets by causing Shelbourne to
acquire additional assets funded by debt or the issuance of
new securities.
o If you vote against the conversion and the conversion is
approved, you will not have the right to receive cash based on
an appraisal of your interest in your partnership or
otherwise.
o The estimated range of values of Shelbourne's common stock is
based upon anticipated growth that will take time to achieve.
The growth is anticipated to result from Shelbourne leveraging
its assets and investing the proceeds obtained from
leveraging. Although Shelbourne intends to actively pursue
investment opportunities, we cannot guarantee when investments
will be made or the terms of those investments. We also cannot
guarantee the terms on which Shelbourne will be able to
borrow.
o Maintaining qualification as a real estate investment trust
will require Shelbourne to satisfy requirements that do not
apply to your partnership such as distributing substantially
all of its taxable income other than capital gains. If
Shelbourne fails to qualify or remain qualified as a real
estate investment trust, it will be subject to federal, state
and local income tax on its taxable income at regular
corporate rates. This would reduce the cash available for
distribution to stockholders and could materially reduce the
value of your common stock.
o Until you sell all of your common stock in Shelbourne, you
will be unable to offset your unused passive activity losses
from your partnership against dividends or capital gains from
your common stock.
BENEFITS OF THE CONVERSION
We believe that the conversion will provide you the following benefits
which are more fully described on page 25 in "BENEFITS OF THE CONVERSION."
o The range of estimated values for shares of common stock is
significantly greater than recent secondary market prices for
units.
o You will not be taxed on common stock you receive in the
conversion.
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o Common stock will be traded on the American Stock Exchange,
which should provide you with significantly greater liquidity
and a more efficient market than the limited trading market on
which your units may currently be sold.
o Unlike your partnership, Shelbourne will have the ability to
make new investments. The ability to make new investments will
enable Shelbourne to change its investment portfolio in
response to changing market conditions and to avail itself of
potentially favorable investment opportunities.
o Shelbourne will be required to distribute 95% of its taxable
income - 90% after 2000 - other than capital gains, to
maintain its status as a real estate investment trust. Your
partnership is not required to make distributions.
o By conducting its operations through the operating
partnership, Shelbourne can offer either common stock or
limited partnership interests in the operating partnership to
potential sellers of real estate. This increases Shelbourne's
flexibility in structuring future acquisitions on a tax
efficient basis.
o Following the conversion, Shelbourne's board of directors will
be elected by holders of common stock.
o Shelbourne will have the ability to borrow money and issue
equity securities. The proceeds from such loans or equity
issuances may be used to finance future investments, to
improve existing properties or for other purposes.
Indebtedness incurred by Shelbourne will not result in
unrelated business taxable income to tax-exempt stockholders.
o The conversion will result in simplified tax administration
for you. You no longer will receive a Schedule K-1 which
complicates tax return preparation, but instead will receive a
Form 1099-DIV.
o Unlike your investment in your partnership, you generally will
not be subject to state income tax or be required to file
individual state income tax returns in states other than in
your state of residence solely as a result of an investment in
Shelbourne.
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE
There are differences between an investment in your partnership and an
investment in Shelbourne. The following chart summarizes some of these
differences.
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CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
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Types of Investments Interests in four office buildings, Interests in four office buildings, a vacant
a vacant lot, a group of lot, a group of warehouse and manufacturing
warehouse and manufacturing buildings, a group of industrial buildings and
buildings, a group of industrial three shopping centers as well as new real
buildings and three shopping estate investments including real property,
centers; no ability to make new mortgages and securities of other real estate
investments companies; no restrictive investment criteria
such as property use or geographic location
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CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
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Form of Ownership of Investments in four properties The operating partnership will own its
Investments through joint-ventures; six investments directly and through joint-
additional properties owned ventures. All of Shelbourne's investments
directly by your partnership will be owned through the operating
partnership
Method of Acquisition All of your partnership's Shelbourne may acquire properties for cash,
of Investments properties were acquired for cash on a leveraged or unleveraged basis, or
on an unleveraged basis equity securities, including through the
issuance of limited partnership interests in
the operating partnership
Liquidity of Your Relatively illiquid Listed for trading on the American Stock
Investment Exchange
Investment Portfolio Fixed portfolio Investment flexibility; ability to acquire new
properties and sell existing properties; ability
to acquire and sell other real estate-related
investments such as mortgages and securities
of other real estate companies
Transactions with Our Prohibited from selling or leasing Subject to applicable provisions of Delaware
Affiliates properties to, or purchasing law; transactions with our affiliates must be
properties from, our affiliates or on terms comparable to transactions with
receiving long-term secured or unaffiliated third parties and approved by a
unsecured loans from our majority of Shelbourne's independent
affiliates directors
Borrowing Policy Borrowing to finance capital Shelbourne may borrow on a secured and
expenditures not permitted unsecured basis to acquire new investments
or to finance capital expenditures; such
borrowing will not result in unrelated
business taxable income; Shelbourne
currently intends not to borrow in excess of
75% of its gross assets
Issuances of Additional Prohibited from issuing additional Ability to raise additional capital or acquire
Securities securities additional properties or other investments
through issuances of debt or equity securities
Duration of Entity December 31, 2015; originally Perpetual, no fixed liquidation date
contemplated holding period for
properties expired in 1998
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
<S> <C> <C>
Federal Taxation Not subject to Federal tax Generally not subject to Federal tax on
income distributed to stockholders, but
subject to entity-level tax on any
undistributed income; significant adverse tax
consequences if it fails to qualify or remain
qualified as a real estate investment trust
Your allocable share of your Generally taxed on amounts distributed to
partnership's taxable income or you, which distributions will be made pro
loss is included in calculating rata to all holders of common stock
your taxable income, regardless
of whether your partnership
makes any cash distributions;
there are special allocations of
depreciation deductions to taxable
unitholders
Tax Characterization of Generally passive activity income Dividends and capital gains from common
Income stock are not passive activity income and
generally cannot be offset by unused passive
activity losses from your partnership or other
sources
Tax Reporting Schedule K-1, generally mailed to Form 1099-DIV must be mailed to you by
you by March 15 of each year, January 31 of each year
typically increasing your cost of
tax return preparation
You generally are required to file You generally will not have to file tax
state tax returns, and pay taxes, returns or pay taxes in states other than your
in various states where properties state of residence
are located
Distributions; Quarterly historical distributions; Quarterly dividends; dividend rate
distribution policy distributions suspended as of determined by the Board of Directors based
September 30, 1999 on Shelbourne's results of operations, cash
flow and capital requirements; mandatory
distributions required to satisfy REIT
requirements and/or avoid entity-level taxes
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
<S> <C> <C>
Management Vested in general partners; AP- Vested in Board of Directors elected by
PCC III, L.P. performs asset holders of common stock; Board of Directors
management and investor ultimately responsible for management,
relations services for your control and investment activities of
partnership on behalf of your Shelbourne; Shelbourne Management
general partners retained to manage Shelbourne's day-to-day
business; AP-PCC III, L.P. to perform asset
management and investor relations services
for Shelbourne on behalf of Shelbourne
Management
Voting Majority vote of units required Majority or two-thirds vote of common stock
for significant actions specified in required for significant transactions specified
the partnership agreement in Shelbourne's certificate of incorporation;
annual shareholder vote for election of
directors
Partnership Asset Partnership asset management fee Partnership asset management fee equal to
Management Fees paid to us equal to 1.25% of gross 1.25% of gross value of assets will be paid to
value of assets Shelbourne Management
Property Management Up to 6% of property revenues Up to 6% of property revenues but no more
Fees Payable to Us or to but no more than competitive rate than competitive rate for similar services,
Our Affiliates for similar services will be paid to Shelbourne Management
Property Disposition Generally, 3% subordinated fee None
Fees Payable to Us or plus subordinated incentive
Our Affiliates management fees
Reimbursement of All expenses paid by your All expenses paid by Shelbourne;
Expenses to Us or Our partnership; we are reimbursed Shelbourne Management will be reimbursed
Affiliates for expenses incurred for your for expenses incurred for Shelbourne plus a
partnership plus a $200,000 non- $200,000 non-accountable expense
accountable expense reimbursement per annum
reimbursement per annum
</TABLE>
8
<PAGE>
The following depicts the structure of your partnership before and
after the conversion:
BEFORE THE CONVERSION:
----------------------
----------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
----------------------------
MANAGING MEMBER |
(INDIRECT) |
\|/
----------------------------
PRESIDIO CAPITAL
INVESTMENT COMPANY, LLC ----------
---------------------------- |
----------------------- | |
AP-PCC III, L.P.(1) | |
| |
----------------------- | 100% |
SERVICES | | |
AGREEMENT | \|/ |
| ---------------------------- |
|------------> PRESIDIO CAPITAL CORP. |
|
---------------------------- |
| |
| 100% |
\|/ |
---------------------------- |
GENERAL PARTNERS |
---------------- |
|
RESOURCES HIGH EQUITY, INC. |
RESOURSES CAPITAL CORP. |
PRESIDIO AGP CORP. |
---------------------------- |
----------------------- | |
LIMITED PARTNERS | |
(NOT AFFILIATED WITH | 5% |
GENERAL PARTNERS) | (GENERAL PARTNER) |
----------------------- \|/ |
| ---------------------------- | 19.92%
75.08% | YOUR PARTNERSHIP | (LIMITED
(Limited | ---------------- | PARTNER)
Partner) | |
|----------> HIGH EQUIT PARTNERS L.P.- |
SERIES 86, <-----
----------------------------
-------------
(1) Provider of asset management and investor relations services for your
partnership on behalf of your general partners.
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
AFTER THE CONVERSION:
---------------------
-------------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
------------------------------- ------------------------
| MANAGING MEMBER AP-PCC III, L.P. (5,6)
| (INDIRECT) ------------------------
| |
------------------------------- |
PRESIDIO CAPITAL |
---- INVESTMENT COMPANY, |
| LLC |
| ------------------------------- | -----------------------
| | | AFFILIATE OF
| | | NORTHSTAR
| 100.00% | | CAPITAL
| | | INVESTMENT CORP.
| | | -----------------------
19.92% | ------------------------------- | |
STOCKHOLDER | SERVICES AGREEMENT | |
(FORMER | PRESIDIO CAPITAL CORP. <--------------------| |
LIMITED | |
PARTBER) | ------------------------------- 100% |
| 100% | |
| | |
| ------------------------------- ----------------------------- |
| RESOURCES HIGH EQUITY, FORMER LIMITED |
| INC. PARTNERS |
| RESOURCES CAPITAL (NOT AFFILIATED WITH FORMER |
| CORP. GENERAL PARTNERS) |
| PRESIDIO AGP CORP. ----------------------------- |
| (FORMER GENERAL PARTNERS) | |
| ------------------------------- | |
| 5% | | 75.08% |
| STOCKHOLDER | | STOCKHOLDER |
| \|/ \|/ \|/
| ------------------------ ADVISORY ----------------------
| AGREEMENT SHELBOURNE(4,6)
|----------------------> SHELBOURNE(1) --------- MANAGEMENT
(EXTERNAL ADVISOR)
------------------------ ----------------------
100% | |
\|/ |
------------------------------- |
SHELBOURNE | 99%
PROPERTIES II GP LLC(3) |(LIMITED PARTNER)
------------------------------- |
1% | |
(GENERAL | |
PARTNER) \|/ \|/
--------------------------------
OPERATING PARTNERSHIP(2)
SHELBOURNE PROPERTIES II L.P.
(PROPERTY OWNER)
--------------------------------
</TABLE>
-------------
(See notes to chart beginning on following page)
10
<PAGE>
-------------
1 Shelbourne is the publicly-traded real estate investment trust in which you
will own shares.
2 All of Shelbourne's real estate investments will be owned by the operating
partnership. Following the conversion, Shelbourne will own 100% of the
operating partnership.
3 As general partner of the operating partnership, Shelbourne Properties II
GP LLC is responsible for the management, operation and control of the
operating partnership. Shelbourne owns 100% of the general partner.
4 Shelbourne Management is the external advisor to be retained by Shelbourne
to perform day to day management, advisory and property management
services.
5 Provider of asset management and investor relations services to Shelbourne
on behalf of Shelbourne Management.
6 Consents are currently being solicited from limited partners in each of
Integrated Resources High Equity Partners, Series 85, A California Limited
Partnership and High Equity Partners L.P. Series 88 to convert those
partnerships into separate real estate investment trusts. If the
conversions of those partnerships are approved, Shelbourne Management and
AP-PCC will also provide similar services to the real estate investment
trusts resulting from those conversions.
ALLOCATION OF COMMON STOCK
Units in your partnership will be exchanged for shares of common stock
on a two-for-one basis. We and our affiliates who own units, Millennium Funding
Corp., Millennium Funding III Corp., Millennium Funding I LLC and Millennium
Funding III LLC, will be allocated common stock on the same basis as
unitholders.
We own a 5% general partnership interest in your partnership
corresponding to 30,948 units in your partnership. Our affiliates, Millennium
Funding Corp. Millennium Funding III Corp, Millennium Funding I LLC and
Millennium Funding III LLC, own a total of 123,266 units in your partnership. We
and our affiliates will therefore receive 308,428 shares of common stock in the
conversion for our interests in your partnership.
ALTERNATIVES TO THE CONVERSION
We have compared the alternatives to the conversion discussed below to
assist you in evaluating the conversion.
LIQUIDATION AND DISSOLUTION OF YOUR PARTNERSHIP
One alternative to the conversion is to liquidate your partnership by
selling all of its assets at the best possible price.
o Liquidation of your partnership would provide liquidity to you
as properties are sold and net sales proceeds are distributed;
and
o If your partnership were liquidated now, you would receive
$4.06 per unit from us as repayment of fees previously
received.
11
<PAGE>
CONTINUATION OF YOUR PARTNERSHIP
Continuation of your partnership in its current form would have the
following effects:
o Your partnership would pursue its original investment
objectives consistent with the provisions of your partnership
agreement;
o Your partnership would sell its properties and distribute the
net proceeds to you not later than December 31, 2015; and
o There would be no change in the nature of your voting rights
COMPARISON VALUATION ANALYSIS
We retained Insignia/ESG, Inc., a nationally recognized commercial real
estate service provider, to perform four separate valuation analyses: a
liquidation analysis, a going concern analysis, a secondary market trading
history analysis and a conversion and comparable company analysis. The range of
liquidation values and going concern values estimated by Insignia/ESG were based
on June 30, 2000 appraisals of your partnership's properties performed by
Cushman & Wakefield, Inc., a nationally recognized real estate appraisal firm,
and information provided by your partnership. The secondary market trading
history analysis was based on secondary market trading data for the most recent
bi-monthly period reported by Partnership Spectrum, an independent industry
publication. The range of values for Shelbourne's common stock was estimated by
applying trading multiples for real estate investment trusts with a market
capitalization of less than $250,000,000 to Shelbourne's projected funds from
operations assuming Shelbourne leverages its assets and invests the proceeds
obtained from leveraging. The following table sets forth the results of the
comparative valuation analyses. For ease of comparison, we have presented the
respective values on a per share of Shelbourne common stock basis. The estimated
values on a per unit basis would be two times the per share values.
COMPARATIVE VALUATION ANALYSIS
------------------------------
Estimated range of going concern values $55.43- $62.51
Estimated range of liquidation values $66.17 - $74.62
Range of implied secondary market values $39.18 - $44.19
Estimated range of values for
Shelbourne common stock $45.02 - $55.85
GENERAL PARTNERS' RECOMMENDATION
We believe that the conversion is fair and in your best interest and we
recommend that you vote "YES" to approve the conversion.
Our recommendation is based on the following:
o We believe that the value of an investment in Shelbourne will
have a greater potential for appreciation than the value of an
investment in your partnership.
12
<PAGE>
o The range of estimated values for common stock is
significantly higher than the recently reported secondary
market price for units.
o You cannot currently realize the liquidation value of your
units since a liquidation of your partnership is not currently
contemplated and would, in any event, occur over a significant
period of time.
o The American Stock Exchange will provide you with greater
liquidity and a more efficient market to sell common stock as
compared to the inefficient and limited secondary market for
your partnership units.
Our belief that the conversion is fair is based on the following:
o After the conversion you will initially own the same
percentage interest in Shelbourne that you presently own in
your partnership.
o Shelbourne will initially own the identical properties owned
by your partnership prior to the conversion.
o Limited partners and general partners will receive common
stock in the conversion on the same basis.
o While fees payable by Shelbourne may increase over current
levels, the method of determining those fees will remain the
same.
o The conversion will be tax-free to you.
We did not give significant weight to the estimated liquidation value
of your partnership derived by Insignia/ESG because:
o You cannot currently realize the liquidation value since we
are not proposing a liquidation of your partnership at this
time. We believe that your partnership's properties will
appreciate in value before your partnership is required to
liquidate in 2015. We note that the current appraised value of
your partnership's properties is $88,519,680, or approximately
28% higher than the 1998 appraised value of your partnership's
properties and approximately 46.7% higher than the 1996
appraised value of your partnership's properties. In addition,
our affiliates, Millennium Funding Corp., Millennium Funding
III Corp., Millennium Funding I LLC and Millennium Funding III
LLC, which own in the aggregate 20.96% of the outstanding
units, would not vote in favor of a proposal to liquidate your
partnership at this time.
o An aggressive bulk sale or gradual liquidation of your
partnership's properties would reduce the portion of net sales
proceeds available for distribution to you.
o Your partnership's interest in four properties held in joint
ventures with other partnerships would likely be sold at
substantial discounts to the fair market values of those
properties if the other joint venture partners did not vote to
sell those properties.
13
<PAGE>
We also did not give significant weight to the estimated going concern
value of your partnership derived by Insignia/ESG because:
o You cannot currently realize the going concern value of your
units since the only way to currently realize the value of
your units is to sell them in the secondary market. Recent
secondary market prices are significantly less than the range
of estimated values for shares of common stock.
o Immediately following the conversion, Shelbourne will continue
to own the properties owned by your partnership and will incur
substantially identical expenses in its operation of those
properties.
o There currently is not an efficient market on which to realize
the value of your units. Following the conversion, the
American Stock Exchange should provide an efficient market for
shareholders who wish to dispose of their shares.
VOTING
Your vote is important. Please complete and sign the enclosed consent
form and return it to the depositary by mail in the enclosed pre-addressed,
postage paid envelope or by facsimile to (718) 236-2641.
This consent solicitation statement is accompanied by a separate
consent form in the form of Appendix A. You may take one of the following
actions:
Vote "YES" -- I vote to approve the conversion.
or
Vote "NO" -- I vote not to approve the conversion.
or
Abstain from voting which will constitute a "NO" vote
WE STRONGLY URGE YOU TO VOTE "YES" TO APPROVE THE CONVERSION.
If the conversion is approved, you will receive two shares of common
stock in exchange for each of your partnership units whether or not you voted to
approve the conversion.
Please complete, sign and return the enclosed consent form to the
depositary no later than the ________ __, 2000 expiration date. You may withdraw
your consent form at any time before the expiration date by delivering written
notice of your withdrawal to the depositary. You may change your consent form at
any time before the expiration date by delivering to the depositary a duly
completed and signed substitute consent form, together with a letter indicating
that your prior consent form has been revoked.
You must vote all of your units in the same way. If you return a signed
consent form but do not indicate a vote, you will be deemed to have voted "YES"
for approval of the conversion.
The conversion will be approved if limited partners holding a majority
of the outstanding units have as of the expiration date voted "YES" to approve
the conversion. The information agent will tabulate the consent forms.
14
<PAGE>
The conversion will apply prospectively from and after the date it
becomes effective. If the conversion becomes effective, you will be bound by its
terms, whether or not you vote in favor of it.
The depositary is:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
LIMITED PARTNER LIST
You may obtain a copy of a current list of limited partners by
delivering a written request to us at 5 Cambridge Center, 9th floor, Cambridge,
Massachusetts 02142. You will be required to pay applicable duplicating charges.
15
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information set forth or incorporated by reference in this consent solicitation
statement before voting on the conversion.
THE CONVERSION WILL RESULT IN A FUNDAMENTAL CHANGE IN THE NATURE OF YOUR
INVESTMENT TO AN INTEREST IN AN ENTITY WITH PERPETUAL EXISTENCE THAT MAY CHANGE
ITS INVESTMENTS WITHOUT YOUR APPROVAL.
The nature of your investment will change fundamentally. Shelbourne
plans to operate indefinitely, has no required date by which it must liquidate
its assets and may change its investments from time to time without your
approval. Shelbourne does not intend to distribute proceeds of any sales of its
assets except as necessary to maintain its status as a real estate investment
trust and to avoid the imposition of income and excise taxes on Shelbourne.
Instead, Shelbourne intends to reinvest the proceeds of any sales or financings.
Currently, after establishing reserves for existing property requirements, net
property sales proceeds would be distributed to you since your partnership is
not permitted to make new investments.
SHELBOURNE'S COMMON STOCK MAY TRADE AT PRICES BELOW THE ESTIMATED VALUE OF YOUR
UNITS OR THE VALUE OF SHELBOURNE'S NET ASSETS.
It is possible that after the conversion common stock will trade at
prices below the current liquidation value of your units. As a result, the
amount you could receive upon sale of your shares of common stock may be less
than the amount you would have received if your partnership were liquidated at
this time. In that regard, the range of values for shares of common stock
estimated by Insignia/ESG is between $45.02 and $55.85 whereas the estimated
range of liquidation values estimated by Insignia/ESG is between $66.17 and
$74.62. The common stock may also trade at prices below the value of
Shelbourne's net assets or below the going concern value of your partnership. We
believe that following the conversion the market price of shares of common stock
will depend on several factors. Such factors include:
o how the market perceives Shelbourne and its growth potential;
o whether Shelbourne maintains or increases its dividend level;
o the size of Shelbourne in terms of its assets and market
capitalization;
o the timing and terms of Shelbourne's new investments;
o the degree to which leverage is used in Shelbourne's capital
structure;
o the historical performance of Shelbourne;
o external factors such as the creditworthiness of tenants of
Shelbourne's properties, market interest rates, conditions of
the real estate and stock markets, performance of our
investments in mortgages and other real estate companies; and
o technical factors relating to the supply and demand for shares
of common stock.
16
<PAGE>
SHELBOURNE'S ABILITY TO INCUR DEBT INCREASES SHELBOURNE'S RISK OF DEFAULT ON ITS
OBLIGATIONS WHICH COULD, IN TURN, ADVERSELY AFFECT SHELBOURNE'S RESULTS OF
OPERATIONS AND DISTRIBUTIONS TO STOCKHOLDERS.
Shelbourne will likely incur significant indebtedness to finance future
investments. The use of leverage creates the risk that Shelbourne could default
on its obligations which, in turn, could adversely affect Shelbourne's results
of operations and ability to pay dividends to its stockholders. Your partnership
did not incur any indebtedness in connection with raising capital or acquiring
its properties. In contrast, Shelbourne may borrow on a secured and unsecured
basis to finance future investments, to improve existing properties or for other
purposes. However, Shelbourne's current intention is not to borrow in excess of
75% of its gross assets. The properties owned by Shelbourne could be subject to
foreclosure if required principal and interest payments are not made when due.
Shelbourne may be unable to make distributions because of the obligation to make
principal payments, thereby jeopardizing Shelbourne's qualification as a real
estate investment trust or subjecting Shelbourne to entity-level taxes. Finally,
any default by Shelbourne in any of its debt obligations may cause other debt
obligations to become immediately due and payable.
SHELBOURNE MAY MAKE INVESTMENTS WHICH HAVE A HIGHER DEGREE OF RISK THAN THE
INVESTMENTS HELD BY YOUR PARTNERSHIP.
Shelbourne may make investments which are riskier than your
partnership's present investments. Your partnership is presently invested in
unencumbered real estate. Shelbourne's investments may include mortgage loans,
joint venture interests, interests in other real estate-related companies and
other real estate-related investments. These types of investments are typically
subject to greater outside factors such as general market conditions and
reliance on third parties. If such additional risks were to materialize,
Shelbourne's performance could be adversely affected.
DIVIDEND LEVELS ARE NOT GUARANTEED AND MAY FLUCTUATE.
The amount of Shelbourne's dividends may be less than prior
distributions by your partnership. The amount of dividends will depend upon
numerous factors, some of which are beyond the control of management. These
factors include profitability, interest and principal payments on any
indebtedness, the cost of acquisitions including related debt service payments,
issuances of debt and equity securities, fluctuations in working capital,
capital expenditures, adjustments in reserves and prevailing economic
conditions. Shelbourne will not adhere to any particular formula in determining
what dividends it will declare and pay. The Board of Directors of Shelbourne
will determine the actual dividend rate based on Shelbourne's results of
operations, cash flow and capital requirements, economic conditions, tax
considerations and other factors. Shelbourne, however, will be required to
distribute at least 95% of its taxable income, excluding net capital gain, for
the year 2000 in order to maintain its status as a real estate investment trust,
and 90% for each year thereafter.
IF THE CONVERSION IS APPROVED OUR OBLIGATIONS TO REPAY FEES PREVIOUSLY RECEIVED
BY US UPON LIQUIDATION OF YOUR PARTNERSHIP WILL BE ELIMINATED.
If the conversion is approved, we no longer will be obligated to pay
you additional amounts when your partnership is liquidated. If your partnership
were currently liquidated we would be required to pay limited partners $4.06 per
unit, or an aggregate of $2,384,398, as repayment of fees previously received.
Our obligation is reduced each year by approximately $0.49 per unit, or $286,000
in the aggregate, and is completely eliminated in 2008. Elimination of our
obligation to pay you this additional amount was an agreed-upon element of the
settlement.
17
<PAGE>
WE HAVE A CONFLICT OF INTEREST IN RECOMMENDING THE CONVERSION BECAUSE WE ARE
AFFILIATED WITH SHELBOURNE MANAGEMENT WHICH WILL CONTINUE TO RECEIVE FEES FOR
MANAGING SHELBOURNE.
We have an economic interest in the conversion since Shelbourne
Management will have a contractual right to receive fees for managing
Shelbourne's business for ten years after the conversion. Although we currently
receive fees for managing your partnership, your general partners originally
expected to receive these fees through the end of an anticipated holding period
that expired in 1998. In addition, your partnership agreement gives limited
partners the right to remove us as general partners.
SHELBOURNE MANAGEMENT WILL HAVE A CONFLICT OF INTEREST BECAUSE ITS ASSET
MANAGEMENT FEE WILL BE BASED ON SHELBOURNE'S GROSS ASSET VALUE AND SHELBOURNE
MANAGEMENT WILL HAVE THE ABILITY TO INCREASE THE GROSS ASSET VALUE BY INCURRING
DEBT AND ACQUIRING NEW INVESTMENTS.
Shelbourne Management will receive an asset management fee for managing
Shelbourne. The asset management fee will be based on the gross assets of
Shelbourne and will therefore increase if Shelbourne's gross assets increase. To
that extent, Shelbourne Management will benefit if Shelbourne retains properties
and leverages its properties to acquire new investments, while Shelbourne's
shareholders may be better served by Shelbourne's disposing of a property or
holding a property on an unleveraged basis. However, the Board of Directors will
be ultimately responsible for the management, control and investment activities
of Shelbourne.
YOU WILL NOT HAVE ANY DISSENTERS' OR APPRAISAL RIGHTS IF YOU VOTE AGAINST THE
CONVERSION.
If you vote against the conversion and the conversion is nevertheless
approved by limited partners holding a majority of the outstanding units, you
will not have the right to receive cash based on an appraisal of your interest
in your partnership or otherwise. This means that if you do not wish to
participate in the conversion, you would either have to sell your units prior to
the conversion or sell your common stock after the conversion.
THE ESTIMATED VALUE OF SHELBOURNE'S COMMON STOCK IS BASED UPON ANTICIPATED
GROWTH THAT WILL TAKE TIME TO ACHIEVE.
Insignia/ESG has estimated the value of shares of Shelbourne's common
stock at between $45.02 and $55.85. This range of estimated values assumes that
Shelbourne has grown its asset base through the use of leverage such that
Shelbourne has a ratio of total indebtedness to total assets of 75%. Other
assumptions, including investment performance and interest rates, were made in
arriving at the range of estimated values. Although Shelbourne intends to
actively pursue investment opportunities, we cannot guarantee the actual timing
or terms of any new investments or the timing or terms of any borrowing. In
addition, there is substantial uncertainty as to the price at which the shares
of Shelbourne's common stock will trade. The shares of common stock may trade
below the range estimated by Insignia/ESG.
STOCKHOLDERS WILL BE DILUTED BY ANY SUBSEQUENT EQUITY ISSUANCES.
The issuance of additional equity securities to raise capital or make
new investments would reduce your percentage interest in Shelbourne and could
reduce dividends you would receive from Shelbourne. Unlike your partnership,
Shelbourne will have the ability to raise capital by issuing additional shares
of common stock and causing the operating partnership to issue additional
limited partnership interests.
18
<PAGE>
SHELBOURNE MAY ENTER INTO TRANSACTIONS WITH OUR AFFILIATES WHICH MAY NOT SOLELY
SERVE YOUR INTERESTS AS A STOCKHOLDER.
Shelbourne will be permitted to purchase properties from, sell
properties to, borrow money from or enter into other transactions with,
companies in which our beneficial owner, NorthStar Capital Investment Corp. has
an economic interest. Therefore, such transactions may not solely serve your
interests as a stockholder. Although these affiliated transactions must be on
terms comparable to those obtainable from third parties and must be approved by
a majority of Shelbourne's independent directors, any transactions between
Shelbourne and affiliates of ours may not be reached through arms-length
negotiation.
PROVISIONS IN THE CERTIFICATE, BYLAWS AND SHAREHOLDER RIGHTS AGREEMENT COULD
INHIBIT CHANGES IN CONTROL.
Some of the provisions of Shelbourne's certificate of incorporation,
bylaws and shareholder rights agreement described below, may have the effect of
discouraging a third party from making an acquisition proposal for Shelbourne
and may therefore inhibit a change in control of Shelbourne. In order to
maintain its qualification as a real estate investment trust for federal income
tax purposes, not more than 50% in value of the outstanding stock of Shelbourne
may be owned, directly or indirectly, by five or fewer individuals, as defined
in the Internal Revenue Code.
In order to facilitate maintenance of its qualification as a real
estate investment trust for federal income tax purposes, and to otherwise
address concerns relating to concentration of capital stock ownership,
Shelbourne generally has prohibited ownership, directly or by virtue of the
attribution provisions of the Internal Revenue Code, by any single stockholder
of more than 8% of the issued and outstanding shares of Shelbourne's common
stock. However, the ownership limit will not apply to NorthStar Capital
Investment Corp. or any of its officers, directors and affiliates provided that
their ownership in excess of this limit will not jeopardize Shelbourne's
qualification as a real estate investment trust for Federal income tax purposes.
The Board of Directors may waive the ownership limitation described above or
modify the ownership limit with respect to one or more persons if it is
satisfied, based upon the advice of tax counsel, that ownership in excess of
this limit will not jeopardize Shelbourne's qualification as a real estate
investment trust for federal income tax purposes or if it determines that it is
no longer in the best interests of Shelbourne's shareholders for Shelbourne to
continue to qualify as a real estate investment trust. The ownership limit may
have the effect of inhibiting or impeding a change in control and, therefore,
could adversely affect the stockholders' ability to realize a premium over the
then-prevailing market price for the common stock.
In addition, the Board of Directors has been divided into three
classes, the initial terms of which expire in 2001, 2002 and 2003, with
directors of a given class chosen for three-year terms upon expiration of the
terms of the members of that class. The staggered terms of the members of the
Board of Directors may adversely affect the stockholders' ability to effect a
change in control of Shelbourne, even if such a change in control were in the
best interests of some, or a majority, of Shelbourne's stockholders.
The certificate of incorporation authorizes the Board of Directors to
issue shares of preferred stock in series and to establish the rights and
preferences of any series of preferred stock so issued. The issuance of
preferred stock also could have the effect of delaying or preventing a change in
control of Shelbourne, even if such a change in control were in the best
interests of some, or a majority, of Shelbourne's stockholders. No shares of
preferred stock will be issued or outstanding immediately subsequent to the
conversion and Shelbourne has no present intention to issue any such shares.
19
<PAGE>
Shelbourne has also adopted a shareholder rights agreement. Under the
terms of the shareholder rights agreement, in general, if a person or group
becomes an "acquiring person" meaning such person or group acquires more than
15% of the outstanding shares of common stock, all other stockholders will have
the right to purchase securities from Shelbourne at a discount to such
securities' fair market value, thus causing substantial dilution to the
acquiring person. The shareholder rights agreement may have the effect of
inhibiting or impeding a change in control and, therefore, could adversely
affect the stockholders' ability to realize a premium over the then- prevailing
market price for the common stock in connection with such a transaction. In
addition, since the Board of Directors of Shelbourne can prevent the shareholder
rights agreement from operating in the event the Board approves of an acquiring
person, the shareholder rights agreement gives the Board significant discretion
over whether a potential acquiror's efforts to acquire a large interest in
Shelbourne will be successful. Because the shareholder rights agreement contains
provisions that are designed to assure that NorthStar Capital Investment Corp.
and its affiliates will never, alone, be considered a group that is an acquiring
person, the shareholder rights agreement provides NorthStar Capital Investment
Corp. and its affiliates with some advantages under the shareholder rights
agreement that are not available to other stockholders. For instance, NorthStar
Capital Investment Corp. and its affiliates could acquire greater than 15% of
the outstanding shares of common stock of Shelbourne without triggering the
purchase right described above.
Some provisions of the Delaware General Corporation Law also may have
the effect of inhibiting a third party from making an acquisition proposal for
Shelbourne or of impeding a change in control of Shelbourne under circumstances
that otherwise could provide the holders of shares of common stock with the
opportunity to realize a premium over the then-prevailing market price of such
shares. For instance, Section 203 of the Delaware General Corporation Law
generally prohibits a Delaware corporation from engaging in a broad range of
business combinations with an interested stockholder for a period of three years
from the date such person became an interested stockholder.
SHELBOURNE IS SUBJECT TO RISKS OF DEFAULT BY BORROWERS AND INTEREST RATE RISKS
ASSOCIATED WITH INVESTMENTS IN MORTGAGE LOANS.
Shelbourne may invest in mortgage loans and is therefore subject to
risks inherent in the business of lending, such as the risk of default by or
bankruptcy of the borrower. Upon a default by a borrower, Shelbourne may not be
able to sell the property securing a mortgage loan at a price that would enable
it to recover the balance of a defaulted mortgage loan. In addition, the
mortgage loans could be subject to regulation by federal, state and local
authorities which could interfere with Shelbourne's administration of the
mortgage loans and any collections upon a borrower's default.
By investing in mortgage loans Shelbourne is also subject to interest
rate risks. Market interest rates have recently fluctuated and may rise in the
future. Accordingly, if interest rates rise to a greater percentage rate than
that received by Shelbourne from its mortgage loans, Shelbourne's public
valuation is likely to be adversely affected.
SHELBOURNE'S PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE REAL
ESTATE INDUSTRY.
Following the conversion, Shelbourne may make additional real
estate-related investments including investments in additional properties, joint
ventures and other real estate companies. These investments will be subject to
the general risks associated with the ownership of real estate investments. Such
risks include adverse changes normally associated with changes in national,
regional and local economic and market conditions, changes in laws and
governmental regulations including those governing usage, zoning and
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<PAGE>
taxes, changes in interest rates and the availability of financing. Other
factors affecting real estate, which would impact on Shelbourne's properties and
could have an impact on its other investments, include acts of God, property
damage or casualty losses, unexpected capital expenditures, changes in market
rents and the creditworthiness of tenants.
SHELBOURNE MAY NOT BE ABLE TO RE-LEASE PROPERTIES UPON THE EXPIRATION OF LEASES.
Most of the leases of your partnership's existing properties expire on
dates ranging from 2000 to 2009. In addition, leases representing approximately
21%, 71%, 38% and 31% of the gross annual rents at the 568 Broadway, Commerce
Plaza, Melrose Crossing and Seattle Tower properties, respectively, expire in or
before 2001. Upon the expiration of a lease, Shelbourne may not be able to
re-lease the related property at a comparable lease rate or without incurring
additional expenses.
