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Registration Number 333-30210
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
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.
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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 18. 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 23.75% 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 $4.01 per unit, or $2,360,860 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 TERM SHEET..............................................................................................................1
SUMMARY ........................................................................................................................2
Background Of The Proposal...................................................................................................2
Your Partnership..........................................................................................................2
The Class Action Settlement...............................................................................................2
Shelbourne...................................................................................................................3
Risk Factors.................................................................................................................4
Benefits of the Conversion...................................................................................................6
Comparison of Your Partnership and Shelbourne................................................................................7
Allocation of Common stock..................................................................................................13
Alternatives to the Conversion..............................................................................................13
Liquidation and Dissolution of Your Partnership..........................................................................13
Continuation of Your Partnership.........................................................................................14
Comparison Valuation Analyses...............................................................................................14
General Partners'Recommendation.............................................................................................15
Voting......................................................................................................................16
Limited Partner List........................................................................................................17
RISK FACTORS...................................................................................................................18
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...............................................................................................................18
Shelbourne's common stock may trade at prices below the estimated value of your units or
the value of Shelbourne's net assets........................................................................................18
There is a significant amount of uncertainty as to the value of the shares you will receive if
the conversion is approved..................................................................................................18
The estimated value of Shelbourne's common stock assumes that the market will recognize
Shelbourne's intention to leverage and grow its asset base..................................................................18
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................................................................................................................19
Shelbourne may make investments which have a higher degree of risk than the investments
held by your partnership....................................................................................................19
Dividends are not guaranteed and may fluctuate..............................................................................19
If the conversion is approved our obligations to repay fees previously received by us upon
liquidation of your partnership will be eliminated..........................................................................19
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......................................20
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...........................................20
You will not have any dissenters'or appraisal rights if you vote against the conversion.....................................20
If the conversion is approved, Shelbourne intends to reinvest most of the cash that would
otherwise be available for distribution by your partnership if the conversion is not approved...............................20
Stockholders will be diluted by any subsequent equity issuances.............................................................20
Shelbourne may enter into transactions with our affiliates which may not solely serve your
interests as a stockholder..................................................................................................21
The asset management fee payable by Shelbourne will increase to the extent that Shelbourne
increases its gross assets, including through acquisitions and through leverage.............................................21
Provisions in the Certificate, Bylaws and Shareholder Rights Agreement could inhibit
changes in control..........................................................................................................21
Shelbourne is subject to risks of default by borrowers and interest rate risks associated
with investments in mortgage loans..........................................................................................22
Shelbourne's performance and value are subject to risks associated with the real estate industry............................23
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TABLE OF CONTENTS
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Shelbourne will face intense competition in all of its markets.............................................................23
Shelbourne may not be able to re-lease properties upon the expiration of leases.............................................23
Shelbourne will be managed by a third-party advisor and will therefore have less control
over its operations.........................................................................................................23
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............................................................................................................23
Many of Shelbourne's officers and directors will have conflicts of interest in managing
Shelbourne's business and properties. Thus, they may make decisions or take actions that
do not solely reflect your interests as a shareholder.......................................................................24
Shelbourne's retention of an external manager could adversely affect the value of your shares...............................24
Shelbourne's ability to grow could be adversely affected if Shelbourne is not successful
in raising capital..........................................................................................................24
Fluctuations in interest rates could adversely affect the value of your shares..............................................24
Illiquidity of real estate investments could adversely affect Shelbourne's financial condition..............................25
Liability for environmental matters could adversely affect Shelbourne's financial condition.................................25
Stockholder approval is not required for Shelbourne to discontinue its status as a real estate
investment trust............................................................................................................25
Uninsured losses could adversely affect Shelbourne's financial condition....................................................25
FEDERAL INCOME TAX RISKS.......................................................................................................26
Failure to qualify or remain qualified as a real estate investment trust would cause Shelbourne
to be taxed as a corporation................................................................................................26
Shelbourne will be subject to a 4% nondeductible excise tax if it fails to distribute
required amounts............................................................................................................26
There are potential tax disadvantages to conducting business as a real estate investment trust..............................27
BENEFITS OF THE CONVERSION.....................................................................................................28
Greater Market Value........................................................................................................28
Tax-Free Receipt of Common Stock............................................................................................28
Greater Liquidity and More Efficient Market.................................................................................28
Ability to Make New Investments.............................................................................................28
Required Dividends..........................................................................................................28
Beneficial Company Structure................................................................................................28
Elected Governance..........................................................................................................29
Ability to Raise Capital....................................................................................................29
No Unrelated Business Taxable Income........................................................................................29
Simplified Tax Reporting....................................................................................................29
Reduced State Income Tax Reporting..........................................................................................29
COMPARISON OF YOUR PARTNERSHIP AND SHELBOURNE..................................................................................29
Form of Organization........................................................................................................30
General Business............................................................................................................31
Duration of Existence.......................................................................................................31
Voting Rights...............................................................................................................32
Fiduciary Duties, Limitation of Liability and Indemnification...............................................................33
Review of Books and Records.................................................................................................34
Management..................................................................................................................34
Distributions; distribution policy..........................................................................................35
Leverage; borrowing policy..................................................................................................36
Lending Policy..............................................................................................................36
Fees to Affiliates..........................................................................................................37
Taxation of Taxable Limited Partners........................................................................................40
Taxation of Tax-Exempt Limited Partners.....................................................................................40
(ii)
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TABLE OF CONTENTS
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BACKGROUND OF THE CONVERSION...................................................................................................41
General.....................................................................................................................41
Your Partnership............................................................................................................41
The Class Action............................................................................................................44
The Class Action Settlement.................................................................................................45
ALTERNATIVES TO THE CONVERSION.................................................................................................47
Appraisals..................................................................................................................47
Valuation Analyses..........................................................................................................52
General..................................................................................................................52
Continuation.............................................................................................................52
Liquidation Analysis.....................................................................................................54
Secondary Market Trading History Analysis................................................................................56
Conversion and Comparable Company Analysis...............................................................................56
Comparison Valuation Table...............................................................................................57
RECOMMENDATION AND FAIRNESS....................................................................................................58
General Partners'Recommendation.............................................................................................58
Fairness of the Conversion..................................................................................................58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................60
SELECTED FINANCIAL DATA........................................................................................................61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................62
General.....................................................................................................................62
Liquidity and Capital Resources.............................................................................................62
Capital Improvements and Capitalized Tenant Procurement Costs...............................................................63
Real Estate Market..........................................................................................................63
Impairment of Assets........................................................................................................65
THE CONVERSION.................................................................................................................70
Mechanics of the Conversion.................................................................................................70
Effective Time..............................................................................................................70
Conditions to the Conversion................................................................................................70
Fees And Expenses...........................................................................................................71
Accounting Treatment........................................................................................................71
VOTING ........................................................................................................................71
General.....................................................................................................................71
Vote Required...............................................................................................................72
Voting Procedure............................................................................................................72
Record Date and Outstanding Units...........................................................................................72
Effect of Voting to Approve the Conversion..................................................................................73
Exchange of Certificates For Shares.........................................................................................73
Solicitation of Votes; Solicitation Expenses................................................................................73
Limited Partner Lists.......................................................................................................73
CONFLICTS OF INTEREST..........................................................................................................74
Conflicts Relating to the Conversion........................................................................................74
Conflicts Following the Conversion..........................................................................................75
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................................77
AP-PCC III, L.P. Services Agreement.........................................................................................77
property management agreements..............................................................................................77
Management Fees To Affiliates...............................................................................................77
Olympia Agreement...........................................................................................................77
(iii)
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TABLE OF CONTENTS
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SHELBOURNE.....................................................................................................................78
General.....................................................................................................................78
The Operating Partnership...................................................................................................78
Objectives and Strategies...................................................................................................80
The Properties..............................................................................................................82
Other Assets and Liabilities................................................................................................88
Cash Dividend Policy........................................................................................................88
Management..................................................................................................................89
PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE..................................................................................94
DESCRIPTION OF CAPITAL STOCK..................................................................................................103
General....................................................................................................................103
Common Stock...............................................................................................................103
Preferred Stock............................................................................................................104
Listing, Price and Trading.................................................................................................104
Restrictions on Transfers..................................................................................................104
Additional Issuances.......................................................................................................107
Shareholder Rights Agreement...............................................................................................107
MATERIAL PROVISIONS OF DELAWARE LAW AND SHELBOURNE'S CERTIFICATE
AND BYLAWS....................................................................................................................109
Amendment of Certificate and Bylaws........................................................................................110
Dissolution of Shelbourne..................................................................................................110
Meetings of Stockholders...................................................................................................110
The Board of Directors.....................................................................................................110
Limitation of Liability and Indemnification................................................................................111
Business Combinations......................................................................................................111
Indemnification Agreements.................................................................................................112
FEDERAL INCOME TAX CONSEQUENCES...............................................................................................112
The Conversion.............................................................................................................113
Taxation of Shelbourne as a Real Estate Investment Trust...................................................................113
General.................................................................................................................113
Requirements for Qualification..........................................................................................115
Organizational Requirements.............................................................................................115
Income Tests............................................................................................................116
Asset Tests.............................................................................................................118
Annual Distribution Requirements........................................................................................119
Failure of Shelbourne to Qualify as a Real Estate Investment Trust......................................................119
Taxation of Taxable U.S. Stockholders......................................................................................120
Distributions by Shelbourne.............................................................................................120
Passive Activity Losses and the Investment Interest Limitation..........................................................121
Sale of Common Stock....................................................................................................121
Backup Withholding......................................................................................................121
Taxation of Tax-Exempt Stockholders........................................................................................121
Taxation of Non-U.S. Stockholders..........................................................................................122
Distributions by Shelbourne.............................................................................................122
Sale of Common Stock....................................................................................................123
Backup Withholding Tax and Information Reporting........................................................................123
Tax Status of the Operating Partnership....................................................................................123
Other Taxes................................................................................................................124
Transfer Taxes.............................................................................................................124
Possible Tax Law Changes...................................................................................................124
Importance of Obtaining Professional Tax Assistance........................................................................124
(iv)
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AVAILABLE INFORMATION.....................................................125
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................126
FORWARD-LOOKING STATEMENTS................................................126
EXPERTS ..................................................................126
LEGAL MATTERS.............................................................127
(v)
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SUMMARY TERM SHEET
THE FOLLOWING ARE THE MORE IMPORTANT TERMS OF THE PROPOSED CONVERSION:
o You are being asked to approve the conversion of your partnership, High
Equity Partners L.P. - Series 86 into a publicly-traded real estate
investment trust, commonly referred to as a REIT. The REIT is called
Shelbourne Properties II, Inc.
o The conversion is being proposed as the final step of a class action
settlement which was approved and found to be fair, reasonable and adequate
and in the best interests of your partnership by the California Superior
Court. The settlement requires us to propose and use our best efforts to
complete a restructuring of your partnership into a real estate investment
trust or other entity whose shares are traded on a national securities
exchange or the NASDAQ National Market.
o Limited partners holding more than 50% of the outstanding units must
approve the conversion for it to become effective.
o If the conversion is approved you will receive two shares of common stock
of Shelbourne, on a tax-free basis, in exchange for each unit you own in
your partnership, regardless of whether you vote in favor of or against the
conversion.
o The shares of Shelbourne will be listed for trading on the American Stock
Exchange under the symbol _________.
o Shelbourne will be an externally managed real estate investment trust. Our
affiliate, Shelbourne Management LLC, will be retained as Shelbourne's
external advisor.
o Shelbourne may invest in a variety of real estate-related investments,
including undervalued assets and value-enhancing situations, a broad range
of property types and geographical locations. Shelbourne intends to raise
capital for additional investments by mortgaging existing properties so
that its ratio of total debt to total assets is 75%.
o Shelbourne must distribute to its stockholders 90% of Shelbourne's taxable
income, excluding net capital gain, if any, to maintain its status as a
real estate investment trust.
o To vote, you should complete and sign on the enclosed consent form return
it to our depositary American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York. 10005.
o If you have any questions you should call our information agent, the
Swenson Group L.L.C., at (800) 448-5554
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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
Capital Corp.