SHELBOURNE WILL BE MANAGED BY A THIRD-PARTY ADVISOR AND WILL THEREFORE HAVE LESS
CONTROL OVER ITS OPERATIONS.
Shelbourne will rely on Shelbourne Management to manage its business
and assets. Subject to the control of Shelbourne's Board of Directors,
Shelbourne Management will make all decisions with respect to the management of
the company. Thus, the success of Shelbourne's business will depend in large
part on the ability of Shelbourne Management to manage Shelbourne's day-to-day
operations. Any adversity experienced by Shelbourne Management could adversely
impact the operation of Shelbourne's properties and, consequently, Shelbourne's
cash flow and ability to make distributions to its stockholders.
SHELBOURNE MANAGEMENT WILL HAVE CONFLICTS OF INTEREST IN MANAGING SHELBOURNE'S
BUSINESS AND MAY THEREFORE MAKE DECISIONS OR TAKE ACTIONS THAT DO NOT SOLELY
REFLECT YOUR INTERESTS AS A STOCKHOLDER.
Shelbourne Management manages the assets of other entities, including
entities which may seek to make investments which may also be potential
acquisition targets for Shelbourne. Shelbourne Management may not always take
the actions in advising Shelbourne that would be expected of Shelbourne
Management if its business had been limited to managing Shelbourne's assets.
Shelbourne Management will also manage two other publicly traded real estate
investment trusts if the conversion of the other High Equity partnerships are
approved and may manage other public real estate investment trusts. Shelbourne
Management has discretion to allocate investment opportunities among the
companies it manages.
SHELBOURNE'S RETENTION OF AN EXTERNAL MANAGER COULD ADVERSELY AFFECT THE VALUE
OF YOUR SHARES.
Instead of being self-managed Shelbourne will pay a third party,
Shelbourne Management, to manage its operations. Shares of externally managed
real estate investment trusts typically trade at a lower valuation than shares
of internally managed real estate investment trusts.
SHELBOURNE'S ABILITY TO GROW COULD BE ADVERSELY AFFECTED IF SHELBOURNE IS NOT
SUCCESSFUL IN RAISING CAPITAL.
Shelbourne's ability to grow is largely dependent on its ability to
raise additional capital to acquire additional properties and make new
investments. While Shelbourne has the ability to raise additional capital in a
variety of ways, including through the issuance of debt and equity securities,
it may not be successful in raising such capital in the capital and financial
markets. For example, since Shelbourne must distribute substantially all of its
taxable income to maintain its status as a real estate investment trust, lenders
may be
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<PAGE>
unwilling to lend money to it. Also, Shelbourne's ability to raise additional
capital by selling additional equity securities may be adversely affected by
equity market trends resulting in higher yields for non-real estate securities.
If Shelbourne is unable to raise additional capital on favorable terms,
Shelbourne's ability to achieve its objectives and the value of your investment
could be adversely affected.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT THE VALUE OF YOUR SHARES.
One of the factors that may be expected to influence the prevailing
market price of the common stock is the annual yield on the stock price from
distributions by Shelbourne. Accordingly, an increase in market interest rates
may lead purchasers of shares in common stock in the secondary market to demand
a higher annual yield, which could adversely affect the market price of the
common stock. For instance, if interest rates are greater than the percentage
return you receive on a share of common stock, the price of a share of common
stock will likely decrease because potential investors may not be willing to
invest in shares of Shelbourne's common stock that would yield less than the
market rate on interest-bearing securities, such as bonds. Interest rates have
fluctuated over the past several months and may rise in the near future.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD ADVERSELY AFFECT SHELBOURNE'S
FINANCIAL CONDITION.
Real estate investments are illiquid relative to some other investments
such as publicly traded securities. The illiquidity of Shelbourne's assets may
limit its ability to buy or sell property in response to changes in economic or
other conditions. In addition, some significant costs and expenses attendant to
real estate ownership are fixed, such as principal and interest payments on
debt, real estate taxes, and operating and maintenance costs. As a result,
Shelbourne's ability to respond to adverse changes in the performance of its
investments may be limited, which could have an adverse effect on Shelbourne's
financial condition and results of operations.
THE UNCERTAINTY OF THE OUTCOME OF LAWSUITS PENDING AGAINST YOUR PARTNERSHIP
COULD ADVERSELY AFFECT SHELBOURNE'S FINANCIAL CONDITION.
Your partnership is involved in two litigations both involving the
joint venture which owns the 568 Broadway property. One litigation involves a
number of present or former tenants at 568 Broadway who are in default of their
lease obligations. Several of these tenants have brought claims or counterclaims
seeking total damages of over $20,000,000 plus additional damages of an
indeterminate amount. The plaintiffs' allegations include but are not limited
to, claims for breach of contract, failure to provide some services,
overcharging of expenses and loss of profits and income.
In the second litigation, a former retail tenant of 568 Broadway filed
a lawsuit against the joint venture that owns 568 Broadway alleging that by
erecting a sidewalk shed which the joint venture was required to do by law, the
joint venture deprived the plaintiffs of light, air and visibility to their
customers. The lawsuit seeks $20,000,000 in compensatory damages and $10,000,000
in punitive damages.
Although your partnership believes that both claims are without merit,
an unsuccessful outcome to either of these lawsuits could adversely affect
Shelbourne's financial condition.
LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT SHELBOURNE'S
FINANCIAL CONDITION.
Shelbourne may acquire properties that have unknown environmental
problems or develop environmental problems after acquisition that could require
substantial expenditures to remedy. In addition,
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<PAGE>
Shelbourne could be found to have environmental problems in some of its existing
properties. Often, federal and state laws impose liability on property owners or
operators for the clean-up or removal of hazardous substances on their
properties even if the present owner did not know of, or was not responsible
for, the contamination caused by the substances. In addition to the costs of
clean-up, contamination can affect the value of a property, Shelbourne's ability
to lease and sell the property, and Shelbourne's ability to borrow funds using
the property as collateral. Environmental laws typically allow the government to
place liens for such liabilities against affected properties, which liens would
be senior in priority to other liens. Costs that Shelbourne incurs to remedy
environmental problems in existing properties or to perform environmental
compliance due diligence on newly-acquired properties would reduce Shelbourne's
cash available for distribution to you as a shareholder. Your partnership has
not been notified by any governmental authority of any noncompliance, liability
or other claim in connection with any of its properties.
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR SHELBOURNE TO DISCONTINUE ITS STATUS AS
A REAL ESTATE INVESTMENT TRUST.
Shelbourne's Board will have the authority to determine whether
Shelbourne should continue to qualify as a real estate investment trust.
Although Shelbourne currently intends to operate in a manner designed to enable
it to qualify as a real estate investment trust, it is possible that future
economic, market, legal, tax or other considerations may cause Shelbourne to
fail to qualify as a real estate investment trust or may cause Shelbourne's
Board to revoke Shelbourne's REIT election. If that were to happen, Shelbourne
would be required to pay corporate-level income tax which could reduce the cash
available for distribution to stockholders and could materially reduce the value
of your common stock.
UNINSURED LOSSES COULD ADVERSELY AFFECT SHELBOURNE'S FINANCIAL CONDITION.
Your partnership carries, and Shelbourne will continue to carry
comprehensive liability, fire, flood, extended coverage and rental loss
insurance, as applicable, with respect to its properties as customarily carried
for similar properties. There are, however, some types of losses such as from
wars or catastrophic acts of nature that may be either uninsurable or not
economically insurable. Any uninsured loss could result in both loss of cash
flow from, and asset value of, the affected property.
We do not anticipate obtaining new owner's title insurance policies in
connection with the conversion. Each of your partnership's properties has
previously been insured by title insurance policies. However, each such title
insurance policy may be in an amount less than the current value of the
applicable property. In the event of a loss with respect to a property relating
to a title defect, Shelbourne could lose both its capital invested in and
anticipated profits from such property.
FEDERAL INCOME TAX RISKS
FAILURE TO QUALIFY OR REMAIN QUALIFIED AS A REAL ESTATE INVESTMENT TRUST WOULD
CAUSE SHELBOURNE TO BE TAXED AS A CORPORATION.
Shelbourne intends to elect to be treated for tax purposes and to
operate so as to qualify as a real estate investment trust under the Internal
Revenue Code effective for its taxable year ending December 31, 2000. If
Shelbourne qualifies as a real estate investment trust, it generally will not be
subject to corporate-level income tax on income that it currently distributes to
its stockholders as long as it makes current distributions of at least 95% - 90%
for taxable years after 2000 - of its taxable income excluding net capital gain.
This treatment substantially eliminates the "double taxation," i.e., taxation at
both the corporate and stockholder levels, that ordinarily results from
investment in a corporation. No assurance can be given that
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<PAGE>
Shelbourne will qualify or remain qualified as a real estate investment trust,
or that legislation, new regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to
qualification as a real estate investment trust or the Federal income tax
consequences of such qualification. Shelbourne has received an opinion of
Rosenman & Colin LLP to the effect that, commencing with Shelbourne's taxable
year ending on December 31, 2000, Shelbourne will be organized in conformity
with the requirements for qualification as a real estate investment trust, and
Shelbourne's proposed method of operation will enable it to meet the
requirements for qualification and taxation as a real estate investment trust,
provided that (1) the conversion and the procedural steps described under
"FEDERAL INCOME TAX CONSEQUENCES - REQUIREMENTS FOR QUALIFICATION -
ORGANIZATIONAL REQUIREMENTS" are completed in a timely fashion and (2)
Shelbourne and the operating partnership operate in accordance with the
customary representations and assumptions for transactions of this nature,
including representations with respect to their organization, business,
properties and operations. However, an opinion of counsel is not binding on the
Internal Revenue Service or the courts.
If Shelbourne were to fail to qualify as a real estate investment trust
in any taxable year, it would not be allowed a deduction for distributions to
stockholders in computing its taxable income, and its taxable income would be
subject to Federal income tax at regular corporate rates. Unless entitled to
relief, Shelbourne also would be disqualified from treatment as a real estate
investment trust for the four taxable years following the year during which
qualification was lost. The resulting taxes imposed on Shelbourne would reduce
the funds available for distribution to its stockholders for each of the years
involved, and could materially reduce the value of your common stock.
SHELBOURNE WILL BE SUBJECT TO A 4% NONDEDUCTIBLE EXCISE TAX IF IT FAILS TO
DISTRIBUTE REQUIRED AMOUNTS.
Shelbourne will be subject to a 4% nondeductible excise tax if its
distributions during each calendar year do not equal at least the sum of:
(1) 85% of its ordinary income for that year;
(2) 95% of its capital gain net income for that year less any
capital gains that Shelbourne elects to retain and pay taxes
on; and
(3) any undistributed taxable income from prior periods less any
capital gains that Shelbourne elected to retain and pay taxes
on.
While Shelbourne intends to make distributions to its stockholders in
amounts sufficient to comply with the foregoing distribution requirement and
also avoid the 4% excise tax, the occurrence of an excise tax would adversely
affect the value of shares.
THERE ARE POTENTIAL TAX DISADVANTAGES TO CONDUCTING BUSINESS AS A REAL ESTATE
INVESTMENT TRUST.
Maintaining qualification as a real estate investment trust will
require Shelbourne to comply with restrictions with respect to its assets,
income and distributions that are not applicable to your partnership. See
"FEDERAL INCOME TAX CONSEQUENCES - REQUIREMENTS FOR QUALIFICATION. Unlike your
partnership, Shelbourne may be subject to entity-level income taxes even while
remaining qualified as a real estate investment trust. Unlike your partnership,
Shelbourne will be unable to pass through losses to its stockholders.
Unlike your investment in your partnership, your ownership of common
stock will not be a passive activity for purposes of the passive activity loss
limitation, and dividends and capital gains from common
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stock may not be offset by your unused passive activity losses from your
partnership or other investments. However, unused passive activity losses from
your partnership generally may be deducted when you sell all of your common
stock. If you bought your units in your partnership's original offering, we
estimate that you may have unused passive activity losses from your partnership
of up to $42 per unit. This amount is reduced if you have previously used any of
these losses to offset your passive activity income from other investments.
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BENEFITS OF THE CONVERSION
As discussed under "BACKGROUND OF THE CONVERSION," we are proposing the
conversion as required by the settlement of the class action litigation
involving your partnership. We expect that the following benefits will result
from the conversion.
GREATER MARKET VALUE
The estimated range of values for shares of common stock is between
$45.02 and $55.85, whereas the estimated range of per share secondary market
trading values based on secondary market trading data for the most recent period
reported by Partnership Spectrum, an independent third party industry
publication, is between $39.18 and $44.19. In addition, these secondary prices
do not take into account commissions and other transactional costs which sellers
of units may be required to pay and which typically range between 8% and 10% of
the reported selling price.
TAX-FREE RECEIPT OF COMMON STOCK
You will not be taxed on common stock you receive in the conversion.
GREATER LIQUIDITY AND MORE EFFICIENT MARKET
Common stock will be traded on the American Stock Exchange. The
American Stock Exchange will likely provide significantly greater liquidity than
limited partners currently have in the existing limited and informal secondary
market for units. In the most recent two-month period reported by Partnership
Spectrum, 4,652 units, or less than 1% of the outstanding units, were traded on
the secondary market.
The American Stock Exchange should also provide stockholders in
Shelbourne with a more efficient market to sell their shares than limited
partners currently have in the secondary market for units. Payment for shares
sold on the American Stock Exchange is required to be made within three business
days from the date that shares are sold. Currently it can take a significant
amount of time to complete the sale of units on the secondary market and receive
payment.
ABILITY TO MAKE NEW INVESTMENTS
Shelbourne will have the ability to make new investments. Shelbourne
may acquire new properties, interests in joint ventures and other real estate
companies, mortgages and other real estate-related assets. The ability to make
new investments will enable Shelbourne to change its investment portfolio in
response to changing market conditions and to avail itself of potentially
favorable investment opportunities. Through such additional investments,
Shelbourne will attempt to maximize the value of the common stock.
REQUIRED DIVIDENDS
Shelbourne will be required to distribute 95% of its taxable income -
90% after 2000 - other than capital gains, to maintain its status as a real
estate investment trust. Your partnership is not required to make distributions.
BENEFICIAL COMPANY STRUCTURE
Shelbourne's "UPREIT" structure will enhance its ability to make future
acquisitions. Shelbourne, through the operating partnership, may issue
additional partnership interests in transactions which would allow prospective
sellers to defer recognizing gain on their transfer of property to the operating
partnership.
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ELECTED GOVERNANCE
Following the conversion, directors of Shelbourne will be elected by
holders of common stock. In addition, a vote of stockholders holding two-thirds
of the outstanding common stock generally may remove a directors of Shelbourne.
Each year, holders of common stock will elect either two or three of
Shelbourne's directors, each of whom will serve for a three-year term.
ABILITY TO RAISE CAPITAL
Shelbourne will have the ability to raise capital by borrowing money,
including by mortgaging existing properties, and by issuing equity securities.
The proceeds from such loans or equity issuances may be used to finance future
investments, to improve existing properties, or for other purposes. In addition,
the borrowing of money by Shelbourne will not result in unrelated business
taxable income.
NO UNRELATED BUSINESS TAXABLE INCOME
Dividends paid to you generally will not constitute unrelated business
taxable income even if Shelbourne borrows funds to finance acquisitions or
improvements.
SIMPLIFIED TAX REPORTING
The conversion will result in simplified tax administration for many of
you. You no longer will receive a Schedule K-1, which is generally received in
March, which complicates and typically leads to more costly tax return
preparation, but instead will receive a Form 1099-DIV by January 31 of each year
to report your taxable income and gain from Shelbourne.
REDUCED STATE INCOME TAX REPORTING
You generally will not be subject to state income tax or required to
file individual state income tax returns in states other than in your state of
residence solely as a result of an investment in common stock.
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE
Your rights and obligations are currently governed by the Delaware
Revised Uniform Limited Partnership Act, which we will refer to as "Delaware
partnership law", and your partnership agreement. Following the conversion, your
rights will be governed by the Delaware General Corporation Law and the
organizational documents of Shelbourne. The following compares the material
rights and attributes of the ownership of units in your partnership and shares
of common stock. See "DESCRIPTION OF CAPITAL STOCK" for additional information
on common stock.
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<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
FORM OF ORGANIZATION
<S> <C>
Your partnership is a limited partnership formed under Shelbourne is a corporation organized under Delaware
Delaware partnership law. Your partnership has been General Corporation Law. Shelbourne intends to
treated as a partnership for Federal income tax qualify as a real estate investment trust under the
purposes, and is not subject to entity-level taxes. Internal Revenue Code, thereby generally avoiding
Federal taxation of income distributed to stockholders.
Maintaining real estate investment trust status will
require ongoing satisfaction of various tests and
restrictions that do not apply to your partnership.
Shelbourne may be subject to entity-level taxes even
while remaining qualified as a real estate investment
trust, including if Shelbourne fails to distribute 100%
of its real estate investment trust taxable income,
including its net capital gain.
</TABLE>
Your partnership is a limited partnership governed by Delaware
partnership law. Shelbourne is a corporation governed by Delaware corporate law.
Qualification of Shelbourne as a real estate investment trust will enable
Shelbourne to avoid much of the double taxation normally associated with
corporations.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
GENERAL BUSINESS
<S> <C>
The business of your partnership is limited to the Shelbourne will have the authority to engage in any
ownership of interests in its properties. The properties and all business activities permitted a corporation
were intended to be sold over varying periods of time organized under the laws of the State of Delaware.
with the resulting liquidation of your partnership. Your Specifically, through the operating partnership,
partnership is prohibited from reinvesting its funds in Shelbourne will own the operating partnership's
additional properties. All of your partnership's properties and, when appropriate, recognize the value
properties were acquired for cash. of the properties through sales and/or mortgage
financing. The proceeds of such transactions will be
used to make new real estate-related investments.
Shelbourne will also acquire new investments with
borrowed money or capital raised by issuing additional
equity securities. Shelbourne may acquire properties
for cash or through the issuance of equity securities,
including limited partnership interests in the operating
partnership.
</TABLE>
Shelbourne will be permitted to engage in a broader range of business
opportunities as compared to your partnership. Such opportunities will be
facilitated as a result of the greater flexibility of Shelbourne with respect to
raising additional capital, borrowing money and acquiring additional properties.
<TABLE>
------------------------------------------------------------- ----------------------------------------------------------
<S> <C>
Duration of Existence
Your partnership has a finite term of existence. Your In accordance with the Delaware General Corporation
partnership agreement provides for a term lasting until Law and Shelbourne's certificate of incorporation,
December 31, 2015, unless sooner terminated in Shelbourne will have a perpetual existence, and
connection with a liquidation following the sale of all continue to operate indefinitely.
the properties. While your partnership initially
contemplated selling its interests in its properties within
seven to ten years, we have the discretion and authority
to determine the actual timing of any sales. Any such
determination would be based, in part, on then
prevailing economic and market conditions.
</TABLE>
Your partnership agreement provides for the dissolution of your
partnership in 2015, whereas Shelbourne's certificate of incorporation provides
for perpetual existence. Accordingly, after the conversion, liquidation of your
investment in Shelbourne will not likely be achieved through liquidating
distributions, but through the sale of shares of Common Stock on the American
Stock Exchange.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
Voting Rights
<S> <C>
You are entitled to one vote per unit on matters The bylaws and Delaware law provide that the
requiring a vote of limited partners. Limited partners stockholders of Shelbourne shall be entitled to vote,
generally may vote on: subject to any voting rights which may be granted to
holders of preferred stock, on all matters submitted to a
o removal of a general partner and the election of a vote of the stockholders. In determining the number of
successor general partner; shares entitled to vote, each share of common stock is
entitled to one vote.
o election of an additional general partner;
Generally, matters submitted to the stockholders
o termination and dissolution of your partnership; require the affirmative vote of stockholders holding a
majority of the number of votes cast either present in
o amendments to your partnership's partnership person or by proxy at a duly convened meeting of
agreement other than amendments relating to stockholders, except that the removal of directors and
actions which are under the sole authority of your the amendment of some sections of the certificate of
managing general partner; incorporation requires the affirmative vote of
stockholders holding two-thirds of the number of votes
o material changes in your partnership's investment entitled to be cast on such proposals.
objectives;
The bylaws of Shelbourne require Shelbourne to send
o sale of substantially all of the assets of your notice at least 10 days and not more than 60 days
partnership; before the annual meeting of stockholders to each
stockholder entitled to vote at such meeting or to each
o the pledge or encumbrance of substantially all of stockholder who, by law, under the certificate of
the assets of your partnership; and incorporation or under the bylaws is entitled to such
notice.
o the extension of the term of your partnership.
A vote of 50% or more of the outstanding units is
required to approve any of the foregoing actions.
</TABLE>
You will be entitled to vote on more matters as a stockholder of
Shelbourne than you are as a limited partner in your partnership, including the
entitlement to vote in the annual election of directors.
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<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
--------------------------------------------------- ----------------------------------------------------------
Fiduciary Duties, Limitation of Liability and Indemnification
<S> <C>
We are accountable to your partnership as At least one Delaware court has stated that the fiduciary duties of a
fiduciaries and are required to exercise good general partner are comparable to those of a director to a stockholder.
faith and integrity in all our dealings in your Other courts, however, have indicated that the fiduciary duties of a general
partnership's affairs. Your partnership partner are greater than those of a director to a stockholder, and other
agreement generally provides that neither we Delaware courts have held that the fiduciary duties of a general partner
nor any of our affiliates performing services on can be determined or modified by the partnership agreement.
behalf of your partnership will be liable to your
partnership or any of their respective partners Accordingly, although it is unclear whether or to what extent there are any
for any loss suffered by your partnership that differences in such fiduciary duties, it is possible that the fiduciary duties
arises out of any action or inaction of us or our of directors of Shelbourne to its stockholders could be less than our
affiliates if we in good faith determine that such fiduciary duties to you. This may result in decreased potential liability of
course of conduct was in the best interests of the directors of Shelbourne and less recourse available to stockholders
your partnership, provided that such course of who believe that Shelbourne's Board did not act properly in managing
conduct did not constitute negligence or Shelbourne's affairs. Shelbourne's certificate of incorporation limits the
misconduct of us and our affiliates. liability of Shelbourne's directors to the fullest extent permitted from time
to time by Delaware law. The certificate of incorporation presently
Your partnership agreement generally requires permits the liability of directors to Shelbourne or its stockholders for
your partnership to indemnify us to the money damages to be limited, except for liability:
maximum extent permitted by law from any
liability, loss or damage incurred by reason of o for any transaction from which the director derived an improper
an act performed or omitted to be performed by benefit;
them, including costs and expenses, provided
that (1) the course of conduct was determined o for any breach of the director's duty of loyalty to Shelbourne or its
to be in the best interest of your partnership, stockholders;
and (2) the course of conduct did not constitute
negligence or misconduct. o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; and
o under Section 174 of the General Corporation Law of the State of
Delaware.
Shelbourne's bylaws require Shelbourne to indemnify its directors and
officers to the fullest extent permitted by Delaware law.
Delaware law permits indemnification against expenses and liabilities
arising out of legal actions brought or threatened against directors for their
conduct on behalf of a corporation, provided that they acted in good faith
and in a manner reasonably believed was in or not opposed to such
corporation's best interests and in the case of a criminal proceeding, that
they had no reasonable cause to believe their conduct was unlawful.
Delaware does not allow indemnification of directors in the case of an
action by or in the right of a corporation, including stockholder derivative
suits, unless the directors successfully defend the action or
indemnification is ordered by the court.
Shelbourne has agreed to indemnify its directors and executive officers to
the fullest extent permitted by law and to advance to the directors and
executive officers all related expenses, including legal costs, subject to
reimbursement, if it is subsequently determined that the indemnification is
not permitted.
</TABLE>
The rights of stockholders against management of Shelbourne in some
circumstances may be more limited than the rights you have against us or your
general partners.
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<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
Review of Books and Records
<S> <C>
Under your partnership agreement and applicable law, Under Delaware General Corporation Law, a
you are entitled to review and obtain a copy of a current stockholder is entitled, upon written demand, to inspect
list of the names and addresses of limited partners in for any proper purposes during usual business hours,
your partnership as well as other information Shelbourne's stock ledger, a list of Shelbourne's
maintained at the principal offices of your partnership. stockholders and its other books and records and to
make copies or extracts therefrom. In addition,
Shelbourne is required to prepare, at least 10 days
before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting,
arranged in alphabetical order, and showing the address
of each stockholder and the number of shares
registered in the name of each stockholder. Such list
must be open to the examination of any stockholder,
for any purpose germane to the meeting, during
ordinary business hours, for at least 10 days prior to the
meeting either at the place where the meeting is to be
held or at a place in the city which is specified in the
notice of the meeting.
</TABLE>
The rights of stockholders to obtain an investor list is somewhat more
limited than your corresponding right in your partnership.
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
Management
<S> <C>
With the exception of some significant transactions Shelbourne will be managed by its Board of Directors
which require your approval such as a sale of all of and executive officers. Management of the day-to-day
your partnership's assets, we have exclusive authority affairs of Shelbourne will be performed by Shelbourne
and control over the management and operation of your Management. The Board of Directors will be elected
partnership. You do not have the right to annually elect by the holders of common stock.
the management of your partnership. However, we
may be removed at any time by a vote of a majority of
the outstanding units in your partnership.
</TABLE>
Unlike limited partners in your partnership, holders of Common Stock
will vote to elect management of Shelbourne.
32
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
Distributions; Distribution Policy
<S> <C>
Your partnership generally distributes available cash on Shelbourne intends to make quarterly dividend
a quarterly basis. Amounts distributed to you payments to its stockholders. The amount of such
historically have been derived from your share of dividends will be established by the Board of Directors,
adjusted cash from operations. We may, under your taking into account the cash needs of Shelbourne, the
partnership agreement, create working capital and other requirements of the Internal Revenue Code for
reserves that may have the effect of decreasing cash qualification as a real estate investment trust and the
distributions. You also are entitled to receive your amount of distributions necessary to avoid becoming
share of cash from sales or financings upon the sale or, subject to non-deductible excise tax. See "FEDERAL
in limited circumstances, financing of your INCOME TAX CONSEQUENCES." Under the
partnership's properties. However, except for the sale Internal Revenue Code, Shelbourne is required to
of two properties, your partnership has not to date sold distribute ordinary income dividends of at least 95% -
or financed any of its real estate investments. 90% after taxable year 2000 - of its taxable income
other than net capital gain in order to maintain its
qualification as a real estate investment trust. Unlike
your partnership, Shelbourne is not required to
distribute net proceeds from a financing of properties
or from sales of properties. For a summary of
Shelbourne's dividend policy, see, "SHELBOURNE
--CASH DIVIDEND POLICY".
</TABLE>
Shelbourne will pay dividends when declared by the Board of Directors
of Shelbourne. The amount of such dividends will depend upon Shelbourne's
operating expenses, debt service payments, capital expenditures and other
factors. To maintain its qualification as a real estate investment trust,
Shelbourne must distribute 95% - 90% after 2000 - of its taxable income other
than net capital gain.
33
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------------- ----------------------------------------------------------
Leverage; borrowing policy
<S> <C>
Your partnership did not incur any indebtedness in Shelbourne will likely incur significant indebtedness
connection with raising capital or acquiring its on a secured and unsecured basis to finance future
properties. Your partnership is permitted to encumber investments, to improve existing properties or for other
with mortgage financing any properties which have purposes. Shelbourne will not be limited as to the
been owned by your partnership for at least five years, amount of indebtedness it may incur with respect to
provided that your partnership has obtained an opinion of any of its properties, but currently does not intend to
counsel that such financing will not result in income borrow, in the aggregate, more than an amount equal to
derived from your partnership's properties constituting 75% of its gross assets.
"unrelated business taxable income" to tax-exempt
investors. There is no maximum percentage leverage
with respect to any single property or all properties on a
combined basis. To date, your partnership has not
encumbered any of its properties.
</TABLE>
Your partnership can only employ leverage if borrowing does not result
in unrelated business taxable income. Shelbourne may borrow on a secured or
unsecured basis. Borrowing by Shelbourne will not result in unrelated business
taxable income.
<TABLE>
<CAPTION>
------------------------------------------------------------- ----------------------------------------------------------
Lending Policy
<S> <C>
Your partnership has not engaged in the business of Shelbourne may make loans, including mortgage loans, as
making loans and is not permitted to make new part of its investment strategy. Shelbourne will not be
investments. limited as to the amount it may lend with respect to any
one investment and is not limited as to the percentage of
gross assets represented by loans.
</TABLE>
Your partnership is not in the business of making loans. Subject to
complying with the requirements of the Internal Revenue Code for qualification
as a real estate investment trust, Shelbourne may make loans, including mortgage
loans, as part of its investment strategy.
34
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------ ----------------------------------------------------------------------
Management Fees to Affiliates
<S> <C>
Your partnership agreement provides for the Shelbourne Management will manage Shelbourne under an advisory
payment of the following fees to us and our agreement and will be paid:
affiliates:
o Asset Management Fee. An asset management fee equal to 1.25%
o Asset Management Fee. A per annum of gross assets of Shelbourne. Since the asset management fee is
partnership asset management fee equal to based on gross assets, the amount payable to Shelbourne
1.25% of the gross assets of your partnership Management will increase to the extent Shelbourne acquires new
per annum; investments, whether for cash, by causing Shelbourne to incur
indebtedness or otherwise;
o Non-accountable Expense Reimbursement.
$200,000 per year for non-accountable o Non-accountable Expense Reimbursement. $200,000 per year for
expenses of your managing general partner reimbursement of non-accountable administrative expenses;
relating to the administration of your
partnership; o Property Management Fee. Competitive property management
fees not in excess of 6% of revenues; and
o Property Management Fee. Competitive
property management fees not in excess of 6% o Accountable Expense Reimbursement. Reimbursements for
of revenues payable to us and our affiliates; accountable expenses incurred in connection with the performance
of administrative services for Shelbourne.
o Accountable Expense Reimbursement.
Reimbursement for accountable expenses Under the advisory agreement, Shelbourne Management will be
incurred in connection with the performance of responsible to do the following:
administrative services for your partnership;
and o manage Shelbourne's day-to-day operations;
o Subordinated Incentive Fee. A fee equal to o provide or arrange for customary property management services to
15% of the proceeds of any sales or financings be provided at Shelbourne's properties;
after limited partners are distributed their total
original invested capital plus an amount that o supervise Shelbourne's financings including any sales of
would equal a 10% annual return on their Shelbourne's securities;
adjusted invested capital. We do not expect
that limited partners will receive the required o conduct relations for Shelbourne with the American Stock
amount upon liquidation of your partnership Exchange or with dealers which make markets in Shelbourne's
and therefore we do not expect to receive any securities;
subordinated incentive fees
o select and conduct relations with lenders, lawyers, consultants,
accountants, mortgage loan originators, brokers, participants,
attorneys, appraisers, insurers, and others who may be relevant to
Shelbourne's activities;
o administer day-to-day bookkeeping and accounting functions;
o prepare reports to stockholders which may be required by
governmental authorities for the ordinary conduct or Shelbourne's
business;
o negotiate and enter into leases of space at Shelbourne's properties;
and
o supervise the development and improvement of properties,
including capital and tenant improvements.
</TABLE>
The method of determining the amount of fees payable to Shelbourne
Management for managing Shelbourne and its properties is substantially the same
as the method for determining the amount of fees payable to us and our
affiliates for performing the same services for your partnership. However, if
the conversion is approved we will no longer be obligated to repay a maximum of
$4.06 per unit, or an aggregate of $2,384,398, which we would otherwise be
required to pay if your partnership were liquidated. In addition, to the extent
Shelbourne increases its gross assets, including through acquisitions and
through leverage, the asset management fee payable to Shelbourne Management
would increase.
35
<PAGE>
The following information compares (1) the compensation and
distributions paid by your partnership to us and our affiliates and (2) the
compensation and distributions that would have been paid to us and our
affiliates if the conversion had been in effect during the periods presented
below.
36
<PAGE>
HISTORICAL AND PRO FORMA PAYMENTS TO THE GENERAL PARTNERS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1998
---- ----
----------------------------------------------------------------------------
Net Net
Historical Shelbourne Increase Historical Shelbourne Increase
Partnership Pro Forma (Decrease) Partnership Pro Forma (Decrease)
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Asset Management Fee (1)
No leverage $1,376,001 $859,652 ($516,349) $1,285,432 $928,561 ($356,871)
75% leverage -- $3,438,607 -- -- $3,714,242 --
Property Management Fees (2) $416,429 $416,429 0 $427,126 $427,126 0
General Partners' $124,721 0 ($124,721) $142,360 $80,296 ($62,064)
Distributions (3) (4)
Distributions on Units/Shares
Held by our Affiliates (4) $20,584 0 ($20,584) $205,301 $115,797 ($89,504)
Non-Accountable Expense $200,000 $200,000 $0 $200,000 $200,000 $0
Reimbursement
Accountable Expense $43,361 $43,361 $102,025 $102,025
Reimbursement
----------------------------------------------------------------------------
<CAPTION>
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------------------------------------------------------
1999 JUNE 30, 2000
---- -----------------
---------------------------------------------------------------------------
Net Net
Historical Shelbourne Increase Historical Shelbourne Increase
Partnership Pro Forma (Decrease) Partnership Pro Forma (Decrease)
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Asset Management Fee (1)
No leverage $973,293 $1,023,273 $99,980 $432,154 $432,154 0
75% leverage -- $4,093,093 -- -- $2,095,386 --
Property Management Fees (2) $389,113 $389,113 0 $172,710 $172,710 0
General Partners' $71,181 $100,175 $28,994 0 $70,539 $70,539
Distributions (3) (4)
Distributions on Units/Shares
Held by our Affiliates (4) $175,484 $246,963 $71,479 0 $242,085 $242,085
Non-Accountable Expense $200,000 $200,000 0 $100,000 $100,000
--------
Reimbursement
Accountable Expense $58,480 $58,480 0 0 0 0
-------- -------- -------- --------
Reimbursement
---------------------------------------------------------------------------
</TABLE>
(1) Amounts under Historical Partnership represent the actual fee paid by
your partnership for the period indicated. Amounts under Shelbourne Pro
Forma were determined based on a fee of 1.25% of Shelbourne's gross
asset value both with and without the effects of borrowing. The amounts
under Shelbourne pro forma for the six months ended June 30, 2000 do
not reflect additional amounts payable as a result of the June 2000
property appraisals. The fees based on 75% leverage assume that
Shelbourne's gross assets were $275,088,524, $297,139,360, $327,447,424
and $335,261,724, as of December 31, 1997, 1998 and 1999 and June 30,
2000, respectively
(2) Historical cost includes $416,428, $427,126, $389,113 and $172,710, of
Supervisory Management Fees paid to our affiliate, Resources
Supervisory Management Corp. for the years ended December 31, 1997,
1998 and 1999, and the six months ended June 30, 2000, respectively, of
which $287,466, $278,204, $319,610 and $165,684 respectively, was paid
to unaffiliated management companies
(3) The amount under Historical Partnership represents distributions
actually paid to your general partners on account of their 5% interest
in your partnership. On a pro forma basis the general partner interest
in your partnership will be converted into shares of Shelbourne. The
amount listed under Shelbourne Pro Forma represents dividends which
would be paid to the general partners as 5% shareholders.
(4) Amounts under Shelbourne Pro Forma represent the distribution of 95% of
taxable income in order to qualify as a real estate investment trust.
37
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------
TAXATION OF TAXABLE LIMITED PARTNERS
<S> <C>
Your partnership, which is treated as a partnership for Dividends paid to taxable stockholders generally will be
Federal income tax purposes, is not subject to tax, but taxable to them as ordinary dividend income except for
you must report your allocable share of partnership distributions properly designated as capital gain
income and loss on your tax return. Partnership distributions. Dividends and capital gains from
distributions are not taxable to you except to the extent common stock cannot be offset by passive activity
such distributions exceed your adjusted tax basis in losses, including any unused passive activity losses from
your partnership units. Your partnership specially your partnership, in the case of stockholders who are
allocates depreciation deductions to taxable subject to the passive activity loss limitation. Unused
unitholders. Losses from your partnership constitute passive activity losses from your partnership generally
passive activity losses which, under the passive activity may be deducted when you sell all of your common
loss limitation rules, cannot be deducted currently stock. Tax losses of Shelbourne will not pass through to
except to the extent of your passive activity income, if stockholders, but will reduce Shelbourne's future
any, from other investments. Income from your taxable income subject to applicable limitations. Each
partnership generally constitutes passive activity January, stockholders will be mailed the familiar Form
income which, subject to applicable limitations, can be 1099-DIV for corporate dividends.
offset by unused passive activity losses from your
partnership or other investments. Generally, by March As a stockholder, you generally will not be required to
15 of each year, you receive annual Schedule K-1 file state income tax returns or pay state income taxes
forms with respect to information for inclusion on your outside your state of residence with respect to
Federal income tax returns. Shelbourne's operations. Shelbourne must pay state
income taxes in certain states where it owns properties.
You generally must file state income tax returns and
may incur state income tax in various states in which
your partnership owns property.
</TABLE>
Shelbourne's dividends generally will be taxable to taxable
stockholders as ordinary income which is not passive activity income.
Stockholders will receive a Form 1099-DIV rather than a Schedule K-1.
<TABLE>
<CAPTION>
TAXATION OF TAX-EXEMPT LIMITED PARTNERS
<S> <C>
Leveraged acquisitions by your partnership would give The Service has ruled that distributions by a real estate
rise to unrelated business taxable income under the investment trust to a tax-exempt pension trust generally
Internal Revenue Code. will not constitute unrelated business taxable income.
Accordingly, dividends received from Shelbourne by a
stockholder whose income is exempt from Federal
income taxation generally should not constitute
unrelated business taxable income assuming the
stockholder does not hold its shares subject to
acquisition indebtedness.
</TABLE>
Shelbourne's dividends generally will not constitute unrelated business
taxable income to tax-exempt stockholders.
38
<PAGE>
BACKGROUND OF THE CONVERSION
GENERAL
We are proposing the conversion as part of the court-approved
settlement of the class action litigation involving your partnership. The
following summarizes the history of your partnership and the events leading
toward and surrounding the settlement.
YOUR PARTNERSHIP
Your partnership was formed in 1985 to invest in and hold existing or
to-be-constructed income-producing properties. Your partnership currently owns
interests in office buildings, shopping centers and other commercial and
industrial properties. Units in your partnership were registered under the
Securities Act of 1933 and publicly offered and sold between April 1986 and
September 1987 resulting in the sale of 588,010 partnership units for aggregate
gross proceeds to your partnership of $147,002,500. Substantially all of the
capital raised by your partnership through the sale of units, net of offering
costs, fees and some distributions, was invested in the properties currently
owned by your partnership as well as two other properties which have since been
sold. A complete description of the properties currently owned by your
partnership is set forth under "SHELBOURNE -- THE PROPERTIEs."
The stated investment objectives of your partnership were to (1)
preserve its capital, (2) provide quarterly distributions to partners, and (3)
create the potential for capital gains through appreciation of its properties.
We believe that your partnership has, to some extent, achieved its objectives of
providing quarterly distributions to partners. Prior to the quarter ended
September 30, 1999, your partnership has made quarterly distributions to limited
partners. For a discussion of the operating history and performance of your
partnership, see "SELECTED FINANCIAL DATA" AND "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
The following table sets forth (1) equity balances on a total and per
unit basis for all partners in your partnership as of the date of the original
offering of units in your partnership and as of June 30, 2000, (2) income
allocated by your partnership during such period, (3) distributions from your
partnership during such period, and (4) losses allocated by your partnership
during such period. The beginning equity account of the general partners
includes a reallocation of $7,350,125, representing 5% of the gross proceeds
originally raised by your partnership, to reflect the general partners' 5%
equity interest in your partnership.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
ORGANIZATION
BEGINNING EQUITY COSTS CHARGED TO DISTRIBUTIONS ON EQUITY BALANCES AS
BALANCE CAPITAL INCOME ALLOCATED EQUITY LOSSES ALLOCATED OF 6/30/00
------------------------------------------------------------------------------------------------------------------------------------
TOTAL PER TOTAL PER TOTAL PER TOTAL PER TOTAL PER TOTAL PER
UNIT UNIT UNIT UNIT UNIT UNIT
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Limited $139,652,375 237.50 (4,189,500) (7.12) 32,883,538 55.92 (53,464,084) (90.92) (54,944,845) (93.44) 59,937,484 101.93
Partners
------------------------------------------------------------------------------------------------------------------------------------
General 7,351,125 -- (220,500) -- 1,730,710 -- (2,813,901) -- (2,891,834) -- 3,155,600 --
Partners
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Your partnership has three general partners. The Investment General
Partner is Resources High Equity, Inc., a Delaware corporation, the
Administrative General Partner is Resources Capital Corp., a Delaware
corporation and the Associate General Partner is Presidio AGP Corp. As the
investment general partner, Resources High Equity, Inc. is responsible for
evaluating and negotiating all property dispositions as well as for management
of your partnership's properties. Resources Capital Corp., the Administrative
General Partner is responsible for the administration and day to day operation
of your partnership. Presidio AGP Corp., the associate general partner of your
partnership, does not have any power or responsibility with respect to your
partnership and does not devote any material amount of its business time and
attention to the affairs of your partnership. We are accountable to your
partnership as fiduciaries and accordingly must exercise good faith and
integrity in handling its affairs. We do not have any outstanding obligations or
commitments to your partnership other than our contingent obligation to pay
limited partners up to $4.06 per unit, or $2,384,398 in the aggregate, upon
liquidation of your partnership. See the discussion of such contingent
obligation included in "ALTERNATIVES TO THE CONVERSION -- LIQUIDATION AND
DISSOLUTION OF YOUR PARTNERSHIP."
Your Investment General Partner and Administrative General Partner were
owned by Integrated Resources, Inc. until November 3, 1994. On that date,
Integrated consummated its plan of reorganization under Chapter 11 of the United
States Bankruptcy Code and Presidio Capital Corp. acquired your Investment
General Partner and your Administrative General Partner. In August 1998,
Presidio, which also owns Presidio AGP Corp., was acquired by Presidio Capital
Investment Company, LLC, which in turn is controlled by NorthStar Capital
Investment Corp.
In October 1999, Presidio Capital Corp. entered into an agreement with
AP-PCC III, L.P., an affiliate of Winthrop Financial Associates. Winthrop is a
Boston-based partnership and property management company which is not affiliated
with Presidio Capital Corp. Under the agreement, AP-PCC III, L.P. is responsible
for providing your partnership with asset management and investor relation
services on behalf of your general partners. In order to facilitate the
provision of these services, nominees of AP-PCC III, L.P. were elected as
officers and directors of your general partners. Following the conversion AP-PCC
III, L.P. will continue to furnish the foregoing services on behalf of
Shelbourne Management. In addition, nominees of AP-PCC III, L.P. have been
elected as officers and directors of Shelbourne Management. Accordingly, since
Shelbourne will be managed by one or more individuals who also manage Winthrop,
Shelbourne and Winthrop will be affiliates under common control.
Your partnership's properties were acquired between November 1986 and
November 1988. Although your partnership's original management anticipated
holding your partnership's properties for seven to ten years following the time
such properties were acquired, your partnership agreement provided your general
partners with the discretion and authority to determine the actual timing of
sales. Your general partners determined not to meet your partnership's original
timetable for liquidation based on their assessment of the condition of the real
estate markets in the areas where your partnership's properties were located as
well as the condition of some of your partnership's properties. Liquidation of
your partnership within the originally anticipated time frame would not have
accomplished your partnership's stated investment objective of preserving
capital or creating capital gains.
The following table sets forth the number and prices of units sold from
February 1, 1996 through May 31, 2000 as reported by Partnership Spectrum, an
independent industry publication. These prices do not take into account
commissions and other transactional costs which sellers of units may be required
to pay and which typically range between 8% and 10% of the reported selling
price.
40
<PAGE>
SECONDARY MARKET TRADING VOLUME AND UNIT PRICES
(Except as otherwise indicated all price information on a per unit basis)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
TOTAL UNITS NUMBER OF WEIGHTED AVERAGE
DATE TRADED TRADES HIGH LOW WEIGHTED AVERAGE PER SHARE
---- ------ ------ ---- --- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
2/96-3/96 1,257 31 $54.00 $33.00 $47.62 $23.81
4/96-5/96 2,545 37 $54.38 $43.26 $50.14 $25.07
6/96-7/96 3,432 56 $55.00 $42.80 $47.82 $23.91
8/96-9/96 2,140 22 $61.40 $43.26 $52.10 $26.05
10/96-11/96 2,350 43 $64.00 $46.12 $53.02 $26.51
12/96-1/97 4,491 30 $63.00 $45.51 $58.27 $29.14
2/97-3/97 4,323 92 $71.00 $55.00 $59.77 $29.89
4/97-5/97 2,071 46 $70.20 $57.00 $64.26 $32.13
6/97-7/97 1,735 35 $69.11 $59.00 $62.34 $31.17
8/97-9/97 3,058 45 $96.00 $58.00 $64.34 $32.17
10/97-11/97 982 22 $95.00 $60.00 $66.08 $33.04
12/97-1/98 2,315 47 $78.65 $59.00 $71.66 $35.83
2/98-3/98 2,640 53 $84.03 $70.00 $73.47 $36.74
4/98-5/98 1,340 43 $85.00 $71.50 $76.60 $38.30
6/98-7/98 1,528 31 $94.30 $85.00 $87.75 $43.88
8/98-9/98 3,132 49 $90.88 $77.00 $87.09 $43.55
10/98-11/98 9,586 6 $90.25 $85.00 $86.45 $43.23
12/98-1/99 2,473 39 $90.88 $84.60 $88.10 $44.05
2/99-3/99 2,731 50 $91.00 $85.00 $87.57 $43.79
4/99-5/99 1,667 41 $100.99 $85.00 $90.23 $45.12
6/99-7/99 2,024 43 $101.18 $85.00 $91.71 $45.86
8/99-9/99 2,748 53 $96.00 $80.00 $89.44 $44.72
10/99-11/99 2,893 34 $90.00 $80.00 $86.52 $43.26
12/99-1/00 1,610 20 $90.00 $82.00 $87.77 $43.89
2/00-3/00 824 33 $95.32 $81.00 $87.72 $43.86
4/00-5/00 4,652 107 $100.00 $80.00 $83.37 $41.69
--------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
THE CLASS ACTION
In May 1993, Mark Erwin, Trustee, Mark Erwin Sale, Inc. Defined Benefit
Plan and Leonard Drescher, Trustee of Drescher Family Trust Account, limited
partners in your partnership, Integrated Resources High Equity Partners, Series
85, A California Limited Partnership and High Equity Partners L.P. - Series 88
commenced a class action in the California Superior Court on behalf of all
limited partners, and in April 1994, the complaint in the action was amended to
include claims on behalf of all limited partners who owned units in each of the
High Equity partnerships. The amended complaint asserted various state law class
and derivative claims against the general partners of the High Equity
partnerships and some related persons and entities for, among other things,
common law fraud, negligent misrepresentation, breach of contract, unfair and
fraudulent business practices, negligence, dissolution, accounting, receivership
and removal of general partner and breaches of fiduciary duty.
The amended complaint alleged, among other things:
o that the general partners of the High Equity partnerships
caused a waste of the High Equity partnerships' assets by
collecting management fees in lieu of pursuing a strategy to
maximize the value of the investments owned by the investors
in the High Equity partnerships;
o that the general partners of the High Equity partnerships
breached the duty of loyalty and due care to the investors by
expropriating management fees from the High Equity
partnerships without trying to manage the High Equity
partnerships for the purposes for which they were intended;
o that the general partners of the High Equity partnerships were
acting improperly to entrench themselves in a position of
control over the High Equity partnerships and that their
actions prevented non-affiliated entities from making and
completing tender offers to purchase units of limited
partnership interest in the High Equity partnerships;
o that, by refusing to seek the sale of the High Equity
partnerships' properties, the general partners of the High
Equity partnerships diminished the value of the investors'
equity in the High Equity partnerships;
o that the general partners of the High Equity partnerships took
heavily overvalued asset management fees; and
o that the High Equity partnership units were sold and marketed
through the use of false and misleading statements.
The plaintiffs sought, among other things, the recovery of compensatory
and punitive damages, dissolution, an accounting, receivership, and removal of
the general partner, as well as an award of attorneys' fees and costs. The
defendants in the action at all times considered the action to be without merit
and vigorously defended the action.
In February 1996, the limited partners involved in the class action and
the general partners of the High Equity partnerships and related defendants
submitted a proposed settlement to the court, which contemplated a
reorganization of the three High Equity partnerships into a single real estate
investment trust
42
<PAGE>
under terms which were substantially different from the conversion being
proposed now. In January 1997, the court declined to grant final approval to the
proposed settlement.
On or about July 1, 1997, the limited partners involved in the class
action filed an amended complaint, which generally asserts the same claims as
the earlier complaint but contains more detailed factual assertions and
eliminates some claims they had previously asserted. The general partners of the
High Equity partnerships and related defendants in the action challenged the
amended complaint on legal grounds and filed demurrers and a motion to strike.
In October 1997, the court sustained demurrers to several of the causes of
action and ordered stricken from the complaint some paragraphs relating to
allegedly wrongful activity by the general partners of the High Equity
partnerships and related defendants that was alleged to have occurred before
November 30, 1995, and allegations of the complaint relating to certain alleged
prohibitions in the partnership agreement. Thereafter, the general partners of
the High Equity partnerships and related defendants in the action served answers
denying the allegations and asserting numerous defenses.
On February 11, 1998, the court certified three separate plaintiff
classes, and appointed class counsel and liaison counsel.
THE CLASS ACTION SETTLEMENT
By letter dated January 23, 1998, counsel for the limited partners
involved in the class action sent an offer of compromise to counsel for the
general partners of the High Equity partnerships and related defendants. On
February 12, 1998, representatives of the general partners of the High Equity
partnerships and related defendants in the action met with representatives of
the limited partners at the offices of counsel to the general partners to
discuss the January 12, 1998 offer of compromise. At that meeting the parties
disagreed on several issues relating to the offer of compromise and agreed to
exchange proposed term sheets.
On or about March 12, 1998, the general partners communicated a
proposed term sheet to a representative of the limited partners involved in the
action. Shortly after that, counsel to the general partners had a series of
telephone conversations with counsel to the limited partners involved in the
action. The primary issues discussed were (a) the amount that the general
partners of the High Equity partnerships would be liable to pay upon liquidation
of the High Equity partnerships, (b) a liquidation date for the partnerships if
reorganizations of the High Equity partnerships could not be accomplished, (c)
the extent of the obligations of the general partners of the High Equity
partnerships to pursue a reorganization of the High Equity partnerships, (d) the
size of tender offer to be made for limited partnership units in the High Equity
partnerships in advance of any such reorganization and (e) the request by the
limited partners involved in the action that Presidio Capital Corp. guarantee
the obligations of the general partners of the High Equity partnerships to pay
the "fee give-back amount."
In May 1998, the parties exchanged further draft term sheets which set
forth the respective positions of the limited partners involved in the action
and general partners of the High Equity partnerships and related defendants on
the issues mentioned above.
Counsel to the general partners of the High Equity partnerships and
related defendants and counsel to the limited partners involved in the action
continued to have conversations related to the issues mentioned above in June
and July 1998. However, the parties were unable to reach an agreement during
those conversations.
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On September 18, 1998, counsel to the general partners of the High
Equity partnerships and related defendants and other representatives of the
general partners met with counsel to the limited partners involved in the action
at the offices of counsel to the limited partners involved in the action in
Greenbrae, California. At the end of the meeting an agreement in principle was
signed setting for the general outline for a proposed settlement.
During the following months, the limited partners involved in the class
action and the general partners of the High Equity partnerships and related
defendants negotiated a more formal settlement stipulation, which they executed
on December 23, 1998.
On January 27, 1999, counsel to the limited partners involved in the
action and counsel to the general partners of the High Equity partnerships and
related defendants met with Willie Barnes, an expert appointed by the court. By
letter report dated January 27, 1999, Mr. Barnes reported to the court that in
his opinion the settlement was fair, reasonable and adequate and in the best
interests of the settlement class and the High Equity partnerships.
On February 1, 1999, the court preliminarily approved the settlement
and directed that notice be given to the class. We then mailed you a
court-approved notice of the settlement that contained a detailed description of
the terms of the settlement and notified you of a hearing to be held on April
29, 1999 to consider approval of the terms of the settlement. All limited
partners, including those who had opted out of the action were furnished notice
and given an opportunity to be heard at the hearing. Some of the limited
partners then filed objections to the settlement which objections the court
directed to Mr. Barnes to review. By letter dated April 26, 1999, Mr. Barnes
reported to the court his view that the proposed settlement was fair and
reasonable.
Shortly after that, counsel to the general partners and related
defendants had communicated with representatives of the limited partners who had
filed objections to the settlement. The general partners of the High Equity
partnerships agreed to have one of their affiliates purchase the units in the
High Equity partnerships owned by the objectors at the unit prices set forth in
the settlement agreement at which the general partners were required to cause
tender offers to be made and to pay the costs the objectors had incurred in
connection with the filing of the objections. The objectors then withdrew their
objections. On April 29, 1999 the court approved the settlement.
Pursuant to the settlement, we agreed to take some actions regarding
your partnership subject to first obtaining the consent of limited partners to
amendments to your partnership agreement described below. The settlement became
effective in August 1999 following approval of the amendments. As amended, your
partnership agreement provides for (a) a partnership management fee equal to
1.25% of the gross assets of your partnership in lieu of the prior fee of 1.05%
of the gross amount of your partnership's original offering proceeds paid or
allocable to acquire properties, (b) a fixed 1999 partnership asset management
fee of $973,293 which is $312,139 less than the amount that would have been paid
for 1999 under the prior formula and (c) fixing the amount that we would be
liable to pay upon liquidation of your partnership as repayment of fees
previously received by us and our affiliates, which amount would be reduced by
10% for each year after 1998 in which a liquidation does not occur and prorated
for a liquidation prior to the end of a year. As amended, your partnership
agreement provides that upon a reorganization of your partnership into a real
estate investment trust or other public entity, we would have no liability to
repay any amount. Our affiliate, Presidio Capital Corp., guaranteed our payment
obligation.
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As required by the settlement, our affiliate, Millennium Funding III,
LLC, made a tender offer to limited partners of your partnership to acquire
39,596 units of your partnership at a price of $103.05 per unit. The offer
closed in January 2000 and Millennium acquired all 39,596 units subject to the
tender.
The final requirement of the settlement obligated us and the other HEP
general partners to use our best efforts to reorganize your partnership and the
other HEP partnerships into separate real estate investment trusts or other
entities whose shares will be listed on a national securities exchange or on the
NASDAQ National Market System. We are proposing this conversion to satisfy the
foregoing requirement of the settlement with respect to your partnership.
ALTERNATIVES TO THE CONVERSION
In order to assist you in evaluating the conversion, we have compared
three alternatives to the conversion:
o continuation of your partnership until its required dissolution
in 2015;
o liquidation of your partnership at the present time; and
o sale of your units on the secondary market at the present time.
If limited partners do not approve the conversion, your partnership
will continue in its current form and will operate in the manner currently
operated. The alternative of liquidating your partnership would require a vote
of a majority of the outstanding units, and, for the reasons set forth under
"RECOMMENDATION AND FAIRNESS," that vote is not being solicited at this time.
Accordingly, we are not proposing the alternatives discussed below, but rather
are providing them for comparison purposes.
RETENTION OF INSIGNIA/ESG
We retained Insignia/ESG, Inc. to perform four separate valuation
analyses: a going concern analysis, a liquidation analysis, a secondary market
trading history analysis and a conversion and comparable company analysis. For
ease of comparison, Insignia/ESG presented the values derived under each
analysis on a per share of Shelbourne common stock basis. The estimated values
on a per unit basis would be two times the per share values. Insignia/ESG based
its going concern and liquidation valuation analyses for your partnership on
June 30, 2000 appraisals of your partnership's properties.
We chose Insignia/ESG because it is one of the nation's leading
commercial real estate service providers with the experience and resources
necessary to perform the appropriate valuation analyses. Except as described
below and under "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," Insignia/ESG
has not performed any other services for us, our affiliates or Winthrop
Financial Associates in the past two years, and no relationship otherwise exists
between us, our affiliates and Insignia/ESG. In April 2000, Insignia/ESG
received a $90,750 real estate brokerage commission from one of our affiliates.
In March 1999, Insignia/ESG received a $575,000 real estate brokerage commission
from a limited partnership in which Winthrop Financial Associates serves as the
general partner.
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APPRAISALS
GENERAL
The appraisals used by Insignia/ESG were performed by Cushman &
Wakefield, Inc. or one of its subsidiaries in June 2000. These appraisals
updated appraisals which were performed in 1996 and updated in March 1998.
Cushman & Wakefield was selected for the 1996 appraisals and the 1998
updates by mutual agreement of the general partners of the High Equity
partnerships and class counsel in the class action litigation involving your
partnership. Cushman & Wakefield was chosen because it is a nationally
recognized real estate appraisal firm with extensive appraisal experience. The
1996 appraisals were obtained as part of the settlement of the action for the
purpose of obtaining independent third party confirmation of the reasonableness
of the values given to the properties in the first proposed settlement of the
action. The appraisals were updated in March 1998 in connection with negotiation
of the current settlement. We retained Cushman & Wakefield in June 2000 to
update the appraisals in order to provide a more accurate basis with which
Insignia/ESG could perform its going concern and liquidation value analyses.
Cushman & Wakefield and its affiliates have from time to time in the
past performed various property valuation and other services for your general
partners and their affiliates or real estate partnerships controlled by such
affiliates, including real estate brokerage services. All of such other services
were performed in the ordinary course, and no relationship between us or our
affiliates and Cushman & Wakefield and its affiliates otherwise exists.
Other than Cushman & Wakefield and Insignia/ESG we did not contact any
third party with respect to performing any valuations of your partnership's
properties, your partnership or otherwise with respect to the conversion.
We will provide free of charge a copy of the appraisal reports
completed by Cushman & Wakefield upon your written request or that of your
representative, who has been designated in writing, that is submitted to your
partnership at 5 Cambridge Center, 9th floor, Cambridge, Massachusetts 02142.
In preparing the appraisals, Cushman & Wakefield among other
considerations set forth in each appraisal generally inspected your
partnership's properties and the surrounding environs. Cushman & Wakefield also
reviewed economic and demographic trends in the neighborhoods and regions in
which the properties are located and considered the competitive markets in the
local areas. Cushman & Wakefield used certain assumptions in determining the
appraised values of the properties and the appraisals are subject to certain
qualification and limitations, some of which are discussed below.
In evaluating the properties, Cushman & Wakefield did not take
responsibility for the accuracy of the legal description provided or for any
matters which are legal in nature. Unless otherwise indicated, Cushman &
Wakefield assumed title to the properties is good and marketable and the
properties are free and clear of all liens. Cushman & Wakefield did not obtain
any surveys of properties in preparing the appraisals. For purposes of
forecasting gross income of properties and to arrive at its best estimates of
what the investment community, as of the dates of the appraisals, envisions for
the future in terms of rental rates, expenses, supply, and demand, Cushman &
Wakefield reviewed lease summaries provided by us. Cushman & Wakefield conducted
only visual inspections of the properties, and did not consider potential hidden
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structural defects or damages that might exist at the properties which could
have a negative impact on the properties' appraised values. Similarly, unless
otherwise stated in the appraisals, the existence of potentially hazardous or
toxic materials which may have been used in the construction or maintenance or
operation of the improvements or may be located at or about the properties was
not considered in arriving at the opinions of value stated in the appraisals.
Each appraisal is only an estimate of value, as of the specific date stated in
the appraisal, and is subject to the assumptions and limiting conditions stated
in the report. As an opinion it is not a measure of realizable value and may not
reflect the amount which would be received if the property was sold. Reference
should be made to the entire appraisal report.
The following table sets forth the June 30, 2000 appraised value
determined by Cushman & Wakefield. The adjusted appraised value column reflects
a 25%, 30% or 35% discount to the appraised values of properties held in joint
venture. Cushman & Wakefield attributed these discounts to the illiquidity of
your partnership's interest in the joint ventures. Cushman & Wakefield
determined the discounts by taking into account your partnership's lack of
control over the properties, the inability of your partnership to sell its
interest without the consent of other venture partners, and the lack of a market
in which to sell the joint venture interests.
APPRAISED ADJUSTED
PROPERTY VALUE APPRAISED VALUE
-------- ----- ---------------
Century Park I (1) $10,500,000 $7,875,000
568 Broadway (2) $19,462,500 $13,623,750
Seattle Tower (1) $11,350,000 $8,512,500
Commonwealth Industrial Park $8,100,000 $8,100,000
Commerce Plaza I $7,700,000 $7,700,000
Melrose Crossing $3,100,000 $3,100,000
Matthews Township Festival $11,800,000 $11,800,000
Sutton Square Shopping Center $11,900,000 $11,900,000
TMR Warehouses (3) $4,607,180 $2,995,000
--------- ---------
TOTAL $88,519,680 $75,605,750
---------------
(1) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable value.
(2) Your partnership has a 38.925% interest in this property and the amount
listed in the table represents 38.925% of the applicable value.
(3) Your partnership has a 20.66% interest in this property and the amount
listed in the table represents 20.66% of the appraised value.
Appraisers typically use three approaches in valuing real property: the
cost approach, the income capitalization approach, and the sales comparison
approach. In most instances, the real property interest being appraised - i.e.
whether it is a fee simple, leased fee or leasehold property - affects the
suitability of a particular approach. In addition, the type and age of the
property and the quantity and quality of available data affect the applicability
of each approach in a specific appraisal situation. Due to the leases in place
at
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your partnership's properties, Cushman & Wakefield generally considered the
income capitalization approach most relevant to its valuation of the properties
with, in most cases, support from the sales comparison approach. However, in
valuing your partnership's Melrose Crossing property, Cushman & Wakefield did
not consider the income approach relevant. Cushman & Wakefield believed that the
typical buyer of that property would be less concerned with the property's
income stream than its redevelopment potential. In addition, given the
property's high vacancy level and the lack of any real evidence of demand for
the space by any large retailers, Cushman & Wakefield did not believe the income
approach would give an accurate estimate of value. Instead, Cushman & Wakefield
used the sales comparison approach to value the Melrose property, with support
from the cost approach.
INCOME CAPITALIZATION APPROACH
The income capitalization approach is a method of converting the
anticipated economic benefits of owning property into a value estimate through
capitalization. The principle of "anticipation" underlies this approach in that
investors recognize the relationship between an asset's income and its value. In
order to value the anticipated economic benefits of a particular property,
potential income and expenses must be estimated, and the most appropriate
capitalization method must be selected. The two most common methods of
converting net income into value are direct capitalization and discounted cash
flow analysis. In the direct capitalization approach, net operating income is
divided by an overall rate extracted from market sales to indicate a value. In
the discounted cash flow method, anticipated future net income streams and a
future sale value are discounted to an estimate of net present value at a chosen
yield rate. The following table sets forth the values determined by Cushman &
Wakefield using the income approach:
PROPERTY INCOME CAPITALIZATION APPROACH
-------- -----------------------------------------------
DISCOUNTED DIRECT
CASH FLOW METHOD CAPITALIZATION METHOD
---------------- ---------------------
Century Park I (1) $10,850,000 $10,150,000
568 Broadway (2) $19,462,500 --
Seattle Tower (1) $11,350,000 --
Commonwealth Industrial Park $8,130,000 $8,000,000
Commerce Plaza I $7,700,000 --
Melrose Crossing -- --
Matthews Township Festival $11,800,000 --
Sutton Square Shopping Center $11,900,000 --
TMR Warehouses (3) -- $4,638,170
---------------
(1) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable value.
(2) Your partnership has a 38.925% interest in this property and the amount
listed in the table represents 38.925% of the applicable value.
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(3) Your partnership has a 20.66% interest in this property and the amount
listed in the table represents 20.66% of the appraised value.
SALES COMPARISON APPROACH
In the sales comparison approach, value is estimated by comparing the
property with similar, recently sold properties in the surrounding or competing
area. Inherent in this approach is the principle of substitution, which holds
that when a property is replaceable in the market, its value tends to be set at
the cost of acquiring an equally desirable substitute property, assuming that no
costly delay is encountered in making the substitution. The following table sets
forth the values determined by Cushman & Wakefield using the sales comparison
approach:
SALES
PROPERTY COMPARISON APPROACH
-------- -------------------
Century Park I (1) $11,100,000
568 Broadway (2) $19,851,750
Seattle Tower (1) $11,100,000 to $11,500,000
Commonwealth Industrial Park $8,200,000
Commerce Plaza I $7,800,000
Melrose Crossing $3,100,000
Matthews Township Festival $11,450,000
Sutton Square Shopping Center $11,700,000
TMR Warehouses (3) $4,555,530
---------------
(1) Your partnership has a 50% interest in this property and the amount
listed in the table represents 50% of the applicable values.
(2) Your partnership has a 38.925% interest in this property and the amount
listed in the table represents 38.925% of the applicable value.
(3) Your partnership has a 20.66% interest in this property and the amount
listed in the table represents 20.66% of the appraised value.
COST APPROACH
Cushman & Wakefield determined a value for your partnership's Melrose
Crossing property under the cost approach. The cost approach renders an estimate
of value based upon the price of obtaining a site and constructing improvements,
both with equal desirability and utility as the subject property. Cushman &
Wakefield believes that historically investors have not emphasized cost analysis
in purchasing investment grade properties such as those properties, other than
the Melrose Crossing property, which are owned by your partnership and that the
estimation of obsolescence for functional and economic conditions, as well as
depreciation on improvements, makes this approach difficult. Cushman & Wakefield
determined the value of the Melrose Crossing property using the cost approach to
be $3,000,000.
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VALUATION ANALYSES
GENERAL
The following discussion includes a description of the analyses
performed by Insignia/ESG for your partnership. The full text of Insignia/ESG's
written valuation analysis report, dated August 31, 2000, which describes the
assumptions made, matters considered and limitations on the analyses is filed as
an exhibit to the Registration Statement of which this consent solicitation is a
part. You should read the report in its entirety. We will provide free of charge
a copy of the report upon your written request or that of your representative,
who has been designated in writing, that is submitted to your partnership at 5
Cambridge Center, 9th floor, Cambridge, Massachusetts 02142.
In performing these analyses, Insignia/ESG reviewed the documents we
provided about your partnership which are identified in the Insignia/ESG report.
Insignia/ESG also relied upon and assumed, without independent verification or
investigation, the accuracy and completeness of all financial and other
information we provided to or discussed with them about your partnership.
Insignia/ESG assumed, at our direction and without independent verification or
investigation, that forecasts of future financial condition and operating
results of your partnership were reasonably prepared by us on bases reflecting
the best currently available information, estimates and our good faith judgment.
Insignia/ESG also relied upon our assurances that we were unaware of any facts
that would make the historical information or forecasts incomplete or
misleading. Except for the Cushman & Wakefield appraisals, Insignia/ESG neither
made nor obtained any independent evaluations or appraisals of the assets or the
liabilities, contingent or otherwise, of your partnership. The analyses do not
address the tax consequences of any aspect of the proposed conversion, other
than transfer taxes on the disposition of real estate upon liquidation.
Insignia/ESG did not express any opinion as to the underlying evaluation, future
performance or long-term viability of your partnership or Shelbourne, or the
price at which units in your partnership or common stock of Shelbourne will
trade, whether or not the conversion occurs. Insignia/ESG's analyses are
necessarily based on available information and general economic, financial and
securities market conditions and circumstances as they exist and can be
evaluated by it on the date of the report. Although subsequent developments may
affect Insignia/ESG's analyses, Insignia/ESG does not have any obligation to
update, revise or reaffirm the analyses. Insignia/ESG did not make any
recommendation to any holder of partnership units regarding the conversion.
CONTINUATION
Continuing your partnership would provide you with continuity of your
original investment. From its date of organization, your partnership has pursued
the specific investment objectives set forth in your partnership agreement, and
if continued, would continue to pursue those investment objectives. If we
continue your partnership, you would have the opportunity to realize any
potential benefits of owning your partnership's existing properties over the
remaining term of your partnership. Your partnership is required to sell its
properties and distribute the net proceeds to you not later than December 31,
2015. In addition, if your partnership were continued there would be no change
in the nature of your voting rights.
Insignia/ESG estimated the going concern value of your partnership to
be between $55.43 and $62.51 per share as of June 30, 2000. In this analysis,
Insignia/ESG made the following adjustments to the $88,519,680 appraised value
of your partnership's properties:
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1. Insignia/ESG added $12,951,026 representing the amount as of
June 30, 2000 of your partnership's cash and cash equivalents
and other non-real estate assets that we believed would have
value upon liquidation reduced by your partnership's
outstanding current liabilities.
2. Insignia/ESG subtracted $817,304 representing the present
value of our estimate of the cost of maintaining a $1,000,000
reserve in your partnership through 2015.
3. Insignia/ESG also subtracted $811,774 representing the
estimated cost of maintaining an additional reserve for
anticipated capital requirements over the next five years at
the TMR Warehouse property. The additional reserve was
required because the appraisals for those properties did not
make provisions for capital improvements.
4. Insignia/ESG subtracted $20,990,177 , representing the present
value of the estimated cost of operating your partnership.
Insignia/ESG derived this estimated cost by discounting the
anticipated amount of your partnership's asset management fee
and administrative costs for the life of your partnership.
5. Insignia/ESG subtracted $5,852,255 representing a discount
attributable to your partnership's joint venture investments.
This reduction results from the application of the joint
venture discount used by Cushman & Wakefield to the future
sale value component of the appraised value for each joint
venture investment.
Insignia/ESG then applied a 6% margin of error to establish the range
of estimated going concern values of your partnership.
For the reasons set forth in "RECOMMENDATION AND FAIRNESS," we did not
give significant weight to the estimated going concern value of your partnership
in recommending the conversion.
LIQUIDATION ANALYSIS
If your partnership were liquidated, it would sell its assets at the
best available price, pay off existing liabilities, distribute the cash proceeds
in accordance with your partnership agreement, and then dissolve. Liquidation of
your partnership would provide liquidity to you as properties are sold and net
sales proceeds are distributed. If your partnership were liquidated you would no
longer be subject to the risks associated with owning real estate. If your
partnership were liquidated as of August 31, 2000, we would pay to limited
partners $4.06 per unit or an aggregate of $2,384,398, as repayment of fees
previously received. That amount decreases every quarter and is eliminated if
your partnership is not liquidated until December 31, 2008.
Insignia/ESG estimated the liquidation value of your partnership to be
between $66.17 and $74.62 per share as of June 30, 2000. In this analysis,
Insignia/ESG made the following adjustments to the $75,605,917 adjusted
appraised value of your partnership's properties:
1. Insignia/ESG subtracted $3,893,404 representing the estimated
costs of disposing of your partnership's properties and
dissolving your partnership. Disposition costs generally
consist of transfer taxes, brokerage commissions and closing
costs and were generally assumed to be the amounts used by
Cushman & Wakefield in determining the future sale values of
each
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property. For your partnership's TMR Warehouse and Melrose Crossing
properties, which were appraised using the direct capitalization and
cost approaches, respectively, disposition costs were assumed to be 5%
of each property's adjusted appraised value. Dissolution costs include
professional fees and administrative costs and were estimated by us to
be $500,000.
2. Insignia/ESG added $12,951,026 representing the net amount as
of June 30, 2000 of your partnership's cash and cash
equivalents and other non-real estate assets that we believed
would have value upon liquidation reduced by your
partnership's outstanding current liabilities.
3. Insignia/ESG added $2.07 per share representing the amount we
would be required to pay limited partners if your partnership
were liquidated as of June 30, 2000 as repayment of fees
previously receivable.
Insignia/ESG then applied a 6% margin of error to establish the range
of estimated liquidation values of your partnership.
For the reasons set forth in "RECOMMENDATION AND FAIRNESS," we did not
give significant weight to the estimated liquidation value of your partnership
in recommending the conversion.
SECONDARY MARKET TRADING HISTORY ANALYSIS
The units in your partnership are not listed on any national stock
exchange or traded in any formal trading market. There is, however, a limited
and informal secondary market for units.
Insignia/ESG estimated the per share secondary market value, based on
recent secondary market trading activity of units, to be between $39.18 and
$44.19. To estimate the secondary market value, Insignia/ESG used the weighted
average trading price for units traded between April 1 and May 31, 2000.