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.
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
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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 may invest in a variety of real
estate-related investments, including undervalued assets and value-enhancing
situations, in a broad range of property types and geographical locations.
Shelbourne may raise additional capital by mortgaging existing 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.
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Shelbourne will have a Board of Directors consisting of seven directors,
three of whom will be independent directors. 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, Shelbourne's 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 18 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 between $
45.41 and $ 56.10 whereas the estimated range of liquidation values for
your units is between $67.71 and $76.36. 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 The $56.10 high estimate of the value of Shelbourne's common stock is
$10.69 or 24% more than the $45.41 low estimate. The size of the range
of values is due to the inherent uncertainties involved in estimating
the value of the security you will receive.
o The range of estimated values of Shelbourne's common stock reflects
Shelbourne's ability and intention to leverage and grow its asset base.
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. The value of Shelbourne's common
stock would be adversely affected if the market does not value
Shelbourne based upon its growth objectives or if Shelbourne does not
pursue, or is unsuccessful in achieving, its growth objectives. In that
case, the market could value Shelbourne's common stock based solely on
your partnership's current asset base. The low end of that value has
been estimated at $36.69 per share.
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.
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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.
o If the conversion is approved we no longer will have any obligation to
pay limited partners an amount which presently equals $4.01 per unit,
or $2,360,860 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 23.75% of
the units would receive 23.75% 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 If the conversion is approved, Shelbourne intends to reinvest
approximately 80% of your partnership's cash reserves which reserves
amounted to $16,465,000 as of September 30, 2000. Any cash that
Shelbourne uses to invest in additional assets will not be available
for distribution to you. If the conversion is not approved, your
partnership's cash in excess of cash reserves, including amounts
required to fund capital improvements at existing properties, is
generally available for distribution to you since your partnership is
not permitted to make new investments.
o The asset management fee to be paid by Shelbourne will likely be higher
than the asset management fee currently paid by your partnership
because the fee is based on the amount of gross assets and, unlike your
partnership, Shelbourne will be permitted to increase its gross assets
by leveraging its properties and acquiring additional assets.
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.
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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 28 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.
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 90% of its taxable income,
excluding net capital gain, in order 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.
6
<PAGE>
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.
<TABLE>
<CAPTION>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
<S> <C> <C>
Types of Investments Interests in four office buildings, a Interests in four office buildings, a vacant lot, a
vacant lot, a group of warehouses and group of warehouses and manufacturing buildings, a
manufacturing buildings, a group of group of industrial buildings and three shopping
industrial buildings and three shopping centers as well as new real estate investments
centers; no ability to make new including real property, mortgages and securities of
investments other real estate companies; no restrictive
investment criteria such as property use or
geographic location
Form of Ownership of Investments Investments in four properties through Investments will be owned by the operating
joint-ventures; six additional partnership directly and through joint-ventures. All
properties owned directly by your of Shelbourne's investments will be owned through the
partnership operating partnership
Method of Acquisition of All of your partnership's properties Shelbourne may acquire properties for cash, on a
Investments were acquired for cash on an leveraged or unleveraged basis, or equity securities,
unleveraged basis including through the issuance of limited partnership
interests in the operating partnership
Liquidity of Your Investment Units are not listed for trading on any Shares will be listed for trading on the American
national exchange or traded in any Stock Exchange
formal trading market. There is a
limited and informal secondary market
for units
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
7
<PAGE>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
Transactions with Our Affiliates Prohibited from selling or leasing Transactions with affiliates not prohibited, subject
properties to, or purchasing properties to applicable provisions of Delaware law;
from, our affiliates or receiving transactions with our affiliates must be on terms
long-term secured or unsecured loans comparable to transactions with unaffiliated third
from our affiliates parties and approved by a majority of Shelbourne's
independent directors
Borrowing Policy Borrowing to finance capital Borrowing permitted on a secured and unsecured basis
expenditures not permitted 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
the value of its gross assets
Issuances of Additional Prohibited from issuing additional Permitted to issue additional debt or equity
Securities securities securities to raise additional capital or acquire
additional properties
Duration of Entity Fixed date of December 31, 2015 for Perpetual, no fixed liquidation or termination date
termination of partnership; originally
contemplated holding period for
properties expired in 1998
8
<PAGE>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
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 you, which
partnership's taxable income or loss is distributions will be made pro rata to all holders of
included in calculating your taxable common stock
income, regardless of whether your
partnership makes any cash
distributions; there are special
allocations of depreciation deductions
to taxable unitholders
Tax Characterization of Income Generally passive activity income Dividends and capital gains from common 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 you Form 1099-DIV must be mailed to you by January 31 of
by March 15 of each year, typically each year
increasing your cost of tax return
preparation
You generally are required to file You generally will not have to file tax returns or
state tax returns, and pay taxes, in pay taxes in states other than your state of residence
various states where properties are
located
Distributions; distribution Quarterly historical distributions; Dividend rate will be determined by the Board of
policy distributions suspended as of September Directors based on Shelbourne's results of
30, 1999 operations, cash flow and capital requirements;
mandatory distributions required to satisfy REIT
requirements and/or avoid entity-level taxes
9
<PAGE>
CHARACTERISTIC YOUR PARTNERSHIP SHELBOURNE
-------------- ---------------- ----------
Management Vested in general partners; Vested in Board of Directors elected by holders of
common stock; Board of Directors ultimately
responsible for management, control and investment
activities of Shelbourne; Shelbourne Management
retained to manage Shelbourne's day-to-day business
Voting Majority vote of units required for Majority or two-thirds vote of common stock required
significant actions such as removal of for significant transactions specified in
general partners, election of Shelbourne's certificate of incorporation such as
additional general partners, removal of directors and amendment of some sections
termination and dissolution, various of certificate of incorporation; annual shareholder
amendments to partnership agreement, vote for election of directors
changes in investment objectives, sale,
pledge or encumbrance of substantially
all of partnership's assets, and
extension of partnership's term
Partnership Asset Management Partnership asset management fee paid Partnership asset management fee equal to 1.25% of
Fees to us equal to 1.25% of gross value of gross value of assets will be paid to Shelbourne
assets Management
Property Management Fees Payable Up to 6% of property revenues but no Up to 6% of property revenues but no more than
to Us or to Our Affiliates more than competitive rate for similar competitive rate for similar services will be paid to
services Shelbourne Management
Property Disposition Fees Generally, 3% subordinated fee plus None
Payable to Us or Our Affiliates subordinated incentive management fees
Reimbursement of Expenses to Us All expenses paid by your partnership; All expenses paid by Shelbourne; Shelbourne
or Our Affiliates we are reimbursed for expenses incurred Management will be reimbursed for expenses incurred
for your partnership plus an additional for Shelbourne plus an additional $200,000 for
$200,000 for expenses for which we do expenses for which Shelbourne Management does not
not have to account have to account
</TABLE>
10
<PAGE>
The following depicts the structure of your partnership before and
after the conversion:
<TABLE>
<S> <C>
BEFORE THE CONVERSION:
----------------------
------------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
------------------------------
MANAGING MEMBER |
(INDIRECT) |
|
\ /
------------------------------
PRESIDIO CAPITAL
INVESTMENT COMPANY, LLC ----------
------------------------------ |
| |
| 100% |
| |
\ / |
------------------------------ |
PRESIDIO CAPITAL CORP. |
| |
| |
| 100% |
| |
\ / |
------------------------------ |
GENERAL PARTNERS |
|
RESOURCES HIGH EQUITY, INC. |
|
RESOURCES CAPITAL CORP. |
|
PRESIDIO AGP CORP. |
------------------------------ |
| |
| |
---------------------------- | |
LIMITED PARTNERS | 5% (GENERAL PARTNER) | 22.56%
(NOT AFFILIATED WITH GENERAL | | (LIMITED PARTNER)
PARTNERS) | |
---------------------------- | |
| \ / |
72.44% | ------------------------------ |
(LIMITED | YOUR PARTNERSHIP |
PARTNER) | |
| HIGH PARTNERS L.P. - SERIES 86 |
---------- ------------
------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C>
AFTER THE CONVERSION:
---------------------
-------------------------------
NORTHSTAR CAPITAL
INVESTMENT CORP.
------------------------------- -----------------------
| MANAGING MEMBER (INDIRECT) AFFILIATE OF
| PRESIDIO
| CAPITAL
------------------------------- INVESTMENT
PRESIDIO CAPITAL COMPANY, LLC
---- INVESTMENT COMPANY, -----------------------
| LLC |
| ------------------------------- |
| | |
| | |
| 100% | |
| | |
| | |
22.56% | ------------------------------- |
STOCKHOLDER | |
(FORMER | PRESIDIO CAPITAL CORP. |
LIMITED | |
PARTNER) | ------------------------------- 100% |
| 100% | |
| | |
| ------------------------------- ----------------------------- |
| RESOURCES HIGH EQUITY, |
| INC. FORMER LIMITED |
| RESOURCES CAPITAL CORP. PARTNERS |
| PRESIDIO AGP CORP. (NOT AFFILIATED WITH FORMER |
| (FORMER GENERAL PARTNERS) GENERAL PARTNERS) |
| ------------------------------- ----------------------------- |
| 5% | | 72.44% |
| STOCKHOLDER | | STOCKHOLDER |
| \|/ \|/ \|/
| ------------------------ ADVISORY ----------------------
| AGREEMENT SHELBOURNE(4,5)
|----------------------> 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)
12
<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 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 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 139,641 units in your partnership. We and our affiliates
will therefore receive 341,178 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 $4.01 per
unit from us as repayment of fees previously received.