Insignia/ESG then applied a 6% margin of error to establish the range of
estimated per share secondary market prices. Secondary market trading data was
provided by your partnership based on information reported by Partnership
Spectrum, an independent industry publication.
CONVERSION AND CONTINUATION COMPANY ANALYSIS
Insignia/ESG estimated the value of the shares of common stock of
Shelbourne to be between $45.02 and $55.85 per share. In this analysis,
Insignia/ESG applied a range of multiples to Shelbourne's projected funds from
operations.
Insignia/ESG derived the range of multiples by identifying publicly
traded real estate investment trusts with a market capitalization of less than
$250,000,000. None of the approximately 50 real estate investment trusts
identified by Insignia/ESG were directly comparable to Shelbourne. However,
Insignia/ESG estimated the median current trading multiple for those trusts
based on projected 2001 funds from operations. Insignia/ESG then applied a
margin of error to this estimate indicating a range of multiples for Shelbourne
from 5.4 to 6.7.
Insignia/ESG applied the foregoing range of multiples to Shelbourne's
projected funds from operations. Shelbourne's projected funds from operations
were estimated by us as follows:
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1. We projected Shelbourne's funds from operations from the
properties now owned by your partnership. Our projections were
based on actual operating results for the twelve months ended
June 30, 2000 as adjusted to reflect an increase in expenses
resulting previously from higher asset management fees based
on the new Cushman & Wakefield appraisals. The resulting
projected funds from operations for Shelbourne from the
properties currently owned by your partnership was $5,716,304.
2. We projected Shelbourne's funds from operations from
additional investments that Shelbourne anticipates making in
the future by leveraging its existing assets and any newly
acquired assets. In estimating the amount of additional
investments by Shelbourne, we assumed that Shelbourne would
achieve a 75% debt to asset ratio and would use approximately
80% of its current cash reserves to acquire more investments.
We also assumed that the debt would bear interest at an
average rate of 8% per year and that the new investments would
generate annual net operating income of 10.5% of their cost.
The resulting projected funds from operations from the
additional investments is $4,603,317.
Applying this methodology, Insignia/ESG established the range of
estimated values for shares of common stock of Shelbourne. The estimated value
is not intended to be a prediction of the price at which the shares of common
stock will trade on the American Stock Exchange. The common stock may trade at
prices below the estimated range of values.
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RECOMMENDATION AND FAIRNESS
GENERAL PARTNERS' RECOMMENDATION
We believe that the conversion is fair and in your best interest and we
recommend that you vote "YES" to approve the conversion.
Our recommendation is based on the following:
o We believe that the value of an investment in Shelbourne will
have a greater potential for appreciation than the value of an
investment in your partnership.
o The range of estimated values for common stock is
significantly higher than the recently reported secondary
market price for units.
o You cannot currently realize the liquidation value of your
units since a liquidation of your partnership is not currently
contemplated and would, in any event, occur over a significant
period of time.
o The American Stock Exchange will provide you with greater
liquidity and a more efficient market to sell common stock as
compared to the inefficient and limited secondary market for
your partnership units.
FAIRNESS OF THE CONVERSION
We believe that the conversion is fair and in the best interests of
limited partners. Our belief that the conversion is fair is based on the
following factors:
o After the conversion you will own the same percentage interest
in Shelbourne that you presently own in your partnership.
o Shelbourne will initially own the identical properties owned
by your partnership prior to the conversion.
o Limited partners and general partners will receive common
stock in the conversion on the same basis.
o While fees payable by Shelbourne may increase over current
levels, the method of determining those fees will remain the
same.
o The conversion will be tax-free to you.
We gave greatest weight to the first three factors listed above in
determining that the conversion is fair to you.
We did not give significant weight to the estimated continuation and
liquidation value derived by Insignia/ESG in determining that the conversion is
fair for the following reasons:
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LIQUIDATION
o You cannot currently realize the liquidation value since we are not
proposing a liquidation of your partnership at this time. We believe
that your partnership's properties will appreciate in value before your
partnership is required to liquidate in 2015. We note that the current
appraised value of your partnership's properties is $88,519,680, or
approximately 28% higher than the 1998 appraised value of your
partnership's properties and approximately 46.7% higher than the 1996
appraised value of your partnership's properties. In addition, our
affiliates, Millennium Funding Corp., Millennium Funding III Corp.,
Millennium Funding I LLC and Millennium Funding III LLC, which own in
the aggregate 20.96% of the outstanding units, would not vote in favor
of a proposal to liquidate your partnership at this time.
o An aggressive bulk sale of your partnership's properties could result
in significant discounts from fair market values while a gradual
liquidation likely would involve higher administrative costs and
greater uncertainty, either of which would reduce the portion of net
sales proceeds available for distribution to you; and
o Four of your partnership's properties which are held in joint ventures
with other partnerships would likely be sold at substantial discounts
to the fair market value of those properties. This would likely be the
case even though we control the joint venture partner in these
investments since we must exercise our fiduciary duties to each joint
venture partner separately. You can not assume for purposes of this
analysis that your partnership's joint venture partner would be willing
to sell the joint venture investment at this time. We note that Cushman
& Wakefield applied a 25%, 30% or 35% discount from the appraised value
of a property held in joint venture to reflect the illiquidity of your
partnership's interest in the joint venture.
CONTINUATION
o The estimated range of values for shares of common stock is between
$45.02 and $55.85, which is significantly higher than the weighted
average secondary market prices for units during the most recent period
reported by Partnership Spectrum, an independent third party industry
publication. In addition, these prices do not take into account
commissions and other transactional costs which sellers of units may be
required to pay and which typically range between 8% and 10% of the
reported selling price.
o The going concern analysis performed by Insignia/ESG was based on the
appraised value of your partnership's properties and the expenses
associated with operating your partnership. Immediately following the
conversion Shelbourne will continue to own all of the properties
currently owned by your partnership and will incur substantially
identical expenses in its operation of those properties. Accordingly,
we do not believe that the going concern value derived by Insignia/ESG
is relevant in determining whether the conversion is fair;
o There currently is not an efficient market through which to realize the
value of your units. Secondary market sales activity for the units,
including privately negotiated sales, has been limited. At present,
privately negotiated sales and sales through intermediaries, such as
the trading system operated by American Partnership Board, are the only
means available to a limited partner to liquidate an investment in
units. Following the conversion the American Stock Exchange should
provide an efficient market for shareholders who wish to dispose of
their shares.
55
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Shelbourne's
common stock for each stockholder known by Shelbourne to own in excess of 5% of
Shelbourne's outstanding voting securities upon consummation of the conversion.
No director or executive officer will, upon consummation of the conversion, own
any securities of Shelbourne.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
TITLE OF BENEFICIAL OWNERSHIP
NAME OF BENEFICIAL OWNER SECURITIES ADDRESS OF COMMON STOCK % OF CLASS
------------------------ ---------- ------- ------ -----
<S> <C> <C> <C> <C>
NorthStar Capital Investment Corp. (1) Common Stock 527 Madison Avenue 308,428 (2)(3) 24.92%
New York, New York 10022
</TABLE>
------------
(1) NorthStar Capital Investment Corp. is the general partner of NorthStar
Partnership, L.P., the sole shareholder of NorthStar Presidio Capital
Holding Corp. NorthStar Presidio Capital Holding Corp. is the majority
owner of Presidio Capital Investment Company, LLC, the sole shareholder
of Presidio Capital Corp.
(2) Comprised of (a) 40 shares which will be held by Millennium Funding
Corp., a wholly-owned subsidiary of Presidio Capital Corp., (b) 160,888
shares which will be held by Millennium Funding III Corp., a
wholly-owned subsidiary of Presidio Capital Corp., (c) 5,888 shares
which will be held by Millennium Funding I LLC, a wholly-owned
subsidiary of Presidio Capital Investment Company, LLC, (d) 79,716
shares held by Millennium Funding III LLC, a wholly-owned subsidiary of
Presidio Capital Investment Company, LLC, and (e) 61,896 shares which
will be received by us in exchange for our 5% general partnership
interest in your partnership.
(3) Does not include 16,375 units in your partnership, representing 32,750
shares of Shelbourne, or 2.65% of the class, which are subject to a
"buy/sell" agreement with a third party. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
56
<PAGE>
SELECTED FINANCIAL DATA (1)
Set forth below is selected financial data for the periods indicated,
on a historical basis and on a pro forma basis as if the conversion was
consummated on January 1, 1999. The pro forma balance sheet information is
presented as if the conversion was consummated as of June 30, 2000. The
information set forth below should be read in conjunction with the Financial
Statements of your partnership, the Pro Forma Financial Information of
Shelbourne and Management's Discussion and Analysis of the Financial Condition
and Results of Operations, appearing elsewhere in this consent solicitation
statement or incorporated herein by reference.
<TABLE>
<CAPTION>
HISTORICAL HIGH EQUITY PARTNERS L.P. - SERIES 86
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
---------------------
Total Revenues $10,814,043 $12,074,558 $12,660,956 $11,883,246 $12,800,623
Total Costs and Expenses $32,898,948 $9,830,038 $9,815,331 $8,783,086 $8,948,143
Net Income (Loss) ($22,084,905) $2,244,520 $2,845,625 $3,100,160 $3,852,480
BALANCE SHEET DATA
Cash and Cash Equiv. $4,752,024 $7,409,578 $9,828,701 $10,220,165 $12,675,936
Total Assets $60,266,933 $61,979,385 $61,919,546 $61,837,211 $63,413,501
Total Liabilities $2,837,220 $3,840,168 $3,429,104 $3,093,813 $2,241,223
L.P. Equity $54,557,278 $55,231,308 $55,564,973 $55,805,281 $58,112,718
G.P. Equity (Deficit) $2,872,435 $2,907,909 $2,925,469 $2,938,117 $3,059,560
Total Common Stockholders
Equity
OTHER FINANCIAL DATA
Net Increase (Decrease) ($998,065) $2,657,554 $2,419,123 $391,464 $2,455,771
in Cash and Cash Equiv.
Net Cash Provided By $2,737,148 $4,879,769 $3,214,689 $4,261,619 $5,228,795
Operating Activities
Distributions $1,535,016 $1,535,016 $2,166,352 $2,847,204 $2,135,401
PER UNIT/SHARE DATA
Net Income (loss)/units ($35.68) $3.63 $4.60 $5.01 $6.22
Basic and diluted Income Per
Share
Pro Forma Taxable Income Per
Share
Book Value Per Unit $92.78 $93.93 $94.50 $94.91 $98.83
Book Value - Pro forma per
share
Distributions declared as a $2.48 $2.48 $4.03 $4.60 $3.45
return of capital per unit
Proforma Shelbourne REIT
distributions from earnings
and profits per share
Proforma Shelbourne REIT
distributiions as a return
of capital per share
Ratio of earnings to total assets -36.65% 3.62% 4.60% 5.01% 6.08%
</TABLE>
<TABLE>
<CAPTION>
SHELBOURNE PRO SHELBOURNE PRO
FORMA HISTORICAL PARTNERSHIP FOR FORMA FOR THE
FOR THE YEAR ENDED THE SIX MONTHS ENDED SIX MONTHS
DECEMBER 31, JUNE 30, ENDED JUNE 30,
------------- ---------------------------- --------------
1999 1999 2000 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Revenues $12,800,623 $6,321,055 $6,104,013 $6,104,013
Total Costs and Expenses $8,948,143 $4,763,987 $4,183,207 $4,304,301
Net Income (Loss) $3,852,480 $1,557,068 $1,920,806 $1,799,712
BALANCE SHEET DATA
Cash and Cash Equiv. $11,470,092 $14,629,511 $13,219,727
Total Assets $62,496,728 $65,013,709 $63,603,925
Total Liabilities $3,619,864 $1,920,625 $2,041,719
L.P. Equity $55,932,074 $59,937,484
G.P. Equity (Deficit) $2,944,790 $3,155,600
Total Common Stockholders
Equity $61,562,206
OTHER FINANCIAL DATA
Net Increase (Decrease) $1,875,877 $1,249,927 $1,953,575 $542,791
in Cash and Cash Equiv.
$5,228,795 $2,849,929 $2,259,593 $2,259,593
Net Cash Provided By
Operating Activities
$2,715,295 $1,423,602 $0 $1,410,784
Distributions
PER UNIT/SHARE DATA
$2.52 $3.10
Net Income (loss)/units $3.11 $1.45
Basic and diluted Income Per
Share $2.31 $1.20
Pro Forma Taxable Income Per
Share $95.12 $101.93
Book Value Per Unit $46.95 $49.73
Book Value - Pro forma per
share $2.30 $0
Distributions declared as a
return of capital per unit
Proforma Shelbourne REIT $2.19 $1.14
distributions from earnings
and profits per share
Proforma Shelbourne REIT $0 $0
distributiions as a return
of capital per share
Ratio of earnings to total assets 6.13% 2.49% 2.95% 2.83%
</TABLE>
(1) No value was assigned for purposes of the conversion as your partnership
was the only participant in the transaction. The general partner is being
allocated 5% of the shares issued consistent with its participation in
your partnership.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is our discussion and analysis of the financial condition of
your partnership and Shelbourne and the historical operations of your
partnership. Our discussion should be read in conjunction with the financial
statements of your partnership and the related notes.
Following the restructuring, Shelbourne's will own 100% of the operating
partnership and will make all of its future investments through the operating
partnership. The operating partnership will own the properties currently owned
by your partnership. As a result, Shelbourne's revenues will be derived
primarily from distributions from the operating partnership. The distributions
from the operating partnership will be derived primarily from revenue generated
by the ownership, operation, financing and disposition of the properties
currently owned by your partnership and any other properties and real estate
related assets the operating partnership may acquire in the future.
The Commission released Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" on December 3, 1999. Your partnership has
reviewed its revenue recognition policies and as a result there will be no
material change in the revenue recognized by Shelbourne.
LIQUIDITY AND CAPITAL RESOURCES
Your partnership currently uses its working capital reserves and any cash
from operations as its primary source of liquidity. Following the conversion,
your partnership's cash will become an asset of, and potential source of
liquidity for, Shelbourne. In addition to cash, Shelbourne will have as
potential sources of liquidity, capital raised by either borrowing money on a
long-term or short-term basis, or issuing additional equity securities. Due to
the current restrictions on debt incurrence in your partnership and the
resulting lack of mortgage debt on the properties, following the conversion
management anticipates that Shelbourne will have significantly enhanced capital
resources as compared to your partnership. Shelbourne's use of these sources of
capital will likely result in the encumbrance of its current and future assets
2000. Unlike your partnership, because Shelbourne may acquire additional
assets, its cash flow from operations will be derived from a larger, more
diverse, and potentially riskier group of assets than your partnership.
Likewise, Shelbourne's ability to pay dividends may be further affected by the
trading value of its stock, the planned leveraging of its assets and
reinvestment of sale and financing proceeds for the acquisition of additional
assets. with substantial amounts of indebtedness. As a result, Shelbourne may
have an increased risk of default on its obligations and thus a decrease in its
long-term liquidity.
Your partnership had $14,629,511 of cash and cash equivalents at June 30,
2000, as compared to $12,675,936 at December 31, 1999. During the six months
ended June 30, 2000 cash and cash equivalents increased $1,953,775 as a result
of 2,259,593 of net cash provided by operating activities which was partially
offset by $306,018 of net cash used in investing activities. Cash used in
investing activities consisted of tenant improvements to the properties. Your
partnership's primary source, and Shelbourne's initial primary source of funds,
For the six months ended June 30, 2000, your partnership's capital
expenditures were funded from cash flow and your partnership's working capital
is cash flow from the operation of its properties, principally rents received
reserves. The following table sets forth, for the six months ended June 30,
2000 from tenants, which amounted to $2,259,593 for the six months ended June
30, and for the prior two fiscal years, your partnership's expenditures at each
of its properties for capital improvements and capitalized tenant procurement
costs:
58
<PAGE>
CAPITAL IMPROVEMENTS AND CAPITALIZED TENANT PROCUREMENT COSTS
6/30/2000 1999 1998
--------- ------------ ---------------
Century Park I $ 22,153 $ 173,238 $ 89,729
568 Broadway 65,080 154,617 293,021
Seattle Tower 82,832 355,407 490,322
Commonwealth 218,919 -- 128,526
Commerce Plaza I 24,680 162,046 90,857
Melrose Crossing I -- 26,487 69,338
Matthews Festival 14,708 25,689 69,666
Sutton Square 46,257 33,918 110,775
TMR Warehouse 19,393 29,311 6,043
Melrose Out Parcel -- -- --
----------- -------------- -------------
TOTALS $ 494,022 $ 960,713 $ 1,348,277
----------- -------------- -------------
Your partnership has budgeted expenditures for capital improvements and
capitalized tenant procurement costs of $1,255,000 in 2000. These costs which
are anticipated to be incurred in the normal course of business are expected to
be funded from cash flow from the operation of the properties and working
capital reserves which are temporarily invested in short-term money market
instruments. However, the actual amount of such expenditures will depend upon
the level of leasing activity and other factors which cannot be predicted with
certainty. Following the conversion, it is anticipated that Shelbourne's cash
flow from operations together with its other sources of capital including cash
reserves, financing proceeds and the issuance of additional equity will be
sufficient to fund its capital improvements and tenant procurement costs.
However, because it is expected that Shelbourne will have significant mortgage
indebtedness and a substantially larger pool of real estate assets, the risk
that it may be unable to fund the necessary capital and tenant procurement
costs at its properties will likely be increased.
Except as discussed herein, management is not aware of any other trends,
events, commitments or uncertainties that will have a significant impact on
Shelbourne's liquidity. If, however, real estate market conditions deteriorate
in any areas where your partnership's properties are located, there is
substantial risk that future cash flow may be insufficient to fund the capital
improvements and lease procurement costs of the properties. In that event,
Shelbourne would utilize its remaining working capital reserves, reduce
distributions, raise additional capital through financing or the issuance of
equity, or sell one or more properties.
REAL ESTATE MARKET
In the markets in which your partnership's properties are located, the
market values of existing properties continue to recover from the effects of
the substantial decline in the real estate market in the early 1990's. However,
in select markets, values have been slow to recover, and high vacancy rates
continue to exist in some areas. The geographic diversity of your partnership's
properties decreases the risk of a significant partnership devaluation
resulting from an isolated market slump in a particular region. The overall
economic outlook for the specific markets in which your partnership's
properties are located continues to be stable to improving.
The outlook is particularly positive for 568 Broadway as office and retail
space in the Midtown South sub-market in which 568 Broadway is located is
becoming increasingly popular. Little new office and retail space inventory
have been introduced to offset demand in the area, resulting in a favorable
operating
59
<PAGE>
environment for the property. Rents are thus anticipated to continue to
increase at the property for the foreseeable future.
Likewise, the outlook for Seattle Tower is positive as extraordinary
business development in the Puget Sound region and the demand for space in the
central business district of Seattle continue. Nonetheless, due to the age of
many of the leases at the building, and the functional obsolescence of the
building for many potential tenants, much of the space at Seattle Tower is
currently leased at below market rental rates. The property thus has the
potential for substantially improved operations as current leases expire and
the capital needs of the property are addressed. In an effort to maximize
rents, over the next four years, in excess of $2.5 million is budgeted for
capital improvements at Seattle Tower. This capital work will attempt to
address the extremely outdated mechanical systems and the lack of technological
infrastructure at the property, both of which are currently impeding the
property's realization of market rental rates. It is anticipated that these
improvements coupled with expected overall growth in the office market in
downtown Seattle would position the property for a substantial improvement in
operations in the future.
The expectations are also positive for improving market conditions in
Columbus, Ohio, a market in which your partnership has an interest in three
warehouse properties. Columbus has become a hub for North American distribution
facilities and substantial construction activity is producing increased
competition for your partnership's properties. Nevertheless, values are
expected to continue to improve for properties comparable to those in which
your partnership has an interest. The realization of any market appreciation
will however be subject to the terms of the existing leases which are not due
to expire for several years at your partnership's properties in these
locations.
The prospects for your partnership's retail properties are also generally
favorable. Sutton Square Shopping Center is located in the Raleigh Durham
market that is experiencing high demand for retail space and low vacancy.
Matthew's Festival is located in the Charlotte, North Carolina market which is
also experiencing generally favorable economic conditions resulting largely
from investment in the area by foreign manufacturers. Both areas are
experiencing household formation and income growth, and the properties'
sub-markets are deemed to be middle to upper middle-income areas. While it is
still meeting its leasehold obligations, the anchor tenant at Matthew's
Festival no longer operates a store at the site and this has hindered leasing
efforts at the property. Therefore, while both properties are well positioned
to benefit from a forecasted improvement in regional market conditions, the
lack of an operating anchor tenant at Matthew's Festival is expected to
continue to adversely affect that property's ability to lease in-line space.
Your partnership's property in Melrose Park, Illinois continues to
experience extremely poor operating conditions. While the broader Chicago
market is experiencing economic and population growth which is creating a
positive environment for real estate appreciation, the trade area in which the
property is located is experiencing a decline in population. This decline
coupled with the related flight from the area by big box retailers has left
many retail properties, including your partnership's property, suffering from
high vacancy and low rental rates. Vehicular access to your partnership's
property is also difficult, further contributing to the negative outlook for
the property in the foreseeable future. Your partnership recently received an
unsolicited offer to purchase this property. Although the purchase price of the
offer is higher than the appraised value of the Melrose center, the offer is
subject to numerous conditions. These conditions include a 90 to 150 day due
diligence period after the date that a binding agreement is signed. While we
intend to explore this opportunity, there can be no assurance that this will
result in a sale of the property.
Operations at Commonwealth Industrial Park are expected to be positively
influenced by generally favorable industrial trends in the Orange County market
in which the property is located. Vacancy in the market for comparable
properties is low and the property's market is a mature one with consistent
recent
60
<PAGE>
growth in rental rates. Commonwealth is not considered, however, to be
among the most highly demanded industrial properties in the area as many
tenants in the market are seeking highly planned newer properties in the region
that have more technologically advanced space. Commonwealth is therefore more
appealing to local or regional tenants that do not require highly functional
state of the art facilities.
Demand for office and research and development space in the Kearny Mesa
office sub-market in which Century Park is located is very strong contributing
to historically high occupancy levels in the area. New supply that is entering
the marketplace is, however, expected to slow the growth of rental rates and
the market has begun to soften slightly. Nonetheless, overall growth in the
real estate market is expected to continue and the property is believed to be
well situated and adequately configured to benefit from this anticipated
improvement. The extent to which Century Park will realize the benefit of any
market appreciation will, however, be subject to the terms of the existing
leases at the property, which are not scheduled to expire for several years.
Commonwealth Park is located in the northwestern section of Richmond,
Virginia, an area that has seen generally good economic conditions in the
recent past. The property is in an expanding neighborhood that is considered to
be the primary suburban office sub-market in the Richmond area. Several
developments in the area have produced an increase in competitive space for the
property. The most significant of these developments, Innsbrook Office Park has
been established as the most desirable office location in the immediate area,
resulting in Commonwealth becoming a secondary alternative with lower rental
rates. Nonetheless, Commonwealth's operations are expected to benefit from the
overall ongoing growth in the area.
Technological changes are also occurring which may reduce the space needs
of many tenants and potential tenants and may alter the demand for amenities
and power supplies at your partnership's properties. As a result of these
changes and the continued risk for overall market volatility, your
partnership's, and ultimately Shelbourne's, potential for realizing the full
value of its investment in the properties is at continued risk.
Impairment of Assets
Your partnership evaluates the recoverability of the net carrying value of
its real estate and related assets at least annually, and more often if
circumstances dictate as required by SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
If there is an indication that the carrying amount of a property may not be
recoverable, your partnership prepares an estimate of the future undiscounted
cash flows expected to result from the use of the property and its eventual
disposition, generally over a five-year holding period. In performing this
review, management takes into account, among other things, the existing
occupancy, the expected leasing prospects of the property and the economic
situation in the region where the property is located.
If the sum of the expected future undiscounted cash flow is less than the
carrying amount of the property, your partnership recognizes an impairment
loss, and reduces the carrying amount of the asset to its estimated fair value
as required by SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." Fair value is the amount at which
the asset could be bought or sold in a current transaction between willing
parties, that is, other than in a forced or liquidation sale. Management
estimates fair value using discounted cash flows or market comparables, as most
appropriate for each property. Independent certified appraisers are utilized to
assist management, when warranted.
61
<PAGE>
Impairment adjustments to reduce the carrying value of the real estate
assets recorded by your partnership do not affect the tax basis of the assets
and are not included in the determination of taxable income or loss.
Management is not aware of any other current trends, events, or
commitments that will have a significant impact on the long-term value of the
properties. However, because the cash flows used to evaluate the recoverability
of the assets and their fair values are based upon projections of future
economic events such as property occupancy rates, rental rates, operating cost
inflation and market capitalization rates which are inherently subjective, the
amounts ultimately realized at disposition may differ materially from the net
carrying values at the balance sheet dates. The cash flows and market
comparables used in this process are based on good faith estimates and
assumptions developed by management. Unanticipated events and circumstances may
occur and some assumptions may not materialize. Actual results may vary from
the estimates and the variances may be material. Shelbourne may provide
additional adjustments to reduce the carrying value of the properties, which
could be material in subsequent years if real estate markets or local economic
conditions change.
All of your partnership's properties have experienced varying degrees of
operating difficulties and your partnership recorded significant impairment
adjustments in prior years. Improvements in the real estate market and in
property operations resulted in no adjustments for impairment being needed from
1997 through June 30, 2000.
The following table represents the impairment adjustments recorded to date
against your partnership's properties held as of June 30, 2000:
Property
Century Park $ 11,700,000
568 Broadway 10,821,150
Seattle Tower 6,050,000
Commonwealth 5,800,000
Commerce Plaza I 2,700,000
Melrose Crossing 12,100,000
Matthews Festival 5,300,000
---------
TOTAL $54,471,150
===========
RESULTS OF OPERATIONS
JUNE 30, 2000 VS. JUNE 30, 1999
For the six months ended June 30, 2000, your partnership experienced an
increase of $363,738 or 23.4% in net income to $1,920,806 from $1,557,068 for
the six months ended June 30, 1999. The increase was due to the reduction in
costs and expenses of $580,780 as well as an increase in interest income of
$84,412 which more than offset the decrease in rental revenues of $223,474 and
a decrease in other income of $77,980.
Rental revenues for the six months ended June 30, 2000 decreased $223,474
or 3.7% to $5,761,070 from $5,984,544 for the six months ended June 30, 1999.
The decreased resulted from lower percentage rental income and lower common
area maintenance and real estate tax reimbursement.
The decrease in costs and expense for the six months ended June 30, 2000
as compared to 1999, are primarily due to a decrease in administrative expenses
of $269,241, partnership management fees of
62
<PAGE>
$210,562, operating expenses of $73,154 and property management fees of
$29,666. These decreases were partially offset by a $1,843 increase in
depreciation and amortization.
Administrative expense decreased due to legal expenses associated with the
conversion of your partnership to a real estate investment trust were less than
the legal fees associated with the class action litigation. In addition,
partnership asset management fees decreased for the first six months of 2000 as
compared to the first six months of 1999 as a result of an amendment to the
partnership agreement which changed the calculation of such fee. Depreciation
and amortization expense increased due to real estate improvements in 1999.
Interest income increased during the six months ended June 30, 2000 as
compared to the same period in 1999 due to higher cash balances. Other income
decreased during the six months ended June 30, 2000 due to the receipt of fewer
investor transfer fees.
Inflation is not expected to have a material impact on your partnership's
operations or financial position.
1999 VS. 1998
Your partnership experienced an increase in net income of 24.3% for the
year ended December 31, 1999 to $3,852,476 compared to 1998 net income of
$3,100,160 primarily due to higher rental revenues, interest income and other
income that were partially offset by higher cost and expenses.
Rental revenues increased by 6.9% during the year ended December 31, 1999
to $12,178,691 from $11,390,709 for the same period in 1998 primarily due to
increases from higher rental rates in 568 Broadway, Century Park, Commerce
Plaza I and Sutton Square. Seattle Tower's increase was the result of higher
occupancy rates in 1999 of 98% compared to 96% in 1998.
Costs and expenses increased by 1.9% during the year ended December 31,
1999 to $8,948,143 compared to $8,783,086 in 1998, due to increases in
administrative expenses partially offset by decreases in partnership asset
management and property management fees. Operating expenses and depreciation
and amortization remained relatively stable with the prior year. Administrative
expenses for the year ended December 31, 1999 increased $514,651 or 57%
compared to 1998 due to higher professional fees related to the settlement of
the litigation and reorganization of your partnership. Partnership asset
management fees decreased $312,139 or 24.3% in 1999 due to an amendment to the
partnership agreement. Beginning with the third quarter of 2000, it is expected
that your partnership's asset management fees will increase by approximately
28% to $1,106,496 on an annualized basis due to an increase in the appraised
value of your partnership's assets. Following the conversion, Shelbourne
Management will receive fees based on Shelbourne's gross assets. Because we
expect Shelbourne to increase its gross assets relative to your partnership's
current gross assets, the asset management fees paid to Shelbourne Management
are expected to be significantly greater than your partnership's anticipated
asset management fee obligations.
Interest income increased 10.4% from $458,990 in 1998 to $506,778 in 1999
due to higher interest rates and higher cash balances during the current year
compared to 1998. Other income increased by $81,603 during the year ended
December 31, 1999 compared to 1998 due to an increase in fees from investor
servicing primarily related to an increase in investor transfers.
1998 VS. 1997
Your partnership experienced an increase in net income of 8.9% for the
year ended December 31, 1998 to $3,100,160 compared to 1997 net income of
$2,845,625 primarily due to higher rental revenues,
63
<PAGE>
lower costs and expenses and higher interest income in 1998. These increases to
net income were partially offset by lower other income and the fact that no
gain on sale of property was recorded in 1998.
Rental revenues increased by 1.3% during the year ended December 31, 1998
to $11,390,709 from $11,249,284 for the same period in 1997 due to an increase
in rental revenue of $221,078 at Century Park due to higher occupancy rates in
1998 of 100% compared to 91% in 1997 and an increase of $75,820 at Commonwealth
due to higher rental rates in place during 1998 as compared to 1997. These
increases were partially offset by the decrease in revenues of $609,891
resulting from the sale of the 230 East Ohio property in October 1997.
Costs and expenses decreased by 10.5% during the year ended December 31,
1998 to $8,783,086 compared to $9,815,331 in 1997, due to decreases in
operating expenses, partnership asset management fee, and administrative
expenses, partially offset by increases in depreciation and property management
fees. Operating expenses decreased $735,518 or 15.3% during the year ended
December 31, 1998 due primarily to lower real estate taxes and repairs and
maintenance costs resulting from the sale of the 230 East Ohio property in
1997. Administrative expenses for the year ended December 31, 1998 decreased
$345,230 or 27.7% compared to 1997 due to lower legal and accounting fees
related to the ongoing litigation and possible reorganization of your
partnership. Your partnership's asset management fee decreased by $90,579
during 1998 because of reduced assets under management due to the sale of 230
East Ohio in the prior year. Depreciation increased by $153,610 due to higher
depreciation recorded on certain capitalized tenant improvements and property
management fees increased by $10,697 in 1998 due to higher revenues, as
previously discussed.
Interest income increased by 22.4% from $374,716 in 1997 to $458,990
during the year ended December 31, 1998 due to higher invested cash balances.
Other income decreased by $52,718 during the year ended December 31, 1998
compared to 1997 due to a decrease in fees from investor servicing primarily
related to a decrease in investor transfers in 1998.
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THE CONVERSION
MECHANICS OF THE CONVERSION
The conversion will be accomplished by merging your partnership into
Shelbourne Properties II L.P., a newly-formed partnership wholly-owned by
Shelbourne on the terms set forth in the Merger Agreement attached to this
consent solicitation statement as Appendix B. Shelbourne Properties II L.P.,
will survive the merger as the operating partnership. As part of the merger,
each unit in your partnership will be converted into two shares of common
stock. As a result of the conversion, Shelbourne will own 100% of the operating
partnership. Shelbourne will own a 1% partnership interest in the operating
partnership through its wholly-owned subsidiary, which will be the general
partner of the operating partnership.
EFFECTIVE TIME
The conversion will become effective as soon as practicable after the
later of (a) the last date on which consent forms may be received by the
depositary in order to be valid or (b) the last of the conditions to the
conversion are fulfilled or waived.
The conversion will become effective upon filing certificates of merger
and other documents and instruments required by Delaware law with the Office of
the Secretary of State of the State of Delaware.
CONDITIONS TO THE CONVERSION
Our obligation to effect the conversion is subject to satisfaction of the
following conditions:
o Approval of the conversion by limited partners holding a majority of
the outstanding units in your partnership
o This consent solicitation statement has become effective and is not
subject to any stop order or a proceeding seeking a stop order
o The issuance of securities in the conversion complies with all
requirements of state securities or "blue sky" laws
o Shelbourne has at least 100 shareholders and not more than 50% in
value of the outstanding common stock is owned, directly or
indirectly, by five or fewer individuals as defined in the Internal
Revenue Code to include certain entities
o No pension trust individually owns more than 25% in value of the
common stock of Shelbourne, and all pension trusts that individually
own 10% in value or more of the common stock of Shelbourne own in the
aggregate less than 50% in value of the common stock of Shelbourne
o Less than 50% in value of the common stock will be held directly or
indirectly by foreign persons
o The common stock has been approved for listing upon issuance on the
American Stock Exchange
o Rosenman & Colin LLP has rendered tax opinions concerning the
conversion and Shelbourne's qualification as a real estate investment
trust. See "FEDERAL INCOME TAX CONSEQUENCES -- THe CONVERSION" and
"-- TAXATION OF SHELBOURNE AS A REAL ESTATE INVESTMENT TRUST -
GENERAl."
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FEES AND EXPENSES
All costs and expenses incurred in connection with the conversion will
be paid by your partnership, whether or not the conversion is consummated. The
following is an estimate of such expenses.
Registration, Listing and Filing Fees $30,782
Legal Fees........................... 250,000
Appraisals and Valuation Fees........ 115,000
Accounting Fees and Expenses......... 50,000
Solicitation Fees and Expenses....... 50,000
Printing and Engraving Expenses...... 30,000
Postage.............................. 40,000
Miscellaneous........................ 13,718
--------
Total......................... $579,500
ACCOUNTING TREATMENT
The conversion will be accomplished by merging your partnership into
Shelbourne Properties II L.P., a limited partnership wholly-owned by Shelbourne
Properties II, Inc. As there will be no change in the ultimate ownership
structure the conversion will be accounted for on a historical cost basis.
VOTING
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE AND SIGN THE ENCLOSED CONSENT FORM
AND POWER OF ATTORNEY AND RETURN IT TO THE INFORMATION AGENT BY MAIL IN THE
ENCLOSED PRE-ADDRESSED, POSTAGE PAID ENVELOPE OR BY FACSIMILE TO (718)
236-2641.
GENERAL
You may take one of the following actions with respect to the conversion:
Vote "YES" -- I vote to approve the conversion
or
Vote "NO" -- I vote not to approve the conversion
or
Abstain from voting which will constitute a "NO" vote.
WE STRONGLY URGE YOU TO VOTE "YES" FOR APPROVAL OF THE CONVERSION.
If the conversion is approved, you will receive two shares of common stock
in exchange for each of your units whether or not you voted in favor of the
conversion.
VOTE REQUIRED
The affirmative vote of limited partners holding a majority of the
outstanding units of your partnership is required for approval of the
conversion. This consent solicitation statement constitutes our solicitation of
your consent to the conversion, including all such actions required by your
partnership to
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consummate the conversion. We also must approve the conversion as general
partners of your partnership. We intend to approve the conversion, and our
affiliates, Millennium Funding Corp., Millennium Funding III Corp., Millennium
Funding I LLC and Millennium Funding III LLC who own an aggregate of 20.96% of
the units, intend to vote "YES" to approve the conversion. In addition, in 1998
Presidio Capital Corp. entered into an agreement with a limited partner owning
16,375 units, representing approximately 2.65% of the outstanding units, in
which the limited partner agreed to vote all of its units in favor of a
conversion, such as the one which we are proposing, which results in limited
partners receiving securities listed on a national securities exchange.
VOTING PROCEDURE
The consent form and power of attorney are filed as Appendix A to this
consent solicitation statement. Please note that we refer, collectively, to the
power of attorney and consent as the consent form. The consent form consists of
two parts. The first part seeks your consent to the conversion and related
matters. The second part of the consent form is a power of attorney, which must
be signed separately. The power of attorney appoints each of Michael L. Ashner
and Peter Braverman as your attorneys-in-fact for the purpose of executing all
other documents and instruments advisable or necessary to complete the
conversion. The power of attorney is intended solely to ease the administrative
burden of completing the conversion without needing to obtain your signature on
multiple documents. Please complete, sign and return the enclosed consent form
to the depositary in the enclosed pre-addressed, postage paid envelope no later
than __________ __, 2000. The depositary is:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
You may withdraw a consent form at any time before the expiration date by
delivering to the depositary written notice of your withdrawal. You may change
a consent form at any time before the expiration date by delivering to the
depositary a duly completed and signed substitute consent form, together with a
letter indicating that your prior consent form(s) have been revoked.
You must vote all of your units in the same way. If you return a signed
consent form but do not indicate a "YES" or "NO" vote or an abstention, you
will be deemed to have voted "YES" for approval of the conversion.
The conversion will be approved at such time as limited partners holding a
majority of the outstanding units shall have consented to the conversion but in
no event prior to the expiration date. The depositary will tabulate the consent
forms received from you.
The conversion will apply prospectively from and after the date it becomes
effective. You will be bound by the conversion, if it becomes effective,
whether or not you vote in favor of the conversion. Delivery of a consent form
is at your risk. The consent form will be effective only when it is actually
received by the depositary. A pre-addressed, postage paid envelope to be used
in returning completed consent forms has been included with this consent
solicitation statement.
RECORD DATE AND OUTSTANDING UNITS
If you are a limited partner at the close of business on __________ ___,
2000, the record date for voting, you will be entitled to one vote for each
unit held. On the record date there were 588,010 units outstanding held by
10,785 limited partners, including 123,263 units, representing 20.96% of the
outstanding
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units, owned by our affiliates Millennium Funding Corp., Millennium
Funding III Corp., Millennium Funding I LLC and Millennium Funding III LLC.
EFFECT OF VOTING TO APPROVE THE CONVERSION
Your vote of "YES" on the conversion form will constitute your approval to
the merger of your partnership on substantially the terms provided in the
merger agreement attached as Appendix B. By executing the enclosed power of
attorney, you authorize Michael L. Ashner and Peter Braverman to execute any
and all documents in connection with the conversion.
SOLICITATION OF VOTES; SOLICITATION EXPENSES
We may solicit your approval of the conversion. Our employees may solicit
approval of the conversion by use of the mails, by telephone, telegram, or
other means. Solicitation expenses will be paid as set forth under "THE
CONVERSION -- FEES AND EXPENSES." No party soliciting approval of the
conversion will receive compensation contingent on the outcome of their
solicitation efforts or the approval of the conversion.
LIMITED PARTNER LISTS
You may obtain a copy of a current list of limited partners by delivering
a written request to us at 5 Cambridge Center, 9th Floor, Cambridge,
Massachusetts 02142. You will be required to pay applicable duplicating
charges. Under Rule 14a-7 of the Exchange Act, we will, at your option, either:
o mail at your expense to the limited partners you designate copies of
any proxy statement, proxy form or other soliciting material that you
furnished to us; or
o deliver to you at your expense, within five business days of the
receipt of the request, a reasonably current list of the names and
addresses of the limited partners. In connection with a request under
Rule 14a-7 of the Exchange Act, we are obligated, upon your written
request, to deliver to you (1) a statement of the approximate number
of limited partners in your partnership, and (2) the estimated cost
of mailing a proxy statement, form of proxy or other similar
communication to such limited partners.
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CONFLICTS OF INTEREST
The following describes the conflicts of interest resulting from the
relationships among us, Shelbourne Management and Shelbourne which exist in
connection with the conversion or which may potentially exist after the
conversion.
CONFLICTS RELATING TO THE CONVERSION
In determining whether to recommend the conversion to you we have an
inherent conflict of interest for the following reasons:
ELIMINATION OF FEE GIVE BACK AMOUNT
We have a conflict of interest in recommending the conversion because if
the conversion is approved, we no longer will be obligated to pay you
additional amounts when your partnership is liquidated. If your partnership
were liquidated at this time we would be required to pay limited partners an
aggregate of $4.06 per unit, or an aggregate of $2,384,398, as repayment of
fees previously received. The amount which we are required to pay to you upon
liquidation of your partnership is reduced each calendar year by approximately
$0.49 per unit, or an aggregate of $286,000, and is eliminated in 2008.
Elimination of our obligation to pay you this additional amount was an
agreed-upon element of the settlement.
OUR AFFILIATION WITH SHELBOURNE MANAGEMENT
We have a conflict of interest in recommending the conversion because an
affiliate of Presidio Capital Investment Company, LLC, our beneficial owner,
has an economic interest in the conversion since it also beneficially owns
Shelbourne Management. Shelbourne Management will have a contractual right to
receive fees for managing Shelbourne's business for ten years. These fees will
include:
o an asset management fee equal to 1.25% of Shelbourne's gross assets;
o $200,000 per year for non-accountable expenses relating to the
administration of Shelbourne; and
o competitive property management fees not in excess of 6% of revenues.
Although we, as your general partners, currently have the right to receive
fees from your partnership based on its gross assets, your partnership
agreement gives limited partners the right to remove us as general partners.
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CONFLICTS FOLLOWING THE CONVERSION
The following describes the conflicts of interest which will exist
following the conversion:
ALLOCATION OF INVESTMENT OPPORTUNITIES AMONG SHELBOURNE AND OTHER ENTITIES
MANAGED BY SHELBOURNE MANAGEMENT
Shelbourne Management may manage other real estate investment trusts with
investment objectives similar to Shelbourne's. Therefore, Shelbourne Management
could be subject to a conflict of interest in determining whether to present an
investment opportunity to Shelbourne or another real estate investment trust
which it manages. Shelbourne Management will determine how to allocate
investment opportunities among the entities it manages based on the type and
characteristics of the investment opportunity, the financial condition of each
of the entities it manages and the availability of capital of such entities.
Shelbourne Management may also propose that potential investments be acquired
on a joint venture basis by Shelbourne and other real estate investment trusts
managed by Shelbourne Management.
POTENTIAL TRANSACTIONS WITH OUR AFFILIATES
Shelbourne will be permitted to purchase properties from, sell properties
to, borrow money from or enter into other transactions with, companies in which
our beneficial owner, NorthStar Capital Investment Corp. has an economic
interest. Therefore, such transactions may not solely serve your interests as a
stockholder. Although these affiliated transactions must be on terms comparable
to those obtainable from third parties and must be approved by a majority of
Shelbourne's independent directors, any transactions between Shelbourne and
affiliates of ours may not be reached through arms-length negotiation.
SHELBOURNE MANAGEMENT WILL RECEIVE AN ASSET MANAGEMENT FEE BASED ON
SHELBOURNE'S GROSS ASSETS
Shelbourne Management will receive an asset management fee based on
Shelbourne's gross assets. The asset management fee will increase if
Shelbourne's gross assets increase. To that extent, Shelbourne Management will
benefit if Shelbourne retains ownership of properties, leverages its properties
or acquires new properties, while Shelbourne's shareholders may be better
served if Shelbourne disposes of properties or holds properties on an
unleveraged basis.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AP-PCC III, L.P. SERVICES AGREEMENT
We are wholly-owned by Presidio Capital Corp. Effective October 21,
1999, Presidio Capital Corp. entered into a services agreement with AP-PCC III,
L.P. under which AP-PCC III was retained to provide asset management and
investor relation services to your partnership and other entities affiliated
with your partnership. Under this agreement, following the conversion AP-PCC III
will provide asset management and investor relation services to Shelbourne for
Shelbourne Management, a subsidiary of Presidio Capital Corp.
As a result of the services agreement AP-PCC III has the duty to direct
the day to day affairs of your partnership, including, without limitation,
reviewing and analyzing potential sale, financing or restructuring proposals
regarding your partnership's assets, preparation of all reports, maintaining
records and maintaining bank accounts of your partnership. AP-PCC III is not
permitted, however, without the consent of Presidio Capital Corp., or as
otherwise required under the terms of your limited partnership agreement to,
among other things, cause your partnership to sell or acquire an asset or file
for bankruptcy protection.
Similarly, as a result of this agreement AP-PCC III will have the duty to
direct the day to day affairs of Shelbourne for Shelbourne Management,
including, without limitation, reviewing and analyzing potential sale,
financing or restructuring proposals regarding Shelbourne's assets, preparation
of all reports, maintaining records and maintaining bank accounts of
Shelbourne.
In order to facilitate the provision of asset management services and
investor relation services by AP-PCC III, effective October 25, 1999, nominees
of AP-PCC III were elected as officers and directors of your general partners.
Nominees of AP-PCC III will also serve as officers and directors of Shelbourne
and Shelbourne Management. AP-PCC III is compensated for its services by
Presidio Capital Corp.
AP-PCC III is an affiliate of Winthrop Financial Associates, a
Boston-based company that provides asset management services, investor relation
services and property management services to over 150 limited partnerships
which own commercial property and other assets.
From August 28, 1997 until October 21, 1999, the services currently being
provided by AP-PCC were provided by NorthStar Presidio Management Company LLC,
an affiliate of Presidio Capital Corp. For the years ended December 31, 1999
and December 31, 1998, reimbursable expenses incurred by NorthStar Presidio
Management Company LLC in respect of your partnership amounted to approximately
$58,480 and $102,025, respectively.
MANAGEMENT FEES TO AFFILIATES
We receive various fees and are entitled to various reimbursements for
managing the affairs of your partnership and Shelbourne Management will receive
various fees and be entitled to various reimbursements for managing the affairs
of Shelbourne. See "COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE - MANAGEMENT
FEES TO AFFILIATES," for a detailed description of these fees.
OLYMPIA AGREEMENT
In connection with a tender offer for units of your partnership made on
March 12, 1998 by Olympia Investors, L.P., Olympia and Presidio Capital Corp.
entered into an agreement dated March 6, 1998. After the Olympia offer expired
Olympia announced that it had accepted for payment 32,750 units properly
tendered under the offer. Under the agreement, Presidio purchased 50% of those
units owned by Olympia as a result of the offer, or 16,375 units, for $91.73
per unit. In addition, Olympia has the right to cause Presidio to purchase its
remaining units for a price based on appraisal procedures set forth in the
agreement. Olympia recently exercised this right. Presidio has retained
Insignia/ESG to represent it in connection with this matter.
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SHELBOURNE
GENERAL
Shelbourne was recently formed for purposes of the conversion.
Shelbourne's principal executive offices are located at 5 Cambridge Center, 9th
floor, Cambridge, MA 02142. The telephone number of Shelbourne at such office
is (617) 234-3000.
Shelbourne will conduct all of its operations through the operating
partnership. Following the conversion, Shelbourne will elect to be treated for
Federal income tax purposes as a real estate investment trust.
As a result of the conversion, Shelbourne's only asset will be its
ownership interests in the operating partnership. Shelbourne will be a limited
partner of the operating partnership, and Shelbourne Properties II GP, LLC, a
wholly-owned subsidiary of Shelbourne, will be the general partner of the
operating partnership.
This structure, which is commonly referred to as an "UPREIT" structure,
will enhance Shelbourne's ability to make future acquisitions in a manner which
allows prospective sellers to defer recognizing gain on their transfer of
property to the operating partnership.
THE OPERATING PARTNERSHIP
GENERAL
Following the conversion, your partnership will be merged with and into
Shelbourne Properties II L.P. which will become the operating partnership and
will own and operate the assets and properties currently owned by your
partnership.
ORGANIZATION; TERM
Shelbourne Properties II L.P. was organized under the laws of the State of
Delaware on April 3, 2000. The operating partnership's partnership agreement
will provide for perpetual existence.
OWNERSHIP OF PROPERTIES
Following the conversion, legal title to the interests in the properties
currently held by your partnership will be held by the operating partnership.
No specific assets have been identified for sale, financing or purchase
following the conversion.
PARTNERSHIP AGREEMENT
Shelbourne Properties II L.P. has adopted a partnership agreement which
will remain in effect following the conversion. The following is a summary of
the operating partnership's partnership agreement.
GENERAL PARTNER
Shelbourne Properties II GP, LLC, a wholly-owned subsidiary of Shelbourne,
as the sole general partner of the operating partnership, has full, exclusive
and complete responsibility and discretion in the management, operation and
control of the operating partnership. Shelbourne has retained Shelbourne
Management to provide day-to-day management and administrative services
following the conversion.
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Shelbourne Management will generally provide the services that we provided
prior to the conversion. See "SHELBOURNE -- MANAGEMENT - THE ADVISORY AGREEMENT
AND THE ADVISOr."
BUSINESS OPERATIONS
The operating partnership's partnership agreement provides that all
business activities of Shelbourne, including all activities pertaining to the
acquisition and operation of properties, must be conducted through the
operating partnership. Unless otherwise determined by Shelbourne's Board, the
operating partnership will be operated in a manner that is intended to enable
Shelbourne to satisfy the requirements for classification as a real estate
investment trust.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
Shelbourne may from time to time after the conversion contribute
additional capital to, or make loans to, the operating partnership for a
variety of purposes including the funding of future acquisitions, the funding
of capital expenditures or the establishment of reserves. In addition, the
operating partnership's partnership agreement will further provide that
Shelbourne Properties II GP, LLC, as general partner, may from time to time
cause the operating partnership to issue additional partnership interests,
which additional partnership interests may be convertible into shares of
Shelbourne's common stock.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The operating partnership's partnership agreement generally provides that
Shelbourne Properties II GP, LLC, as general partner of the operating
partnership, will incur no liability to the operating partnership or any
limited partner for losses sustained or liabilities incurred as a result of
errors in judgment or of any act or omission if Shelbourne Properties II GP,
LLC carried out its duties in good faith. In addition, Shelbourne Properties II
GP, LLC is not responsible for any misconduct or negligence on the part of its
agents, provided it appointed such agents in good faith. Shelbourne Properties
II GP, LLC may consult with legal counsel, accountants, appraisers, management
consultants, investment bankers and other consultants and advisors, and any
action it takes or omits to take in reliance upon the opinion of such persons,
as to matters that Shelbourne Properties II GP, LLC reasonably believes to be
within their professional or expert competence, shall be conclusively presumed
to have been done or omitted in good faith and in accordance with such opinion.
The operating partnership's partnership agreement also provides for
indemnification of Shelbourne Properties II GP, LLC, the directors and officers
of Shelbourne Properties II GP, LLC, and such other persons as Shelbourne
Properties II GP, LLC may from time to time designate against any judgments,
penalties, fines, settlements and reasonable expenses, including legal fees,
actually incurred by such person in connection with the preceding unless it is
established that: (1) the act or omission of the indemnified person was
material to the matter giving rise to the preceding and either was committed in
bad faith or was the result of active and deliberate dishonesty; (2) the
indemnified person actually received an improper personal benefit in money,
property or services; or (3) in the case of any criminal proceeding, the
indemnified person had reasonable cause to believe that the act or omission was
unlawful.
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TAX MATTERS
Shelbourne Properties II GP, LLC will be the tax matters partner of the
operating partnership and, as such, will have the authority to make tax
elections and other tax-related decisions on behalf of the operating
partnership.
OBJECTIVES AND STRATEGIES
Shelbourne's primary business objective following the conversion will be
to maximize the value of common stock. Shelbourne will seek to achieve this
objective by making capital improvements to and/or selling its properties and
by making additional real estate related investments. Shelbourne intends to
employ a strategy of opportunistic investing by seeking undervalued assets and
value-enhancing situations in a broad range of property types and geographical
locations. To achieve these objectives, Shelbourne may need to raise additional
capital. Shelbourne will raise capital either by selling or leveraging
properties, by otherwise borrowing money, or by selling additional equity or
debt securities.
We believe that favorable investment opportunities exist within the
current real estate environment for investors with cash or access to capital.
Shelbourne may pursue a variety of types of real estate investments including
acquiring properties, investing in mortgage loans, and investing in other real
estate companies. We have not identified or executed commitments for any
additional investments at the current time. While Shelbourne will seek to
implement its investment strategies as soon as practicable following the
conversion, the ultimate timing and extent of any new investments will depend
upon various factors. These factors include Shelbourne's capitalization and
ability to raise debt and/or equity financing, the availability of attractive
investments, expected investment returns and other similar economic factors
generally considered when making real estate-related investments. Shelbourne
also will consider the effect that such investments will have on its ability to
satisfy the various income, asset and distribution tests applicable to real
estate investment trusts, and will use reasonable efforts to avoid making any
investments that might jeopardize its ability to maintain qualification as a
real estate investment trust, unless the Board of Directors determines that
maintaining such qualification is no longer in the best interests of
Shelbourne's stockholders. See "FEDERAL INCOME TAX CONSEQUENCES -- TAXATION OF
SHELBOURNE AS A REAL ESTATE INVESTMENT TRUST -REQUIREMENTS FOR QUALIFICATION."
Shelbourne Management is responsible for seeking out and evaluating
potential investment opportunities for Shelbourne. Shelbourne's Board will make
the ultimate determination as to whether or not Shelbourne should pursue an
investment opportunity. Shelbourne's Board may determine to establish a more
specific investment strategy for Shelbourne than that initially contemplated
or, from time to time, change Shelbourne's investment strategy without a vote
of shareholders.
Shelbourne's investments may include:
o Interests in real estate. Shelbourne does not intend to limit its
investment portfolio to any particular type of real estate assets.
Instead, Shelbourne will consider investment opportunities in all
types of real estate, including investments in office buildings,
apartment buildings, shopping centers, industrial and commercial
properties, special purpose buildings and undeveloped acreage. In
addition, Shelbourne does not currently intend to focus its real
estate investment activity in any particular market or geographic
region. Shelbourne intends to acquire interests in real estate with
its cash reserves, through the issuance of additional units in the
operating partnership, through the issuance of additional equity
securities in Shelbourne or by borrowing money. Shelbourne will not
be limited as to the amount of
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indebtedness it may incur with respect to, or number of mortgages it
may place on, any of its properties, but currently does not intend to
borrow, in the aggregate, more than an amount equal to 75% of its
gross assets. Shelbourne will acquire interests in real estate for
the purpose of generating income and realizing capital gain.
Shelbourne will not be limited as to the amount or percentage of
assets which may be invested in any specific property.
o Interests in real estate mortgages. Shelbourne may invest in first or
second mortgages and will not be limited to investing in guaranteed
or insured mortgages. Subject to complying with the requirements of
the Internal Revenue Code for qualification as a real estate
investment trust, Shelbourne will not be limited as to the proportion
of its assets which may be invested in any type of mortgage or in any
single mortgage. Shelbourne may acquire mortgages which encumber any
of various types of properties, including residential buildings,
office buildings, shopping centers, industrial and commercial
properties and unimproved land.
o Investments in other real estate companies. Shelbourne may invest in
equity or debt securities of other real estate companies, including
other real estate investment trusts. Subject to limitations
applicable to qualification as a real estate investment trust,
Shelbourne may also seek to exercise control over other real estate
companies in which it invests and will not be limited as to the
proportion of its assets which may be invested in other real estate
companies. Shelbourne does not have any pre-determined investment
criteria for its investments in other real estate companies.
Shelbourne does not intend to underwrite the securities of any other
company.
Shelbourne may pursue the foregoing types of investments through
joint ventures with other real estate investors.
The ability of Shelbourne to make new investments will depend in part upon
it raising additional capital or obtaining financing following the conversion.
Shelbourne may seek to raise additional capital through placing mortgages on
existing properties and the public and/or private sale of debt and/or equity
securities. The ability of Shelbourne to raise additional capital, and the
manner in which Shelbourne raises such capital, may depend in part on the
trading price of common stock following the conversion. Shelbourne may raise
additional capital by issuing debt or equity securities with rights and
preferences that are senior to those of common stock. By conducting its
operations through the operating partnership, Shelbourne will be able to offer
either common stock or limited partnership interests in the operating
partnership to potential property sellers thereby increasing Shelbourne's
flexibility in structuring acquisitions on a tax-efficient basis. Shelbourne
may from time to time offer to repurchase shares of its outstanding capital
stock.
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THE PROPERTIES
The operating partnership will own and operate the properties your
partnership currently owns. All of the properties are owned free of any
mortgage indebtedness.
The following table contains information on your partnership's properties.
<TABLE>
<CAPTION>
7/1/00
ORIGINAL COST 6/30/00 ADJUSTED TOTAL RENTABLE
LESS ACCUMULATED ADJUSTMENT CARRYING VALUE APPRAISED DATE SQUARE
DEPRECIATION FOR IMPAIRMENT (1) VALUE (2) ACQUIRED FOOTAGE
------------ ---------- --- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
DESCRIPTION
Century Park I Office Complex $15,835,013 $11,700,000 $4,135,013 $7,875,000 11/86 200,002
Kearny Mesa, California (50% owned)
568 Broadway Office Building New $15,474,477 $10,821,150 $4,653,327 13,623,750 12/86 300,832
York, New York (38.925% owned)
Seattle Tower Office Building $8,733,353 $6,050,000 $2,683,353 8,512,000 12/86 167,534
Seattle, Washington (50% owned)
Commonwealth Industrial Park $10,435,577 $5,800,000 $4,635,577 8,100,000 4/87 273,576
Manufacturing/Warehouse Buildings
Fullerton, California
Commerce Plaza I Office Building $7,783,313 $2,700,000 $5,083,313 7,700,000 4/87 84,610
Richmond, Virginia
Melrose Crossing Shopping Center $14,495,651 $12,100,000 $2,395,651 3,100,000 1/88 138,355
Retail Building Melrose Park,
Illinois (3)
Matthews Township Festival Shopping $13,518,887 $5,300,000 $8,218,887 11,800,000 2/88 127,403
Center Retail Building Matthews,
North Carolina
Sutton Square Shopping Center $10,401,291 -- $10,401,291 11,900,000 4/88 101,965
Retail Building Raleigh, North
Carolina
TMR Warehouse Industrial Buildings $4,496,147 -- $4,496,147 2,995,000 (4) 9/88 1,010,500
Hillard, Grove City & Delaware,
Ohio (20.66% owned)
Melrose (lot #7) Vacant Lot Melrose
Park, Illinois 0 -- 0 0 11/88 --
============ =========== =========== =========== ===== =========
TOTAL $101,173,709 $54,471,150 $46,702,559 $75,605,750 2,404,777
</TABLE>
(1) Carrying value is the amount shown on your partnership's June 30, 2000
balance sheet. It represents the historical cost of each property
reduced by depreciation, amortization and adjustments for impairment in
the value of the property. Impairment adjustments reduce the carrying
value to a property's estimated fair value. No impairment adjustment
has been taken by your partnership since 1995.
(2) The adjusted appraised value is the value determined in the most
current appraisal performed by Cushman & Wakefield. The adjusted value
of the three properties owned by your partnership in joint venture
reflect a discount from the appraised value of each property which
Cushman & Wakefield attributed to the illiquidity of your partnership's
interest in the joint venture.
See "ALTERNATIVES TO THE CONVERSION - APPRAISALS."
(3) Your partnership recently received an unsolicited offer to purchase the
Melrose Crossing Shopping Center owned by your partnership. Although
the purchase price of the offer is higher than the appraised value of
the Melrose center, the offer is subject to numerous conditions. These
conditions include a 90 to 150 day due diligence period after the date
that a binding agreement is signed. While we intend to explore this
opportunity, there can be no assurance that this will result in a sale
of the property.
(4) The estimated future undiscounted cash flows expected to result from
the use of the TMR Warehouse Industrial buildings in their eventual
disposition exceed their carrying values. Therefore an impairment
adjustment is not required.
76
<PAGE>
The following table lists the occupancy rates of your partnership's
properties at the beginning of each of the last 5 years.
<TABLE>
<CAPTION>
OCCUPANCY
------------------------------------------------------------------------------------
PROPERTY 1/1/2000 1/1/1999 1/1/1998 1/1/1997 1/1/1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
568 Broadway Office Building 100% 100% 100% 100% 95%
Century Park I Office Complex 100% 100% 91% 74% 74%
Commerce Plaza I Office Building 100% 100% 85% 95% 92%
Commonwealth Industrial Park 87% 87% 87% 87% 66%
Matthews Township Festival 95% 93% 94% 86% 89%
Melrose Crossing Shopping Center 13% 35% 33% 18% 50%
Melrose Outparcel 0% 0% 0% 0% 0%
Seattle Tower Office Building 98% 96% 95% 96% 92%
Sutton Square Shopping Center 100% 100% 98% 100% 100%
Tri-Columbus-Orange 100% 100% 100% 100% 100%
Tri-Columbus-Grove City 100% 100% 100% 100% 100%
Tri-Columbus-Hilliard 0%(1) 0% 74% 100% 74%
</TABLE>
-----------
(1) New lease for 67% of space signed in March 2000.
The following table lists the average annual rent per square foot for the
last 5 years at each property owned by your partnership.
<TABLE>
<CAPTION>
AVERAGE RENTAL RATE PER SQUARE FOOT
------------------------------------------------------------------------------------
PROPERTY 1999 1998 1997 1996 1995
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
568 Broadway Office Building $25.81 $21.77 $21.07 $16.52 $15.90
Century Park I Office Complex $13.71 $12.32 $10.22 $8.20 $4.54
Commerce Plaza I Office Building $14.94 $14.27 $12.46 $12.44 $10.81
Commonwealth Industrial Park $3.07 $3.24 $3.00 $1.83 $1.46
Matthews Township Festival $14.28 $13.83 $13.32 $10.07 $13.70
Melrose Crossing Shopping Center $3.66 $3.97 $3.55 $3.66 $9.90
Melrose Outparcel -- -- -- -- --
Seattle Tower Office Building $16.57 $15.06 $14.49 $11.11 $10.72
Sutton Square Shopping Center $16.15 $15.20 $15.07 $10.80 $12.52
Tri-Columbus $2.10 $2.56 $2.63 $2.95 $2.65
</TABLE>
The following tables contain information on leases at your
partnership's properties that are scheduled to expire over the next ten years.
The annual rent numbers were determined based on scheduled base rent for the
calendar year 2000.
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<PAGE>
568 BROADWAY OFFICE BUILDING
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000 5 11,665 $140,609 2.12%
2001 7 33,889 $990,554 18.83%
2002 10 18,316 $322,532 4.87%
2003 12 26,550 $604,537 9.13%
2004 5 23,840 $412,134 6.23%
2005 13 36,717 $677,303 10.23%
2006 6 26,830 $930,148 14.05%
2007 6 13,825 $329,199 4.97%
2008 18 85,680 $1,655,483 25.01%
2009 1 5,500 $159,500 2.41%
</TABLE>
CENTURY PARK I OFFICE COMPLEX
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000
2001 1 9,406 $150,093 5.72%
2002 2 40,693 $622,379 23.74%
2003
2004
2005 3 96,719 $1,256,586 47.92%
2006
2007 1 51,242 $593,042 22.62%
</TABLE>
COMMERCE PARK PLAZA I OFFICE BUILDING
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000 1 2,725 $37,456 3.45%
2001 7 47,899 $738,867 67.99%
2002 2 7,130 $120,217 11.06%
2003 2 11,402 $190,172 17.50%
</TABLE>
78
<PAGE>
COMMONWEALTH INDUSTRIAL PARK
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000
2001
2002 2 112,540 $421,263 48.01%
2003 2 125,743 $397,538 45.31%
</TABLE>
MATTHEWS TOWNSHIP FESTIVAL
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000 1 1,222 $7,679 .51%
2001 2 3,800 $43,716 2.89%
2002 8 16,853 $208,904 13.82%
2003 2 4,700 $52,058 3.44%
2004 3 7,548 $102,288 6.77%
2005 2 2,293 $27,248 1.80%
2006
2007 3 85,928 $1,069,403 70.76%
</TABLE>
MELROSE CROSSING SHOPPING CENTER
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000 4 6,844 $44,461 27.05%
2001 1 1,830 $17,477 10.63%
2002 1 7,066 $74,134 45.09%
2003 1 2,286 $28,325 17.23%
</TABLE>
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<PAGE>
SEATTLE TOWER OFFICE BUILDING
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000 6 8,583 $138,659 5.64%
2001 20 33,717 $611,452 24.89%
2002 11 23,353 $467,384 19.03%
2003 10 33,454 $601,857 24.5%
2004 5 10,013 $209,534 8.53%
2005 3 2,381 $59,161 2.41%
2006
2007
2008
2009 7 23,673 $368,340 15.00%
</TABLE>
SUTTON SQUARE SHOPPING CENTER
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000
2001 4 17,173 $216,111 17.7%
2002 5 7,773 $139,832 11.45%
2003 7 17,804 $258,148 21.14%
2004 6 10,871 $185,481 15.19%
2005 4 14,344 $146,280 11.98%
</TABLE>
TMR WAREHOUSE INDUSTRIAL BUILDINGS (TRI-COLUMBUS)
<TABLE>
<CAPTION>
NUMBER OF EXPIRING SQUARE FOOTAGE OF ANNUAL RENT OF PERCENTAGE OF
YEAR LEASES EXPIRING LEASES EXPIRING LEASES GROSS ANNUAL RENT
---- ------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
2000
2001
2002 1 583,000 $1,418,825 61.2%
2003 1 175,000 $358,139 15.45%
2004 1 190,000 $541,500 23.36%
</TABLE>
80
<PAGE>
The following table contains information with respect to tenants that
occupy ten percent or more of the rentable square footage of any of your
partnership's properties.
<TABLE>
<CAPTION>
SQUARE FEET
PRINCIPAL LEASED BY ANNUAL LEASE
PROPERTY 10% TENANT BUSINESS OF TENANT TENANT RENT EXPIRATION DATE RENEWAL OPTION
-------- ---------- ------------------ ------ ---- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Melrose Crossing I N/A N/A N/A N/A N/A N/A
Century Park I San Diego Gas & Utilities 75,969 $962,651 11/30/07 One 5 yr. option.
Electric
Per-Se Physician's 64,817 $813,334 7/31/05 Two 5 yr. options.
Technologies billing service
CitiFinancial Loan servicing 25,988 $407,222 10/31/02 One 5 yr. option.
Commonwealth Associated Plastic bag 34,893 $117,240 6/30/10 One 2 yr. term.
Polybag manufacturer
Advanced Equipment 51,600 $155,832 8/30/03 None.
Equipment manufacturer
Kiva Container Container 55,214 $187,383 12/14/02 One 5 yr. term.
manufacturer
Alliance Metal Metal partition 57,326 $233,880 1/26/02 One 5 yr. term.
manufacturer
Parkinson Furniture 74,143 $241,706 8/31/03 None.
manufacturer
Seattle Tower Electric Telephone 23,475 $363,393 8/31/09 None.
Lightwave switching company
Sutton Square Eckerd Drug Retailer 10,356 $86,991 9/30/05 Two 5 yr. options.
Harris Teeter Grocery retailer 34,000 $264,060 11/30/14 Four 5 yr. options.
Tri-Columbus Volvo Truck parts 583,000 $1,418,825 12/31/02 One 5 yr. option.
distributor
Simmons USA Mattress 190,000 $541,500 4/30/04 One 5 yr. option.
wholesaler
Computer Computer 175,000 $402,500 1/31/03 One 4 yr. option.
Associates distributor
Matthews Festival A&P Grocery retailer 40,526 $364,734 11/30/07 Four 5 yr. terms.
Carmike Theater Cinema 36,762 $615,763 3/31/07 Two 5 yr. terms.
81
<PAGE>
SQUARE FEET
PRINCIPAL LEASED BY ANNUAL LEASE
PROPERTY 10% TENANT BUSINESS OF TENANT TENANT RENT EXPIRATION DATE RENEWAL OPTION
-------- ---------- ------------------ ------ ---- --------------- --------------
Commerce Plaza Branch Banking Banking 18,089 $242,811 6/30/01 Two 5 yr. terms.
& Trust
Invensys Appliance control 15,344 $251,877 1/31/01 One 3 yr. term.
Controls manufacturer
Sinclair Communications 9,621 $161,697 4/30/03 One 5 yr. term.
Telecable/
Radio One
568-578 Broadway Scholastic Publishing 87,000 $1,254,723 4/30/08 One 5 yr. option.
</TABLE>
You can find additional information about your partnership's properties in your
partnership's Annual Report on Form 10-K for 1999 which is incorporated by
reference in this consent solicitation.
OTHER ASSETS AND LIABILITIES
Following the conversion, the operating partnership will own the other
assets of your partnership. These other assets include, among other things,
cash and cash equivalents totaling approximately $14,629,511, as of June 30,
2000. The operating partnership will be subject to the liabilities of your
partnership. These liabilities, totaling approximately $1,920,625 as of June
30, 2000, consist primarily of your partnership's accounts payable. The assets
of the operating partnership as of the date of the conversion will be reduced
by the expenses of the conversion.
CASH DIVIDEND POLICY
Following the conversion, the sole partners of the operating partnership
will be Shelbourne as the 99% limited partner and Shelbourne Properties II GP,
LLC, a wholly-owned subsidiary of Shelbourne, as the 1% general partner. The
operating partnership's partnership agreement will provide for distributions to
its partners in proportion to their percentage interest in the operating
partnership. Shelbourne Properties II GP, LLC, as the general partner of the
operating partnership, will have the exclusive right to declare and cause the
operating partnership to make distributions. For so long as Shelbourne elects
to qualify as a real estate investment trust, Shelbourne will use reasonable
efforts to cause the operating partnership to make distributions to Shelbourne
in amounts such that Shelbourne will be able to pay dividends that will satisfy
the requirements for qualification as a real estate investment trust and avoid
any Federal income or excise tax liability for Shelbourne. See "FEDERAL INCOME
TAX CONSEQUENCES -- TAXATION OF SHELBOURNE AS A REAL ESTATE INVESTMENT TRUST -
REQUIREMENTS FOR QUALIFICATION - ANNUAL DISTRIBUTION REQUIREMENTS."
The operating partnership expects to make regular quarterly cash
distributions to Shelbourne. Shelbourne, in turn, will pay cash dividends to
holders of common stock. We expect Shelbourne to pay quarterly dividends within
45 days after the end of each calendar quarter to holders of record of common
stock on the record date determined by Shelbourne's Board of Directors. The
first dividend on the shares of common stock will be paid for the period from
the effective date of the conversion through the end of the calendar quarter in
which such effective date occurs.
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<PAGE>
The amount of funds actually available for the payment of dividends will
be affected by a number of factors and circumstances, including the revenue
actually received from properties and other investments, operating expenses,
the interest expense incurred in borrowings, the ability of tenants to meet
their obligations, unanticipated capital expenditures, general economic
conditions and a large number of other factors and circumstances, including
those discussed under "RISK FACTORS." Many of these factors are not within
Shelbourne's control.
Shelbourne's dividend policy may be altered by Shelbourne's Board of
Directors without the approval of its stockholders.
MANAGEMENT
GENERAL. Following the conversion, all management, advisory and property
management services that we or our affiliates currently perform for your
partnership will be performed by one of our affiliates, Shelbourne Management
LLC, under an advisory agreement. Shelbourne will retain Shelbourne Management
pursuant to the authority of its Board of Directors. Pursuant to Shelbourne's
organizational documents, responsibility for operation of Shelbourne's business
and affairs is vested in the Board of Directors. Accordingly, the Board of
Directors is ultimately responsible for the management, control and investment
activities of Shelbourne's business and operations, as well as the general
supervision of Shelbourne's officers, agents, employees, advisors, managers,
and independent contractors, including the advisor. The settlement contemplated
that Shelbourne would be externally managed and that your partnership's fee
structure would continue in effect for Shelbourne after the conversion. Under
an agreement between AP-PCC III, L.P., an affiliate of Winthrop Financial
Associates, and Presidio Capital Corp., the sole shareholder of your general
partners, AP-PCC III, L.P. will be responsible for providing asset management
and investor relation services to Shelbourne for Shelbourne Management.