13
<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 ANALYSES
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 based upon assumptions described under "ALTERNATIVES TO THE
CONVERSION - VALUATION ANALYSIS - CONVERSION AND COMPARABLE COMPANY ANALYSIS."
Also described in that section is a similar valuation based on your
partnership's current asset base. 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 ANALYSES
Estimated range of going concern values $56.98 - $64.25
Estimated range of liquidation values $67.71 - $76.36
Range of implied secondary market values $37.75 - $42.57
Estimated range of values for $45.41 - $56.10
Shelbourne common stock
14
<PAGE>
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.
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 23.75% of the
15
<PAGE>
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.
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
all of the properties currently 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 ________ __, 2001 expiration date. You may withdraw
your consent form at any time before the expiration
16
<PAGE>
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.
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.
17
<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 $45.41 and $56.10 whereas the estimated range of
liquidation values estimated by Insignia/ESG is between $67.71 and $76.36. 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.
THERE IS A SIGNIFICANT AMOUNT OF UNCERTAINTY AS TO THE VALUE OF THE SHARES YOU
WILL RECEIVE IF THE CONVERSION IS APPROVED.
The $56.10 high estimate of the value of Shelbourne common stock is $10.69
or 24% more than the $45.41 low estimate. The size of the range of values is due
to the inherent uncertainties involved in estimating the value of the security
you will receive. Such inherent uncertainties include:
o The inability to identify any real estate investment trusts which are
directly comparable to Shelbourne. This is due in large part to the
relatively small anticipated market capitalization for Shelbourne, the
mixed nature of Shelbourne's initial property portfolio and the fact that
Shelbourne will be externally managed;
o The difficulty of predicting funds from operations and other measures of
Shelbourne's performance; and
o How the market will perceive Shelbourne and its growth potential.
THE ESTIMATED VALUE OF SHELBOURNE'S COMMON STOCK ASSUMES THAT THE MARKET WILL
RECOGNIZE SHELBOURNE'S INTENTION TO LEVERAGE AND GROW ITS ASSET BASE.
The range of estimated values of Shelbourne's common stock reflects
Shelbourne's ability and intention to leverage and grow its asset base. The
value of Shelbourne's common stock will be adversely affected if the market does
not value Shelbourne based upon its growth objectives or if Shelbourne does not
pursue, or is unsuccessful in achieving, its growth objectives. In that case,
the market could value
18
<PAGE>
Shelbourne's common stock based solely on your partnership's current asset base,
which value has been estimated to be as low as $36.69. In addition, the common
stock may trade at prices below this estimated value.
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.
DIVIDENDS 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 90% of its taxable
income, excluding net capital gain, in order to maintain its status as a real
estate investment trust.
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 $4.01 per
unit, or an aggregate of $2,360,860, 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. As a result of the
elimination of our obligation to repay these fees, we have a
19
<PAGE>
conflict of interest in recommending the conversion. Elimination of our
obligation to pay you this additional amount was an agreed-upon element of the
settlement.
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 and longer if renewed. 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. The duration of our fees is now limited by the requirement
that your partnership be liquidated no later than December 31, 2015.
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.
IF THE CONVERSION IS APPROVED, SHELBOURNE INTENDS TO REINVEST MOST OF THE CASH
THAT WOULD OTHERWISE BE AVAILABLE FOR DISTRIBUTION BY YOUR PARTNERSHIP IF THE
CONVERSION IS NOT APPROVED.
If the conversion is approved, Shelbourne intends to reinvest approximately
80% of your partnership's cash reserves which reserves amounted to $16,465,000
as of September 30, 2000. Any cash that Shelbourne uses to invest in additional
assets will not be available for distribution to you. If the conversion is not
approved, your partnership's cash, in excess of cash reserves, including amounts
required to fund capital improvements at existing properties, is generally
available for distribution to you since your partnership is not permitted to
make new investments.
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.
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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.
THE ASSET MANAGEMENT FEE PAYABLE BY SHELBOURNE WILL INCREASE TO THE EXTENT THAT
SHELBOURNE INCREASES ITS GROSS ASSETS, INCLUDING THROUGH ACQUISITIONS AND
THROUGH LEVERAGE.
The asset management fee payable to Shelbourne Management for managing
Shelbourne and its properties will be based on the same percentage of gross
assets as the asset management fee currently payable to us and our affiliates
for managing your partnership and its properties. However, unlike your
partnership Shelbourne will be permitted to leverage its properties and acquire
new properties. To the extent that Shelbourne increases its gross assets,
including through acquisitions and through leverage, the asset management fee
will increase. Shelbourne currently intends to increase its gross assets by
borrowing an amount equal to up to 75% of its gross assets.
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, 2002, 2003 and 2004, 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
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<PAGE>
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.
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
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<PAGE>
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 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 WILL FACE INTENSE COMPETITION IN ALL OF ITS MARKETS
Shelbourne will compete with other entities, including other
publicly-traded real estate investment trusts, for real estate investments as
well as for tenants for its properties. Shelbourne's competitors may have
greater financial or informational resources than Shelbourne.
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.
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MANY OF SHELBOURNE'S OFFICERS AND DIRECTORS WILL HAVE CONFLICTS OF INTEREST IN
MANAGING SHELBOURNE'S BUSINESS AND PROPERTIES. THUS, THEY MAY MAKE DECISIONS OR
TAKE ACTIONS THAT DO NOT SOLELY REFLECT YOUR INTERESTS AS A SHAREHOLDER.
Many of Shelbourne's officers and directors are also officers of Shelbourne
Management, Winthrop Financial Associates and/or NorthStar Capital Investment
Corp., entities which manage other real estate investment companies that may
compete with Shelbourne or otherwise have similar business interests. As
officers and directors of entities with which Shelbourne will conduct business
or with interests in competition with Shelbourne's interests, Shelbourne's
officers and directors will experience conflicts between their fiduciary
obligations to Shelbourne and their fiduciary obligations to Shelbourne
Management, Winthrop Financial Associates, NorthStar Capital Investment Company
and their affiliated entities. This conflict of interest could:
o limit the time and services that the officers and directors of Shelbourne
devote to Shelbourne, because they will be providing similar services to
other real estate entities; and
o impair Shelbourne's ability to compete for acquisition of properties with
other real estate entities that are also advised by Shelbourne Management,
Winthrop Financial Associates and NorthStar.
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
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.
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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.
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, 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 would 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.
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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, 2001. 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 90% 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 an investment in a corporation.
No assurance can be given that 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, 2001, 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
assumptions and 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 taxable
income that Shelbourne elected to retain and pay federal income 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 imposition of an excise tax would adversely
affect the value of shares.
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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. 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 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
as of the end of 1999. 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 $45.41
and $56.10, 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 $37.75 and $42.57. 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,
3,015 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 90% of its taxable income,
excluding net capital gain, 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 director of Shelbourne.
Each year, holders of common stock will elect either two or three directors of
Shelbourne, 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
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
FORM OF ORGANIZATION
Your partnership is a limited partnership formed under Shelbourne is a corporation organized under Delaware
Delaware partnership law. Your partnership has been treated General Corporation Law. Shelbourne intends to qualify as
as a partnership for Federal income tax purposes, and is a real estate investment trust under the Internal Revenue
not subject to entity-level taxes. Code, thereby generally avoiding Federal taxation of
income distributed to stockholders. Maintaining real
estate investment trust status will require ongoing
satisfaction of income, asset and distribution tests and
restrictions that do not apply to your partnership.
</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
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
GENERAL BUSINESS
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>
<CAPTION>
----------------------------------------------------------- --------------------------------------------------------
<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 connection Shelbourne will have a perpetual existence, and
with a liquidation following the sale of all the continue to operate indefinitely.
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
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
Voting Rights
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
o removal of a general partner and the election of to a vote of the stockholders. In determining the
a successor general partner; number of 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 the amendment of some sections of the certificate of
your 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 entitled to be cast on such proposals.
investment 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
o the pledge or encumbrance of substantially all each stockholder who, by law, under the certificate of
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.
32
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
--------------------------------------------------- ---------------------------------------------------------------------------
<S> <C>
Fiduciary Duties, Limitation of Liability and Indemnification
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
partnership's affairs. Your partnership general partner are greater than those of a director to a stockholder,
agreement generally provides that neither we nor and other Delaware courts have held that the fiduciary duties of a
any of our affiliates performing services on general partner can be determined or modified by the partnership
behalf of your partnership will be liable to your agreement.
partnership or any of their respective partners
for any loss suffered by your partnership that Accordingly, although it is unclear whether or to what extent there are
arises out of any action or inaction of us or our any differences in such fiduciary duties, it is possible that the
affiliates if we in good faith determine that fiduciary duties of directors of Shelbourne to its stockholders could be
such course of conduct was in the best interests less than our fiduciary duties to you. This may result in decreased
of your partnership, provided that such course of potential liability of the directors of Shelbourne and less recourse
conduct did not constitute negligence or available to stockholders who believe that Shelbourne's Board did not act
misconduct of us and our affiliates. properly in managing Shelbourne's affairs. Shelbourne's certificate of
incorporation limits the liability of Shelbourne's directors to the
Your partnership agreement generally requires fullest extent permitted from time to time by Delaware law. The
your partnership to indemnify us to the maximum certificate of incorporation presently permits the liability of directors
extent permitted by law from any liability, loss to Shelbourne or its stockholders for money damages to be limited, except
or damage incurred by reason of an act performed for liability:
or omitted to be performed by them, including
costs and expenses, provided that (1) the course o for any transaction from which the director derived an improper
of conduct was determined to be in the best benefit;
interest of your partnership, and (2) the course o for any breach of the director's duty of loyalty to Shelbourne
of conduct did not constitute negligence or or its stockholders;
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.
33
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
Review of Books and Records
Under your partnership agreement and applicable law, you Under Delaware General Corporation Law, a stockholder
are entitled to review and obtain a copy of a current is entitled, upon written demand, to inspect for any
list of the names and addresses of limited partners in proper purposes during usual business hours,
your partnership as well as other information maintained Shelbourne's stock ledger, a list of Shelbourne's
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>
Management
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
With the exception of some significant transactions which Shelbourne will be managed by its Board of Directors
require your approval such as a sale of all of your and executive officers. Management of the day-to-day
partnership's assets, we have exclusive authority and affairs of Shelbourne will be performed by Shelbourne
control over the management and operation of your Management. The Board of Directors will be elected by
partnership. You do not have the right to annually elect 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.
34
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------
<S> <C>
Distributions; distribution policy
Your partnership generally distributes available cash on The amount of Shelbourne's dividends will be
a quarterly basis. Amounts distributed to you established by the Board of Directors, taking into
historically have been derived from your share of account the cash needs of Shelbourne, the requirements
adjusted cash from operations. We may, under your of the Internal Revenue Code for qualification as a
partnership agreement, create working capital and other real estate investment trust and the amount of
reserves that may have the effect of decreasing cash distributions necessary to avoid becoming subject to
distributions. You also are entitled to receive your non-deductible excise tax. Under the Internal Revenue
share of cash from sales or financings upon the sale or, Code, Shelbourne is required to distribute ordinary
in limited circumstances, financing of your partnership's income dividends of at least 90% of its taxable income
properties. However, except for the sale of two other than net capital gain in order to maintain its
properties, your partnership has not to date sold or qualification as a real estate investment trust.
financed any of its real estate investments. 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 90% of its taxable income other than net capital gain.
35
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
----------------------------------------------------------- --------------------------------------------------------------
<S> <C>
Leverage; borrowing policy
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
with mortgage financing any properties which have been other purposes. Shelbourne will not be limited as to
owned by your partnership for at least five years, the amount of indebtedness it may incur with respect
provided that your partnership has obtained an opinion of to any of its properties, but currently does not
counsel that such financing will not result in income intend to borrow, in the aggregate, more than an
derived from your partnership's properties constituting amount equal to 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>
----------------------------------------------------------- --------------------------------------------------------------
<S> <C>
Lending Policy
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 investments. part of its investment strategy. Shelbourne will not be
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.
36
<PAGE>
<TABLE>
<CAPTION>
YOUR PARTNERSHIP SHELBOURNE
------------------------------------------------------ ----------------------------------------------------------------------
<S> <C>
Fees to Affiliates
Your partnership agreement provides for the payment Shelbourne Management will manage Shelbourne under an advisory
of the following fees to us and our affiliates: agreement and will be paid:
o Asset Management Fee. An asset management fee equal to 1.25% of
o Asset Management Fee. A per annum partnership gross assets of Shelbourne based on the latest appraised value
asset management fee equal to 1.25% of the gross of Shelbourne's properties and the amount of Shelbourne's other
assets of your partnership per annum based on assets. Since the asset management fee is based on gross
the latest appraised value of your partnership's assets, the amount payable to Shelbourne Management will
properties and the amount of your partnership's increase to the extent Shelbourne increases its gross assets,
other assets; including through leverage;
o Expense Reimbursement. $200,000 per year for o Expense Reimbursement. $200,000 per year for reimbursement of
expenses of your managing general partner administrative expenses which Shelbourne Management is not
relating to the administration of your required to account for;
partnership which your managing general partner
is not required to account for; 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% of revenues o Accountable Expense Reimbursement. Reimbursements for
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 incurred Under the advisory agreement, Shelbourne Management will be
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 15%
of the proceeds of any sales or financings after o provide or arrange for customary property management services to
limited partners are distributed their total be provided at Shelbourne's properties;
original invested capital plus an amount that
would equal a 10% annual return on their o supervise Shelbourne's financings including any sales of
adjusted invested capital. We do not expect Shelbourne's securities;
that limited partners will receive the required
amount upon liquidation of your partnership and o conduct relations for Shelbourne with the American Stock
therefore we do not expect to receive any Exchange or with dealers which make markets in Shelbourne's
subordinated incentive fees. 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 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
$4.01 per unit, or an aggregate of $2,360,860, 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 leverage, the asset
management fee payable to Shelbourne Management would increase.
37
<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.
38
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL AND PRO FORMA PAYMENTS TO THE GENERAL PARTNERS
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------- ----------------------------------------
1997 1998
----------- ----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net
Historical Shelbourne Increase Historical Shelbourne Increase
Partnership Pro Forma (Decrease) Partnership Pro Forma (Decrease)
----------- ---------- ---------- ----------- ---------- ----------
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 $20,584 0 ($20,584) $205,301 $115,797 ($89,504)
Affiliates (4)
Non-Accountable Expense $200,000 $200,000 $0 $200,000 $200,000 $0
Reimbursement
Accountable Expense $43,361 $43,361 0 $102,025 $102,025 0
Reimbursement ---------- ---------- --------- --------- ---------- ---------
Total - No Leverage $2,181,096 $1,519,442 ($661,654) $2,362,244 $1,853,805 ($508,439)
Total - 75% Leverage -- $4,098,397 -- -- $4,639,486 --
---------- ---------- --------- ---------- ---------- ---------
<CAPTION>
------------------------------------- -------------------------------------
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------- -------------------------------------
1999 SEPTEMBER 30, 2000
------------ ------------ ----------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net
Historical Shelbourne Increase Historical Shelbourne Increase
Partnership Pro Forma (Decrease) Partnership Pro Forma (Decrease)
----------- ---------- ---------- ----------- ---------- ----------
Asset Management Fee (1)
No leverage $973,293 $1,023,273 $49,980 $708,778 $708,778 $0
75% leverage -- $4,093,093 -- -- $3,936,944 --
Property Management Fees (2) $389,113 $389,113 0 $254,820 $254,820 0
General Partners' $71,181 $100,175 $28,994 0 $135,930 $135,930
Distributions (3) (4)
Distributions on 0 $613,367 $613,367
Units/Shares Held by our $175,484 $246,963 $71,479
Affiliates (4)
Non-Accountable Expense $200,000 $200,000 $0 $150,000 $150,000 0
Reimbursement
Accountable Expense $58,480 $58,480 0 0 0 0
Reimbursement ---------- ---------- -------- ---------- ---------- -------
Total - No Leverage $1,867,551 $2,018,004 $150,453 $1,113,598 $1,862,695 $749,297
Total - 75% Leverage -- $5,087,824 -- -- $5,091,061 --
--------- ---------- -------- ---------- ---------- --------
</TABLE>
----------
(1) Amounts under Historical Partnership represent the actual fee paid by your
partnership for the period indicated. For the years ended December 31, 1997
and 1998, the historical fee was equal to 1.05% of the gross amount of your
partnership's original offering proceeds paid or allocable to acquire
properties. As a result of the settlement of the class action involving
your partnership, the asset management fee was changed to a fixed amount
for 1999 and thereafter to an amount equal to 1.25% of your partnership's
gross assets. The historical fee for 1999 would have been $1,023,273 if it
had been calculated based on 1.25% of gross assets. Amounts under
Shelbourne Pro Forma were determined based on a fee of 1.25% of
Shelbourne's gross assets both with and without the effects of borrowing.
At any given time, "gross assets" are valued based on the latest appraised
value of the properties, as well as the amount of other assets. The amounts
under Historical Partnership and Shelbourne Pro Forma, No Leverage for the
nine months ended September 30, 2000 reflect additional amounts payable for
the three months ended September 30, 2000 based on the June 30, 2000
property appraisals. The fees based on 75% leverage assume that
Shelbourne's gross assets were $275,088,524, $297,139,630, $327,447,424 and
$419,940,693 during the years ended December 31, 1997, 1998 and 1999 and
the nine months ended September 30, 2000, respectively.
(2) Historical cost includes $416,428, $427,126, and $389,113 of supervisory
management fees paid to our affiliate, Resources Supervisory Management
Corp. for the years ended December 31, 1997, 1998 and 1999, respectively,
of which $287,466, $278,204 and $319,610, respectively, was paid to
unaffiliated management companies. For the nine months ended September 30,
2000 Resources Supervisory was entitled to receive a $254,820 supervisory
management fee, $152,415 of which was paid to Kestrel Management L. P., an
affiliate of your general partners, and $102,405 of which was paid to
unaffiliated management companies with the balance being retained by
Resources Supervisory. As of October 1, 2000 all property management
services for your partnership were being performed directly by Kestrel and
Resources Supervisory was no longer performing any property management
services.
(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.
Beginning in 2001, Shelbourne will be required to distribute 90% of its
taxable income in order to qualify as a real estate investment trust.
39
<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
Federal income tax purposes, is not subject to tax, but be taxable to them as ordinary dividend income except
you must report your allocable share of partnership for distributions properly designated as capital gain
income and loss on your tax return. Partnership distributions. Dividends and capital gains from common
distributions are not taxable to you except to the extent stock cannot be offset by passive activity losses,
such distributions exceed your adjusted tax basis in your including any unused passive activity losses from your
partnership units. Your partnership specially allocates partnership, in the case of stockholders who are
depreciation deductions to taxable unitholders. Losses subject to the passive activity loss limitation.
from your partnership constitute passive activity losses Unused passive activity losses from your partnership
which, under the passive activity loss limitation rules, generally may be deducted when you sell all of your
cannot be deducted currently except to the extent of your common stock. Tax losses of Shelbourne will not pass
passive activity income, if any, from other investments. through to stockholders, but will reduce Shelbourne's
Income from your partnership generally constitutes future taxable income subject to applicable
passive activity income which, subject to applicable limitations. Each January, stockholders will be mailed
limitations, can be offset by unused passive activity the familiar Form 1099-DIV for corporate dividends.
losses from your partnership or other investments.
Generally, by March 15 of each year, you receive annual As a stockholder, you generally will not be required to
Schedule K-1 forms with respect to information for file state income tax returns or pay state income taxes
inclusion on your Federal income tax returns. outside your state of residence with respect to
Shelbourne's operations. Shelbourne must pay state
You generally must file state income tax returns and may income taxes in certain states where it owns properties.
incur state income tax in various states in which your
partnership owns property.
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>
<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
rise to unrelated business taxable income under the estate investment trust to a tax-exempt pension trust
Internal Revenue Code. generally 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.
Shelbourne's dividends generally will not constitute unrelated business taxable income to tax-exempt stockholders.
</TABLE>
40
<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.
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 made quarterly distributions to limited
partners.
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 September 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>
-------------------------------------------------------------------------------------------------
BEGINNING EQUITY ORGANIZATION COSTS DISTRIBUTIONS ON
BALANCE CAPITAL INCOME ALLOCATED EQUITY
---------------------- ------------------- ------------------- ---------------------
TOTAL PER TOTAL PER TOTAL PER TOTAL PER
UNIT UNIT UNIT UNIT
----------- -------------- ------- ---------- ------ ---------- ------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Limited $139,652,375 237.50 (4,189,500) (7.12) 34,398,335 58.50 (53,464,084) (90.92)
Partners
----------- ------------ ------- ----------- ------- ---------- ----- ----------- ------
General 7,351,125 -- (220,500) -- 1,810,436 -- (2,813,901) --
Partners
-------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------
EQUITY BALANCES AS
LOSSES ALLOCATED OF 9/30/00
------------------- --------------------
TOTAL PER TOTAL PER
UNIT UNIT
----------- ----------- ------ ----------- --------
<S> <C> <C> <C> <C>
Limited (54,944,845) (93.44) 61,452,281 104.51
Partners
----------- ----------- ------ ---------- ------
General (2,891,834) -- 3,235,326 --
Partners
------------------------------------------------------
</TABLE>
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
41
<PAGE>
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 $4.01 per unit, or $2,360,860 in the
aggregate, upon liquidation 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 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.