DIRECTORS. The certificate of incorporation divides the Board of Directors
into three classes of directors. The initial terms of the three classes will
expire in 2001 (two directors who have not yet been identified), 2002 (Michael
L. Ashner and Robert Martin) and 2003 (David T. Hamamoto, W. Edward Scheetz and
David G. King, Jr.), respectively. In order to facilitate the provisions of the
services agreement between Presidio Capital Corp. and AP-PCC III, L.P., Mr.
Ashner was elected to serve on the Board as a nominee of AP-PCC III, L.P.
Beginning in 2001, directors of each class will be chosen for three-year terms
upon the expiration of their current terms and each year one class of directors
will be elected by the stockholders. Shelbourne believes that classification of
the Board of Directors helps to assure the continuity and stability of
Shelbourne's business strategies and policies as determined by the Board of
Directors. Holders of shares of common stock have no right to cumulative voting
in the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of common stock will be
able to elect all of the successors of the class of directors whose terms
expire at that meeting.
OFFICERS. Officers of Shelbourne will be elected by and serve at the
discretion of the Board of Directors. There are no arrangements or
understandings between or among any of the officers or directors and any other
person pursuant to which any officer or director was selected as such. There
are no family relationships among any directors and officers of Shelbourne.
THE ADVISORY AGREEMENT AND THE ADVISOR. The advisory agreement with
Shelbourne Management will commence on the effective date of the conversion and
terminate ten years after such date. During that period, Shelbourne Management
will manage the day-to-day operations of Shelbourne and the operating
partnership and will be responsible to do the following:
o manage Shelbourne's day-to-day operations;
83
<PAGE>
o provide or arrange for customary property management services to be
provided at Shelbourne's properties;
o supervise Shelbourne's financings including any sales of Shelbourne's
securities;
o conduct relations for Shelbourne with the American Stock Exchange or
with dealers which make markets in Shelbourne's securities;
o select and conduct relations with lenders, lawyers, consultants,
accountants, mortgage loan originators, brokers, participants,
attorneys, appraisers, insurers, and others who may be relevant to
Shelbourne's activities;
o administer day-to-day bookkeeping and accounting functions;
o prepare reports to stockholders which may be required by governmental
authorities for the ordinary conduct of Shelbourne's business;
o negotiate and enter into leases of space at Shelbourne's properties;
o supervise the development and improvement of properties, including
capital and tenant improvements.
Shelbourne Management will receive (1) an annual asset management fee,
payable quarterly, equal to 1.25% of the gross asset value of Shelbourne as of
the last day of each year, (2) property management fees of up to 6% of property
revenues, (3) $200,000 for non-accountable expenses and (4) reimbursement of
expenses incurred in connection with the performance of its services. Gross
asset value is the gross asset value of all assets owned by the operating
partnership as determined by the latest appraisal of such assets by an
independent appraiser of national reputation selected by the advisor. Since the
asset management fee is based on gross assets, the amount payable to Shelbourne
Management will increase to the extent Shelbourne acquires new investments,
whether for cash, by causing Shelbourne to incur indebtedness or otherwise.
Shelbourne Management is a newly-formed company affiliated with us which
will provide management services to entities in which Presidio Capital
Investment Company, LLC, our beneficial owner, has an interest including the
other High Equity partnerships if they are converted into real estate
investment trusts. See "BACKGROUND OF THE CONVERSION - THE CLASS ACTION
SETTLEMENT."
The initial directors and executive officers of Shelbourne and Shelbourne
Management following the conversion are set forth below. Two additional
directors will be added prior to the effective date of the Registration
Statement of which this consent solicitation is a part. The individuals listed
below as the sole director and the executive officers of Shelbourne Management
will also serve as the sole director and hold the same executive officer
positions of Shelbourne Properties II GP, LLC, the general partner of the
operating partnership.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Michael L. Ashner 48 President and Sole Director of Shelbourne Management and
President and Director of Shelbourne
Peter Braverman 48 Vice President of Shelbourne Management and Vice President
of Shelbourne
David T. Hamamoto 40 Director of Shelbourne
84
<PAGE>
Steven B. Kauff 37 Vice President of Shelbourne Management and Vice President
of Shelbourne
David G. King, Jr. 37 Vice President of Shelbourne Management and Vice President
and Director of Shelbourne
Dallas E. Lucas 37 Vice President of Shelbourne Management and Vice President
of Shelbourne
Robert Martin 38 Director of Shelbourne
W. Edward Scheetz 34 Director of Shelbourne
Lara Sweeney 28 Vice President and Secretary of Shelbourne Management and
Vice President and Secretary of Shelbourne
Carolyn Tiffany 33 Vice President and Treasurer of Shelbourne Management and
Vice President and Treasurer of Shelbourne
</TABLE>
MICHAEL L. ASHNER. Mr. Ashner has been President and the sole director of
your general partners since November 1999. Mr. Ashner serves as the Chief
Executive Officer of Winthrop Financial Associates, A Limited Partnership and
its affiliates, a position he has held since January 15, 1996, as well as the
Chief Executive Officer of The Newkirk Group. From June 1994 until January
1996, Mr. Ashner was a Director, President and Co-chairman of National Property
Investors, Inc., a real estate investment company. Mr. Ashner was also a
Director and executive officer of NPI Property Management Corporation from
April 1984 until January 1996. In addition, since 1981 Mr. Ashner has been
President of Exeter Capital Corporation, a firm which has organized and
administered real estate limited partnerships. Mr. Ashner also currently serves
on the Board of Directors of Interstate Hotel Corp., Nexthealth Corp., Greater
Bay Hotel and Casino Inc., Burnham Pacific Properties, Inc. and NBTY Inc.
PETER BRAVERMAN. Mr. Braverman has been a Vice President of your general
partners since November 1999. Mr. Braverman has served as the Executive Vice
President of Winthrop Financial Associates and its affiliates since January
1996. Mr. Braverman also serves as the Executive Vice President of The Newkirk
Group. From June 1995 until January 1996, Mr. Braverman was a Vice President of
National Property Investors, Inc. and NPI Property Management Corporation. From
June 1991 until March 1994, Mr. Braverman was President of the Braverman Group,
a firm specializing in management consulting for the real estate and
construction industries. From 1988 to 1991, Mr. Braverman was a Vice President
and Assistant Secretary of Fischbach Corporation, a publicly traded,
international real estate and construction firm.
DAVID T. HAMAMOTO. Mr. Hamamoto is a Co-Chief Executive Officer of
NorthStar Capital Investment Corp., having co-founded the firm in July 1997. At
NorthStar Capital Investment Corp., Mr. Hamamoto has overseen the investment of
more than $1 billion in real estate assets and operating companies with an
aggregate cost exceeding $2 billion. In his capacity as Co-Chief Executive
Officer, Mr. Hamamoto is responsible for capital raising, setting investment
strategy, creating deal flow, advising on financing, asset management, and
acquisition issues, and overseeing the day-to-day activities of NorthStar
Capital Investment Corp.'s investment professionals. Prior to founding
NorthStar Capital Investment Corp., Mr. Hamamoto initiated the effort in 1988
to build a real estate principal investment business at Goldman, Sachs & Co.
under the auspices of the Whitehall Funds, and was a co-head of the Whitehall
Funds and a partner at Goldman, Sachs & Co. from 1994 to 1997. Mr. Hamamoto is
a director of Emeritus Corporation, one of the
85
<PAGE>
largest publicly traded owners and operators of assisted living facilities, and
U.S. Franchise Systems, a publicly traded franchising concern. Mr. Hamamoto
received a B.S. from Stanford University and an M.B.A. from the Wharton School
of the University of Pennsylvania.
STEVEN B. KAUFF. Mr. Kauff has been a Vice President of NorthStar Capital
Investment Corp. since July 1999. He is also a Vice President of your general
partners. Prior to joining NorthStar Capital Investment Corp. he was with
Arthur Andersen LLP in the Real Estate and Hospitality Services Group from 1996
to 1999, where he specialized in transaction consulting, due diligence and tax
products for real estate ventures, including real estate investment trusts and
partnerships. From 1994 to 1996, Mr. Kauff was with Price Waterhouse LLP in the
Real Estate Industry Services Group.
DAVID G. KING, JR. Mr. King has been a Vice President and Assistant
Treasurer of NorthStar Capital Investment Corp. since November 1997. He is also
a Vice President of your general partners. Prior to joining NorthStar Capital
Investment Corp., he was a Senior Vice President of Finance at Olympia & York
Companies (USA).
DALLAS E. LUCAS. Mr. Lucas has been a director, Vice President, Treasurer
and Chief Financial Officer of NorthStar Capital Investment Corp. since August
1998. He is also a Vice President of your general partners. From 1994 until
August 1998 he was the Chief Financial Officer and Senior Vice President of
Crescent Real Estate Equities Company.
ROBERT MARTIN. Mr. Martin is a Senior Managing Director at Insignia/ESG.
He has been actively involved in the real estate business for more than 15
years.
W. EDWARD SCHEETZ. Mr. Scheetz is a Co-Chief Executive Officer of
NorthStar Capital Investment Corp., having co-founded the firm in July 1997. At
NorthStar Capital Investment Corp., Mr. Scheetz has overseen the investment of
more than $1 billion in real estate assets and operating companies with an
aggregate cost exceeding $2 billion. In his capacity as Co-Chief Executive
Officer, Mr. Scheetz is responsible for capital raising, setting investment
strategy, creating deal flow, advising on financing, asset management, and
acquisition issues, and overseeing the day-to-day activities of NorthStar
Capital Investment Corp.'s investment professionals. Prior to founding
NorthStar Capital Investment Corp., Mr. Scheetz was a partner from 1993 to 1997
at Apollo Real Estate Advisors where he was responsible for the investment
activities of Apollo Real Estate Investment Fund I and II. From 1989 to 1993,
Mr. Scheetz was a principal with Trammell Crow Ventures where he was
responsible for that firm's opportunistic real estate investment activities.
Mr. Scheetz received an A.B. in economics from Princeton University.
LARA SWEENEY. Ms. Sweeney has been a Vice President and Secretary of your
general partners since November 1999. Ms. Sweeney has been a Senior Vice
President of Winthrop Financial Associates since 1996. Ms. Sweeney was Director
of Investor Relations for National Property Investors, Inc. from 1994 until
1996.
CAROLYN TIFFANY. Ms. Tiffany has been a Vice President and Treasurer of
your general partners since November 1999. Ms. Tiffany has been with Winthrop
Financial Associates since January 1993. From 1993 to September 1995, Ms.
Tiffany was a Senior Analyst and Associate in Winthrop Financial Associate's
accounting and asset management departments. Ms. Tiffany was a Vice President
in the asset management and investor relations departments of Winthrop
Financial Associates from October 1995 to December 1997, at which time she
became the Chief Operating Officer of Winthrop Financial Associates. In
addition, Ms. Tiffany is the Chief Operating Officer of The Newkirk Group.
86
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Shelbourne intends to pay an annual fee of $6,667 to each of its three
independent directors (Robert Martin and two additional directors to be named).
Shelbourne will not pay any director's fees to directors who are employees of
Shelbourne and/or Shelbourne Management. Shelbourne will reimburse all
directors for travel expenses and other out-of-pocket expenses incurred in
connection with their serving as directors of Shelbourne. Executive officers of
Shelbourne will not receive any remuneration for their services as such to
Shelbourne, but will be compensated by Shelbourne Management in their
capacities as officers and employees of Shelbourne Management.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors will establish an Audit Committee that will consist
solely of independent directors. The Audit Committee will recommend to the
Board of Directors the independent public accountants to be selected to audit
Shelbourne's annual financial statements, will approve (1) any special
assignments given to such accountants, (2) such accountants' letter of comments
and management's responses thereto and (3) any major accounting changes made or
contemplated, and will review the effectiveness and adequacy of Shelbourne's
internal accounting controls.
The Board of Directors may from time to time establish other committees to
facilitate the management of Shelbourne.
BENEFICIAL OWNERSHIP OF SHARES BY CERTAIN PERSONS
We own, together with our affiliates, a 24.92% interest in your
partnership comprised of a 5% general partnership interest owned by us and
123,266 units owned by our affiliates. Accordingly, we, together with our
affiliates, will be entitled to receive 308,428 shares of common stock in the
conversion, representing approximately 24.92% of the total number of shares of
common stock that will be outstanding immediately following the conversion.
87
<PAGE>
PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE
The following pro forma statements of operations and cash flows of
Shelbourne for the six months ended June 30, 2000 and the year ended December
31, 1999 assume that the conversion was consummated on January 1, 1999 and have
been prepared based on the historical financial statements of your partnership
and Shelbourne. The pro forma balance sheet has been prepared as if the
conversion was consummated on June 30, 2000.
The following pro forma financial information should be read in
conjunction with the financial statements of your partnership which are
incorporated by reference in this consent solicitation statement and which form
the basis of the pro forma financial statements for Shelbourne. These
statements do not purport to be indicative of the results of operations or cash
flows that actually would have occurred had the conversion been consummated on
January 1, 1999 or that may be expected to occur in the future.
88
<PAGE>
SHELBOURNE PROPERTIES II, INC.
PRO FORMA BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
Pro Forma Other
Shelbourne Partnership Capitalization Pro Forma Shelbourne
Historical Historical of Shelbourne Adjustments Pro Forma
-------------- --------------- ------------------ ------------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
REAL ESTATE $46,702,559 $46,702,559
CASH AND CASH EQUIVALENTS $1,000 14,629,511 ($1,410,784) 13,219,727
OTHER ASSETS 3,505,303 3,505,303
RECEIVABLES 176,336 176,336
--------- ------------- ------------------ ------------- -------------
$1,000 $65,013,709 ($1,410,784) $63,603,925
========= =============== ================== ============= ==============
LIABILITIES AND PARTNERS' EQUITY:
ACCOUNTS PAYABLE AND $1,657,727 $121,094 (e) $1,778,821
ACCRUED EXPENSES
DUE TO AFFILIATES 262,898 262,898
--------- --------------- ------------------ ------------------- --------------
1,920,625 121,094 2,041,719
--------- --------------- ------------------ ------------------- --------------
COMMITMENTS AND
CONTINGENCIES
PARTNERS' EQUITY
LIMITED PARTNERS' EQUITY 59,937,484 (59,937,484) (a)
(588,010 UNITS ISSUED AND
OUTSTANDING)
GENERAL PARTNERS' EQUITY 3,155,600 (3,155,600) (a)
COMMON STOCK, PAR VALUE
$.01 (1,237,916 SHARES ISSUED 12,380
AND OUTSTANDING) 1 12,379 (b)
PAID-IN CAPITAL (121,094)
999 63,080,705 (b) (1,410,784) (c) 61,549,826
--------- --------------- ------------------ ------------------- --------------
1,000 63,093,084 (1,531,878) 61,562,206
--------- --------------- ------------------ ------------------- --------------
$1,000 $65,013,709 ($1,410,784) $63,603,925
========= =============== ================== =================== ==============
</TABLE>
89
<PAGE>
SHELBOURNE PROPERTIES II, INC. PRO FORMA STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
----------------- ------------------ ------------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
RENTAL INCOME $5,761,070 $5,761,070
----------------- ------------------ ------------------ -------------
COST AND EXPENSES
OPERATING EXPENSES 1,901,258 1,901,258
DEPRECIATION AND AMORTIZATION 1,030,995 1,030,995
PARTNERSHIP MANAGEMENT FEE 432,154 121,094 (e) 553,248
ADMINISTRATIVE EXPENSES 646,090 646,090
PROPERTY MANAGEMENT FEE 172,710 172,710
----------------- ------------------ ------------------ -------------
4,183,207 121,094 4,304,301
----------------- ------------------ ------------------ -------------
INCOME BEFORE INTEREST $1,577,863 $121,094 $1,456,769
AND OTHER INCOME:
INTEREST INCOME 332,893 332,893
OTHER INCOME 10,050 10,050
----------------- ------------------ ------------------ -------------
NET INCOME $1,920,806 $121,094 (e) $1,799,712
================= ================== ================== =============
BASIC AND DILUTED NET INCOME PER UNIT (588,010 $3.10
UNITS OUTSTANDING)
================= ================== ================== =============
BASIC AND DILUTED NET INCOME PER SHARE (1,237,916 $1.45
SHARES) OUTSTANDING)
================= ================== ================== =============
</TABLE>
90
<PAGE>
SHELBOURNE PROPERTIES II, INC.
PRO FORMA STATEMENT OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
----------------- --------------- ------------------ ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $1,920,806 ($121,094) (e) $1,799,712
Adjustment to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,030,995 1,030,995
Straight-line adjustment for 15,861 15,861
stepped lease rentals
Changes in asset and liabilities
Receivables (97,766) (97,766)
Accounts payable and accrued (116,968) 121,094 (e) 4,126
expenses
Due to affiliates (203,630) (203,630)
Other assets (289,705) (289,705)
----------------- ------------------ ---------------
---------------
Net cash provided by operating 2,259,593 2,259,593
activities
----------------- --------------- ------------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to real estate (306,018) (306,018)
----------------- --------------- ------------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution to partners (1,410,784) (c) (1,410,784)
----------------- --------------- ------------------ ---------------
Increase (decrease) in cash and cash 1,953,575 (1,410,784) 542,791
equivalents
Cash and cash equivalents, beginning 1,000 12,675,936 12,676,936
of period
================= =============== ================== ===============
Cash and cash equivalents, end of
period $1,000 $14,629,511 ($1,410,784) $13,219,727
================= =============== ================== ===============
</TABLE>
91
<PAGE>
SHELBOURNE PROPERTIES II, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
For the six months ended
June 30, 2000
---------------------------
Average number of pro forma common and common 1,237,916
equivalent shares outstanding during the period ==========
Pro forma net income $1,799,712
==========
Pro forma basic and diluted income per share $1.45
==========
92
<PAGE>
SHELBOURNE PROPERTIES II, INC. PRO FORMA STATEMENT
OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
RENTAL INCOME $12,178,694 $12,178,694
---------------- --------------- ---------------- ---------------
COST AND EXPENSES
OPERATING EXPENSES 4,076,117 4,076,117
DEPRECIATION AND AMORTIZATION 2,092,145 2,092,145
PARTNERSHIP MANAGEMENT FEE 973,293 973,293 (d)
ADMINISTRATIVE EXPENSES 1,417,475 1,417,475
PROPERTY MANAGEMENT FEE 389,113 389,113
---------------- --------------- ---------------- ---------------
8,948,143 8,948,143
---------------- --------------- ---------------- ---------------
INCOME (LOSS) BEFORE INTEREST AND OTHER INCOME: $3,230,551 $3,230,551
INTEREST INCOME 506,779 506,779
OTHER INCOME 115,150 115,150
NET INCOME $3,852,480 $3,852,480
================ =============== ================ ===============
NET INCOME PER UNIT (588,010 UNITS OUTSTANDING)
$6.22
================ =============== ================ ===============
NET INCOME PER SHARE (1,237,916 SHARES) OUTSTANDING) $3.11
================ =============== ================ ===============
</TABLE>
93
<PAGE>
SHELBOURNE PROPERTIES II, INC. PRO FORMA STATEMENT
OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
--------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,852,480 $3,852,480
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,092,145 2,092,145
Straight-line adjustment for stepped lease (433,619) (433,619)
rentals
Changes in asset and liabilities
Receivables 164,670 164,670
Accounts payable and accrued expenses (128,111) (128,111)
Due to affiliates (12,678) (12,678)
Other assets (306,092) (306,092)
--------------- -------------- --------------
-------------
Net cash provided by operating activities 5,228,795 5,228,795
--------------- ------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to real estate (637,623) (637,623)
--------------- ------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution to partners (2,135,401) ($579,894)(c) (2,715,295)
--------------- ------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 2,455,771 (579,894) 1,875,877
Cash and cash equivalents, beginning of period 1,000 10,220,165 10,221,165
-------------
=============== ============== ==============
Cash and cash equivalents, end of period $1,000 $12,675,936 ($579,894) $12,097,042
=============== ============= ============== ==============
</TABLE>
94
<PAGE>
SHELBOURNE PROPERTIES II, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
For the year ended
December 31, 1999
-----------------------
Average number of pro forma common and common 1,237,916
equivalent shares outstanding during the period ==========
Pro forma net income $3,852,480
==========
Pro forma basic and diluted income per share $3.11
====
95
<PAGE>
SHELBOURNE PROPERTIES II, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
(a) These adjustments eliminate the Partnership Equity.
(b) These adjustments capitalize Shelbourne.
(c) This adjustment reflects the distribution of 95% of taxable income in
order to qualify as a real estate investment trust.
(d) While the settlement fixed the asset management fee for 1999 at $973,293,
the fee in future years will be based on 1.25% of the gross assets of
Shelbourne. The fee for 1999 would have been $864,308 if it had been
calculated based on 1.25% of gross assets using the 1998 property
appraisals and $1,106,496 using the June 30, 2000 property appraisals.
(e) This adjustment reflects the asset management fee that would have been
paid for the six months ended June 30, 2000 if the fee was based on the
June 30, 2000 property appraisals.
96
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The description of Shelbourne's capital stock set forth below does not
purport to be complete and is qualified in its entirety by reference to
Shelbourne's certificate of incorporation and bylaws, copies of which are
exhibits to the Registration Statement of which this consent solicitation
statement is a part.
GENERAL
Shelbourne will have authority under its certificate of incorporation to
issue up to 4,500,000 shares of stock, consisting of 2,500,000 shares of common
stock, par value $0.01 per share, 1,500,000 shares of excess stock, par value
$0.01 per share, and 500,000 shares of preferred stock, par value $0.01 per
share. Under Delaware law, stockholders generally are not responsible for the
corporation's debts or obligations. Immediately following consummation of the
conversion, 1,237,916 shares of common stock will be issued and outstanding and
no shares of excess stock or preferred stock will be issued and outstanding.
With respect to the preferred stock, the certificate of incorporation
authorizes the Board of Directors to set or change the preferences, conversion
or other rights, voting powers, restrictions, limitations as to distributions,
qualifications or terms or conditions of redemption of such stock.
COMMON STOCK
All shares of common stock offered hereby have been duly authorized, and
will be fully paid and nonassessable. Subject to the preferential rights of any
other shares or series of shares and to the provisions of Shelbourne's
certificate of incorporation regarding excess stock, holders of common stock
are entitled to receive dividends on common stock if, as and when authorized
and declared by the Board of Directors of Shelbourne out of assets legally
available for such dividends. In addition, subject to the preferential rights
of any other shares or series of shares and to the provisions of Shelbourne's
certificate of incorporation regarding excess stock, holders of common stock
are entitled to share ratably in the assets of Shelbourne legally available for
distribution to its stockholders in the event of its liquidation, dissolution
or winding-up after payment of, or adequate provision for, all known debts and
liabilities of Shelbourne.
Subject to the provisions of Shelbourne's certificate of incorporation
regarding excess stock, each outstanding share of common stock entitles the
holder to one vote on all matters submitted to a vote of stockholders,
including the election of directors. In addition, except as otherwise required
by law or except as provided with respect to any other class or series of
shares, the holders of common stock possess exclusive voting power. There is no
cumulative voting in the election of directors, which means that the holders of
a majority of the outstanding shares of common stock can elect all of the
directors then standing for election, and the holders of the remaining shares
of common stock will not be able to elect any director.
Holders of common stock have no conversion, sinking fund or redemption
rights, or preemptive rights to subscribe for any securities of Shelbourne.
Shelbourne intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm and quarterly reports for
the first three quarters of each fiscal year containing unaudited financial
information.
97
<PAGE>
Subject to the provisions of Shelbourne's certificate of incorporation
regarding excess stock, all common stock has equal dividend, distribution,
liquidation and other rights, and has no preference or exchange rights and,
except as provided by Delaware law, no appraisal rights.
PREFERRED STOCK
The Board of Directors may from time to time establish and issue one or
more series of preferred stock without stockholder approval. The Board of
Directors may classify or reclassify any unissued preferred stock by setting or
changing the number, designation, preference, conversion or other rights,
voting powers, restrictions, limitations as to dividends, qualifications and
terms or conditions of redemption of such series. Because the Board of
Directors has the power to establish the preferences and rights of each series
of preferred stock, it may afford the holders of any series of preferred stock
preferences, powers and rights, voting or otherwise, senior to the rights of
holders of common stock. In addition, the Board of Directors could authorize
the issuance of preferred stock with terms and conditions that could have the
effect of discouraging a takeover or any other transaction that holders of
common stock might believe to be in their best interests or in which holders of
some, or a majority, of the common stock might receive a premium for their
shares over the then current market price of such shares. As of the date
hereof, no shares of preferred stock are outstanding, and Shelbourne has no
present plans to issue any preferred stock. Shelbourne has authorized the
issuance of a series of preferred stock in connection with Shelbourne's
shareholder rights plan. See "DESCRIPTION OF CAPITAL STOCK -- SHAREHOLDER
RIGHTS AGREEMENT" and "CERTAIN PROVISIONS OF DELAWARE LAW AND OF SHELBOURNE'S
CERTIFICATE AND BYLAWS."
LISTING, PRICE AND TRADING
There is currently no established trading market for common stock, and,
prior to the conversion, common stock will not be listed on any national
securities exchange or quoted on the National Association of Securities Dealers
quotation system. Therefore, no sale or bid price information is available with
respect to shares of common stock. Consummation of the conversion is
conditioned on the common stock being approved for listing on the American
Stock Exchange, subject to official notice of issuance. American Stock Transfer
& Trust Company will act as transfer agent and registrar of common stock. There
can be no assurance as to the price at which common stock will trade on the
American Stock Exchange.
Subject to the restrictions on ownership (discussed below), shares of
common stock that you receive in the conversion will be freely transferable.
RESTRICTIONS ON TRANSFERS
For Shelbourne to continue to qualify as a real estate investment trust
under the Internal Revenue Code, it must adhere to the following ownership
limits:
(a) not more than 50% in value of the outstanding equity securities of all
classes may be owned, directly or indirectly, by five or fewer individuals, as
defined in the Internal Revenue Code to include certain entities, during the
last half of a taxable year; and
(b) the equity securities must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year.
98
<PAGE>
A description of these complex requirements is included in the "Federal
Income Tax Considerations" section starting on page 100 of this consent
solicitation.
In order to protect Shelbourne against the risk of losing its status as a
real estate investment trust and to otherwise protect Shelbourne from the
consequences of a concentration of ownership among its stockholders, the
certificate of incorporation, subject to some exceptions, provides that no
single person, which includes any "group" of persons - other than the "related
parties," as defined below - may "beneficially own" more than 8% of the
aggregate number of outstanding shares of any class or series of capital stock.
Under the certificate of incorporation, a person generally "beneficially owns"
shares if:
(a) such person has direct ownership of such shares;
(b) such person has indirect ownership of such shares taking into account
the constructive ownership rules of the Internal Revenue Code; or
(c) such person would be permitted to "beneficially own" such shares
pursuant to Rule 13d- 3 under the Exchange Act.
A "related party", however, will not be deemed to beneficially own shares
by virtue of clause (c) above and a "group" of which a related party is a
member will generally not have attributed to the group's beneficial ownership
any shares beneficially owned by such related party. NorthStar Capital
Investment Corp. and its officers, directors and affiliates are "related
parties." Related parties will be limited in the number of shares which they
may beneficially own if, and to the extent that, the Board of Directors
determines that such ownership would jeopardize Shelbourne's status as a real
estate investment trust for Federal income tax purposes.
Any transfer of shares of capital stock or of any security convertible
into shares of capital stock that would create a direct or indirect ownership
of shares of capital stock in excess of the 8% ownership limit described above
or the related party ownership limit described above, as applicable, or that
would result:
(1) in the disqualification of Shelbourne as a real estate investment
trust, including any transfer that results in the shares of capital stock being
owned by fewer than 100 persons;
(2) in Shelbourne's being "closely held" within the meaning of Section
856(h) of the Internal Revenue Code;
(3) in Shelbourne's being a "pension-held real estate investment trust"
within the meaning of Section 856(h)(3)(D) of the Internal Revenue Code;
(4) in Shelbourne's failing to be a "domestically controlled real estate
investment trust" within the meaning of Section 897(h)(4)(B) of the Internal
Revenue Code; or
(5) in Shelbourne's ownership, taking into account the constructive
ownership rules of the Internal Revenue Code, or ownership by any actual or
constructive owner of 10% or more of the common stock, of 10% or more of the
vote or ownership interests in a tenant of any of Shelbourne's properties
taking into account the constructive ownership rules of Section 318 of the
Internal Revenue Code as modified by Section 856(d)(5) of the Internal Revenue
Code, shall be null and void, and the intended transferee will acquire no
rights to the shares of capital stock.
99
<PAGE>
The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best interests
of Shelbourne to attempt to qualify, or to continue to qualify, as a real
estate investment trust. The Board of Directors may, in its sole discretion,
waive the 8% ownership limit if evidence satisfactory to the Board of Directors
is presented that the changes in ownership will not jeopardize Shelbourne's
status as a real estate investment trust and the Board of Directors otherwise
decides that such action is in the best interest of Shelbourne.
Any purported transfer of Shelbourne's capital stock or any other event
that would otherwise result in any person violating the 8% ownership limit or
the related party ownership limit, as applicable, or the certificate of
incorporation will be void with respect to the purported transferee as to that
number of shares in excess of the applicable ownership limit. In such instance,
the prohibited transferee will acquire no right or interest in such excess
shares. In addition, in the case of any event other than a purported transfer,
the person or entity holding record title to any such shares in excess of the
applicable ownership limit - we will refer to such person or entity as the
"prohibited owner" - will cease to own any right or interest in such excess
shares. Any such excess shares described above will be converted automatically
into an equal number of shares of excess stock and transferred automatically,
by operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by Shelbourne. Such automatic transfer shall
be deemed to be effective as of the close of business on the Trading Day (as
defined in the certificate of incorporation) prior to the date of such
violative transfer. As soon as practical after the transfer of shares to the
trust, the trustee of the trust will be required to sell such shares of excess
stock to a person or entity who could own such shares without violating the
applicable ownership limit, and distribute to the prohibited transferee an
amount equal to the lesser of the price paid by the prohibited transferee for
such shares of excess stock or the sales proceeds received by the trust for
such shares of excess stock. The trustee of such trust will be designated by
Shelbourne and be unaffiliated with Shelbourne and any prohibited transferee or
prohibited owner. In the case of any shares of excess stock resulting from any
event other than a transfer, or from a transfer for no consideration such as a
gift, the trustee will be required to sell such shares of excess stock to a
qualified person or entity and distribute to the prohibited owner an amount
equal to the lesser of the fair market value of such shares of excess stock as
of the date of such event or the sales proceeds received by the trust for such
shares of excess stock. In either case, any proceeds in excess of the amount
distributable to the prohibited transferee or prohibited owner, as applicable,
will be distributed to the beneficiary of the trust. Prior to a sale of any
such shares of excess stock by the trust, the trustee will be entitled to
receive in trust for the beneficiary of the trust, all dividends and other
distributions paid by Shelbourne with respect to such shares of excess stock.
In addition, shares of stock of Shelbourne held in the trust shall be
deemed to have been offered for sale to Shelbourne, or its designee, at a price
per share equal to the lesser of:
(1) the price per share in the transaction that resulted in such transfer
to the trust or, in the case of a devise or gift, the market price at
the time of such devise or gift, and
(2) the market price on the date Shelbourne, or its designee, accepts
such offer. Shelbourne will have the right to accept such offer for a
period of 90 days.
Upon such a sale to Shelbourne, the interest of the beneficiary of the
trust in the shares sold will be required to terminate and the trustee shall
distribute the net proceeds of the sale to the prohibited owner.
These restrictions do not preclude settlement of transactions through the
American Stock Exchange.
100
<PAGE>
Each stockholder will upon demand be required to disclose to Shelbourne in
writing any information with respect to the direct, indirect and constructive
ownership of capital stock as the Board of Directors deems necessary to comply
with the provisions of the Internal Revenue Code applicable to real estate
investment trusts, to comply with the requirements of any taxing authority or
governmental agency or to determine any such compliance.
The 8% ownership limit may have the effect of precluding acquisition of
control of Shelbourne.
ADDITIONAL ISSUANCES
Pursuant to the certificate of incorporation, the Board of Directors may,
in its sole discretion, issue additional equity securities, provided that the
total number of shares issued does not exceed the authorized number of shares
of stock set forth in the certificate of incorporation. Shelbourne may from
time to time, in the future, seek to raise additional capital through equity
issuances. Any additional issuances of securities could have a dilutive effect
on the distribution and voting rights of stockholders.
SHAREHOLDER RIGHTS AGREEMENT
The Board of Directors of Shelbourne has adopted a shareholder rights
agreement . The adoption of the shareholder rights agreement could make it more
difficult for a third party to acquire, or could discourage a third party from
acquiring, Shelbourne or a large block of Shelbourne's common stock. Pursuant
to the terms of the shareholder rights agreement, each share of common stock
issued in the conversion will be accompanied by a preferred stock purchase
right. In addition, one purchase right will automatically attach to each share
of common stock issued between the date of the conversion and the "distribution
date" described below. Each purchase right entitles the registered holder to
purchase from Shelbourne a unit consisting of one one-thousandth of a share of
Series A Junior Participating Cumulative preferred stock, par value $.01 per
share at a cash exercise price of $156.76 per preferred stock unit, subject to
adjustment. Each share of common stock offered hereby will be entitled to a
purchase right when distributed.
Initially, the purchase rights are not exercisable and are attached to and
trade with the outstanding shares of common stock. The purchase rights will
separate from the common stock and will become exercisable on the "distribution
date" which means the earliest of the following two dates:
(1) the close of business on the tenth calendar day following the first
public announcement that a person or group of affiliated or associated persons
has become an "acquiring person" meaning such person or group has acquired
beneficial ownership of more than 15% of the sum of the outstanding shares of
common stock and excess stock, the date of said announcement being referred to
in this discussion as the "15% stock acquisition date"; or
(2) the close of business on the tenth business day, or such other
calendar day as the Board of Directors may determine, following the
commencement of a tender offer or exchange offer that would result upon its
consummation in a person or group becoming the beneficial owner of more than
15% of the outstanding shares of common stock and excess stock.
For these purposes, neither NorthStar Capital Investment Corp. nor any of
its officers, directors or affiliates will be deemed an acquiring person. In
addition, no "group" of which NorthStar Capital Investment Corp. or any of its
affiliates is a member will be deemed to beneficially own the shares of common
shares or excess stock beneficially owned by such party.
101
<PAGE>
Until the distribution date or earlier redemption, exchange or expiration
of the purchase rights:
(a) the purchase rights will be evidenced by the common stock certificates
and will be transferred with and only with such common stock certificates;
(b) new common stock certificates issued after the date of the conversion
will contain a notation incorporating the shareholder rights agreement by
reference; and
(c) the surrender for transfer of any certificates for common stock will
also constitute the transfer of the purchase rights associated with the common
stock represented by such certificate.
The purchase rights are not exercisable until the distribution date and
will expire in 2010, unless previously redeemed or exchanged by Shelbourne as
described below.
As soon as practicable after the distribution date, rights certificates
will be mailed to holders of record of common stock as of the close of business
on the distribution date and, thereafter, the separate rights certificates
alone will represent the purchase rights. Except as otherwise determined by the
Board of Directors, only shares of common stock issued prior to the
distribution date will be issued with purchase rights.
In the event that a 15% stock acquisition date occurs, proper provision
will be made so that each holder of a purchase right other than an acquiring
person or its associates or affiliates, whose purchase rights shall become null
and void, will thereafter have the right to receive upon exercise that number
of units of Series A preferred stock of Shelbourne having a market value of two
times the exercise price of the purchase right. For purposes of this
discussion, we will refer to this right as the "subscription right." In the
event that, at any time following the 15% stock acquisition date any one of the
following occurs, each holder of a purchase right shall thereafter have the
right to receive, upon exercise, common stock of the acquiring entity having a
market value equal to two times the exercise price of the purchase right. For
purposes of this discussion, we will refer to this right as the "merger right."
(a) Shelbourne consolidates with, or merges with and into, any other
person, and Shelbourne is not the continuing or surviving corporation;
(b) any person consolidates with Shelbourne, or merges with and into
Shelbourne and Shelbourne is the continuing or surviving corporation of such
merger and, in connection with such merger, all or part of the shares of common
stock are changed into or exchanged for stock or other securities of any other
person or cash or any other property; or
(c) 50% or more of Shelbourne's assets or earning power is sold, mortgaged
or otherwise transferred.