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. At the completion of the originally anticipated holding period for your
partnership's properties in the mid-1990s, your general partners, which were not
under the same management as at present, believed that a liquidation of your
partnership would result in a substantial and permanent loss to limited
partners. During the period from the mid-1980s to the mid-1990s, the commercial
real estate market experienced a general deterioration which had significantly
affected property values and decreased sales activities. In addition, in the
mid-1990s there was a reduction in sources of real estate financing and a glut
in the commercial real estate market caused by overbuilding and sales of
properties acquired by financial institutions and governmental agencies which
further contributed to unfavorable real estate market conditions. Furthermore,
some of your partnership's properties were in poor condition for sale as a
result of high vacancy rates and, in some cases, deteriorating physical
conditions. As a result, your general partners did not believe liquidation of
your partnership at that time was in the best interests of limited partners as
such liquidation 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
October 1, 1998 through September 30, 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.
42
<PAGE>
<TABLE>
SECONDARY MARKET TRADING VOLUME AND UNIT PRICES
(Except as otherwise indicated all price information on a per unit basis)
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
TOTAL UNITS NUMBER OF WEIGHTED WEIGHTED AVERAGE
DATE TRADED TRADES HIGH LOW AVERAGE PER SHARE
---- ----------- --------- ------ ------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
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
------ --- ------- ------ ------ ------
Twelve Months 21,229 232 $101.18 $80.00 $87.97 $43.99
Ended 9/99
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
6/00-7/00 2,952 71 $87.80 $80.00 $80.51 $40.26
8/00-9/00 3,015 63 $89.00 $78.00 $80.32 $40.16
------ --- ------- ------ ------ ------
Twelve Months 15,946 328 $100.00 $78.00 $83.50 $41.75
Ended 9/00
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<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 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
44
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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.
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.
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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.
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.
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<PAGE>
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.
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. The
appraised values reported below reflect market conditions prevailing on or
around June 2000.
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
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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
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.
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<PAGE>
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 applicable 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 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.
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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, Cushman & Wakefield estimated the net operating
income of the properties over a ten year holding period. Cushman & Wakefield
generally determined this to be a period which would allow the investment to
mature, an investor to recognize a return that is commensurate with the risk
taken and a recapture of the original investment At the end of the tenth year
Cushman & Wakefield assumed that the property would be sold at a price
determined by capitalizing the estimated net operating income in the eleventh
year. Cushman & Wakefield determined the appropriate capitalization rate based
on its evaluation of the real estate market. The resulting implied sale value as
well as the estimated net operating income streams for the first ten years were
then discounted to present value using an appropriate yield rate. Cushman &
Wakefield determined the yield rate based on its analysis of yield rates
currently accepted in the market place for comparable real estate investments as
well as other investments.
The following table sets forth the values determined by Cushman &
Wakefield using the income approach and the yield rate applied under the
discounted cash flow method and the capitalization rate chosen under the direct
capitalization method:
<TABLE>
INCOME CAPITALIZATION APPROACH
----------------------------------------------------------------------------
<CAPTION>
DISCOUNTED
PROPERTY CASH FLOW METHOD DIRECT CAPITALIZATION METHOD
-------- ---------------------------- ----------------------------------
YIELD CAPITALIZATION
RATE USED RATE USED
--------- --------------
<S> <C> <C> <C> <C>
Century Park I (1) $10,850,000 11.5% $10,150,000 9.0%
568 Broadway (2) $19,462,500 12.5% -- --
Seattle Tower (1) (3) $11,350,000 11.0% -- --
Commonwealth Industrial Park $8,130,000 12.0% $8,000,000 9.5%
Commerce Plaza I $7,700,000 12.0% -- --
Melrose Crossing -- -- -- --
Matthews Township Festival $11,800,000 13.0% -- --
Sutton Square Shopping Center $11,900,000 12.5% -- --
TMR Warehouse (4) -- -- $4,638,170 10.5%
</TABLE>
---------------
(1) Your partnership has a 50% interest in these properties and the amounts
listed in the table represent 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 adopted a four-year capital improvement plan for
this property. Using the income approach, Cushman & Wakefield estimated
the value of the property upon the completion of the capital
improvement plan to be $15,500,000.
(4) Your partnership has a 20.66% interest in this property and the amount
listed in the table represents 20.66% of the applicable value.
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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 applicable 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 December 8, 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 $56.98 and $64.25 per share as of September 30, 2000. In this
analysis Insignia/ESG made the following adjustments to the $88,519,680
appraised value of your partnership's properties:
1. Insignia/ESG added $15,056,100 representing the amount as of
September 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.
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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 using a 5% discount
rate. Insignia/ESG selected this rate because it is the
approximate rate at which the reserved funds are expected to
earn interest.
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 this property did not make
provisions for capital improvements.
4. Insignia/ESG subtracted $21,055,127 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
using an 11.94% discount rate. Insignia/ESG selected this
discount rate by weighting the various discount rates used by
Cushman & Wakefield in valuing the properties based on the
contribution of each property's appraised value to your
partnership's aggregate appraised value.
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 and then discounting the applicable joint
venture reduction using the discount rate used by Cushman &
Wakefield to value the property under the discounted cash flow
approach.
Insignia/ESG then applied a 6% margin of error to establish the range
of estimated going concern values of your partnership.
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The following chart summarizes Insignia/ESG's estimation of the going
concern value of your partnership:
---------------------------------------------------------------------------
6/30/00 appraised value of partnership properties
$88,519,680
Net cash and cash equivalents and other non-real
estate assets at 9/30/00 deemed to have value on $15,056,100
liquidation
Cost of maintaining $1,000,000 reserve through 2015
discounted to present utilizing 5% rate
($817,304)
Cost of maintaining reserve over next five years at
TMR Warehouse ($811,774)
Estimated partnership costs through 2015 discounted
to 9/30/00 utilizing 11.94% rate
($21,055,127)
Present value of reduction attributable to joint venture
investments using discount rates utilized by Cushman &
Wakefield in applicable property appraisals ($5,852,255)
----------
Net Total: $75,039,320
----------
Net Per Share (1,237,916 shares) $60.62
6% margin of error:
Bottom of range $56.98
Top of range $64.25
---------------------------------------------------------------------------
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 September 30, 2000, we would pay to limited
partners $4.01 per unit or an aggregate of $2,360,860, 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 $67.71 and $76.36 per share as of September 30, 2000. In this analysis
Insignia/ESG made the following adjustments to the $75,605,917 adjusted
appraised value of your partnership's properties:
54
<PAGE>
1. Insignia/ESG subtracted $3,475,191 representing the estimated costs of
disposing of your partnership's properties. Disposition costs
generally consist of transfer taxes, brokerage commissions and closing
costs and were assumed to be the amounts used by Cushman & Wakefield
in determining the future sale values of each 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. Insignia/ESG also subtracted
dissolution costs consisting of professional fees and administrative
costs which were estimated by us to be $500,000.
2. Insignia/ESG added $15,056,100 representing the amount as of
September 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 $2.00 per share representing the amount we would be
required to pay limited partners if your partnership were liquidated
as of September 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.
The following chart summarizes our determination of the estimated
liquidation value of your partnership:
-----------------------------------------------------------------
6/30/00 adjusted appraised value
of partnership properties $75,605,917
Property disposition costs ($3,475,191)
Dissolution costs ($500,000)
Net cash and cash equivalents and other
non-real estate assets at 9/30/00 deemed
to have value on liquidation $15,056,100
----------
Sub-Total $86,686,826
----------
Sub-Total per share (1,237,916 shares) $70.03
Per share fee give-back amount $2.00
$72.03
6% margin of error:
Bottom of range: $67.71
Top of range: $76.36
-----------------------------------------------------------------
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.
55
<PAGE>
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 $37.75 and
$42.57. To estimate the secondary market value, Insignia/ESG used the weighted
average trading price for units traded between August 1 and September 30, 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.
In estimating the secondary market trading value of the units,
Insignia/ESG noted that the secondary markets cannot be characterized as either
efficient or liquid markets and that the units are expected to trade at a
discount to both the liquidation and going concern values of your partnership.
CONVERSION AND COMPARABLE COMPANY ANALYSIS
Insignia/ESG estimated the value of the shares of common stock of
Shelbourne to be between $45.41 and $56.10 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 their projected 2001 funds from operations. Insignia/ESG then applied a
10.5% margin of error to this estimate indicating a range of multiples for
Shelbourne from 5.1 to 6.3.
Insignia/ESG applied the foregoing range of multiples to Shelbourne's
projected funds from operations from your partnership's existing properties and,
in order to give effect to Shelbourne's plan to grow its asset base, from its
anticipated future investments. Shelbourne's projected funds from operations
were estimated by us as follows:
1. Our projections for existing properties were based on actual
operating results for the twelve months ended September 30,
2000 as adjusted to reflect an increase in expenses resulting
primarily 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 $6,773,182.
2. Our projections for Shelbourne's anticipated future
investments were based on Shelbourne using approximately 80%
of its current cash reserves to acquire more investments and
achieving a 75% debt to asset ratio. We 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 Shelbourne's anticipated future investments is
$4,249,983.
The range of estimated values of Shelbourne's common stock reflects
Shelbourne's intention to leverage and grow its asset base. The value of
Shelbourne's common stock would be adversely affected if the market does not
value Shelbourne based upon its growth objectives or if Shelbourne does not
pursue, or is unsuccessful in achieving, its growth objectives. In that case,
the market could value Shelbourne's common stock based solely on your
partnership's current asset base. The low end of Insignia/ESG's
56
<PAGE>
estimated range for this value is $36.69 per share. Insignia/ESG derived
this per share value by applying a 5.358 multiple to Shelbourne's projected
funds from operations from its existing properties. In estimating Shelbourne's
projected funds from operations under this analysis, we assumed that all cash in
excess of that used for reserves would be distributed to shareholders. The 5.358
multiple represents the low end of a range of multiples determined by applying a
6% margin of error to the median current trading multiple for the set of real
estate investment trusts described above.
The $36.69 value represents the low end of Insignia/ESG's estimated
value for Shelbourne's common stock if the market does not value Shelbourne
based upon its growth objectives but instead values Shelbourne's common stock
based solely on your partnership's current asset base. While we believe that the
market is likely to take Shelbourne's growth objectives into consideration in
valuing Shelbourne's common stock, we cannot guarantee the extent to which these
objectives will be taken into account.