The holder of a purchase right will continue to have the merger right
whether or not such holder has exercised the subscription right. Purchase
rights that are or were beneficially owned by an acquiring person may under
some circumstances specified in the shareholder rights agreement become null
and void.
At any time after the 15% stock acquisition date the Board of Directors
may, at its option, exchange all or any part of the then outstanding and
exercisable purchase rights for shares of common stock or units of Series A
preferred stock at an exchange ratio of one share of common stock or one unit
of series A preferred stock per purchase right. Notwithstanding the foregoing,
the Board of Directors
102
<PAGE>
generally will not be empowered to effect such exchange at any time after any
person becomes the beneficial owner of 50% or more of the common stock of
Shelbourne.
The exercise price payable, and the number of units of series A preferred
stock or other securities or property issuable, upon exercise of the purchase
rights are subject to adjustment from time to time to prevent dilution (a) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the series A preferred stock, (b) if holders of the series
A preferred stock are granted certain rights or warrants to subscribe for
series A preferred stock or convertible securities at less than the current
market price of the series A preferred stock, or (c) upon the distribution to
holders of the series A preferred stock of evidences of indebtedness or assets
excluding regular quarterly cash dividends, or of subscription rights or
warrants other than those referred to above.
With some exceptions, no adjustment in the exercise price will be required
until cumulative adjustments amount to at least 1% of the exercise price,
determined on a per purchase right basis. Shelbourne is not obligated to issue
fractional units. If Shelbourne elects not to issue fractional units, in lieu
thereof an adjustment in cash will be made based on the fair market value of
the series A preferred stock on the last trading date prior to the date of
exercise. Any of the provisions of the shareholder rights agreement may be
amended by the Board of Directors at any time prior to the distribution date.
The purchase rights may be redeemed in whole, but not in part, at a price
of $0.01 per purchase right by the Board of Directors only until the earlier of
(1) the close of business on the tenth calendar day after the 15% stock
acquisition date, or (2) the expiration date of the shareholder rights
agreement. Such redemption amount shall be payable in cash, common stock or
other consideration deemed appropriate by the Board of Directors. Immediately
upon the action of the Board of Directors ordering redemption of the purchase
rights, the purchase rights will terminate and thereafter the only right of the
holders of purchase rights will be to receive the redemption price.
The shareholder rights agreement may be amended by the Board of Directors
in its sole discretion until the distribution date. After the distribution
date, the Board of Directors may, subject to some limitations set forth in the
shareholder rights agreement, amend the shareholder rights agreement only to
cure any ambiguity, defect or inconsistency, to shorten or lengthen any time
period, or to make changes that do not adversely affect the interests of
purchase rights holders, excluding the interests of an acquiring person or its
associates or affiliates.
Until a purchase right is exercised, the holder will have no rights as a
stockholder of Shelbourne, beyond those as an existing stockholder, including
the right to vote or to receive dividends. While the distribution of the
purchase rights will not be taxable to stockholders or to Shelbourne,
stockholders may, depending upon the circumstances, recognize taxable income in
the event that the purchase rights become exercisable for units, other
securities of Shelbourne, other consideration or for common stock of an
acquiring entity.
A copy of the shareholder rights agreement has been filed with the
Commission and is incorporated as an exhibit hereto by reference to the
Registration Statement to which this consent solicitation is a part. A copy of
the shareholder rights agreement is also available from Shelbourne upon written
request. The foregoing description of the purchase rights does not purport to
be complete and is qualified in its entirety by reference to the purchase
rights Agreement, which is incorporated herein by reference.
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MATERIAL PROVISIONS OF DELAWARE LAW AND
SHELBOURNE'S CERTIFICATE AND BYLAWS
The following summary of material provisions of Delaware law and
Shelbourne's certificate of incorporation and bylaws does not purport to be
complete and is subject to and qualified in its entirety by reference to
Delaware law and Shelbourne's certificate of incorporation and bylaws, copies
of which have been filed with the Commission and are incorporated as exhibits
hereto by reference to the Registration Statement of which this is a part.
There are provisions of Shelbourne's certificate of incorporation and
bylaws that could make more difficult the acquisition of Shelbourne by means of
a tender offer, a proxy contest or otherwise. These provisions are expected to
discourage some types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of Shelbourne to
negotiate first with the Board of Directors. Shelbourne believes that the
benefits of these provisions outweigh the potential disadvantages of
discouraging such proposals because, among other things, negotiation of such
proposals might result in an improvement of their terms. The description set
forth below is intended as a summary only and is qualified in its entirety by
reference to the certificate of incorporation and the bylaws, which have been
filed with the Commission and are incorporated as exhibits hereto by reference
to the Registration Statement to which this is a part. See "DESCRIPTION OF
CAPITAL STOCK -- RESTRICTIONs ON TRANSFERS."
AMENDMENT OF CERTIFICATE AND BYLAWS
Except as described in the following two sentences, Shelbourne's
certificate of incorporation may be amended only by the affirmative vote of the
holders of two-thirds of all of the votes entitled to be cast on the matter.
However, if a majority of the directors then in office approve such amendment,
the holders of only a majority of the all the votes entitled to be cast on the
matter are needed to approve the amendment. In addition, amendments dealing
with various articles of the certificate of incorporation such as articles
relating to stockholder action; the powers, election of, removal of and
classification of directors; limitation of liability; and amendment of the
By-laws or the certificate of incorporation, shall require the affirmative vote
of not less than two-thirds of the outstanding votes entitled to be cast on the
matter. Unless otherwise required by law, the Board of Directors may amend
Shelbourne's bylaws by the affirmative vote of a majority of the directors then
in office. The bylaws may also be amended by the stockholders, at an annual
meeting or at a special meeting called for such purpose, by the affirmative
vote of at least two-thirds of the votes entitled to be cast on the matter;
provided, that if the Board of Directors recommends that stockholders approve
such amendment at such meeting, such amendment shall require the affirmative
vote of only a majority of the shares present at such meeting and entitled to
vote.
DISSOLUTION OF SHELBOURNE
Delaware law permits the dissolution of Shelbourne by (1) the affirmative
vote of a majority of the entire Board of Directors declaring such dissolution
to be advisable and directing that the proposed dissolution be submitted for
consideration at an annual or special meeting of stockholders, and (2) upon
proper notice, stockholder approval by the affirmative vote of a majority of
the votes entitled to be cast on the matter.
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MEETINGS OF STOCKHOLDERS
Under Shelbourne's bylaws, annual meetings of stockholders shall be held
at such date and time as determined by the Board of Directors, the Chairman of
the Board or the President. The bylaws establish an advance notice procedure
for stockholders to make nominations of candidates for directors or bring other
business before an annual meeting of stockholders. Special meetings of
stockholders may be called only by a majority of the Directors then in office
and only matters set forth in the notice of the meeting may be considered and
acted upon at such a meeting.
THE BOARD OF DIRECTORS
Shelbourne's certificate of incorporation provides that the Board of
Directors shall initially consist of seven Directors and thereafter the number
of Directors of Shelbourne may be established by the Board of Directors but may
not be fewer than the minimum number required by the Delaware law nor more than
nine. Subject to the rights, if any, of the holders of any series of preferred
stock to elect Directors and to fill vacancies in the Board of Directors
relating thereto, any vacancy will be filled, including any vacancy created by
an increase in the number of Directors, at any regular meeting or at any
special meeting called for the purpose, by a majority of the remaining
Directors. Pursuant to the terms of the certificate of incorporation, the
Directors are divided into three classes. One class will hold office initially
for a term expiring at the annual meeting of stockholders to be held in 2001,
another class will hold office initially for a term expiring at the annual
meeting of stockholders to be held in 2002 and the third class will hold office
initially for a term expiring in 2003. As the term of each class expires,
Directors in that class will be elected for a term of three years and until
their successors are duly elected and qualified. The use of a classified board
may render more difficult a change in control of Shelbourne or removal of
incumbent management. Shelbourne believes, however, that classification of the
Board of Directors will help to assure the continuity and stability of its
business strategies and policies.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Shelbourne's certificate of incorporation generally limits the liability
of Shelbourne's Directors to Shelbourne to the fullest extent permitted from
time to time by Delaware law. The Delaware General Corporation Law permits, but
does not require, a corporation to indemnify its directors, officers, employees
or agents and expressly provides that the indemnification provided for under
the Delaware General Corporation Law shall not be deemed exclusive of any
indemnification right under any bylaw, vote of stockholders or disinterested
directors, or otherwise. The Delaware General Corporation Law permits
indemnification against expenses and some other liabilities arising out of
legal actions brought or threatened against such persons for their conduct on
behalf of a corporation, provided that each such person acted in good faith and
in a manner that he reasonably believed was in or not opposed to such
corporation's best interests and in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The Delaware
General Corporation Law does not allow indemnification of directors in the case
of an action by or in the right of a corporation, including stockholder
derivative suits, unless the directors successfully defend the action or
indemnification is ordered by the court.
The bylaws provide that Directors and officers of Shelbourne shall be,
and, in the discretion of the Board of Directors, non-officer employees may be,
indemnified by Shelbourne to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities, including legal fees, actually and reasonably incurred in
connection with service for or on behalf of Shelbourne. The bylaws also provide
that the right of directors and officers to indemnification shall be a contract
right and shall not be exclusive of any other right now possessed or hereafter
acquired
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under any bylaw, agreement, vote of stockholders, or otherwise. The certificate
of incorporation contains a provision permitted by Delaware law that generally
eliminates the personal liability of directors for monetary damages for
breaches of their fiduciary duty, including breaches involving negligence or
gross negligence in business combinations, unless the director has breached his
or her duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or a knowing violation of law, paid a dividend or approved a stock
repurchase in violation of the Delaware General Corporation Law or obtained an
improper personal benefit. The provision does not alter a director's liability
under the federal securities laws. In addition, this provision does not affect
the availability of equitable remedies, such as an injunction or rescission,
for breach of fiduciary duty. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers or
persons controlling Shelbourne pursuant to the foregoing provisions, Shelbourne
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
BUSINESS COMBINATIONS
Shelbourne is subject to the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 provides, with some exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless:
o the transaction resulting in a person becoming an interested
stockholder, or the business combination, was approved by the board of directors
of the corporation before the consummation of such transaction;
o the interested stockholder owned 85% or more of the outstanding
voting stock of the corporation, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain employee
stock ownership plans, immediately after the transaction in which it became an
interested stockholder; or
o on or after the date the person becomes an interested stockholder,
the business combination is approved by the corporation's board of directors and
by the holders of at least 66 2/3% of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholder.
Under Section 203, an "interested stockholder" is defined, with some
exceptions, as any person who, together with affiliates and associates, owns or
within the prior three years did own, 15% or more of the corporation's
outstanding voting stock.
INDEMNIFICATION AGREEMENTS
Shelbourne has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreements require, among
other things, that Shelbourne indemnify its directors and executive officers to
the fullest extent permitted by law and advance to the directors and executive
officers all related expenses, including legal fees, subject to reimbursement if
it is subsequently determined that indemnification is not permitted. Under these
agreements, Shelbourne must also indemnify and advance all expenses incurred by
directors and executive officers seeking to enforce their rights under the
indemnification agreements and may cover directors and executive officers under
Shelbourne's directors' and officers' liability insurance. Although the form of
indemnification
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agreement offers substantially the same scope of coverage afforded by law, it
provides greater assurance to directors and executive officers that
indemnification will be available, because, as a contract, it cannot be
modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the Federal income tax considerations
anticipated to be material to prospective stockholders of Shelbourne. The
discussion does not address the tax consequences that may be relevant to
particular stockholders in light of their specific circumstances or to
stockholders who are subject to special treatment under certain Federal income
tax laws, such as dealers in securities, traders in securities that elect to
mark-to-market, banks, insurance companies, tax-exempt organizations except to
the extent discussed under the heading "-- TAXATION OF TAX-EXEMPT
STOCKHOLDERS", or non-United States persons except to the extent discussed
under the heading "-- TAXATION OF NON-U.S. STOCKHOLDERS". This discussion does
not address any tax consequences arising under the laws of any state, local or
foreign jurisdiction.
The information in this discussion and the opinions of Rosenman & Colin
LLP referenced below are based on current provisions of the Internal Revenue
Code, existing, temporary and currently proposed Treasury Regulations
thereunder, the legislative history of the Code, existing administrative
interpretations and practices of the Internal Revenue Service, and judicial
decisions, all of which are subject to change either prospectively or
retroactively. Rosenman & Colin has rendered an opinion to the effect that the
discussion set forth under this heading, to the extent that it contains
descriptions of applicable Federal income tax law, is correct in all material
respects as of the date hereof. No assurance can be given that future
legislation, Treasury Regulations, administrative interpretations or judicial
decisions will not significantly change the current law or adversely affect
existing interpretations of current law, including the conclusions reached by
Rosenman & Colin. No rulings will be sought in connection with any aspect of
the Federal income tax consequences described below.
YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC FEDERAL, STATE, LOCAL AND (IF APPLICABLE) FOREIGN TAX CONSEQUENCES TO
YOU OF THE CONVERSION AND THE OWNERSHIP AND DISPOSITION OF SHARES OF COMMON
STOCK IN LIGHT OF YOUR SPECIFIC TAX AND INVESTMENT SITUATION.
THE CONVERSION
The proposed conversion has been structured in a manner intended to result
in no recognition of taxable income by you. Rosenman & Colin has rendered an
opinion to the effect that, under current Federal income tax law, (1) the
conversion will qualify as an exchange governed by Section 351 of the Code in
which your partnership will be treated as transferring all of its assets to
Shelbourne in exchange for common stock and the assumption by Shelbourne of
your partnership's liabilities, followed by your partnership's distribution of
the common stock to the unitholders in complete liquidation of your
partnership, and (2) accordingly, no gain or loss will be recognized for
Federal income tax purposes by your partnership, the unitholders or Shelbourne
as a result of the conversion. A legal opinion is not binding on the Service or
the courts. Although the Service has issued a private letter ruling confirming
these tax consequences in the case of a transaction substantially similar to
the proposed conversion, the letter ruling was not issued to your partnership
and analyzed a transaction that was not identical to the proposed conversion.
Accordingly, there can be no assurance that the Service will agree with the
conclusions reached by Rosenman & Colin in its opinion.
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Your aggregate adjusted tax basis in the common stock that you receive in
the conversion will be the same as your aggregate tax basis in your units
immediately before the conversion, reduced by your share of your partnership's
liabilities, if any, assumed by Shelbourne in the conversion. Your holding
period in the common stock generally will include your partnership's holding
period in its assets other than assets, if any, that are not capital assets or
property described in Section 1231 of the Code.
Shelbourne and its stockholders will be required to comply with certain
reporting requirements set forth in the Treasury Regulations, which will
require the reporting of certain information regarding the conversion.
Shelbourne will provide stockholders with the documentation that they will be
required to furnish with their tax returns for the year of the conversion.
TAXATION OF SHELBOURNE AS A REAL ESTATE INVESTMENT TRUST
GENERAL
The sections of the Code and the corresponding Treasury Regulations
relating to the taxation of real estate investment trusts and their
stockholders are highly technical and complex. The following discussion sets
forth the material aspects of the rules that govern the Federal income tax
treatment of a real estate investment trust and its stockholders.
Under Federal income tax law, if certain detailed conditions (discussed
below) imposed by the Code and the related Treasury Regulations are satisfied,
an entity that invests principally in real estate and that would otherwise be
subject to tax as a corporation may elect to be treated as a real estate
investment trust for U.S. Federal income tax purposes. These conditions relate,
in part, to the nature of the entity's assets and income.
Shelbourne intends to elect to be treated for tax purposes as, and to
operate so as to qualify as, a real estate investment trust under Sections 856
through 860 of the Code, commencing with its taxable year ending on December
31, 2000. No assurance can be given that Shelbourne will operate in a manner so
as to qualify, or remain qualified, as a real estate investment trust.
Rosenman & Colin has rendered an opinion to the effect that, commencing
with Shelbourne's tax year ending on December 31, 2000, Shelbourne will be
organized in conformity with the requirements for qualification as a real
estate investment trust, and Shelbourne's proposed method of operation will
enable it to meet the requirements for qualification and taxation as a real
estate investment trust, provided that (1) the conversion and the procedural
steps described below are completed in a timely fashion and (2) Shelbourne and
the operating partnership operate in accordance with the customary
representations and assumptions for transactions of this nature, including
representations with respect to organization, business, properties and
operations. The opinion is based upon certain facts, representations and
assumptions as of its date, including assumptions and factual representations
as to your partnership's organization, business, properties and operation prior
to the conversion, and is not binding on the Service or the courts.
Qualification and taxation as a real estate investment trust will depend upon
whether Shelbourne will be able to meet on an ongoing basis, through its actual
annual operating results, its asset base, distribution levels and diversity of
share ownership, various qualification tests, the results of which will not be
reviewed by Rosenman & Colin. No assurance can be given that the actual results
of Shelbourne's operations for any particular taxable year will satisfy such
requirements. See "-- FAILURE OF SHELBOURNE TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST."
If Shelbourne qualifies for taxation as a real estate investment trust, it
generally will not be subject to Federal corporate income taxes on its net
income that is currently distributed to stockholders.
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This treatment substantially eliminates the "double taxation" that generally
results from investment in a regular corporation. However, Shelbourne will be
subject to Federal income tax in the following circumstances:
(1) Shelbourne will be subject to tax at regular corporate rates on any
undistributed real estate investment trust taxable income, including
undistributed net capital gains;
(2) Under certain circumstances, Shelbourne may be subject to the
"alternative minimum tax" on its items of tax preference, if any;
(3) If Shelbourne has (a) 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 (b) other nonqualifying income from foreclosure
property, Shelbourne will be subject to tax at the highest corporate rate on
such income;
(4) If Shelbourne has net income from the sale or other disposition of
property, other than foreclosure property, held primarily for sale to customers
in the ordinary course of business (a "prohibited transaction"), such income
will be subject to a 100% tax;
(5) For taxable years after 2000, if Shelbourne receives non-arm's length
income directly from or as a result of any services provided by a "taxable REIT
subsidiary", as defined below, such income will be subject to a 100% tax;
(6) If Shelbourne fails to satisfy the 75% gross income test or the 95%
gross income test as discussed below but nonetheless has maintained its
qualification as a real estate investment trust because other requirements have
been met, Shelbourne will be subject to a 100% tax on an amount equal to (1)
the gross income attributable to the greater of the amount by which Shelbourne
fails the 75% or 95% test multiplied by (2) a fraction intended to reflect
Shelbourne's profitability;
(7) If Shelbourne fails to distribute during each calendar year at least
the sum of (1) 85% of its ordinary income for such year, (2) 95% of its capital
gains for such year, less any capital gains that it elects to retain and pay
tax on, and (3) any undistributed taxable income from prior periods, less any
capital gains that it elected to retain and pay tax on, Shelbourne will be
subject to a 4% excise tax on the excess of such required distribution over the
sum of the amounts actually distributed plus the amounts on which Shelbourne
was taxed for such calendar year;
(8) If Shelbourne acquires any asset from a corporation that is subject to
full corporate-level taxation in a transaction in which the basis of the asset
in the hands of Shelbourne is determined by reference to the basis of the asset
in the hands of such corporation, and Shelbourne recognizes gain on the
disposition of such asset during the ten-year period beginning on the date on
which such asset was acquired by Shelbourne, then, to the extent of the excess
of (a) the fair market value of such asset over (b) Shelbourne's adjusted basis
in the asset, determined when Shelbourne acquired the asset, such gain will be
subject to tax at the highest regular corporate income tax rate then
applicable.
REQUIREMENTS FOR QUALIFICATION
To qualify as a real estate investment trust, Shelbourne must elect to be
treated as such on its Federal income tax return for its taxable year ending
December 31, 2000, and must meet the requirements discussed below relating to
Shelbourne's organization, sources of income, nature of assets, and
distributions of income.
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ORGANIZATIONAL REQUIREMENTS
The outstanding stock of Shelbourne must be held by at least 100 persons
and not more than 50% of the value of such stock may be owned, directly or
indirectly, by five or fewer individuals (as specially defined) at any time
during the last half of the taxable year. For these purposes, some entities are
treated as individuals. These stock ownership requirements must be satisfied in
Shelbourne's second taxable year and in each subsequent taxable year. Following
the conversion, Shelbourne expects to have outstanding stock with sufficient
diversity of ownership to enable it to satisfy these requirements. In addition,
the certificate of incorporation provides for certain restrictions regarding
the transfer of Shelbourne's capital stock in order to assist Shelbourne in
meeting the stock ownership requirements, although these restrictions cannot
insure that Shelbourne will always satisfy these stock ownership requirements.
See "DESCRIPTION OF CAPITAL STOCK -- RESTRICTIONS ON TRANSFER."
To monitor Shelbourne's compliance with the stock ownership requirements,
Shelbourne will be required to maintain records regarding the actual ownership
of its stock. To do so, Shelbourne must send a letter to its stockholders
requesting that they disclose to Shelbourne the identity of the actual owners
of the stock, i.e., the persons required to include Shelbourne's dividends in
their income. A list of those persons failing or refusing to comply with this
demand must be maintained as part of Shelbourne's records. A stockholder who
fails or refuses to comply with the demand must submit a statement with its
Federal income tax return disclosing the actual ownership of the stock and
certain other information.
INCOME TESTS
In order to maintain its qualification as a real estate investment trust,
Shelbourne must satisfy two gross income requirements each year:
(1) At least 75% of Shelbourne's gross income, other than gross income
from "prohibited transactions," for each taxable year must be derived, directly
or indirectly, from investments relating to real property or mortgages on real
property or from certain types of temporary investments. Income derived from
investments in real property includes "rents from real property" as defined in
the Code and gain from the sale or disposition of real property other than
property held primarily for sale to customers in the ordinary course of
business, as well as dividends and gains from shares in other real estate
investment trusts; and
(2) At least 95% of Shelbourne's gross income, other than gross income
from "prohibited transactions," for each taxable year must be derived from such
real property investments, dividends, interest, gain from the sale or
disposition of stock or securities or any combination of the foregoing.
Shelbourne will own, directly and indirectly, partnership interests in the
operating partnership. In the case of a real estate investment trust that is a
partner in a partnership, Treasury Regulations provide that the real estate
investment trust will be deemed to own its proportionate share of the assets of
such partnership and will be deemed to be entitled to the income of such
partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of Shelbourne for purposes of satisfying the gross income tests described
above and the asset tests described below. Shelbourne Properties II GP, LLC,
the operating partnership's general partner, will be a limited liability
company wholly-owned by Shelbourne. For Federal income tax purposes, such
entity's assets, liabilities and items of income, deduction and credit will be
treated as assets, liabilities and items of Shelbourne.
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Shelbourne currently anticipates that its gross income will consist
primarily of rents paid under leases of properties owned by the operating
partnership. Such rents will qualify as "rents from real property" in
satisfying the 75% and 95% gross income tests described above provided that
several conditions are met:
(1) The amount of rent generally must not be based in whole or in part on
the income or profits of any person. However, rents will not be excluded from
the term "rents from real property" solely by reason of being based on fixed
percentages of receipts or sales. Also, rents received from a tenant based on
the tenant's income from the property may qualify as "rents from real property"
if the tenant derives substantially all of its income with respect to such
property from the leasing or subleasing of such property, provided that the
tenant receives from subtenants only amounts that would be treated as rents
from real property if received directly by a real estate investment trust;
(2) The rent must not be received from a tenant as to which Shelbourne, or
any actual or constructive owner of 10% or more of Shelbourne, directly or
indirectly owns 10% or more in voting power or number of shares of such tenant
which we refer to as a Related Party Tenant. Recently enacted legislation,
which applies to rents received or accrued beginning after December 31, 2000,
provides an exception to this rule for rents received under some circumstances
from a taxable REIT subsidiary, which is any corporation having a real estate
investment trust as a shareholder that makes and maintains a valid election to
be treated as a taxable REIT subsidiary under the Code;
(3) Any rent attributable to personal property leased in connection with a
lease of real property must not exceed 15% of the total rent received for the
year under the lease;
(4) Shelbourne generally must not operate or manage the property or
furnish or render services to the tenants of such property other than through
an independent contractor who is adequately compensated and from whom
Shelbourne derives no income. Beginning after 2000, services also may be
provided to tenants through a taxable REIT subsidiary subject to applicable
limitations. A real estate investment trust also may provide basic services to
tenants without having to engage independent contractors if the services in
question are of a limited type that a tax-exempt organization can provide to
its tenants without causing its rental income to be treated as taxable under
the Code, i.e., services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and that are not
considered rendered for the convenience of the occupant of the property.
However, receipts for services, whether or not rendered by an independent
contractor or, for taxable years after 2000, a taxable REIT subsidiary, that
are not customarily provided to tenants in properties of a similar class and in
the same geographic market as the relevant property is located will not qualify
as "rents from real property."
Shelbourne anticipates that all or substantially all of the operating
partnership's rental income will qualify as "rents from real property" for
purposes of the 75% and the 95% gross income tests. The operating partnership
does not intend to charge rent for any property that is based in whole or in
part on the income or profits of any person except by reason of being based on
a fixed percentage of receipts or sales, as described above, and does not
intend to derive rents from any persons who, immediately after the conversion,
would be Related Party Tenants as to Shelbourne. The operating partnership does
not intend to derive rent from personal property leased in connection with real
property that exceeds 15% of the total rents under the lease. The operating
partnership intends to provide only services of a type that are customarily
provided to tenants in properties of a similar class in the geographic market
in which the property is located, and all such services will be provided
through independent contractors, except that the operating partnership or the
advisor may provide basic maintenance services of a type that could be provided
by a tax-exempt landlord to its tenants and, after 2000, may also engage
taxable REIT subsidiaries to provide permitted services to tenants.
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Net income realized by Shelbourne from the sale or other disposition of
property will be treated as income from a "prohibited transaction" and, as
such, will not count towards satisfying the 95% and 75% income tests and will
be subject to a 100% penalty tax, if the property was held by the operating
partnership primarily for re-sale. Under existing law, whether property is held
primarily for re-sale is a question of fact that depends on all the facts and
circumstances with respect to the particular transaction. Accordingly, although
Shelbourne currently anticipates that the operating partnership's properties
will be held with a view to long-term appreciation and that the operating
partnership will make only such occasional sales of properties as are
consistent with its investment objectives, there can be no assurance that all
of Shelbourne's income from real property sales will be treated as qualifying
income which is not subject to the 100% penalty tax.
The operating partnership may acquire ownership interests in other
partnerships or entities treated as partnerships for income tax purposes. Prior
to acquiring such interests, the operating partnership will examine the income
and assets of such entity, and currently does not intend to acquire partnership
interests in an entity if Shelbourne's indirect share of the income or assets
of the entity after the acquisition would cause Shelbourne to exceed applicable
limits on non-qualifying income or assets.
It is possible that the operating partnership might have some gross income
that is not qualifying income for purposes of one or both of the 75% or 95%
gross income tests. However, Shelbourne currently believes that its aggregate
gross income from the operating partnership will satisfy the foregoing 75% and
95% gross income tests for each taxable year commencing with Shelbourne's first
taxable year.
If Shelbourne fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it nevertheless may qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will generally be available if:
(1) Shelbourne's failure to meet such tests was due to reasonable cause
and not due to willful neglect;
(2) Shelbourne attaches a schedule of the sources of its income to its
Federal income tax return; and
(3) Any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether Shelbourne
would be entitled to the benefit of these relief provisions in all
circumstances. Also, as discussed above under "TAXATION OF SHELBOURNE AS A REAL
ESTATE INVESTMENT TRUST -- GENERAL," even if these relief provisions apply, a
tax would be imposed with respect to the excess gross income.
ASSET TESTS
Shelbourne, at the close of each quarter of its taxable year, also must
satisfy the following three tests relating to the nature of its assets:
(1) At least 75% of the value of Shelbourne's total assets must be
represented by real estate assets, which for these purposes will include (a)
its allocable share of real estate assets held by partnerships in which
Shelbourne owns an interest including its allocable share of the real estate
assets held by the operating partnership, (b) shares in other real estate
investment trusts, and (c) stock or debt instruments held for not more than one
year purchased with the proceeds of a stock offering or long-term (at least
five years) debt offering of Shelbourne, cash, cash items and government
securities;
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(2) Not more than 25% of Shelbourne's total assets may be represented by
securities other than those in the 75% asset class; and
(3) Of the investments included in the 25% asset class, the value of any
one issuer's securities owned by Shelbourne directly or through the operating
partnership may not exceed 5% of the value of Shelbourne's total assets and
Shelbourne may not own more than 10% of the outstanding voting securities of
any one issuer other than another real estate investment trust or a qualified
REIT subsidiary or a partnership or other flow-through entity, and, after 2000,
may not own more than 10% of the voting power or value of the outstanding
equity or convertible debt securities of any one issuer other than another real
estate investment trust or a qualified REIT subsidiary or a partnership or
other flow-through entity. However, after 2000, Shelbourne also will be
permitted to own more than 10% of the securities of taxable REIT subsidiaries
provided that the total value of these securities does not exceed 20% of the
total value of all of Shelbourne's assets.
Shelbourne anticipates that, as of the closing of the conversion,
substantially more than 75% of the fair market value of the assets indirectly
owned by Shelbourne through the operating partnership will consist of
non-residential rental real estate owned in fee. Shelbourne also expects that,
at all times, substantially more than 75% of the assets indirectly owned by
Shelbourne through the operating partnership will consist of fee ownership of
real property. The operating partnership currently intends to structure its
acquisition of any direct or indirect ownership interests in any entity taxable
as a corporation for Federal income tax purposes in a manner that Shelbourne
determines will be consistent with Shelbourne's satisfying the asset tests both
at the time of the acquisition and for the quarter in which the acquisition
occurs. Accordingly, Shelbourne believes that it will be able to meet the asset
tests described above at the time of the conversion and on a going forward
basis.
If Shelbourne should fail to satisfy the asset tests at the end of a
quarter, such failure would not cause it to lose its real estate investment
trust status if:
(1) it satisfied all of the asset tests at the close of the preceding
quarter; and
(2) the failure arose solely from changes in the market values of
Shelbourne's assets.
If the condition described in clause (2) of the preceding sentence were not
satisfied, Shelbourne could still avoid disqualification by curing the failure
within 30 days after the close of the quarter in which it arose.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a real estate investment trust, Shelbourne will
be required to make ordinary income distributions to its stockholders in an
amount at least equal to (1) the sum of (a) 95% - 90% for taxable years after
2000 - of Shelbourne's "real estate investment trust taxable income," defined as
taxable income computed without regard to the dividends paid deduction and
excluding net capital gain, and (b) 95% of its after-tax net income, if any,
from foreclosure property, minus (2) the sum of certain items of noncash income.
Such distributions must be paid in the taxable year to which they relate, or in
the following taxable year if declared before Shelbourne timely files its tax
return for such year and paid on or before the first regular dividend payment
date after such declaration. Shelbourne intends to make timely distributions
sufficient to satisfy this requirement.
To the extent that Shelbourne does not distribute all of its net
capital gain or distributes at least 95% (90% after 2000), but less than 100%,
of its "real estate investment trust taxable income," as
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adjusted, it will be subject to tax thereon at regular corporate tax rates. In
addition, if Shelbourne fails to distribute during each calendar year at least
the sum of:
(1) 85% of its ordinary income for such year;
(2) 95% of its capital gain net income for such year less any capital
gains that Shelbourne elects to retain and pay tax on; and
(3) any undistributed taxable income from prior periods, less any capital
gains from such periods that Shelbourne elected to retain and pay tax on,
Shelbourne will be subject to a 4% excise tax on the excess of the required
distribution over the sum of the amounts actually distributed plus any amounts
on which Shelbourne was taxed for such calendar year.
It is possible that Shelbourne may report taxable income in excess of cash
flow due to timing or other differences between the operating partnership's
inclusion of income and its actual receipt of the related cash, or due to the
operating partnership's payment of non-deductible items, such as principal
amortization or capital expenditures, in excess of non-cash deductions, such as
deductions for depreciation and accrued but unpaid interest. In that event, if
Shelbourne does not have sufficient cash or liquid assets to satisfy the
distribution requirements above, Shelbourne or the operating partnership may
find it necessary to arrange for short-term, or possibly long-term, borrowings,
issue equity or sell assets.
Under certain circumstances, Shelbourne may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year that may be included in Shelbourne's
deduction for dividends paid for the earlier year. Thus, Shelbourne may be able
to avoid being taxed on amounts distributed as deficiency dividends. However,
Shelbourne will be required to pay interest based upon the amount of any
deduction taken for deficiency dividends.
FAILURE OF SHELBOURNE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
If Shelbourne fails to qualify for taxation as a real estate investment
trust in any taxable year, and if certain relief provisions do not apply,
Shelbourne will be subject to tax, including any applicable alternative minimum
tax, on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which Shelbourne fails to qualify as a real estate
investment trust will not be deductible by Shelbourne in computing its taxable
income. As a result, the cash available for distribution by Shelbourne to its
stockholders would be significantly reduced. In addition, if Shelbourne fails
to qualify as a real estate investment trust, all distributions to stockholders
will be subject to tax as ordinary income, to the extent of Shelbourne's
current and accumulated earnings and profits. In that event, subject to
applicable limitations, distributions paid to a corporate distributee may
qualify for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, Shelbourne also would be disqualified from being
treated as a real estate investment trust for the four taxable years following
the year during which such qualification was lost. It is not possible to state
whether in all circumstances Shelbourne would be entitled to such statutory
relief.
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TAXATION OF TAXABLE U.S. STOCKHOLDERS
DISTRIBUTIONS BY SHELBOURNE
Distributions not designated as capital gain dividends that are made to
taxable U.S. stockholders will be subject to tax as ordinary income to the
extent of Shelbourne's current and accumulated earnings and profits as
determined for Federal income tax purposes, and will not qualify for the
dividends received deduction in the case of taxable stockholders which are
corporations. Dividends will be taxable to stockholders even if the stockholder
uses the funds to purchase additional shares of common stock. If the amounts
distributed exceed Shelbourne's earnings and profits, the excess will be
treated as a tax-free return of capital to a taxable stockholder that will
reduce the amount of his adjusted tax basis in his common stock, and, once the
taxable stockholder's adjusted tax basis in his common stock has been reduced
to zero, as capital gain assuming that the common stock is held as a capital
asset.
Dividends declared by Shelbourne in October, November, or December of
any year and payable to a stockholder of record on a specified date in any such
month are treated as both paid by Shelbourne and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by
Shelbourne on or before January 31 of the following calendar year.
Distributions made by Shelbourne to taxable stockholders that are
properly designated by Shelbourne as long-term capital gain dividends will be
subject to tax as long-term capital gains without regard to the period for which
a stockholder has held his common stock. However, corporate stockholders may be
required to treat up to 20% of such capital gain dividends as ordinary income,
and, for non-corporate stockholders, a 25% Federal income tax rate, rather than
a 20% tax rate, may apply to all or a portion of such capital gain dividends.
Shelbourne may elect to retain its net long-term capital gains rather
than distribute them. In that event, a stockholder would be deemed to receive a
capital gain dividend equal to its share of such retained capital gains, if any,
and would receive a tax credit or refund for his share of the tax paid by
Shelbourne on such undistributed capital gains. The stockholder's tax basis in
his common stock would be increased by his share of the undistributed capital
gains less his share of the tax paid by Shelbourne.
Shelbourne will notify each stockholder after the close of Shelbourne's
taxable year as to the portions of the distributions attributable to that year
which constitute ordinary income, capital gain or a return of capital, and, as
to capital gain distributions, if any, the portion that is taxable for
non-corporate stockholders as a 25% gain distribution and the portion that is
taxable as a 20% gain distribution.