The following chart summarizes Insignia/ESG's estimation of the range
of value of a share of Shelbourne common stock:
--------------------------------------------------------------------
Projected FFO on existing assets $6,773,182
Projected FFO on anticipated future
investments $4,249,983
Total $11,023,165
Multiple range 5.1 to 6.3
Range of Values $56,218,141 to
$69,445,939
Range of per share values $45.41 to $56.10
--------------------------------------------------------------------
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.
Comparison Valuation Table
The following table sets forth the results of the comparative valuation
analyses described above. 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 ANALYSES
Estimated range of going concern values $56.98 - $64.25
Estimated range of liquidation values $67.71 - $76.36
Range of implied secondary market values $37.75 - $42.57
Estimated range of values for $45.41 - $56.10
Shelbourne common stock
57
<PAGE>
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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<PAGE>
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 23.75% 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
$45.41 and $56.10, 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 continuation 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.
59
<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 341,178 (2) 27.56%
New York, New York 10022
------------
(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) 112,466 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.
</TABLE>
60
<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 September 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>
SHELBOURNE PRO
FORMA
FOR THE YEAR
HISTORICAL HIGH EQUITY PARTNERS L.P. - SERIES 86 ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
----------------------------------------------------------------------------- ---------------
1995 1996 1997 1998 1999 1999
---- ---- ---- ---- ---- ----
<S> <C> <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 $12,800,623
Total Costs and Expenses $32,898,948 $9,830,038 $9,815,331 $8,783,086 $8,948,143 $8,948,143
Net Income (Loss) ($22,084,905) $2,244,520 $2,845,625 $3,100,160 $3,852,480 $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) in ($998,065) $2,657,554 $2,419,123 $391,464 $2,455,771 $1,875,877
Cash and Cash Equiv.
Net Cash Provided By Operating $2,737,148 $4,879,769 $3,214,689 $4,261,619 $5,228,795 $5,228,795
Activities
Distributions $1,535,016 $1,535,016 $2,166,352 $2,847,204 $2,135,401 $2,715,295
PER UNIT/SHARE DATA
Net Income (loss)/units ($35.68) $3.63 $4.60 $5.01 $6.22
Basic and diluted Income Per $3.11
Share
Pro Forma Taxable Income Per $2.31
Share
Book Value Per Unit $92.78 $93.93 $94.50 $94.91 $98.83
Book Value - Pro forma per $48.95
share
Distributions declared as a $2.48 $2.48 $4.03 $4.60 $3.45
return of capital per unit
Proforma Shelbourne REIT $2.19
distributions from earnings
and profits per share
Proforma Shelbourne REIT $0
distributiions as a return
of capital per share
Ratio of earnings to total -36.65% 3.62% 4.60% 5.01% 6.08% 6.13%
assets
<CAPTION>
HISTORICAL PARTNERSHIP FOR SHELBOURNE PRO
THE FORMA FOR THE
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -----------------
1999 2000 2000
---- ---- ----
<S> <C> <C> <C>
INCOME STATEMENT DATA
Total Revenues $9,352,910 $9,520,735 $9,520,735
Total Costs and Expenses $6,618,178 $6,005,406 $6,005,406
Net Income (Loss) $2,734,732 $3,515,329 $3,515,329
BALANCE SHEET DATA
Cash and Cash Equiv. $11,655,876 $16,465,000 $13,747,410
Total Assets $62,599,911 $66,402,140 $63,684,550
Total Liabilities $2,545,383 $1,714,533 $1,714,533
L.P. Equity $57,050,855 $61,452,281
G.P. Equity (Deficit) $3,003,673 $3,235,326
Total Common Stockholders $61,970,017
Equity
OTHER FINANCIAL DATA
Net Increase (Decrease) in $1,435,711 $3,789,064 $1,070,474
Cash and Cash Equiv.
Net Cash Provided By Operating $3,981,623 $4,150,467 $4,150,467
Activities
Distributions $2,135,403 $2,718,590
PER UNIT/SHARE DATA
Net Income (loss)/units $4.42 $5.68
Basic and diluted Income Per $2.84
Share
Pro Forma Taxable Income Per $2.31
Share
Book Value Per Unit $97.03 $104.51
Book Value - Pro forma per $50.06
share
Distributions declared as a $3.45
return of capital per unit
Proforma Shelbourne REIT $2.20
distributions from earnings
and profits per share
Proforma Shelbourne REIT
distributiions as a return
of capital per share
Ratio of earnings to total 4.37% 5.29% 5.52%
assets
</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.
61
<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
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 $16,465,000 of cash and cash equivalents at
September 30, 2000, as compared to $12,675,936 at December 31, 1999. During the
nine months ended September 30, 2000 cash and cash equivalents increased
$3,789,064 as a result of $4,150,467 of net cash provided by operating
activities which was partially offset by $361,403 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, is cash flow from the operation of its properties,
principally rents received from tenants, which amounted to $4,150,467 for the
nine months ended September 30, 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
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.
For the nine months ended September 30, 2000, your partnership's
capital expenditures were funded from cash flow and your partnership's working
capital reserves. The following table sets forth, for the nine months ended
September 30, 2000 and for the prior two fiscal years, your partnership's
expenditures at each of its properties for capital improvements and capitalized
tenant procurement costs:
62
<PAGE>
CAPITAL IMPROVEMENTS AND CAPITALIZED TENANT PROCUREMENT COSTS
9/30/2000 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 0 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 0 -- --
------------ ------------- ------------
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.
63
<PAGE>
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
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
64
<PAGE>
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 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
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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.
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
1996 through September 30, 2000.
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The following table represents the original cost less accumulated
depreciation, the September 30, 2000 carrying value and the impairment
adjustments recorded to date against your partnership's properties held as of
September 30, 2000:
<TABLE>
<CAPTION>
ORIGINAL COST LESS
ACCUMULATED ADJUSTMENT FOR 9/30/00
DEPRECIATION IMPAIRMENT CARRYING VALUE
------------------ -------------- --------------
<S> <C> <C> <C>
DESCRIPTION
-----------
Century Park I Office Complex Kearny Mesa, $15,786,330 $11,700,000 $4,086,330
California (50% owned)
568 Broadway Office Building New York, New $15,454,524 $10,821,150 $4,633,374
York (38.925% owned)
Seattle Tower Office Building Seattle, $8,649,865 $6,050,000 $2,599,865
Washington (50% owned)
Commonwealth Industrial Park $10,469,488 $5,800,000 $4,669,488
Manufacturing/Warehouse Buildings
Fullerton, CA
Commerce Plaza I Office Building, $7,737,365 $2,700,000 $5,037,365
Richmond, VA
Melrose Crossing Shopping Center Retail $14,464,818 $12,100,000 $2,364,818
Building, Melrose Park, IL
Matthews Township Festival Shopping Center $13,443,501 $5,300,000 $8,143,501
Retail Building, Matthews, NC
Sutton Square Shopping Center Retail $10,318,930 -- $10,318,930
Building, Raleigh, NC
TMR Warehouse Industrial Buildings, $4,462,012 -- $4,462,012
Hilliard, Grove City and Delaware, OH
(20.66% owned)
Melrose (lot #7) Vacant Lot 0 -- 0
Melrose Park, IL ------------ ----------- -----------
TOTAL $100,786,833 $54,471,150 $46,315,683
</TABLE>
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RESULTS OF OPERATIONS
SEPTEMBER 30, 2000 VS. SEPTEMBER 30, 1999
Your partnership experienced an increase in net income of $780,597 for
the nine months ended September 30, 2000 as compared to the same period in the
prior year.
The increase in net income was due to an increase in rental revenue of
$50,990, a reduction of costs and expenses of $612,772 as well as an increase of
interest income of $183,345 which were partially offset by a decrease in other
income of $66,510.
Rental revenues increased for the nine months ended September 30, 2000
compared to the same period in 1999 due to the rental of vacant spaces in
Commonwealth Industrial Park and increased rental rates on new leasing
activities.
The decrease in cost and expenses for the nine months ended September
30, 2000 as compared to the nine months ended September 30, 1999 is due to
decreased administrative expenses of $348,993, decreased operating expenses of
$173,132, and decreased property and partnership management fees of $39,380 and
$99,277, respectively. Property operating expenses decreased primarily due to
lower real estate taxes as a result of decreased assessed values of your
partnership's properties and lower parking lot maintenance fees. These decreases
were partially offset by an increase in depreciation and amortization expense of
$47,960.
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 nine months of 2000 as
compared to the first nine 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 nine months ended September 30,
2000 due to higher cash balances during the period as compared to the comparable
period in 1999. Other income decreased during the nine months ended September
30, 2000 as compared to the same period in 1999 due to a decrease in 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
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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, 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.
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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.................... 131,000
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..................................... $596,000
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.
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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 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
23.75% of the units, intend to vote "YES" to approve the conversion.
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 __________ __, 2001. 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 139,641 units, representing 23.75% of the
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outstanding 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.
EXCHANGE OF CERTIFICATES FOR SHARES
As soon as practicable after the effective time of the conversion, the
depositary, American Stock Transfer & Trust Company, will mail to you
- a notice advising you that the conversion has become effective and
- instructions for exchanging the certificate(s) representing your
units for shares of Shelbourne common stock.
On surrender to the depositary of your certificate(s), together with
any other required documents, you will be entitled to receive shares of
Shelbourne common stock. If you have lost or misplaced the certificate(s)
representing your units, you will be required to complete, sign, have notarized
and return to the depositary an affidavit of loss and indemnity agreement which
will be provided to you in order to receive shares of Shelbourne common stock in
exchange for your units.
YOU SHOULD NOT FORWARD THE CERTIFICATE(S) REPRESENTING YOUR UNITS TO
THE DEPOSITARY UNTIL YOU HAVE RECEIVED TRANSMITTAL FORMS. YOU SHOULD ALSO NOT
RETURN THE CERTIFICATE(S) REPRESENTING YOUR UNITS WITH THE ENCLOSED PROXY.
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 $4.01 per unit, or an aggregate of $2,360,860, 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
the beneficial owners of Presidio Capital Investment Company, LLC also
beneficially own 100% of 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 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, the duration of
our fees is limited by the requirement that your partnership be liquidated no
later than December 31, 2015. In addition, 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.
ALLOCATION OF TIME AND SERVICES BY SHELBOURNE'S OFFICERS AND DIRECTORS
Many of Shelbourne's officers and directors are also officers of
Shelbourne Management, Winthrop Financial Associates and/or NorthStar Capital
Investment Corp., entities which manage other real estate companies that may
compete with Shelbourne or otherwise have similar business interests. In that
regard, Michael L. Ashner, the President and a director of Shelbourne, is also
the President and sole director of Shelbourne Management and the Chief Executive
Officer of Winthrop Financial Associates and Peter Braverman, Lara Sweeney and
Carolyn Tiffany, officers and/or directors of Shelbourne and Shelbourne
Management, are also officers of Winthrop Financial Associates. In addition,
David T. Hamamoto and W. Edward Scheetz, Co-Chief Executive Officers of
NorthStar Capital Investment Corp., are directors of Shelbourne and Steven B.
Kauff, David G. King, Jr. and Dallas E. Lucas, officers of NorthStar Capital
Investment Corp., are officers and/or directors of Shelbourne and Shelbourne
Management. As officers and directors of entities with which Shelbourne will
conduct business or with interests in competition with Shelbourne's interests,
Shelbourne's officers and directors will experience conflicts between their
fiduciary obligations to Shelbourne and their fiduciary obligations to
Shelbourne Management, Winthrop Financial Associates, NorthStar Capital
Investment Company and their affiliated entities. This conflict of interest
could:
o limit the time and services that the officers and directors of
Shelbourne devote to Shelbourne because they will be providing
similar services to other real estate entities; and
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o impair Shelbourne's ability to compete for acquisition of
properties with other real estate entities that are also advised
by Shelbourne Management, Winthrop Financial Associates and
NorthStar.
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, L.P would arrange for the management of Presidio
Capital Corp. and its direct and indirect subsidiaries.
In order to provide these services for your partnership, effective
October 25, 1999, nominees of AP-PCC III, L.P. were elected as officers and
directors of your general partners. In order to provide these services for
Shelbourne nominees of AP-PCC III, L.P. will also serve as officers and
directors of Shelbourne and Shelbourne Management. The individuals designated by
AP-PCC III, are Michael Ashner, Peter Braverman, Lara Sweeney and Carolyn
Tiffany. Mr. Ashner also serves as the Chief Executive Officer of Winthrop
Financial Associates and Peter Braverman , Lara Sweeney and Carolyn Tiffany also
serve as executive officers of Winthrop Financial Associates.
AP-PCC III, L.P. 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.
PROPERTY MANAGEMENT AGREEMENTS
Kestrel Management L.P., an affiliate of AP-PCC III L.P. and your
general partners, is currently performing property management services for your
partnership's properties. Kestrel Management will be retained by Shelbourne
Management to perform similar property management services for Shelbourne.
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. The terms of the
fees and reimbursements payable by your partnership were specifically provided
for in your partnership's agreement of limited partnership, as amended by the
terms of the settlement of the class action litigation involving your
partnership.
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, on October 12, 2000 Millennium Funding III LLC an affiliate
of Presidio and your general partners, purchased 16,375 units after Olympia
exercised its right under the agreement to cause the purchase of its remaining
units as well as the purchase of 15,566 units in Integrated Resources High
Equity Partners, Series 85, A California Limited Partnership and 7,477 units in
High Equity Partners L.P. Series 88. The units in the other two High Equity
partnerships were purchased by affiliates of Millennium Funding III LLC. The
aggregate purchase price for the purchase of the units in your partnership and
the purchase of units in the other High Equity partnerships was $7,500,000.
Insignia/ESG represented Presidio in connection with the October 2000 purchase.
77
<PAGE>
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
78
<PAGE>
Management to provide day-to-day management and administrative services
following the conversion. 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.
79
<PAGE>
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 investing in a variety of real estate-related investments,
including undervalued assets and value-enhancing situations, as determined from
time to time by Shelbourne's board. 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,
80
<PAGE>
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 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
subject to complying with the requirements of the Internal Revenue Code for
qualification as a real estate investment trust.
81
<PAGE>
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 9/30/00 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 $15,786,330 $11,700,000 $4,086,330 $7,875,000 11/86 200,002
Kearny Mesa, California (50% owned)
568 Broadway Office Building New $15,454,524 $10,821,150 $4,633,374 13,623,750 12/86 300,832
York, New York (38.925% owned)
Seattle Tower Office Building $8,649,865 $6,050,000 $2,599,865 8,512,000 12/86 167,534
Seattle, Washington (50% owned)
Commonwealth Industrial Park $10,469,488 $5,800,000 $4,669,488 8,100,000 4/87 273,576
Manufacturing/Warehouse Buildings
Fullerton, California
Commerce Plaza I Office Building $7,737,365 $2,700,000 $5,037,365 7,700,000 4/87 84,610
Richmond, Virginia
Melrose Crossing Shopping Center $14,464,818 $12,100,000 $2,364,818 3,100,000 1/88 138,355
Retail Building Melrose Park,
Illinois (3)
Matthews Township Festival Shopping $13,443,501 $5,300,000 $8,143,501 11,800,000 2/88 127,403
Center Retail Building Matthews,
North Carolina
Sutton Square Shopping Center $10,318,930 -- $10,318,930 11,900,000 4/88 101,965
Retail Building Raleigh, North
Carolina
TMR Warehouse Industrial Buildings $4,462,012 -- $4,462,012 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 1/88 --
------------ ----------- ----------- -------- ---------
TOTAL $100,786,833 $54,471,150 $46,315,683 $75,605,750 2,404,777
</TABLE>
(1) Carrying value is the amount shown on your partnership's September 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.
82
<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> <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.
83
<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>
84
<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>
85
<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>
86
<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.
87
<PAGE>
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>
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 $16,465,000 as of September 30,
2000. The operating partnership will be subject to the liabilities of your
partnership. These liabilities, totaling approximately $1,714,533 as of
September 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.
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.
88
<PAGE>
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.
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 2002 (two directors who have not yet been named), 2003
(Michael L. Ashner and Robert Martin) and 2004 (David T. Hamamoto, W. Edward
Scheetz and David G. King, Jr.), respectively. Beginning in 2002, 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;
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;
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<PAGE>
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
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>
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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 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).
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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 has been a Senior Managing Director at
Insignia/ESG, Inc., a commercial real estate brokerage firm, since 1998. From
1995 until 1998, Mr. Martin was a Managing Director at Insignia/ESG. From 1984
until 1994, he was employed by Grubb & Ellis, a commercial real estate brokerage
firm, in various positions, starting as Associate Broker in 1984, and becoming a
Senior Managing Director in 1989. Mr. Martin is a graduate of the Wharton School
of Business, University of Pennsylvania, where he received a B.S. in economics.
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.
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<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 27.56% interest in your
partnership comprised of a 5% general partnership interest owned by us and
139,641 units owned by our affiliates. Accordingly, we, together with our
affiliates, will be entitled to receive 341,178 shares of common stock in the
conversion, representing approximately 27.56% of the total number of shares of
common stock that will be outstanding immediately following the conversion.
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PRO FORMA FINANCIAL INFORMATION OF SHELBOURNE
The following pro forma statements of operations and cash flows of
Shelbourne for the nine months ended September 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 September 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.
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<PAGE>
SHELBOURNE PROPERTIES II, INC.
PRO FORMA BALANCE SHEET
SEPTEMBER 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 $46,315,662 $46,315,662
CASH AND CASH EQUIVALENTS $1,000 16,465,000 (2,718,590) (c) 13,747,410
OTHER ASSETS 3,416,845 3,416,845
RECEIVABLES 204,613 204,613
----- ----------- ------------ ---------- ----------
$1,000 $66,402,140 (2,718,590) 63,684,550
====== =========== ============ ========== ==========
LIABILITIES AND PARTNERS' EQUITY:
ACCOUNTS PAYABLE AND $1,387,909 $1,387,909
ACCRUED EXPENSES
DUE TO AFFILIATES 326,624 326,624
------ ----------- ------------ ---------- ----------
1,714,533 1,714,533
------ ----------- ------------ ---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
LIMITED PARTNERS' EQUITY 61,452,281 (61,452,281) (a)
(588,010 UNITS ISSUED AND
OUTSTANDING)
GENERAL PARTNERS' EQUITY 3,235,326 (3,235,326) (a)
COMMON STOCK, PAR VALUE
$.01 (1,237,916 SHARES ISSUED
AND OUTSTANDING) 1 12,379 (b) 12,380
PAID-IN CAPITAL
999 64,675,228 (b) (2,718,590) (c) 61,957,637
------ ----------- ----------- ---------- ----------
1,000 64,687,607 (2,718,590) 61,970,017
------ ----------- ----------- ---------- ----------
$1,000 $66,402,140 (2,718,590) 63,684,550
====== =========== =========== ========== ==========
</TABLE>
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<PAGE>
SHELBOURNE PROPERTIES II, INC. PRO FORMA STATEMENT
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Shelbourne Partnership Pro Forma Shelbourne
Historical Historical Adjustments Pro Forma
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
RENTAL INCOME $8,936,786 $8,936,786
---------- ---------- ---------- ----------
COST AND EXPENSES
OPERATING EXPENSES 2,665,051 2,665,051
DEPRECIATION AND AMORTIZATION 1,591,688 1,591,688
PARTNERSHIP MANAGEMENT FEE 708,778 708,778
ADMINISTRATIVE EXPENSES 785,069 785,069
PROPERTY MANAGEMENT FEE 254,820 254,820
---------- ---------- ---------- ----------
6,005,406 6,005,406
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST $2,931,380 $2,931,380
AND OTHER INCOME:
INTEREST INCOME 548,149 548,149
OTHER INCOME 35,800 35,800
---------- ---------- ---------- ----------
NET INCOME $3,515,329 $3,515,329
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME PER UNIT (588,010 $5.68
UNITS OUTSTANDING)
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME PER SHARE (1,237,916 $2.84
SHARES) OUTSTANDING)
========== ========== ========== ==========
</TABLE>
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<PAGE>
SHELBOURNE PROPERTIES II, INC.
PRO FORMA STATEMENT OF CASH FLOWS FOR
THE NINE MONTHS
ENDED SEPTEMBER 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 $3,515,329 $3,515,329
Adjustment to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,591,688 1,591,688
Straight-line adjustment for (29,833) (29,833)
stepped lease rentals
Changes in asset and liabilities
Receivables (126,043) (126,043)
Accounts payable and accrued (386,786) (386,786)
expenses
Due to affiliates (139,904) (139,904)
Other assets (273,984) (273,984)
------ ----------- ----------- -----------
Net cash provided by operating 4,150,467 4,150,467
activities
------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Improvements to real estate (361,403) (361,403)
------ ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distribution to partners (2,718,590) (c) (2,271,590)
------ ----------- ----------- -----------
Increase (decrease) in cash and cash 3,789,064 (2,718,590) 1,070,474
equivalents
Cash and cash equivalents, beginning 1,000 12,675,936 12,676,936
of period
------ ----------- ----------- -----------
Cash and cash equivalents, end of $1,000 $16,465,000 ($2,718,590) $13,747,410
period ====== =========== =========== ===========
</TABLE>
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SHELBOURNE PROPERTIES II, INC.