PASSIVE ACTIVITY LOSSES AND THE INVESTMENT INTEREST LIMITATION
Distributions made by Shelbourne and gain, if any, from the sale or
exchange of a stockholder's common stock will not be treated as passive activity
income. As a result, taxable stockholders generally will not be able to apply
any "passive activity losses," including any unused passive activity losses from
your partnership, against such income or gain, except that unused passive
activity losses from your partnership generally will be deductible, subject to
any other applicable limitations, in the year a stockholder sells all his common
stock. Dividends from Shelbourne that do not constitute a capital gain dividend
or a return of capital generally will be treated as investment income for
purposes of the investment interest limitation. However, unless a taxable
stockholder elects to pay tax on such gain at ordinary income rates, net capital
gain from the sale or other disposition of shares of common stock and capital
gain dividends from Shelbourne will not be considered investment income for
purposes of the investment interest limitation. See also "COMPARISON OF YOUR
PARTNERSHIP AND SHELBOURNE -- TAXATION OF TAXABLE LIMITED PARTNERS".
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SALE OF COMMON STOCK
Upon any sale or other disposition of common stock, a taxable
stockholder will recognize gain or loss for Federal income tax purposes in an
amount equal to the difference between (1) the amount of cash and the fair
market value of any property received on such sale or other disposition and (2)
such taxable stockholder's adjusted basis in such common stock for tax purposes.
Such gain or loss will be capital gain or loss if such taxable stockholder held
such common stock as a capital asset and, if the taxable stockholder is an
individual, estate or trust, such gain will be taxable at a maximum marginal
Federal income tax rate of 20% if such common stock has been held for more than
one year. In general, any loss recognized by a taxable stockholder upon the sale
or other disposition of common stock that has been held for six months or less
under applicable holding period rules will be treated as a long-term capital
loss to the extent of any distributions received by the taxable stockholder from
Shelbourne that were treated as long-term capital gains.
BACKUP WITHHOLDING
Shelbourne will report to its taxable stockholders and the Service the
amount of dividends paid during each calendar year and the amount of tax
withheld, if any. A taxable stockholder may be subject to backup withholding at
a rate of 31% with respect to dividends unless such taxable stockholder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements. A taxable stockholder that does not
provide Shelbourne with his correct taxpayer identification number also may be
subject to penalties imposed by the Service. Any amount paid as backup
withholding will be creditable against the taxable stockholder's Federal income
tax liability. Additional withholding issues may arise for non-U.S.
stockholders. See "-- TAXATION OF NON-U.S. STOCKHOLDERS - BACKUP WITHHOLDING TAX
AND INFORMATIOn REPORTING."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the Service, distributions by
Shelbourne to a tax-exempt stockholder will not constitute unrelated business
taxable income, provided that the tax-exempt stockholder does not hold its
common stock as "debt-financed property" within the meaning of the Code and such
common stock is not otherwise used in an unrelated trade or business of the
tax-exempt stockholder. Subject to the same proviso, income from the sale of
common stock will not constitute unrelated business taxable income to a
tax-exempt stockholder. However, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group legal
services plans that are exempt from taxation under Sections 501(c)(7), (9), (17)
and (20), respectively, of the Internal Revenue Code are subject to different
rules that generally will require them to treat their income from Shelbourne as
unrelated business taxable income unless they satisfy applicable set aside and
reserve requirements as to which they should consult their own tax advisors. In
addition, a portion of the dividends paid by Shelbourne may be treated as
unrelated business taxable income to certain U.S. private pension trusts if
Shelbourne is treated as a "pension-held real estate investment trust." Based on
stock ownership restrictions imposed by Shelbourne (see "THE CONVERSION --
CONDITIONS TO THE CONVERSION" and "DESCRIPTION OF CAPITAL STOCK -- RESTRICTIONS
ON OWNERSHIP AND TRANSFER"), Shelbourne does not anticipate that it will be a
"pension-held real estate investment trust." In any event, if Shelbourne were to
become a pension-held real estate investment trust, these rules generally would
apply only to certain U.S. pension trusts that hold more than 10% of
Shelbourne's stock.
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TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing the U.S. Federal income taxation of the ownership
and disposition of common stock by persons that are nonresident alien
individuals, foreign corporations, foreign partnerships or foreign estates or
trusts, collectively, "Non-U.S. Holders", are complex, and we have only provided
a brief summary of those rules. Prospective Non-U.S. Holders should consult
their tax advisors to determine the impact of Federal, state, local and foreign
tax laws with regard to an investment in common stock in light of their
individual investment circumstances.
DISTRIBUTIONS BY SHELBOURNE
Distributions received by Non-U.S. Holders that are not attributable to
gain on sales or exchanges by Shelbourne of U.S. real property interests and are
not designated as capital gain dividends generally will be subject to U.S.
withholding tax at the rate of 30% unless reduced by treaty. In cases where the
dividend income from a Non-U.S. Holder's investment in common stock is
effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or
business, the Non-U.S. Holder will generally be subject to U.S. tax at graduated
rates in the same manner as U.S. stockholders, and may also be subject to the
30% branch profits tax in the case of a Non-U.S. Holder that is a foreign
corporation. Distributions in excess of current or accumulated earnings and
profits of Shelbourne to Non-U.S. Holders will not be subject to tax to the
extent that they do not exceed the Non-U.S. Holder's adjusted basis its common
stock, but rather will reduce the adjusted basis of such common stock. To the
extent that such distributions exceed the adjusted basis of a Non-U.S. Holder's
common stock, they will give rise to gain from the sale or exchange of its
common stock, the tax treatment of which is described below.
Shelbourne expects to withhold U.S. income tax at the rate of 30% on
any distribution made to a Non-U.S. Holder unless (a) a lower treaty rate
applies and the required form or certification evidencing eligibility for that
lower rate is filed with Shelbourne or (b) a Non-U.S. Holder files a Federal
Form 4224 with Shelbourne claiming that the distribution is effectively
connected income.
Distributions to a Non-U.S. Holder that are attributable to gain from
sales or exchanges by Shelbourne of United States real property interests will
be taxed under the Foreign Investment in Real Property Tax Act of 1980, as
amended, or FIRPTA. Under FIRPTA, Non-U.S. Holders generally would be subject to
tax on such distributions at the same rates applicable to U.S. stockholders,
subject to a special alternative minimum tax in the case of nonresident alien
individuals. If it is a corporation, a Non-U.S. Holder also may be subject to a
30% branch profits tax. Shelbourne will be required to withhold 35% of any
capital gain distribution. That amount will be creditable against the Non-U.S.
Holder's Federal income tax liability.
SALE OF COMMON STOCK
Gain recognized by a Non-U.S. Holder upon the sale or exchange of
common stock generally will not be subject to United States taxation so long as
Shelbourne is a "domestically-controlled real estate investment trust," i.e., a
real estate investment trust in which, at all times during a specified testing
period, less than 50% in value of its stock is held directly and indirectly by
Non-U.S. Holders. Shelbourne currently anticipates that it will be a
"domestically-controlled real estate investment trust," but, because common
stock will be publicly traded, cannot assure this result. If Shelbourne ceases
to be a "domestically-controlled real estate investment trust," gain arising
from the disposition of common stock will not be subject to tax if the Non-U.S.
Holder owned 5% or less of Shelbourne's outstanding stock throughout the
five-year period ending on the date of disposition. Otherwise, the Non-U.S.
Holder
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would be subject to regular U.S. income tax with respect to such gain in
the same manner as a taxable U.S. stockholder, subject to any applicable
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the 30% branch
profits tax in the case of a foreign corporation, and the purchaser of common
stock would be required to withhold and remit to the Service, an amount equal to
10% of the purchase price.
Notwithstanding the foregoing, a Non-U.S. Holder will be subject to tax
on gain from the sale or exchange of common stock not otherwise subject to
FIRPTA if the Non-U.S. Holder is a nonresident alien individual who is present
in the United States for 183 days or more during the taxable year. In such case,
the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Shelbourne must report annually to the Service and to each Non-U.S.
Holder the amount of dividends paid to, and the tax withheld with respect to,
such stockholder, regardless of whether any tax was actually withheld. That
information may also be made available to the tax authorities of the country in
which a Non-U.S. Holder resides.
Backup withholding tax otherwise imposed at the rate of 31% generally
will not apply to dividends paid on common stock to a Non-U.S. Holder at an
address outside the United States.
The payment of the proceeds from the disposition of common stock to or
through a U.S. office of a broker will be subject to information reporting and
backup withholding unless the owner, under penalties of perjury, certifies,
among other things, its status as a Non-U.S. Holder, or otherwise establishes an
exemption. The payment of the proceeds from the disposition of common stock to
or though a non-U.S. office of a non-U.S. broker generally will not be subject
to backup withholding and information reporting.
The backup withholding tax is not an additional tax and may be credited
against a Non-U.S. Holder's Federal income tax liability or refunded to the
extent excess amounts are withheld, provided that the Non-U.S. Holder files an
appropriate claim for refund with the Service.
The Service has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. These final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 2000. You should consult your
tax advisor regarding the application of the final Treasury Regulations and
their potential effect on your ownership of common stock.
TAX STATUS OF THE OPERATING PARTNERSHIP
Substantially all of Shelbourne's investments will be held through the
operating partnership. Your partnership and Shelbourne each believe that
following the conversion, the operating partnership will be classified as either
(1) a disregarded entity if 100% of its membership interests are held by
Shelbourne directly or indirectly through one or more wholly-owned flow-through
entities, i.e., a limited liability company or a qualified real estate
investment trust subsidiary, or (2) a partnership if, in addition to Shelbourne,
at least one other person who or which is not a disregarded entity of
Shelbourne, owns an interest in the operating partnership. In this regard,
neither the operating partnership nor the limited liability company through
which Shelbourne owns an interest in the operating partnership will elect to be
classified as an association taxable as a corporation. Accordingly, Shelbourne
will include in its
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income its allocable share of operating partnership income for purposes of the
various real estate investment trust income tests and in the computation of its
real estate investment trust taxable income. Moreover, for purposes of the real
estate investment trust asset tests, Shelbourne will include its proportionate
share of assets held through the operating partnership.
The operating partnership may acquire properties in the future by
accepting contributions of property in exchange for which the property
contributor will receive limited partnership interests in the operating
partnership that are redeemable for cash or, at Shelbourne's option, stock in
Shelbourne. The operating partnership's tax basis in any properties so
contributed generally will be the same as the tax basis of the properties in the
hands of the contributor, which tax basis will likely be less than the fair
market value of the contributed properties. This will cause Shelbourne to be
allocated lower amounts of depreciation deductions for tax purposes with respect
to such properties than would be allocated to Shelbourne if all properties were
to have a tax basis equal to their fair market value. This may result in a
higher portion of Shelbourne's distributions being taxed as dividends than would
have occurred if such properties had a tax basis equal to their fair market
value, as would be the case if they were purchased for cash.
OTHER TAXES
Shelbourne, its subsidiaries or the operating partnership may be
subject to state or local tax in various states or localities in which the
operating partnership owns property. The state or local tax treatment of
Shelbourne and the stockholders in such jurisdictions may differ from the
Federal income tax treatment described above. Consequently, prospective
stockholders should consult their tax advisors regarding the effect of state and
local tax laws upon an investment in common stock in light of their individual
investment circumstances.
TRANSFER TAXES
Transfer taxes may be imposed in certain state and local jurisdictions
in connection with the conversion.
POSSIBLE TAX LAW CHANGES
Shelbourne cannot predict whether one or more provisions affecting real
estate investment trusts or Shelbourne will be enacted, what form any final
legislative language will take if so enacted, or the effective date of any such
legislation. Other changes in the tax law could affect the tax consequences to
you of owning common stock.
IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE
The discussion under this heading is intended only as a summary of
Federal income tax consequences of the conversion and owning and disposing of
common stock, and is not a substitute for careful tax planning with a tax
professional. Such tax consequences may vary depending on your individual
circumstances. Accordingly, you are urged to consult with your tax advisor about
the Federal, state, local and foreign tax consequences of the conversion and
owning and disposing of common stock.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission, which we
refer to as the SEC, a Registration Statement on Form S-4 under the Securities
Act of 1933, as amended. This consent
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solicitation statement constitutes the prospectus filed as part of the
Registration Statement. This consent solicitation statement does not contain
all of the information included in the Registration Statement. Any statement
that we make in this prospectus concerning the contents of any contract,
agreement or document is not necessarily complete. If we have filed any such
contract, agreement or document as an exhibit to the Registration Statement you
should read the exhibit for a more complete understanding of the document or
matter involved. EACH STATEMENT REGARDING A CONTRACT, AGREEMENT OR OTHER
DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACTUAL DOCUMENT.
Your partnership files periodic reports and other information with the
SEC under the Securities Exchange Act of 1934, as amended. You may read and copy
the Registration Statement, including the attached exhibits, and any reports,
statements or other information that are on file at the SEC's public reference
room in Washington, D.C. You can request copies of these documents, upon payment
of a duplicating fee, by writing the SEC, Public Reference Section, at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. Our SEC
filings are also available to the public on the SEC's Internet site
(http://www.sec.gov).
You may also obtain reports and other information concerning your
partnership electronically through a variety of databases, including, among
others, the SEC's Electronic Data Gathering and Retrieval ("EDGAR") program,
Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
We have not authorized any person to give any information or to make
any representation other than those contained in or incorporated by reference
into this consent solicitation statement in connection with our solicitation of
consents or our offering of securities. You must not rely on any other
information or representation as having been authorized by us. Neither the
delivery of this consent solicitation statement nor any distribution of common
stock offered hereby shall create under any circumstances an implication that
there has been no change in the affairs of your partnership or Shelbourne since
the date hereof or that the information set forth or incorporated by reference
herein is correct as of any time subsequent to its date. However, if any
material change occurs while this consent solicitation statement is required to
be delivered, we will amend or supplement this consent solicitation statement
accordingly. This consent solicitation statement does not constitute an offer to
sell, or a solicitation of an offer to purchase, any securities, or the
solicitation of a consent, in any jurisdiction in which, or to any person to
whom, it is unlawful to make such offer or solicitation of an offer or consent
solicitation.
We will provide you, upon written or oral request, free of charge, a
copy of any document referred to above that has been incorporated into this
consent solicitation statement by reference, except exhibits to the document.
Please send requests for these documents to Resources Capital Corp., 5 Cambridge
Center, 9th floor, Cambridge, MA 02142. You should make telephone requests for
copies to us at (617) 234-2000. In order to ensure timely delivery of the
documents, we should receive such requests by _______ __, 2000.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Your partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, Quarterly Report on Form 10-Q for the period ended March 31,
2000 and the Quarterly Report on Form 10-Q for the period ended June 30, 2000,
each of which has been filed by your partnership with the SEC pursuant to the
Exchange Act, are incorporated herein by reference. Your partnership's SEC file
number is 000-15753.
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All documents filed by your partnership pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this consent
solicitation statement shall be deemed to be incorporated by reference herein
and to be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this consent
solicitation statement to the extent that a statement contained herein or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this consent solicitation statement.
FORWARD-LOOKING STATEMENTS
This consent solicitation statement contains forward-looking statements
about the financial condition, results of operations and business of the
operating partnership and Shelbourne. All statements, other than statements of
historical facts included in this prospectus, that address activities, events or
developments that we believe, intend or anticipate will or may occur in the
future are forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted with accuracy and some of which
might not even be anticipated. Actual results may differ materially from those
expressed or implied by the forward-looking statements for various reasons,
including those discussed under the "RISK FACTORS" section of this consent
solicitation statement. You are cautioned not to place undue reliance on such
forward-looking statements, which speak only as of the date of this consent
solicitation statement.
EXPERTS
The financial statements of your partnership as of December 31, 1999
and 1998, and for each of the three years in the period ended December 31, 1999,
incorporated in this prospectus by reference from your partnership's Annual
Report on Form 10-K for the year ended December 31, 1999, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The balance sheet of Shelbourne as of June 30, 2000 included in this
prospectus has been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing herein and elsewhere in the registration
statement, and is included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The property appraisals referred to in this consent solicitation and
filed as exhibits to the Registration Statement to which this consent
solicitation is a part have been prepared by Cushman & Wakefield and are
included in reliance upon the authority of said firm as experts in giving such
reports.
The valuation analysis report referred to in this consent solicitation
and filed as an exhibit to the Registration Statement to which this consent
solicitation is a part has been prepared by Insignia/ESG and is included in
reliance upon the authority of said firm as experts in giving such reports.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered
pursuant to this consent solicitation statement and certain tax matters related
to the Partnership and Shelbourne as described under "FEDERAL INCOME TAX
CONSEQUENCES" will be passed upon by Rosenman & Colin LLP, New York, New York.
121
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Shelbourne Properties II, Inc.
We have audited the accompanying consolidated balance sheet of
Shelbourne Properties II, Inc. and subsidiaries (the "Company") as of
June 30, 2000. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about
whether the balance sheet is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the balance sheet. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such consolidated balance sheet presents fairly, in all
material respects, the financial position of the Company at June 30,
2000 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
September 15, 2000
Boston, Massachusetts
F-1
<PAGE>
SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
ASSETS
Cash $1,000
=======
LIABILITIES AND STOCKHOLDER'S EQUITY
Common Stock, $.01 par value
100 shares authorized, 100 issued and outstanding $ 1
Additional paid in capital 999
----
$1,000
=======
NOTES:
1. ORGANIZATION
Shelbourne Properties II, Inc., a Delaware corporation was
formed on February 8, 2000 for the purpose of exchanging
common stock of the Company for the units of limited
partnership interest of High Equity Partners L.P. - Series 86
(the "Exchange"). The Company has two wholly-owned
subsidiaries, Shelbourne Properties II GP, LLC and Shelbourne
Properties II L.P. and all intercompany balances have been
eliminated in consolidation.
2. SUMMARY OF ACCOUNTING POLICIES
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the reporting date. Actual amounts could differ
from those estimates.
Income Taxes
The Company intends to qualify and operate as a real estate
investment trust ("REIT") under the provisions of the Internal
Revenue Code. Under these provisions, the Company is required
to distribute at least 95% (90% for taxable years after 2000)
of its REIT taxable income to its shareholders to maintain the
REIT qualification and not be subject to Federal income taxes
for the portion of taxable income distributed. The Company
must also satisfy certain tests concerning the nature of its
assets and income distributed and meet certain record keeping
requirements.
F-2
<PAGE>
APPENDIX A
CONSENT FORM
<PAGE>
APPENDIX A
Part A
CONSENT FORM
HIGH EQUITY PARTNERS L.P. - SERIES 86
c/o American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attn: Cynthia Trotman
Dear Limited Partner:
Enclosed is a consent solicitation statement describing the proposed
tax-free conversion of your partnership into a real estate investment trust that
will be listed on the American Stock Exchange-listed real estate investment
trust. Your general partners are proposing the conversion as the final step of a
court-approved class action settlement. Your general partners believe that the
conversion is fair and recommend that you vote "YES" in favor of the conversion.
Your vote is important. Please complete the bottom portion of this consent form
and then return it using the enclosed pre-addressed postage paid envelope or by
facsimile to (718) 236-2641. If you have any questions, please call (888)
448-5554.
PLEASE DETACH HERE
HIGH EQUITY PARTNERS L.P. - SERIES 86
CONSENT SOLICITED BY RESOURCES HIGH EQUITY, INC.
CONSENT EXPIRATION DATE: ________ ___, 2000
The undersigned, a holder of units (the "Units") of limited partnership interest
in High Equity Partners L.P. - Series 86 (the "Partnership"), hereby
acknowledges receipt of the consent solicitation statement, dated _________ ___,
2000, and votes with respect to the conversion of the Partnership described
therein, including the merger of the Partnership with and into SHELBOURNE
PROPERTIES II L.P. pursuant to the Merger Agreement as set forth in Appendix B
thereto, as follows:
YES NO ABSTAIN
(Approve conversion) (Do not approve conversion) (Same as voting NO)
[ ] [ ] [ ]
Dated: , 2000
------------------------ -------------------
Signature
------------------------
Signature (if held jointly)
------------------------
Title
Please mark here for change of address [ ]
IMPORTANT: Please sign exactly as name
appears hereon. When Units are held by
joint tenants, both should sign. When
signing as an attorney, as executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in corporate
name by President or other authorized
officer. If a partnership, please sign
in partnership name. If this card is
returned signed but no vote is
indicated, you will be deemed to have
voted "YES" in favor of the
conversion.
<PAGE>
Part B
This form appoints each of Michael L. Ashner and Peter Braverman as
your attorneys-in-fact for the purpose of executing all other documents and
instruments advisable or necessary to complete the conversion. This power of
attorney is intended solely to ease the administrative burden of completing the
conversion without requiring your signatures on multiple documents.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes and
appoints each of Michael L. Ashner and Peter Braverman his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, with full
power to act alone, to execute any and all documents in connection with the
conversion of High Equity Partners L.P. - Series 86 into Shelbourne Properties
II, Inc. on my behalf, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitutes or substitute, may
lawfully do or cause to be done by virtue thereof.
Signatures Title Date
---------- ----- -------
Limited Partner,
_________________________________ High Equity Partners L.P.
- Series 86
Name:
<PAGE>
APPENDIX B
AGREEMENT
AND
PLAN OF MERGER
<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF MERGER
MERGING
HIGH EQUITY PARTNERS L.P.- SERIES 86
INTO
SHELBOURNE PROPERTIES II L.P.
AGREEMENT AND PLAN OF MERGER, dated as of _______ ___, 2000 (the
"Agreement"), among Shelbourne Properties II, Inc., a Delaware corporation (the
"Company"), Shelbourne Properties II L.P., a Delaware limited partnership
("Shelbourne L.P.") and High Equity Partners L.P.- Series 86, a Delaware limited
partnership ("HEP").
RECITALS:
A. The Company, Shelbourne L.P. and HEP desire that HEP be merged with
and into Shelbourne L.P. pursuant to this Agreement and that each of the
outstanding units of limited partnership interest in HEP ("Units") be converted
into two (2) shares of the Company's common stock, $0.01 par value ("Common
Stock"), as contemplated by the conversion (the "Conversion") described in the
consent solicitation statement/prospectus of the Company and HEP.
B. As of the date of this Agreement, the general partners of HEP are
Resources High Equity Inc., Resources Capital Corp. and Presidio AGP Corp., each
Delaware corporations (collectively, the "HEP General Partners"), with an
aggregate 5% partnership interest and there are 588,010 Units outstanding. As of
the date of this Agreement, the Company is the sole limited partner of
Shelbourne L.P. with a 99% partnership interest, and Shelbourne Properties II
GP, LLC, a Delaware limited liability company, the sole member of which is the
Company ("Shelbourne GP"), is the sole general partner of Shelbourne L.P. with a
1% partnership interest.
C. The HEP General Partners and the limited partners of HEP owning a
majority of the outstanding Units have consented to the adoption and
authorization of this Agreement, the transactions contemplated hereby, and the
plan of merger set forth herein. The Company, as the sole limited partner of
Shelbourne L.P., and Shelbourne GP as the sole general partner of Shelbourne
L.P., have consented to the adoption and authorization of this Agreement, the
transactions contemplated hereby and the plan of merger set forth herein. The
adoption and authorization of this Agreement, the transactions contemplated
hereby and the plan of merger set forth herein have been approved by the Board
of Directors of the Company.
Accordingly, in consideration of the promises, and the mutual covenants
and agreements herein contained, the parties hereto agree, subject to the terms
and conditions hereinafter set forth, as follows:
B-1
<PAGE>
ARTICLE 1
THE MERGER
SECTION 1.01 MERGER OF HEP INTO SHELBOURNE L.P. At the Effective Time (as
defined in Section 1.05 hereof), HEP shall merge with and into Shelbourne L.P.
(the "Merger"), and the separate existence of HEP shall cease. Shelbourne L.P.
shall be the surviving entity in the Merger (hereinafter, the surviving entity
is referred to as the "Operating Partnership") and its existence with all its
rights, privileges, powers and franchises, shall continue unaffected and
unimpaired by the Merger.
SECTION 1.02 EFFECT OF THE MERGER. The Merger shall have the effects
provided for in the Delaware Revised Uniform Limited Partnership Act
("DRULPA").
SECTION 1.03 GENERAL PARTNER. Shelbourne GP shall be the sole general
partner of the Operating Partnership with a 1% partnership interest therein.
SECTION 1.04 GOVERNING INSTRUMENT OF THE OPERATING PARTNERSHIP. The
Agreement of Limited Partnership of Shelbourne L.P. in effect immediately prior
to the Effective Time, shall be the Agreement of Limited Partnership of the
Operating Partnership.
SECTION 1.05 EFFECTIVE TIME. Promptly after the date hereof, a certificate
of merger evidencing the Merger shall be filed with the Secretary of State of
the State of Delaware pursuant to DRULPA (the "Certificate of Merger"). The
Merger shall become effective upon the time and date of the filing of the
Certificate of Merger, except that, in the event that the Certificate of Merger
specifies in accordance with DRULPA a date and time subsequent to the date of
such filing on or at which the Merger is to become effective, the Merger shall
be effective on and at such subsequent time (such time and date when the Merger
shall become effective is herein referred to as the "Effective Time").
ARTICLE 2
EFFECT ON SECURITIES
SECTION 2.01 HEP GENERAL PARTNER INTERESTS. The general partner
interests in HEP held by the General Partners immediately prior to the
Effective Time shall, by virtue of the Merger and without any further action by
the HEP General Partners, be converted into 61,896 shares of Common Stock.
SECTION 2.02 UNITS. Each Unit that is outstanding immediately prior
to the Effective Time shall, by virtue of the Merger and without any further
action by the holder thereof, be converted into two (2) shares of the Common
Stock.
SECTION 2.03 SHELBOURNE L.P. GENERAL PARTNER INTERESTS. The general
partner interest in Shelbourne L.P. held by Shelbourne GP immediately prior to
the Effective Time shall continue as an equal general partner interest in the
Operating Partnership immediately following the Merger, and Shelbourne GP will
thereupon continue as the general partner of the Operating Partnership.
SECTION 2.04 PARTNERSHIP INTEREST IN SHELBOURNE L.P. HELD BY THE COMPANY.
The partnership interest in Shelbourne L.P. held by the Company immediately
prior to the Effective Time shall continue as an equal limited partner interest
in the Operating Partnership
B-2
<PAGE>
immediately following the Merger, and the Company will thereupon continue as
the limited partner of the Operating Partnership.
SECTION 2.05 COMMON STOCK. Each share of Common Stock outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any further action by the holder thereof, be cancelled and retired
without consideration.
ARTICLE 3
MISCELLANEOUS
SECTION 3.01 TERMINATION AND AMENDMENT. At any time prior to the
filing of the Certificate of Merger pursuant to Section 1.05 hereof, this
Agreement may be terminated by the mutual agreement of the Company and the
General Partners. This Agreement shall not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
SECTION 3.02 COUNTERPARTS. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to each of the parties.
SECTION 3.03 GENERAL PARTNER ACTIONS. Following the Effective
Time, Shelbourne GP, as a general partner of the Operating Partnership, shall be
authorized, at such time as it deems appropriate in its full discretion, to
execute, acknowledge, verify deliver, file and record, for and in the name of
the Operating Partnership, and, to the extent necessary, the general and limited
partners of HEP prior to giving effect to the Merger, any and all documents and
instruments, and shall do and perform any and all acts required by applicable
law or which Shelbourne GP deems necessary or advisable in order to effectuate
the Merger.
B-3
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused this
Agreement to be duly executed as of the date first above written.
SHELBOURNE PROPERTIES II, INC.
By: _________________________
Title:
HIGH EQUITY PARTNERS L.P.-SERIES 86
By: RESOURCES HIGH EQUITY, INC.
investment general partner
By: _______________________
Title:
SHELBOURNE PROPERTIES II L.P.
By: SHELBOURNE PROPERTIES II GP, LLC
general partner
By: SHELBOURNE PROPERTIES II, INC.,
sole member
By: _______________________
Title:
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Shelbourne's certificate of incorporation, as amended, and Bylaws
provide certain limitations on the liability of Shelbourne's directors and
officers for monetary damages to Shelbourne. The certificate of incorporation
and Bylaws obligate Shelbourne to indemnify its directors and officers, and
permit Shelbourne to indemnify its employees and other agents, against certain
liabilities incurred in connection with their service in such capacities. These
provisions could reduce the legal remedies available to Shelbourne and the
stockholders against these individuals. See "CERTAIN PROVISIONS OF DELAWARE LAW
AND SHELBOURNE'S CERTIFICATE AND BYLAWS--Limitation of Liability and
Indemnification."
Shelbourne's certificate of incorporation limits the liability of
Shelbourne's directors and officers to Shelbourne to the fullest extent
permitted from time to time by Delaware law. The DGCL permits, but does not
require, a corporation to indemnify its directors, officers, employees or agents
and expressly provides that the indemnification provided for under the DGCL
shall not be deemed exclusive of any indemnification right under any bylaw, vote
of stockholders or disinterested directors, or otherwise. The DGCL permits
indemnification against expenses, legal fees and certain other liabilities
arising out of legal actions brought or threatened against such persons for
their conduct on behalf of the corporation, provided that each person acted in
good faith and in a manner that be reasonably believed was in or not opposed to
Shelbourne's best interests and in the case of a criminal proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The DGCL does not
allow indemnification of directors in the case of an action by or in the right
of the corporation (including stockholder derivative suits) unless the directors
successfully defend the actions or indemnification is ordered by the court.
Shelbourne has entered into indemnification agreements with each of its
directors and executive officers. The indemnification agreements require, among
other matters, that Shelbourne indemnify its directors and officers to the
fullest extent permitted by law and advance to the directors and officers all
related expenses including legal fees, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under these
agreements, Shelbourne must also indemnify and advance all expenses including
legal fees incurred by directors and officers seeking the enforce their rights
under the indemnification agreements and may cover directors and officers under
Shelbourne's directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides additional assurance to directors and officers that
indemnification will be available because, as a contract, it cannot be modified
unilaterally in the future by the Board of Directors or the Stockholders to
eliminate the rights it provides. It is the position of the SEC that
indemnification of directors and officers for liabilities under the Securities
Act of 1933, as amended (the "Securities Act") is against public policy and
unenforceable pursuant to Section 14 of the Securities Act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Registration
Statement:
EXHIBIT # DESCRIPTION
2.1 Form of Merger Agreement (included as Appendix B to the Consent
Solicitation Statement/Prospectus included as Part I of this
Registration Statement).
3.1* Form of Amended and Restated Certificate of Incorporation of
Shelbourne
3.2* Form of Amended and Restated Bylaws of Shelbourne
4.1* Form of Shareholders Rights Agreement
4.2* Certificate of Designations, Preferences and Rights of Series A
Junior Participating Cumulative Preferred Stock
4.3* Form of Temporary Stock Certificate
5.1 Opinion of Rosenman & Colin LLP regarding legality of the shares of
the Common Stock issued
8.1 Opinion of Rosenman & Colin LLP regarding tax matters
10.1* Form of Agreement of Limited Partnership of the Operating Partnership
10.2* Form of Indemnification Agreement between Shelbourne and each of its
directors and executive officers
10.3* Form of Advisory Agreement
10.4(P) Appraisal prepared by Cushman & Wakefield of Century Park I Office
Complex
10.5(P) Appraisal prepared by Cushman & Wakefield of 568 Broadway Office
Building
10.6(P) Appraisal prepared by Cushman & Wakefield of Seattle Tower Office
Building
10.7(P) Appraisal prepared by Cushman & Wakefield of Commonwealth Industrial
Park
10.8(P) Appraisal prepared by Cushman & Wakefield of Commerce Plaza I
10.9(P) Appraisal prepared by Cushman & Wakefield of Melrose Crossing
Shopping Center
II-2
<PAGE>
10.10(P) Appraisal prepared by Cushman & Wakefield of Matthews Township
Festival Shopping Center
10.11(P) Appraisal prepared by Cushman & Wakefield of Sutton Square Shopping
Center
10.12(P) Appraisals prepared by Cushman & Wakefield of TMR Warehouses
10.13 Valuation Analysis Report, dated August 31, 2000, prepared by
Insignia/ESG for High Equity Partners L.P. - Series 86
23.1 Consent of Rosenman & Colin LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Cushman & Wakefield, Inc.
23.4 Consent of Insignia/ESG, Inc.
24.1* Power of Attorney
99.1 Form of Consent Form (included as Appendix A to the Consent
Solicitation Statement/ Prospectus included as Part I of this
Registration Statement).
99.2* Final Judgment and Order of Dismissal With Prejudice of Superior
Court of the State of California.
99.3 Stipulation of Settlement of Consolidated Class and Derivative Action
99.4 Continuing Hardship Exemption
* Previously filed
(P) Filed in paper pursuant to a continuing hardship exemption
(b) Financial Statement Schedules
The financial statement schedules are incorporated by reference to the
High Equity Partners L.P. - Series 86 Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;"
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement 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.
(c) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been informed 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
II-4
<PAGE>
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 whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(e) (1) The undersigned registrant hereby undertakes as
follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately proceeding, or (ii) that
purports to meet the requirements of Section 10(a) (3) of the Act and
is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and
that, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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."
(f) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, 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.
(g) The undersigned 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 registration statement when it became
effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 3 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, New York on September 15, 2000.
Shelbourne Properties II, Inc.
By: /s/ Michael L. Ashner
----------------------------------------
Michael L. Ashner
President and Chairman of the Board
-----------------
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement on Form S-4 of Shelbourne Properties
II, Inc. has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Michael L. Ashner
-----------------------
Michael L. Ashner President September 15, 2000
/s/ Peter Braverman *
-----------------------
Peter Braverman Vice President and Director September 15, 2000
/s/ David T. Hamamoto *
-----------------------
David T. Hamamoto Director September 15, 2000
/s/ David G. King , Jr.*
------------------------
David G. King, Jr. Vice President and Director September 15, 2000
/s/ Robert Martin *
------------------------
Robert Martin Director September 15, 2000
/s/ W. Edward Scheetz *
------------------------
W. Edward Scheetz Director September 15, 2000
/s/ Carolyn Tiffany *
------------------------
Carolyn Tiffany Vice President and Treasurer September 15, 2000
</TABLE>
-------------
* BY MICHAEL L. ASHNER, ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
<S> <C>
2.1 Form of Merger Agreement (included as Appendix B to the Consent
Solicitation Statement/Prospectus included as Part I of this
Registration Statement).
3.1* Form of Amended and Restated Certificate of Incorporation of Shelbourne
3.2* Form of Amended and Restated Bylaws of Shelbourne
4.1* Form of Shareholders Rights Agreement
4.2* Certificate of Designations, Preferences and Rights of Series A
Junior Participating Cumulative Preferred Stock
4.3* Form of Temporary Stock Certificate
5.1 Opinion of Rosenman & Colin LLP regarding legality of the shares of
the Common Stock issued
8.1 Opinion of Rosenman & Colin LLP regarding tax matters
10.1* Form of Agreement of Limited Partnership of the Operating Partnership
10.2* Form of Indemnification Agreement between Shelbourne and each of its
directors and executive officers
10.3* Form of Advisory Agreement
10.4(P) Appraisal prepared by Cushman & Wakefield of Century Park I Office Complex
10.5(P) Appraisal prepared by Cushman & Wakefield of 568 Broadway Office Building
10.6(P) Appraisal prepared by Cushman & Wakefield of Seattle Tower Office Building
10.7(P) Appraisal prepared by Cushman & Wakefield of Commonwealth Industrial Park
10.8(P) Appraisal prepared by Cushman & Wakefield of Commerce Plaza I
10.9(P) Appraisal prepared by Cushman & Wakefield of Melrose Crossing Shopping Center
10.10(P) Appraisal prepared by Cushman & Wakefield of Matthews Township
Festival Shopping Center
10.11(P) Appraisal prepared by Cushman & Wakefield of Sutton Square Shopping Center
10.12(P) Appraisals prepared by Cushman & Wakefield of TMR Warehouses
<PAGE>
EXHIBIT # DESCRIPTION
10.13 Valuation Analysis Report, dated August 31, 2000, prepared by Insignia/ESG
for High Equity Partners L.P. -- Series 86
23.1 Consent of Rosenman & Colin LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Cushman & Wakefield, Inc.
23.4 Consent of Insignia/ESG, Inc.
24.1* Power of Attorney
99.1 Form of Consent Form (included as Appendix A to the Consent Solicitation
Statement/Prospectus included as Part I of this Registration Statement).
99.2* Final Judgment and Order of Dismissal With Prejudice of Superior Court
of the State of California
99.3 Stipulation of Settlement of Consolidated Class and Derivative Action
99.4 Continuing Hardship Exemption
</TABLE>
* Previously filed
(P) Filed in paper pursuant to a continuing hardship exemption