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
For the nine months ended
September 30, 2000
-------------------------
Average number of pro forma common and common 1,237,916
equivalent shares outstanding during the period
Pro forma net income $3,515,329
Pro forma basic and diluted income per share $2.84
=====
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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>
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<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>
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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
====
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SHELBOURNE PROPERTIES II, INC.
NOTES TO PRO FORMA FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 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 $1,023,273 if it
had been calculated based on 1.25% of gross assets using the 1998
property appraisals and $1,264,945 using the June 30, 2000 property
appraisals.
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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.
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.
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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 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.
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,
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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 in value of Shelbourne's capital stock, of 10%
or more of the vote or value of the outstanding stock 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.
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.
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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.
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.
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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.
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.
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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 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.
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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.
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
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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.
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.
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 2002, another class
will hold office initially for a
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term expiring at the annual meeting of stockholders to be held in 2003 and the
third class will hold office initially for a term expiring in 2004. 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 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:
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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 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,
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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.
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
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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,
2001. 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, 2001, 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 assumptions and representations
with respect to their organization, business, properties and operations. The
opinion 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.
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. 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) 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;
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(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 federal income tax on, and (3) any undistributed taxable income from prior
periods, less any taxable income that it elected to retain and pay federal
income 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.
Any gain realized by Shelbourne on the sale of any property held by the
operating partnership as inventory or other property held primarily for sale to
customers in the ordinary course of business will be treated as income from a
"prohibited transaction" that is subject to a 100% tax. Such prohibited
transaction income may also have an adverse effect upon Shelbourne's ability to
satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends upon
all the facts and circumstances with respect to the particular transaction. The
operating partnership intends to acquire and hold properties for investment with
a view to long-term appreciation, and to make such occasional sales of
properties as are consistent with its investment objectives. There can be no
assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% tax.
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, 2001, and must meet the requirements discussed below relating to
Shelbourne's organization, sources of income, nature of assets, and
distributions of income.
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 taxable year ending December 31, 2002 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.
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
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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.
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 of the voting power or value of the outstanding
stock of such tenant, hereinafter called a Related Party Tenant. There is 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;
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(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, or 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, even if rendered by an independent contractor or, 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 may also engage taxable REIT subsidiaries
to provide permitted services to tenants.
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:
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(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;
(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 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, Shelbourne would be permitted
to own more than 10% of the securities of taxable REIT subsidiaries provided
that the total value of those 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
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(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) 90% 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)
90% 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 90% but less than 100% of its "real estate
investment trust taxable income," as 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 federal income tax on; and
(3) any undistributed taxable income from prior periods, less any
taxable income from such periods that Shelbourne elected to retain and pay
federal income 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
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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.
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. Alternatively, Shelbourne
may elect to distribute its net long-term capital gains (if any) by making
taxable distributions of stock, which distributions would be taxable to
stockholders as if paid in cash.
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.
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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. A taxable stockholder who bought his units in your partnership's original
offering is estimated to have unused passive activity losses of up to $42 per
unit as of the end of 1999, subject to reduction to the extent utilized to
offset passive activity income from other investments. 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.
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.
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
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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, 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.
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.
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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 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 impose certification and other requirements on Non-U.S. Holders as
to which they should consult their tax advisors.
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
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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 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
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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 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 _______ __, 2001.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Your partnership's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, and Quarterly Reports on Form 10-Q for the periods ended
March 31, June 30 and September 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.
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 September 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.
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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.
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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 September 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 September 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
December 7, 2000
Boston, Massachusetts
F-1
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SHELBOURNE PROPERTIES II, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2000
ASSETS
Cash $1,000
LIABILITIES AND STOCKHOLDER'S EQUITY
Common Stock, $.01 par value
100 shares authorized, 100 issued and outstanding $1
$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 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
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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 PARTNERS L.P. - SERIES 86
CONSENT SOLICITED BY RESOURCES HIGH EQUITY, INC.
CONSENT EXPIRATION DATE: ________ ___, 2001
The undersigned, a holder of units (the "Units") of limited partnership interest
in High Partners L.P. - Series 86 (the "Partnership"), hereby acknowledges
receipt of the consent solicitation statement, dated _________ ___, 2001, 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: ________________,2001
Signature
_________________________________
Signature (if held jointly)
_________________________________
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 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 _______ ___, 2001 (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
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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.
(a) 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 the right to receive two (2) shares of
Common Stock. At the Effective Time, all such Units shall no longer be
outstanding and shall automatically be cancelled and retired and all rights with
respect thereto shall cease to exist, and each holder of Units shall cease to
have any rights with respect thereto, except the right to receive, upon
surrender of the certificate issued with respect to such Units (the "Unit
Certificate") or delivery of an Affidavit of Loss and Indemnity Agreement, in
accordance with Section 2.06(c), certificates representing the shares of Common
Stock required to be delivered under this Section 2.02 to be issued in
consideration therefor upon surrender of such certificate (the "Merger
Consideration") and any dividends or other distributions to which such holder is
entitled pursuant to Section 2.06(d) in each case, without interest and less any
required withholding taxes.
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(b) Notwithstanding the foregoing, the parties understand
that following the Merger the rights of each stockholder of the Company under
this Section 2.02 will be subject to the ownership limitations and other related
provisions contained in the Company's Amended and Restated Certificate of
Incorporation.
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 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.
SECTION 2.06 EXCHANGE OF CERTIFICATES.
(a) The Company and HEP shall jointly appoint a bank or
trust company to act as exchange agent (the "Exchange Agent") for the exchange
of the Merger Consideration upon surrender of Unit Certificates or delivery of
Affidavits of Loss and Indemnity Agreements, as the case may be.
(b) The Company shall provide to the Exchange Agent on or
before the Effective Time, for the benefit of the limited partners of HEP,
sufficient shares of Common Stock issuable in exchange for the issued and
outstanding Units pursuant to Section 2.02.
(c) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of Units (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
title to the Units shall pass, only upon delivery of the Unit Certificates or,
if a Unit Certificate has been lost or misplaced, a properly completed Affidavit
of Loss and Indemnity Agreement (an "Affidavit") to the Exchange Agent and which
letter of transmittal and Affidavit (if applicable) shall be in a form and have
such other provisions as the Company may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Unit Certificates in
exchange for the Merger Consideration. Upon surrender of a Unit Certificate for
cancellation to the Exchange Agent or upon delivery of an Affidavit, as
applicable, together with such letter of transmittal, duly completed and
executed, and such other documents as may reasonably be required by the Exchange
Agent, the registered holder of Units shall be entitled to receive the Merger
Consideration and any dividends or other distributions to which such holder is
entitled pursuant to Section 2.06(d). Until Unit Certificates are surrendered as
contemplated by this Section 2.06 or an Affidavit is delivered, each registered
holder of Units shall be deemed at any time after the Effective Time to have
only the right to receive upon such surrender or delivery the Merger
Consideration, without interest, pursuant to Section 2.02 and any dividends or
other distributions to which such holder is entitled pursuant to Section
2.06(d); provided, however, that a holder of a Unit Certificate with respect to
which an Affidavit has been delivered shall not be entitled to receive the
Merger Consideration upon surrender of the Unit Certificate. No interest will be
paid or will accrue on the Merger Consideration upon the surrender of any Unit
Certificate or any cash payable pursuant to Section 2.06(d).
B-3
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(d) Subject to the effect of applicable abandoned
property, escheat or similar laws, following surrender of any such Unit
Certificate or delivery of an Affidavit there shall be paid to the holder of
such Unit Certificate or the holder of the Units with respect to which an
Affidavit has been delivered, without interest, (x) at the time of such
surrender or delivery, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to the shares
of Common Stock deliverable upon such surrender or delivery of such Unit
Certificate and (y) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender or delivery and with a payment date subsequent to such surrender
or delivery payable with respect to such shares of Common Stock.
(e) No Further Ownership Rights in Units. All Merger
Consideration paid upon the surrender of Unit Certificates or delivery of
Affidavits in accordance with the terms of this Article 2 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Units
represented by such Unit Certificates or with respect to which an Affidavit has
been delivered, subject, however, to the obligation of the Company to pay,
without interest, any dividends or make any other distributions with a record
date prior to the Effective Time which may have been declared or made by HEP on
such Units in accordance with the terms of this Agreement or prior to the date
of this Agreement and which remain unpaid at the Effective Time and have not
been paid prior to such surrender or delivery, and there shall be no further
registration of transfers on the transfer books of HEP of the Units which were
outstanding immediately prior to the Effective Time.
(f) None of the Company, HEP or the Exchange Agent shall
be liable to any person in respect of any Merger Consideration delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any portion of the Merger Consideration delivered to the Exchange
Agent pursuant to this Agreement that remains unclaimed for six months after the
Effective Time shall be redelivered by the Exchange Agent to the Company, upon
demand, and any holders of Unit Certificates who have not theretofore complied
with Section 2.06(c) shall thereafter look only to the Company for delivery of
the Merger Consideration, subject to applicable abandoned property, escheat and
other similar laws.
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.
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<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 Y Opinion of Rosenman & Colin LLP regarding legality of the
shares of the Common Stock issued
8.1 Y 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
B-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 December 8, 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 Previously filed in paper pursuant to a continuing hardship exemption
Y To be filed by amendment
(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.
II-4
<PAGE>
(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 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. 4 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 December 14, 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. 4 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.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Michael L. Ashner
-------------------------
Michael L. Ashner President December 14, 2000
/s/ Peter Braverman *
-------------------------
Peter Braverman Vice President and Director December 14, 2000
/s/ David T. Hamamoto *
-------------------------
David T. Hamamoto Director December 14, 2000
/s/ David G. King , Jr.*
-------------------------
David G. King, Jr. Vice President and Director December 14, 2000
/s/ Robert Martin *
-------------------------
Robert Martin Director December 14, 2000
/s/ W. Edward Scheetz *
-------------------------
W. Edward Scheetz Director December 14, 2000
/s/ Carolyn Tiffany *
-------------------------
Carolyn Tiffany Vice President and Treasurer December 14, 2000
-------------
* BY MICHAEL L. ASHNER, ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT INDEX
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 y Opinion of Rosenman & Colin LLP regarding legality of the shares
of the Common Stock issued
8.1 y 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
<PAGE>
Exhibit # Description
--------- -----------
10.12 p Appraisals prepared by Cushman & Wakefield of TMR Warehouses
10.13 Valuation Analysis Report, dated December 8, 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 Previously filed in paper pursuant to a continuing hardship exemption
y To be filed by amendment
